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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
 Form 10-K þ
    
    Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 2004 oro
    
    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from     to
 Commission File Number 0-8084 Connecticut Water Service, Inc.  Connecticut
    
    06-0739839(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)93 West Main Street, Clinton, CT
(Address of principal executive office)
    
    06413
(Zip Code)
 Registrants telephone number, including area code (860) 669-8636
Registrants website: www.ctwater.com Securities registered pursuant to Section 12 (b) of the Act: Title of each ClassNone
    
    Name of each exchange on which registeredNot 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 þ No o 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act. Yes þ No o 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, 2004 was $202,693,016. 7,988,524 Number of shares of Common Stock outstanding, March 1, 2005
(excluding 51,550 common stock equivalent shares) DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into WhichDocument
    
    Document is IncorporatedDefinitive Proxy Statement, dated
    
    Part IIIMarch 31, 2005, for Annual Meetingof Shareholders to be held onMay 11, 2005.




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INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2004 PageNumberPart IItem 1. Business
    
    
    3Item 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, Related
Stockholder Matters, and Issuer Purchases of Equity Securities
    
    
    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
    
    
    28Item 8. Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
    
    
    28Item 9A. Controls and Procedures
    
    
    29Item 9B. Other Information
    
    
    30Part IIIItem 10. Directors and Executive Officers of the Company
    
    
    31Item 11. Executive Compensation
    
    
    32Item 12. Security Ownership of Certain Beneficial Owners and
Management, and Related Stockholder Matters
    
    
    32Item 13. Certain Relationships and Related Transactions
    
    
    32Item 14. Principal Accountant Fees and Services
    
    
    32Part IVItem 15. Exhibits and Financial Statement Schedule
    
    
    33Signatures
    
    
    36EX-10.5.A: AMENDED AND RESTATED DEFERRED COMPENSATION AGREEMENTEX-10.8.A: SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENTEX-10.9.2 EMPLOYMENT AGREEMENT FOR THOMAS R. MARSTONEX-10.11.1 EMPLOYMENT & CONSULTING AGREEMENT FOR JAMES R. MCQUEENEX-10.12.5 SUPPLEMENTAL PARTICIPATION AGREEMENTEX-10.13.7 AMENDED & RESTATED EMPLOYEE RETIREMENT PLANEX-10.28 ASSET PURCHASE AGREEMENTEX-23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTEX-24 POWER OF ATTORNEYEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION




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3 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 2004
approximately 77% of the Companys earnings were attributable to water activities carried out
within its five regulated water companies: The Connecticut Water Company (Connecticut Water), The
Gallup Water Service, Incorporated (Gallup), The Crystal Water Company of Danielson (Crystal), The
Barnstable Water Company (Barnstable Water), and The Unionville Water Company (Unionville). These
five companies supply water to 87,767 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 Crystal
Water and three small rental properties; BARLACO Inc. (BARLACO), a real estate company in
Massachusetts; and Barnstable Holding Company, a holding company which owns Barnstable Water and
BARLACO. In 2004, these unregulated companies, in conjunction with the regulated water companies,
contributed the remaining 23% 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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4 On January 26, 2005, Gallup and Crystal submitted a joint application to the Connecticut Department
of Public Utility Control (DPUC) pursuant to which Gallup would be merged with and into Crystal.
If the merger is approved and completed, the combined entity would be a wholly-owned subsidiary of
the Company, as they both are currently. A decision is expected by April 27, 2005. The request to merge Crystal and Gallup stems from the Companys plan to seek rate relief for these
entities in 2005. The operations were consolidated in 1999 and the service territories are
geographically connected in various locations. At this time, the Company is planning to apply to the DPUC in 2006 to merge all of its
Connecticut-based, regulated utilities with and into Connecticut Water. If, and when, these
combinations are completed, the resulting entity, Connecticut Water, would consist of the current
subsidiaries Gallup, Crystal, Unionville, and Connecticut Water. It is expected that future rate
relief applications would propose rate equalization steps, which, if approved would result, over
time, in equalized rates for the Companys customers in Connecticut. The Company believes its is
likely that it will apply for rate increases for one or more of its Connecticut subsidiaries during
the next 18 months. 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 Conduct  Board of Directors
    Code of Conduct  Employees
    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 by contacting the Companys
Corporate Secretary at Connecticut Water Company, 93 West Main Street, Clinton, CT 06413. Our Regulated Business Our business is subject to seasonal fluctuations and weather variations. The demand for water is
generally greater during the warmer months than the cooler months due to customers 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.




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5 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
$51,900,000 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
$2,443,000 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. While we vigorously oppose any such attempt, from time to time such legislation is
contemplated. The rates we charge our water customers are established under the jurisdiction of and are approved
by 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. To date, we have not been required to provide any such refunds. As part of the decision
authorizing the surcharge, the Connecticut Department of Public Utility Control (DPUC) also limited
the conditions upon which Unionville may seek a rate increase prior to September 1, 2005.




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6 Our Water Systems Our water infrastructure consists of 30 noncontiguous water systems in the State of Connecticut and
one water system in Massachusetts. Our system, in total, consists of 1,385 miles of water main and
reservoir storage capacity of 7.0 billion gallons. The safe, dependable yield from our 131 active
wells and 19 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, 2004. Water
    
    
    
    Customer WaterNumber of
    
    
    
    Revenues
    
    
    
    ConsumptionWater Company
    
    
    customers
    
    
    
    ($000s)
    
    
    
    (millions of gallons)Barnstable
    
    
    
    7,204
    
    
    
    $
    2,485
    
    
    
    
    820Connecticut Water
    
    
    
    69,767
    
    
    
    
    40,221
    
    
    
    
    5,779Crystal
    
    
    
    3,708
    
    
    
    
    2,118
    
    
    
    
    459Gallup
    
    
    
    1,231
    
    
    
    
    646
    
    
    
    
    92Unionville
    
    
    
    5,857
    
    
    
    
    3,023
    
    
    
    
    651Total
    
    
    
    87,767
    
    
    
    $
    48,493
    
    
    
    
    7,801
 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
    
    
    
    77,619
    
    
    
    $
    30,265
    
    
    
    
    5,405Commercial
    
    
    
    6,484
    
    
    
    
    6,332
    
    
    
    
    1,595Industrial
    
    
    
    430
    
    
    
    
    1,633
    
    
    
    
    453Public Authority
    
    
    
    586
    
    
    
    
    1,430
    
    
    
    
    348Fire Protection
    
    
    
    1,720
    
    
    
    
    8,310
    
    
    
    
    0Other (including
non-metered accounts)
    
    
    
    928
    
    
    
    
    523
    
    
    
    
    0Total
    
    
    
    87,767
    
    
    
    $
    48,493
    
    
    
    
    7,801




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7 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, 2004, this land totaled approximately 350 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 Crystal to the Town of Killingly, CT 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
    
    
    $
    707,000
 In December 2004, Connecticut Water made a donation of 56 acres of land to the Town of Plymouth, CT
for a new school. As a result of legislation passed in 2004, this donation was eligible for the
Connecticut corporate tax credit in the same manner as a donation for open space purposes. The
after tax profit from this transaction was $498,000. 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. 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, which we acquired in February 2001 in
conjunction with the Companys acquisition of The Barnstable Holding Company. Additional information on Disposition of Property can be found in Item 7  Managements Discussion
and Analysis of Financial Conditions and Results of Operation  Commitments and Contingencies. 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, 2004, we employed a total of 193 persons. Our employees are not covered by
collective bargaining agreements. We believe that our relations with our employees are good.




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8 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 services 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 income of this segment between our regulated and
unregulated companies for the past three years is as follows: Net Income from Real Estate TransactionsRegulated
    
    
    
    Unregulated
    
    
    
    Total2004
    
    
    $
    1,206,000
    
    
    
    $
    
    
    
    
    $
    1,206,0002003
    
    
    $
    942,000
    
    
    
    $
    87,000
    
    
    
    $
    1,029,0002002
    
    
    $
    440,000
    
    
    
    
    
    
    
    
    $
    440,000
 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. 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 provides nearly 10
percent of our overall net income. The table below describes the net income generated by this
segment of our business from our regulated and unregulated companies for the past three years: Net Income from Services and RentalsRegulated
    
    
    
    Unregulated
    
    
    
    Total2004
    
    
    $
    512,000
    
    
    
    $
    393,000
    
    
    
    $
    905,0002003
    
    
    $
    411,000
    
    
    
    $
    322,000
    
    
    
    $
    733,0002002
    
    
    $
    274,000
    
    
    
    $
    170,000
    
    
    
    $
    444,000




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9 
 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, Crystal, and Unionville 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, 2004 were as follows: Net Utility PlantBarnstable
    
    
    $
    6,388,000Connecticut Water
    
    
    
    201,760,000Crystal
    
    
    
    11,536,000Gallup
    
    
    
    3,280,000Unionville
    
    
    
    18,812,000Total
    
    
    $
    241,776,000
 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, and one by
Crystal, Gallup and
Barnstable Water do not have, or require, water filtration facilities.




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10 The companies estimated available water supply, not including water purchases or non-principal
systems, is as follows: ESTIMATEDAVAILABLE SUPPLY(MILLION GALLONS PER DAY)Barnstable Water
    
    
    
    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, 2004, the transmission and distribution systems of our five water companies
consisted of approximately 1,385 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. The size of each companys system(s) in terms of miles of mains is as follows: Miles ofTransmission andDistribution WaterMainsBarnstable Water
    
    
    
    100Connecticut Water
    
    
    
    1,085Crystal
    
    
    
    70Gallup
    
    
    
    20Unionville
    
    
    
    110Total
    
    
    
    1,385
 We believe that our properties are maintained in good condition and in accordance with current
regulations and standards of good waterworks industry practice.




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11 
 ITEM 3. LEGAL PROCEEDINGS We are involved in various legal proceedings from time to time. Although the results of legal
proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we,
or any of our subsidiaries are a party, or to which any of our properties is subject, that presents
a reasonable likelihood of a material adverse impact on the Companys financial condition, results
of operations or cash flows. 
 ITEM 4. 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, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES 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 2004 and 2003 are
listed as follows: Price
    
    
    
    DividendsPeriod
    
    
    High
    
    
    
    Low
    
    
    
    Paid2004First Quarter
    
    
    $
    29.76
    
    

    
    $
    27.57
    
    
    
    $
    .2075Second Quarter
    
    
    
    29.00
    
    
    
    
    24.29
    
    
    
    $
    .2075Third Quarter
    
    
    
    27.55
    
    
    
    
    23.83
    
    
    
    $
    .2100Fourth Quarter
    
    
    
    28.98
    
    
    
    
    24.17
    
    
    
    $
    .21002003First Quarter
    
    
    $
    27.49
    
    
    
    $
    24.00
    
    
    
    $
    .2050Second Quarter
    
    
    
    26.96
    
    
    
    
    24.22
    
    
    
    $
    .2050Third Quarter
    
    
    
    30.41
    
    
    
    
    25.20
    
    
    
    $
    .2075Fourth Quarter
    
    
    
    30.25
    
    
    
    
    26.96
    
    
    
    $
    .2075
 As of March 1, 2005, there were approximately 4,700 holders of record of our common stock. We presently have paid or
intend to pay quarterly cash dividends in 2005 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. Purchases of Equity Securities by the Company The Company has not established any share
repurchase plans and thus has not repurchased any shares of its common stock during the last three
months of the fiscal year ended December 31, 2004.




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13 
 ITEM 6. SELECTED FINANCIAL
INFORMATION SUPPLEMENTAL INFORMATION (Unaudited) SELECTED FINANCIAL DATA Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000CONSOLIDATED STATEMENTS OF INCOMEOperating Revenues
    
    $
    48,493
    
    
    $
    47,115
    
    
    $
    45,830
    
    
    $
    45,392          $
    
    
    
    43,997Operating Expenses
    
    $
    37,842
    
    
    $
    35,584
    
    
    $
    33,996
    
    
    $
    34,078          $
    
    
    
    32,335Operating Income
    
    $
    10,651
    
    
    $
    11,531
    
    
    $
    11,834
    
    
    $
    11,314          $
    
    
    
    11,662Interest and Debt Expense
    
    $
    3,897
    
    
    $
    4,635
    
    
    $
    4,534
    
    
    $
    4,632
    
    
    $
    4,782Net Income Applicable to Common Stock
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742
    
    
    $
    8,401
    
    
    $
    7,858Cash Common Stock Dividends Paid
    
    $
    6,641
    
    
    $
    6,529
    
    
    $
    6,277
    
    
    $
    6,105
    
    
    $
    5,890Dividend Payout Ratio
    
    
    71
    %
    
    
    71
    %
    
    
    72
    %
    
    
    73
    %
    
    
    75
    %Weighted Average Common Shares Outstanding
    
    
    7,999,318
    
    
    
    7,956,426
    
    
    
    7,717,608
    
    
    
    7,619,031
    
    
    
    7,604,546Basic Earnings Per Common Share
    
    $
    1.17
    
    
    $
    1.15
    
    
    $
    1.13
    
    
    $
    1.10
    
    
    $
    1.03Number of Shares Outstanding at Year End
    
    
    8,035,199
    
    
    
    7,967,379
    
    
    
    7,939,713
    
    
    
    7,649,362
    
    
    
    7,604,594ROE on Year End Common Equity
    
    
    10.6
    %
    
    
    11.0
    %
    
    
    10.9
    %
    
    
    11.9
    %
    
    
    11.7
    %Declared Common Dividends Per Share*
    
    $
    0.835
    
    
    $
    0.825
    
    
    $
    0.814
    
    
    $
    0.804
    
    
    $
    0.795CONSOLIDATED BALANCE SHEETCommon Stockholders Equity
    
    $
    87,865
    
    
    $
    83,315
    
    
    $
    79,975
    
    
    $
    70,783          $
    
    
    
    67,110Long-Term Debt
    
    $
    66,399
    
    
    $
    64,754
    
    
    $
    64,734
    
    
    $
    63,953          $
    
    
    
    66,283Minority Interest
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    117Preferred Stock (Consolidated, Excluding Current Maturities)
    
    $
    847
    
    
    $
    847
    
    
    $
    847
    
    
    $
    847
    
    
    $
    847Total Capitalization
    
    $
    155,111
    
    
    $
    148,916
    
    
    $
    145,556
    
    
    $
    135,583
    
    
    $
    134,357Stockholders Equity (Includes Preferred Stock)
    
    
    57
    %
    
    
    57
    %
    
    
    56
    %
    
    
    53
    %
    
    
    51
    %Long-Term Debt
    
    
    43
    %
    
    
    43
    %
    
    
    44
    %
    
    
    47
    %
    
    
    49
    %Net Utility Plant
    
    $
    241,776
    
    
    $
    235,098
    
    
    $
    229,097
    
    
    $
    202,330
    
    
    $
    193,169Total Assets
    
    $
    290,940
    
    
    $
    281,345
    
    
    $
    264,799
    
    
    $
    231,714
    
    
    $
    222,546Book Value  Per Common Share
    
    $
    10.94
    
    
    $
    10.46
    
    
    $
    10.07
    
    
    $
    9.25
    
    
    $
    8.82OPERATING REVENUES BY
REVENUE CLASSResidential
    
    $
    30,265
    
    
    $
    29,172
    
    
    $
    28,680
    
    
    $
    28,621          $
    
    
    
    27,364Commercial
    
    
    6,332
    
    
    
    6,210
    
    
    
    6,036
    
    
    
    5,941
    
    
    
    5,817Industrial
    
    
    1,633
    
    
    
    1,616
    
    
    
    1,709
    
    
    
    1,687
    
    
    
    1,905Public Authority
    
    
    1,430
    
    
    
    1,494
    
    
    
    1,436
    
    
    
    1,460
    
    
    
    1,481Fire Protection
    
    
    8,310
    
    
    
    8,105
    
    
    
    7,434
    
    
    
    7,187
    
    
    
    6,960Other (including non-metered accounts)
    
    
    523
    
    
    
    518
    
    
    
    535
    
    
    
    496
    
    
    
    470Total Operating Revenues
    
    $
    48,493
    
    
    $
    47,115
    
    
    $
    45,830
    
    
    $
    45,392          $
    
    
    
    43,997Number of Customers (Average)
    
    
    87,259
    
    
    
    86,145
    
    
    
    82,119
    
    
    
    78,156
    
    
    
    77,183Billed Consumption (Millions of Gallons)
    
    
    7,801
    
    
    
    7,640
    
    
    
    7,418
    
    
    
    7,259
    
    
    
    6,911Number of Employees
    
    
    193
    
    
    
    195
    
    
    
    191
    
    
    
    181
    
    
    
    184
  *     Not restated for
acquisitions accounted for under the pooling-of-interests accounting
method.




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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 2004, approximately 77% of the Companys earnings
were attributable to water activities carried out within its five regulated water companies:
Connecticut Water, Gallup, Crystal, Barnstable Water, and Unionville. The rates charged for
service by these regulated water companies are subject to regulation by the Connecticut DPUC and
the Massachusetts Department of Telecommunications and Energy (DTE). Over 96% of this water
activity income comes from 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 Connecticut regulated water companies during the next 18 months. The material
factors that will affect our decision to consider filing for additional rate increases in the
future are: -
    
    Expected increases in infrastructure investment 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, audit 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 DPUC and our Massachusetts
water companys rates are regulated by the Massachusetts DTE. 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. The Company believes that it is likely that it will apply for rate increases for one or more of its
Connecticut subsidiaries during the next 18 months. 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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##### Table of Contents



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
2003 and 2004 pension expense was calculated using assumed discount rates of 6.5% and 6.25%,
respectively. In 2005, our pension expense will be calculated with an assumed discount rate of
5.75%. The following table shows how much a one percent change in our assumed discount rate would
have changed our reported 2004 pension expense: Increase(Decrease)in expenseA 1% increase in the discount rate
    
    ($
    280,000
    )A 1% decrease in the discount rate
    
    $
    292,000
 Outlook The Companys earnings and profitability are primarily dependent upon the sale and distribution of
water, the amount of which is dependent on seasonal weather fluctuations, particularly during the
summer months when water demand will vary with rainfall and temperature levels. The Companys
earnings and profitability in future years will also depend upon a number of other factors, such as
the ability to maintain our operating costs at lower levels, customer growth in the Companys core
regulated water utility business, growth in revenues attributable to non-water sales operations,
and the timing and adequacy of rate relief if and when requested, from time to time, by our
regulated water companies. The Company believes that the factors described above and those described in detail below under the
heading Commitments and Contingencies may have significant impact, either alone or in the
aggregate, on the Companys earnings and profitability in fiscal years 2005 and beyond. Please
also review carefully the risks and uncertainties described under the heading Forward Looking
Information. Based on the Companys current projections, the Company believes that its net income for the years
2005, 2006 and 2007, excluding the expected gain from the sale of Barnstable Water and BARLACO
assets in 2005 and 2006 may be materially reduced from the levels reported for the years 2003 and
2004. Any such reductions would be primarily attributable to lower net income (reduced tax
benefits) related to the Companys land disposition program during 2005-07, excluding BARLACO. In
addition, following the completion of the expected sale of the assets of Barnstable Water to the
Town of Barnstable in 2005, it is uncertain if the net income realized from a management contract
with the Town to provide full operating and management services to Barnstables customers, combined
with any return generated from the investment of the proceeds of the sale, will be greater or less
than the net income produced historically through the ownership of the Barnstable Water and BARLACO
assets. During 2006 and subsequent years, the ability of the Company to maintain and increase its
net income comparable to historical levels will principally depend upon the effect on the Company
of the factors described above in this Outlook section, those factors described in the section
entitled Commitments and Contingencies and the risks and uncertainties described in Forward
Looking Information.




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##### Table of Contents



17 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 2005. Gross
    
    
    
    Construction
    
    
    
    ConstructionConstruction
    
    
    
    Funded by
    
    
    
    Funded byExpenditures
    
    
    
    Developers &
    
    
    
    CompanyOthers2002
    
    
    $
    15,691,000
    
    
    
    $
    4,992,000
    
    
    
    $
    10,699,0002003
    
    
    $
    11,909,000
    
    
    
    $
    3,522,000
    
    
    
    $
    8,387,0002004
    
    
    $
    12,729,000
    
    
    
    $
    4,394,000
    
    
    
    $
    8,335,0002005 (Projected)
    
    
    $
    17,033,000
    
    
    
    $
    3,000,000
    
    
    
    $
    14,033,000
 We currently fund our working capital requirements through our lines of credit with four banks,
which provide liquidity to satisfy ongoing cash needs. We consider the current aggregate
$15,500,000 lines of credit to be adequate to finance any expected short-term borrowing
requirements that may arise in 2005. All the lines have one-year lives and will expire on different
dates in 2005. We expect to renew the lines in 2005. The interest rates payable are variable and
fluctuate over time based on financial conditions. The weighted average interest rate on the
$5,650,000 balance outstanding at December 31, 2004 was 2.832%. 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. In October 2003,
Connecticut Water borrowed $22.93 million from the issuance of Water Facilities Refunding Revenue
Bonds by the Connecticut Development Authority (Authority). The bonds were sold in two series with
the following terms: 2003 A Series: $8,000,000 (Non-AMT) 4.40% Maturing 12/15/20202003 C Series: $14,930,000 (AMT) 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 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 were 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,
were 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.




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##### Table of Contents



18 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. In June 2004, Unionville secured $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
were used to pay off a portion of the balances outstanding under bank lines of credit. On September 1, 2004, Connecticut Water refinanced a portion of its existing bond indebtedness.
Connecticut Water borrowed $9.55 million in sale proceeds from the issuance of Water Facilities
Refunding Revenue Bonds by the Authority. The bonds were sold in two series with the following
terms: 2004 A Series: $5,000,000 Variable Interest Maturing 7/1/20282004 B Series: $4,550,000 Variable Interest Maturing 9/1/2028
 The proceeds of the transaction were used to redeem prior obligations to the Authority that were
secured by the Series T and Series U first mortgage bonds of Connecticut Water. The Company is currently in the process of negotiating additional fixed-rate, long-term borrowings
from the Authority to fund ongoing and planned capital improvement projects. The Company plans to
submit applications to the Connecticut DPUC with respect to these anticipated borrowings in the
near future. The ability of the Company to complete these borrowing transactions will depend upon
the receipt of final decisions of the DPUC with terms acceptable to the Company, which have not yet
been issued, and the successful completion of negotiations with the Authority and the execution of
definitive borrowing agreements. 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.




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##### Table of Contents



19 The following table summarizes the Companys future contractual cash obligations as of December 31,
2004: Payments due by Periods
(in thousands of dollars) Less
    
    
    
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    
    Years
    
    
    
    Years
    
    
    
    than 5Contractual Obligations
    
    
    Total
    
    
    
    year
    
    
    
    2 - 3
    
    
    
    4 and 5
    
    
    
    yearsLong-Term
Debt (LTD)
    
    
    $
    66,725
    
    
    
    $
    326
    
    
    
    $
    1,011
    
    
    
    $
    752
    
    
    
    $
    64,636Interest
on LTD
    
    
    
    60,343
    
    
    
    
    2,999
    
    
    
    
    5,994
    
    
    
    
    5,993
    
    
    
    
    45,357Operating Lease Obligations
    
    
    
    880
    
    
    
    
    355
    
    
    
    
    460
    
    
    
    
    31
    
    
    
    
    34Purchase Obligations(1)
    
    
    
    33,125
    
    
    
    
    936
    
    
    
    
    1,475
    
    
    
    
    1,412
    
    
    
    
    29,302Total
    
    
    $
    161,073
    
    
    
    $
    4,616
    
    
    
    $
    8,940
    
    
    
    $
    8,188
    
    
    
    $
    139,329
   (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 2004 was $5,650,000, which is $4,050,000 lower than at
the end of 2003. During 2004, the Company incurred approximately $12.7 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 a $14.0 million construction budget for 2005, 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. RESULTS OF OPERATIONS Overview of 2004 Results Earnings for 2004 in total were $184,000, or $0.02 per share, higher than in 2003. The increase in
earnings was due to higher net income in our Real Estate and Services and Rentals business
segments, which more than offset a reduction in net income from our Water Activities segment. Increase(Decrease)Business segment
    
    
    In Net IncomeReal Estate
    
    
    $
    177,000Services and Rentals
    
    
    
    172,000Water Activities
    
    
    
    (165,000
    )Net
Increase
    
    
    $
    184,000




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##### Table of Contents



20 Real Estate
The net income generated by the real estate segment increased from 2003 primarily due to the tax
benefits of a 2004 donation of 56 acres of land to the Town of Plymouth, CT in addition to the
donation of the final parcel of land to the Town of Killingly, CT under our 3-year agreement with
the Town. The 2004 and 2003 net income in this business segment were generated from the following: 2004
    
    
    
    2003Donation of land to Town of Killingly, CT
    
    
    $
    707,000
    
    
    
    $
    942,000Donation of land to Town of Plymouth, CT
    
    
    
    498,000
    
    
    
    
    Miscellaneous sales of real estate
    
    
    
    1,000
    
    
    
    
    87,000Net Income
    
    
    $
    1,206,000
    
    
    
    $
    1,029,000
 Net income from this business segment are dependent on donations/sales of available land. This
typically occurs when utility-owned land is deemed to be not necessary to protect water sources.
The Company currently does not project completing any material land transactions in 2005. Services and Rentals
Net income generated from the services and rental segment in 2004 increased $172,000, or 23%, over
2003 levels. The increased net income is primarily due to a 19% increase in customer enrollment in our
service line maintenance program plus an increased number of leases and higher lease rates charged
to the telecommunications companies that lease space on our water storage tanks for their antenna
sites. The table below summarizes the net income from these two lines of business in this business
segment for 2004 and 2003. 2004
    
    
    2003
    
    
    IncreaseService line contracts
    
    
    $
    343,000
    
    
    
    $
    240,000
    
    
    

$103,000 or 43%Antenna leases
    
    
    $
    394,000
    
    
    
    $
    330,000
    
    
    

$64,000 or 19%
 Water Activities The net income from water
activities in 2004 was $165,000 lower than it was in 2003. A breakdown of
the components of this decrease is as follows: Increase(Decrease)Operating Revenues
    
    
    $
    1,378,000Operation and Maintenance expense
    
    
    
    1,189,000Depreciation expense
    
    
    
    117,000Income Taxes
    
    
    
    782,000Taxes Other than Income Taxes
    
    
    
    170,000Other Income
    
    
    
    (23,000
    )Interest and Debt Expense
    
    
    
    (738,000
    )Net
Decrease
    
    
    
    ($165,000
    )




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##### Table of Contents



21 The 2.9% increase in Operating Revenues is primarily due to: -
    
    A 2.1% increase in metered consumption in 2004 due to a hotter and drier summer and a 1.2%
increase in the number of customers served;-
    
    A $288,000 increase in revenues from Unionvilles 30% rate surcharge that went into effect
mid-2003; and-
    
    A $55,000 increase in fire protection revenues due to system expansion which increased the
number of fire hydrants and revenue generating mains upon which these charges are based.
 The $1,189,000 or 5.2% increase in Operation and Maintenance expense is primarily due to the
following expense increases: IncreaseSarbanesOxley Act Section 404 compliance
    
    
    $
    738,000Purchased Water
    
    
    
    261,000Property and Liability Insurance
    
    
    
    223,000Total
    
    
    $
    1,222,000
 The increase in Depreciation expense is due to the Companys investment in new utility plant. Income tax expense increased in 2004 due to the $613,000 increase in book pre-tax income plus a
higher 2004 effective income tax rate due to flow through accounting
related to book/tax timing differences and a 2003 reduction in
estimated tax liabilities associated with non-current periods. The increase in Taxes Other Than Income taxes is primarily due to increased municipal taxes related
to our increased investment in utility plant. The 16% decrease in interest and debt expense is primarily due to the lowering of our interest
rates through the long-term debt refinancings that were completed in 2003 and 2004. Overview of 2003 Results Earnings for 2003 were higher
than 2002 due to increased net income in our Real Estate and Services
and Rentals business segments, which more than offset a reduction in net income from our Water
Activities segment. The net income 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 income (tax benefits) by year from donations under this
agreement are: 2002
    
    $
    293,0002003
    
    $
    942,0002004*
    
    $
    707,000
   *donated in January, 2004




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##### Table of Contents



22 The net income 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. Net income 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 the fact
that 2003 included 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 net income 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. 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 2002 and 2003. Number of monthsOf Unionville OperatingResults2002
    
    
    
    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



23 2003 Results Compared with 2002 INCOME STATEMENTS
     For the years ended,
December 31, (in thousands) 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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24 COMMITMENTS AND CONTINGENCIES Security The Bioterrorism Response Act of 2001 required every public water system serving over
3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last
of these assessments required to be filed by our companies were submitted to the U.S. Environmental
Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December
2004, per statutory requirements. The information within the VA is not subject to release to the
public and is protected from Freedom of Information Act inquiries. Investment in security-related improvements is a continuing process 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. As previously disclosed on March 11, 2005, the Company entered into an agreement to sell the assets
of its Massachusetts subsidiary, The Barnstable Water Company, and the assets of its BARLACO real
estate subsidiary to the Town of Barnstable, Massachusetts. The total value of the transaction is
$11 million, with $10 million to be received by Barnstable Water in 2005 for the water utility
assets and associated liabilities. A separate real estate transaction for the BARLACO assets will
take place in 2006 with additional proceeds of $1 million. Assuming that the Company completes the
sales of the assets of Barnstable Water and BARLACO during 2005 and 2006 as described above, the
Company estimates that it will record after tax gains of approximately $2.7 million and $1.4
million, respectively, from the sale of those companies assets in those years. At the closing of
the sale of the water utility assets, the Company will also enter into a management contract with
the Town to provide full operating and management services for the Barnstable Water utility
operation. Under this full service contract, the customers will continue to receive the same full
range of field and customer service presently provided by Barnstable Water.




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25 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 assessed and evaluated 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. During the quarter ended March 31, 2004, the Company received notice from the State of Connecticut
Department of Environmental Protection (DEP) that its review of our approximately 7,600 acres of
Class I, II, and III land was complete. The DEP notice indicated that the DEP had identified 240
parcels representing 6,823 acres of land and land underwater as land that the State of Connecticut
would be interested in acquiring as open space, by either fee ownership or a conservation easement.
During October 2004, the Company received notice from the DEP indicating that the State of
Connecticut does not have sufficient funds available for the possible acquisition of Company lands
by the State. The DEP also requested that the Company extend the sales moratorium set forth in the
MOU entered into by the DEP and the Company in December 2002 beyond its current expiration date of
December 31, 2004. The Company chose not to extend the MOU, thus causing it to expire on December
31, 2004. The Company is now free to consider disposition of lands to other interested parties,
subject to the applicable statutory and regulatory requirements. Rate Relief Our four Connecticut operating subsidiaries, Connecticut Water, Crystal, Gallup, and
Unionville, are regulated public utilities, which provide water services to their customers. The
rates that these companies charge their water customers are subject to the jurisdiction of the
regulatory authority of the Connecticut DPUC, which sets water rates for each company independently
because the systems are not interconnected. Similarly, the Massachusetts DTE regulates the
operations and rates of the Barnstable Water. The DPUC and DTE may authorize the Companys operating subsidiaries to charge rates which the DPUC
and the DTE consider to be sufficient to recover the normal operating expenses of our operating
subsidiaries, to provide funds for adding new or replacing water infrastructure, and to allow our
operating subsidiaries to earn what the DPUC and the DTE consider to be a fair and reasonable
return on our invested capital.




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26 The Company believes it is likely that it will apply for rate increases for one or more of its
Connecticut subsidiaries during the next 18 months. Land Dispositions In the past, the Company has engaged in a program of land donations to
municipalities in Connecticut, which has resulted in net income (tax benefits) to the Company of
approximately $4.2 million. As previously disclosed, the land donation program under the Companys
agreement with the Town of Killingly, CT was completed in January 2004 with the donation of the
remaining parcel to the Town. The donation of this final parcel resulted in a net profit (tax
benefit) to the Company of $707,000 during the first quarter of 2004. The donation of land to the
Town of Plymouth, CT in December 2004 resulted in an additional
$498,000 net income. The Company and its subsidiaries own additional parcels of land in Connecticut and Massachusetts
which may be suitable in the future for disposition, either by sale or by donation to
municipalities, other local governments or private charitable entities. These additional parcels
would include certain Class I and II parcels previously identified by the Connecticut DEP in the
DEP notice noted above, as well as certain lands owned by BARLACO in Barnstable, Massachusetts. During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in
Connecticut for public and/or open space purposes. These donations contributed approximately $.9
million and $1.2 million, respectively to net income in those years, as a result of favorable tax
treatment under federal and Connecticut tax laws. The Company currently anticipates that it will
continue to pursue selected land sales and/or donations during fiscal years 2005, 2006 and 2007,
but at a reduced level. The Company currently does not project completing any material land
transactions in 2005. The Company is unable to predict if and when any sales or donations of some
or all of these parcels may occur in the future and, if so, what
amount of net income (tax
benefits) may result from any such sales or donations. 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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27 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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28 
 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, 2004,
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 $15,500,000 current lines
of credit with four banks, under which interim bank loans payable at December 31, 2004 were
$5,650,000. 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 believes that changes in interest rates will not have a material effect on income
or cash flow during 2005, 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 report of PricewaterhouseCoopers LLP are
included herein on pages F-3 through F-28. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None




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29 
 ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and
Procedures As of December 31, 2004, 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
Rule 13a-15(e)). Based upon, and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and procedures were effective. Managements Report on Internal Control Over Financial Reporting Internal control over financial
reporting (as defined in Exchange Act Rules 13a  15(f) and 15(d)  15(f)) is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles. Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. We have used the criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting
our evaluation of the effectiveness of the internal control over financial reporting. Based on our
evaluation, we concluded that the Companys internal control over financial reporting is effective
as of December 31, 2004. Our managements assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears herein. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Changes in Internal Control Over Financial Reporting During the past 18 months, the Company has
implemented a comprehensive plan to review, document, test the operational effectiveness, and
evaluate the processes and systems of internal controls over financial reporting, as required under
Section 404 of the Act and Public Accounting Oversight Board Standard No. 2, An Audit of Internal
Control Over Financial Reporting Performed in Conjunction With An Audit of Financial Statements
(Standard No. 2), which was adopted in June 2004. There were no changes in the Companys internal control over financial reporting that occurred
during the Companys most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.




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30 
 ITEM 9B. OTHER INFORMATION On December 2, 2004, the Company entered into an amended and restated employment agreement with
Thomas R. Marston, the Companys Vice President of Planning and Treatment. The terms of Mr.
Marstons agreement are identical to those of the Companys other executive officers. For a
complete description of the material terms of these agreements, please see the description to be
included in the Companys proxy statement to be dated March 31, 2005, under the heading Employment
Contracts, Change-in-Control, and Termination Arrangement. A copy of Mr. Marstons employment
agreement is being filed with this annual report on Form 10-K as Exhibit 10.9.2.




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31 
 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 31, 2005. 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
    
    
    62
    
    
    President, Chief
Executive Officer and
Chairman of the Board
    
    Held position of
President since January,
1992 and position of
Chief Executive Officer
since July, 1992
    
    2005 Annual MeetingD. C. Benoit
    
    
    47
    
    
    Vice President 
Finance, Chief
Financial Officer and
Treasurer
    
    Held current position or
other executive position
with the company since
April, 1996
    
    2005 Annual MeetingJ. R. McQueen
    
    
    62
    
    
    Senior Vice President
    
    Held current position or
other management or
engineering position with the
Company since October,
1965
    
    Retired on
12/31/04T. P. ONeill
    
    
    51
    
    
    Vice President 
Operations &
Engineering
    
    Held current position or
other engineering position
with the Company since
February, 1980
    
    2005 Annual
MeetingM. P. Westbrook
    
    
    45
    
    
    Vice President 
Administration and
Government Affairs
    
    Held current position or
other management position
with the Company since
September, 1988
    
    2005 Annual
Meeting




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##### Table of Contents



32 Period Held or
    
    Term of OfficeName
    
    Age
    
    Office
    
    Prior Position
    
    ExpiresT. R. Marston
    
    
    52
    
    
    Vice President 
Planning & Treatment
    
    Held current position or
other management position
with the Company since
June 1974.
    
    2005 Annual
MeetingP. J. Bancroft
    
    
    55
    
    
    Assistant Treasurer
and
Controller
    
    Held current position or
other accounting position
with the Company since
October, 1979
    
    2005
Annual MeetingM. G. DiAcri
    
    
    59
    
    
    Corporate Secretary
    
    Held administrative
position
with the Company since
February, 1990
    
    2005 Annual
Meeting
 For further information regarding the executive officers see the Companys Proxy Statement dated
March 31, 2005. 
 ITEM 11. EXECUTIVE COMPENSATION 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCHOLDER
MATTERS 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES




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33 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a)
    
    
    1.
    
    
    Financial Statements:The report of independent registered public accounting firm
and the Companys Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements on page F-1 hereof are filed as part of this
report, commencing on page F-2.PageIndex to Consolidated Financial Statements and Schedule
    
    F-1Report of Independent Registered Public
Accounting Firm
    
    F-2Consolidated Statements of Income for the years
Ended December 31, 2004, 2003, and 2002
    
    F-3Consolidated Statements of Comprehensive Income
for the years ended December 31, 2004, 2003, and 2002
    
    F-3Consolidated Balance Sheets at December 31, 2004
and 2003
    
    F-4Consolidated Statements of Cash Flows for the
years ended December 31, 2004, 2003 and 2002
    
    F-5Notes to Consolidated Financial Statements
    
    F-62.
    
    
    Financial Statement Schedules:The following schedule of the Company is included on the
attached page as indicated:Schedule II Valuation and Qualifying Accounts
and Reserves for the years ended December 31,
2004, 2003 and 2002
    
    S-1All 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



34  (b)
    Exhibits: Exhibits for Connecticut Water Service, Inc. are in the
Index to Exhibits
    
    E-1Exhibits 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.




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##### Table of Contents



F-1 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE PageIndex to Consolidated Financial Statements and Schedule
    
    F-1Reports of Independent Registered Public Accounting Firm
    
    F-2Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    F-3Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002
    
    F-3Consolidated Balance Sheets at December 31, 2004, and 2003
    
    F-4Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    F-5Notes to Consolidated Financial Statements
    
    F-6Schedule
II  Valuation and Qualifying Accounts
    
    S-1




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F-2 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Connecticut Water Service, Inc.: We have completed an integrated audit of Connecticut Water Service, Inc.s 2004 consolidated
financial statements and of its internal control over financial reporting as of December 31, 2004
and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below. Consolidated financial statements and financial statement schedule In our opinion, the consolidated financial statements listed in the index appearing under Item
15(a)(1) present fairly, in all material respects, the financial position of Connecticut Water
Service, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements 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. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal Control
Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of December 31, 2004 based on criteria established in Internal
Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control  Integrated Frameworkissued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express
opinions on managements assessment and on the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control




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##### Table of Contents



F-2 over financial reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we consider necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 2005




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F-3 Connecticut Water Service, Inc. and Subsidiaries 
 CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, (in thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002Operating Revenues
    
    $
    48,493
    
    
    $
    47,115
    
    
    $
    45,830Operating ExpensesOperation and Maintenance
    
    
    23,948
    
    
    
    22,759
    
    
    
    19,531Depreciation
    
    
    5,801
    
    
    
    5,684
    
    
    
    5,187Income Taxes
    
    
    2,790
    
    
    
    2,008
    
    
    
    4,482Taxes Other Than Income Taxes
    
    
    5,303
    
    
    
    5,133
    
    
    
    4,796Total Operating Expenses
    
    
    37,842
    
    
    
    35,584
    
    
    
    33,996Utility Operating Income
    
    
    10,651
    
    
    
    11,531
    
    
    
    11,834Other Income (Deductions), Net of TaxesGain on Property Transactions
    
    
    1,206
    
    
    
    1,029
    
    
    
    440Non-Water Sales Earnings
    
    
    905
    
    
    
    733
    
    
    
    444Allowance for Funds Used During Construction
    
    
    421
    
    
    
    476
    
    
    
    470Other
    
    
    108
    
    
    
    76
    
    
    
    126Total Other Income (Deductions), Net of Taxes
    
    
    2,640
    
    
    
    2,314
    
    
    
    1,480Interest and Debt ExpensesInterest on Long-Term Debt
    
    
    3,054
    
    
    
    4,016
    
    
    
    3,909Other Interest Charges
    
    
    502
    
    
    
    385
    
    
    
    365Amortization of Debt Expense
    
    
    341
    
    
    
    234
    
    
    
    260Total Interest and Debt Expenses
    
    
    3,897
    
    
    
    4,635
    
    
    
    4,534Net Income Before Preferred Dividends
    
    
    9,394
    
    
    
    9,210
    
    
    
    8,780Preferred Stock Dividend Requirement
    
    
    38
    
    
    
    38
    
    
    
    38Net Income Applicable to Common Stock
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742Weighted Average Common Shares Outstanding:Basic
    
    
    7,999
    
    
    
    7,956
    
    
    
    7,718Diluted
    
    
    8,039
    
    
    
    8,002
    
    
    
    7,771Earnings Per Common Share:Basic
    
    $
    1.17
    
    
    $
    1.15
    
    
    $
    1.13Diluted
    
    $
    1.16
    
    
    $
    1.15
    
    
    $
    1.12
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, (in thousands)
    
    2004
    
    
    2003
    
    
    2002Net Income
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742Other Comprehensive Income, net of taxQualified cash flow hedging instrument net of tax of $58
    
    
    87
    
    
    
    
    
    
    
    Comprehensive Income
    
    $
    9,443
    
    
    $
    9,172
    
    
    $
    8,742
 The accompanying notes are an integral part of these consolidated financial statements.




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F-4 Connecticut Water Service, Inc. and Subsidiaries 
 CONSOLIDATED BALANCE SHEETS December 31, (in thousands, except share amounts)
    
    2004
    
    
    2003ASSETSUtility Plant
    
    $
    333,985
    
    
    $
    319,616Construction Work in Progress
    
    
    7,463
    
    
    
    9,291Utility Plant Acquisition Adjustments
    
    
    (1,273
    )
    
    
    (1,274
    )340,175
    
    
    
    327,633Accumulated Provision for Depreciation
    
    
    (98,399
    )
    
    
    (92,535
    )Net Utility Plant
    
    
    241,776
    
    
    
    235,098Other Property and Investments
    
    
    4,298
    
    
    
    3,829Cash and
Cash Equivalents
    
    
    707
    
    
    
    1,122Accounts Receivable (Less Allowance, 2004 - $212; 2003 - $271)
    
    
    5,702
    
    
    
    5,150Accrued Unbilled Revenues
    
    
    4,064
    
    
    
    3,779Materials and Supplies, at Average Cost
    
    
    869
    
    
    
    920Prepayments and Other Current Assets
    
    
    3,923
    
    
    
    4,064Total Current Assets
    
    
    15,265
    
    
    
    15,035Unamortized Debt Issuance Expense
    
    
    7,169
    
    
    
    6,204Unrecovered Income Taxes
    
    
    16,173
    
    
    
    15,006Post-Retirement Benefits Other Than Pension
    
    
    1,088
    
    
    
    946Goodwill
    
    
    3,608
    
    
    
    3,608Deferred Charges and Other Costs
    
    
    1,563
    
    
    
    1,619Total Regulatory and Other Long-Term Assets
    
    
    29,601
    
    
    
    27,383Total Assets
    
    $
    290,940
    
    
    $
    281,345CAPITALIZATION AND LIABILITIESCommon Stockholders Equity:Common Stock Without Par Value:Authorized -
15,000,000 Shares  Issued and Outstanding: 2004 - 8,035,199; 2003 - 7,967,379
    
    $
    55,514
    
    
    $
    53,766Retained Earnings
    
    
    32,264
    
    
    
    29,549Accumulated Other Comprehensive Income
    
    
    87
    
    
    
    Common Stockholders Equity
    
    
    87,865
    
    
    
    83,315Preferred Stock
    
    
    847
    
    
    
    847Long-Term Debt
    
    
    66,399
    
    
    
    64,754Total Capitalization
    
    
    155,111
    
    
    
    148,916Interim Bank Loans Payable
    
    
    5,650
    
    
    
    9,700Current Portion of Long-Term Debt
    
    
    326
    
    
    
    254Accounts Payable and Accrued Expenses
    
    
    5,512
    
    
    
    5,419Accrued Taxes
    
    
    3,300
    
    
    
    2,545Accrued Interest
    
    
    601
    
    
    
    626Other Current Liabilities
    
    
    559
    
    
    
    366Total Current Liabilities
    
    
    15,948
    
    
    
    18,910Advances for Construction
    
    
    27,157
    
    
    
    24,579Contributions in Aid of Construction
    
    
    46,111
    
    
    
    44,337Deferred Federal and State Income Taxes
    
    
    24,249
    
    
    
    23,073Unfunded Future Income Taxes
    
    
    13,096
    
    
    
    12,840Long-Term Compensation Arrangements
    
    
    7,445
    
    
    
    6,812Unamortized Investment Tax Credits
    
    
    1,823
    
    
    
    1,878Commitments and ContingenciesTotal Capitalization and Liabilities
    
    $
    290,940
    
    
    $
    281,345
 The accompanying notes are an integral part of these consolidated financial statements.




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F-5 
 Connecticut Water Service, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in thousands)
    
    2004
    
    
    2003
    
    
    2002Operating Activities:Net Income Before Preferred Dividends
    
    $
    9,394
    
    
    $
    9,210
    
    
    $
    8,780Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:Depreciation (including $208 in 2004, $176 in 2003,
and $164 in 2002 charged to other accounts)
    
    
    6,009
    
    
    
    5,860
    
    
    
    5,351Change in Assets and Liabilities:(Increase) in Accounts Receivable and
Accrued Unbilled Revenues
    
    
    (837
    )
    
    
    (153
    )
    
    
    (165
    )(Increase) Decrease in Other Current Assets
    
    
    259
    
    
    
    (52
    )
    
    
    57(Increase) in Other Non-Current Items
    
    
    (405
    )
    
    
    (621
    )
    
    
    (89
    )Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities
    
    
    949
    
    
    
    (3,129
    )
    
    
    (867
    )Increase in Deferred Income Taxes and
Investment Tax Credits, Net
    
    
    1,121
    
    
    
    2,376
    
    
    
    747Net Cash and
Cash Equivalents Provided by Operating Activities
    
    
    16,490
    
    
    
    13,491
    
    
    
    13,814Investing Activities:Gross Additions to Utility Plant (including
Allowance For Funds Used During Construction of
$436 in 2004, $476 in 2003 and $470 in 2002)
    
    
    (12,729

    )
    
    
    (11,909
    )
    
    
    (15,691
    )Financing Activities:Proceeds from Interim Bank Loans
    
    
    5,650
    
    
    
    9,700
    
    
    
    6,950Repayment of Interim Bank Loans
    
    
    (9,700
    )
    
    
    (6,950
    )
    
    
    (1,875
    )Proceeds
from Issuance of Long-Term Debt
    
    
    23,581
    
    
    
    22,930
    
    
    
    Repayment of
Long-Term Debt Including Current Portion
    
    
    (21,864
    )
    
    
    (22,898
    )
    
    
    (2,376
    )Proceeds from Issuance of Common Stock
    
    
    1,751
    
    
    
    699
    
    
    
    753Advances, Contributions and Funds from
Others for Construction, Net
    
    
    4,394
    
    
    
    3,522
    
    
    
    4,992Costs Incurred to Issue Long-Term Debt and Common Stock
    
    
    (1,309
    )
    
    
    (1,360
    )
    
    
    (192
    )Cash Dividends Paid
    
    
    (6,679
    )
    
    
    (6,567
    )
    
    
    (6,315
    )Net Cash and
Cash Equivalents Provided by (Used in) Financing Activities
    
    
    (4,176
    )
    
    
    (924
    )
    
    
    1,937Net Increase
(Decrease) in Cash and Cash Equivalents
    
    
    (415
    )
    
    
    658
    
    
    
    60Cash and
Cash Equivalents at Beginning of Year
    
    
    1,122
    
    
    
    464
    
    
    
    102Cash and Cash Equivalents at End of Year (Excludes Cash Acquired from Purchase of
Unionville Water Company in 2002)
    
    
    707
    
    
    
    1,122
    
    
    
    162Cash Acquired from Purchase of Unionville Water Company
    
    
    
    
    
    
    
    
    
    
    302Cash and Cash Equivalents at End of Year
    
    $
    707
    
    
    $
    1,122
    
    
    $
    464Non-Cash Investing and Financing Activities:Purchase of Unionville Water Company by Issuance of
Company Common Stock (see Note 2 for details)
    
    $
    
    
    
    $
    
    
    
    $
    6,166Supplemental Disclosures of Cash Flow Information:Cash Paid During the Year for:Interest
    
    $
    3,581
    
    
    $
    4,522
    
    
    $
    4,811State and Federal Income Taxes
    
    $
    1,414
    
    
    $
    2,407
    
    
    $
    3,780




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F-6 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 CorporationThe Crystal Water Company of Danielson (Crystal Water)Chester Realty, Inc.New England Water Utility Services, Inc.Connecticut Water Emergency Services, Inc.The Barnstable Holding CompanyThe Barnstable Water Company (Barnstable Water)BARLACO, Inc.The Unionville Water Company (Unionville) Connecticut Water, Gallup, Crystal Water, Barnstable Water and Unionville (our water companies)
are public water utility companies serving 87,767 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
Linebackerâprogram, 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, Inc. BARLACO, Inc. 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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F-7 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, 2004, Connecticut Water has capitalized approximately
$3,125,000 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 2004, 2.1% for 2003 and
1.9% for 2002. 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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F-8 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 312004
    
    
    2003
    
    
    2002(in thousands, except for per share data)Net income, applicable to common stockholders
as reported
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742Add: Total stock-based employee
compensation expense determined under
intrinsic value based method for all awards,
net of related tax effects
    
    
    137
    
    
    
    151
    
    
    
    121Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects
    
    
    (408
    )
    
    
    (425
    )
    
    
    (339
    )Pro forma net income, applicable to common
stockholders
    
    $
    9,085
    
    
    $
    8,898
    
    
    $
    8,524Earnings per share:Basic  as reported
    
    $
    1.17
    
    
    $
    1.15
    
    
    $
    1.13Basic  pro forma
    
    $
    1.14
    
    
    $
    1.12
    
    
    $
    1.10Diluted  as reported
    
    $
    1.16
    
    
    $
    1.15
    
    
    $
    1.12Diluted  pro forma
    
    $
    1.13
    
    
    $
    1.11
    
    
    $
    1.10
 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 $228,000,
$251,000 and $201,000, for 2004, 2003 and 2002, 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, 2004, 2003, and 2002.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-9 Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Basic earnings per share
    
    $
    1.17
    
    
    $
    1.15
    
    
    $
    1.13Dilutive effect of unexercised stock options
    
    
    .01
    
    
    
    
    
    
    
    .01Diluted earnings per share
    
    $
    1.16
    
    
    $
    1.15
    
    
    $
    1.12Numerator (in thousands):Basic net income
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742Diluted net income
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    8,742Denominator (in thousands):Basic weighted average shares outstanding
    
    
    7,999
    
    
    
    7,956
    
    
    
    7,718Dilutive effect of unexercised stock options
    
    
    40
    
    
    
    46
    
    
    
    53Diluted weighted average shares outstanding
    
    
    8,039
    
    
    
    8,002
    
    
    
    7,771
 RECLASSIFICATION Certain reclassifications have been made to conform previously reported data to
the current presentation. NEW ACCOUNTING PRONOUNCEMENTS- On November 29, 2004, the FASB issued SFAS 151 Inventory
Costs  an Amendment of ARB No. 43, Chapter 4 , which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS 151 will have a material effect on its financial
statements. On December 16, 2004, the FASB issued SFAS 153 Exchanges of Nonmonetary Assets  Amendment of APB
Opinion No. 29, which addresses the measurement of exchanges of nonmonetary assets and redefines
the scope of transactions that should be measured based on the fair value of the assets exchanged.
SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The Company does not believe the adoption of SFAS 153 will have a material effect
on its financial statements. In December 2004, the FASB published SFAS No. 123 (revised 2004), (SFAS 123 (R)) Share Based
Payment. SFAS 123 (R) establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. SFAS 123 (R) eliminates the ability
to account for share-based compensation transactions using APB Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees, and generally requires that such transactions be accounted for
using a fair-value-based method. SFAS 123 (R) is effective as of the first interim or annual
reporting period that begins after June 15, 2005, therefore, the effective date for the Company is
July 1, 2005. SFAS 123 (R) applies to all awards granted after the required effective date and to
awards modified, repurchased, or cancelled after that date and as a consequence future employee
stock option grants and other stock based compensation plans will be recorded as expense over the
vesting period of the award based on their fair values at the date the stock based compensation is
granted. The cumulative effect of initially applying SFAS 123 (R) is to be recognized as of the
required effective date using a modified prospective method. Under the modified prospective method
the Company will recognize stock-based compensation expense from July 1, 2005 as if the fair value
based accounting method had been used to account for all outstanding unvested employee awards
granted, modified or settled in prior years. The ultimate impact on future years results of
operation and financial position will depend upon the level of stock based compensation granted in
future years. Although the compensation expense required under the revised statement differs
slightly, the impacts on the Companys financial statements are expected to be similar to the pro
forma disclosures included in Note 1 to the financial statements under Stock Options. On December 21, 2004, the FASB issued FSP 109-1, which was effective upon issuance, to provide
guidance on the application of SFAS No. 109, Accounting for Income Taxes (SFAS 109), to the
provision within the American Jobs Creation Act of 2004 (Jobs Act) that provides a tax deduction on
qualified production activities. The Jobs Act includes a tax deduction of up to 9% (when fully
phased-in) of the lesser of (a) qualified production activities income, as defined in the Jobs
Act, or (b) taxable income (after the deduction for the utilization of any net operating loss
carryforwards). The tax deduction is limited to 50% of W-2 wages paid by the taxpayer. FSP 109-1
clarifies that the manufacturers deduction provided for under the Jobs Act should be accounted for
as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The Company is
currently assessing the Jobs Act and this pronouncement, as well as the related regulatory
treatment, but currently does not expect a material impact on its financial statements.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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##### Table of Contents



F-10 On December 21, 2004, the FASB issued FSP 109-2, which was effective upon issuance, to provide
guidance on the application of the provision in the Jobs Act that allows a special one-time
dividends received deduction on the repatriation of certain foreign earnings to a US taxpayer,
provided certain criteria are met. This statement has no impact on the Company. The FASB issued FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-2). FSP 106-2
provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the Medicare Drug Act) for employers who sponsor postretirement
health care plans that provide prescription drug benefits. FSP 106-2 also requires those employers
to provide certain disclosures regarding the effect of the federal subsidy provided by the Medicare
Drug Act. The Medicare Drug Act generally permits plan sponsors that provide retiree prescription
drug benefits that are actuarially equivalent to the benefits of Medicare Part D to be eligible
for a non-taxable federal subsidy. The Company has concluded that the postretirement
welfare plans benefits will be considered actuarially equivalent to the benefits provided by
Medicare Part D. The Company does not intend to apply for the government subsidy for
postretirement prescription drug benefits, even though it expects to be eligible. Therefore, the
impact of the subsidy on the plans liabilities are not reflected in the December 31, 2004
disclosure. FSP 106-2 was effective for periods beginning after June 15, 2004.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-11 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)
    
    2004
    
    
    2003
    
    
    2002Federal Classified as Operating Expense
    
    $
    2,572
    
    
    $
    1,752
    
    
    $
    4,065Federal Classified as Other Income:Land Sales
    
    
    
    
    
    
    (11
    )
    
    
    Land Donation
    
    
    (280
    )
    
    
    (246
    )
    
    
    (105
    )Non-Water Sales
    
    
    450
    
    
    
    352
    
    
    
    276Other
    
    
    (78
    )
    
    
    (66
    )
    
    
    (52
    )Total Federal Income Tax Expense
    
    
    2,664
    
    
    
    1,781
    
    
    
    4,184State Classified as Operating Expense
    
    
    218
    
    
    
    256
    
    
    
    417State Classified as Other Income:Land Sales
    
    
    
    
    
    
    (3
    )
    
    
    (1
    )Land Donation
    
    
    (965
    )
    
    
    (733
    )
    
    
    (360
    )Non-Water Sales
    
    
    126
    
    
    
    91
    
    
    
    54Other
    
    
    30
    
    
    
    22
    
    
    
    (18
    )Total State Income Tax Expense (Benefit)
    
    
    (591
    )
    
    
    (367
    )
    
    
    92Total Income Tax Expense
    
    $
    2,073
    
    
    $
    1,414
    
    
    $
    4,276
 The components of the Federal and State income tax provisions are: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    1,968
    
    
    $
    (51
    )
    
    $
    2,835State
    
    
    270
    
    
    
    483
    
    
    
    192Total Current
    
    
    2,238
    
    
    
    432
    
    
    
    3,027Deferred Income Taxes, Net:FederalInvestment Tax Credit
    
    
    (66
    )
    
    
    (64
    )
    
    
    (63
    )Capitalized Interest and AFUDC
    
    
    3
    
    
    
    25
    
    
    
    23Depreciation
    
    
    866
    
    
    
    2,167
    
    
    
    798Other
    
    
    (108
    )
    
    
    (296
    )
    
    
    591Total Federal
    
    
    695
    
    
    
    1,832
    
    
    
    1,349StateDepreciation
    
    
    1
    
    
    
    6
    
    
    
    Other
    
    
    (861
    )
    
    
    (856
    )
    
    
    (100
    )Total State
    
    
    (860
    )
    
    
    (850
    )
    
    
    (100
    )Total Deferred Income Taxes, Net
    
    
    (165
    )
    
    
    982
    
    
    
    1,249Total
    
    $
    2,073
    
    
    $
    1,414
    
    
    $
    4,276
 CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-12 Deferred income tax (assets) and liabilities are categorized as follows on the Consolidated Balance Sheet: (in thousands)
    
    2004
    
    
    2003Unrecovered Income Taxes
    
    $
    (16,173
    )
    
    $
    (15,006
    )Deferred Federal and State Income Taxes
    
    
    24,249
    
    
    
    23,073Unfunded Future Income Taxes
    
    
    13,096
    
    
    
    12,840Unamortized Investment Tax Credit
    
    
    1,823
    
    
    
    1,878Net Deferred Income Tax Liability
    
    $
    22,995
    
    
    $
    22,785
 Deferred income tax (assets) and liabilities are comprised of the following: (in thousands)

    
    2004
    
    
    2003Charitable
Contribution Carryforward(1)
    
    $
    (1,108
    )
    
    $
    (473
    )Tax Credit
Carryforward(2)
    
    
    (1,292
    )
    
    
    (1,110
    )Alternative Minimum Tax Carryforward
    
    
    (285
    )
    
    
    (255
    )Prepaid Income Taxes on CIAC
    
    
    (179
    )
    
    
    (211
    )Prepaid FIT on Services
    
    
    (107
    )
    
    
    (71
    )Other Comprehensive Income
    
    
    58
    
    
    
    Accelerated Depreciation
    
    
    24,247
    
    
    
    23,018Net of AFUDC and Capitalized Interest
    
    
    161
    
    
    
    186Unamortized Investment Tax Credit
    
    
    1,823
    
    
    
    1,878Other
    
    
    (323
    )
    
    
    (177
    )Net Deferred Income Tax Liability
    
    $
    22,995
    
    
    $
    22,785
 (1)   2004 charitable
contribution carryover expires beginning in 2005 and ending in 2009. (2)   2004 tax credit
carryforward expires beginning in 2017 and ending in 2019. The calculation of Pre-Tax Income is as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Pre-Tax IncomeNet Income Before Preferred Dividends
    
    $
    9,394
    
    
    $
    9,210
    
    
    $
    8,780Income Taxes
    
    
    2,073
    
    
    
    1,414
    
    
    
    4,276Total Pre-Tax Income
    
    $
    11,467
    
    
    $
    10,624
    
    
    $
    13,056
 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 in 2003 from 2002 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: 2004
    
    
    2003
    
    
    2002Federal 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
    
    
    2.2
    %
    
    
    2.3
    %
    
    
    (1.8
    %)Land Donation Credit
    
    
    (5.6
    %)
    
    
    (4.5
    %)
    
    
    (1.8
    %)Depreciation
    
    
    1.5
    %
    
    
    
    
    
    
    .5
    %Charitable Contribution  Land Donation
    
    
    (5.3
    %)
    
    
    (4.7
    %)
    
    
    (1.7
    %)Pension Costs
    
    
    (2.7
    %)
    
    
    (.3
    %)
    
    
    (.7
    %)Debt Refinancing Costs
    
    
    (3.5
    %)
    
    
    (4.4
    %)
    
    
    .2
    %Allowance for Funds Used During Construction
    
    
    (1.2
    %)
    
    
    (1.3
    %)
    
    
    (1.0
    %)Change in
Estimate of Prior Year Income Tax Expense
    
    
    (0.8
    %)
    
    
    (11.5
    %)
    
    
    Common Stock Equivalents
    
    
    0.4
    %
    
    
    .9
    %
    
    
    Other
    
    
    (0.9
    %)
    
    
    2.8
    %
    
    
    1.0
    %Effective Income Tax Rate
    
    
    18.1
    %
    
    
    13.3
    %
    
    
    32.8
    %
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F-14 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, 2002 through December 31, 2004,
appears below: Issuance(in thousands, except share data)
    
    Shares
    
    
    Amount
    
    
    Expense
    
    
    TotalBalance, January 1, 2002
    
    
    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
    
    
    7,967,379
    
    
    
    55,360
    
    
    
    (1,594
    )
    
    
    53,766Stock and equivalents issued through
Performance Stock Program
    
    
    6,893
    
    
    
    138
    
    
    
    
    
    
    
    138Dividend Reinvestment Plan
    
    
    60,927
    
    
    
    1,622
    
    
    
    (3
    )
    
    
    1,619Tax adjustment on prior year stock
options exercised
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Balance, December 31, 2004 (1)
    
    
    8,035,199
    
    
    $
    57,111
    
    
    $
    (1,597
    )
    
    $
    55,514
  (1)
    Includes 295 restricted and 51,550 common stock equivalent shares issued through the
Performance Stock Program through December 31, 2004. 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.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-14 NOTE 5: ANALYSIS OF RETAINED EARNINGS The summary of the changes in Retained Earnings for the period January 1, 2002 through December 31,
2004, appears below: (in thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002Balance, Beginning of Year
    
    $
    29,549
    
    
    $
    26,906
    
    
    $
    24,441Income Before Preferred Stock Dividends
    
    
    9,394
    
    
    
    9,210
    
    
    
    8,78038,943
    
    
    
    36,116
    
    
    
    33,221Dividends Declared:Cumulative Preferred Stock, Series A, $.80 Per Share
    
    
    12
    
    
    
    12
    
    
    
    12Cumulative Preferred Stock, Series $.90, $.90 Per Share
    
    
    26
    
    
    
    26
    
    
    
    26Common Stock:2004 $0.835 Per Share
    
    
    6,641
    
    
    
    
    
    
    
    2003 $0.825 Per Share
    
    
    
    
    
    
    6,529
    
    
    
    2002 $0.810 Per Share
    
    
    
    
    
    
    
    
    
    
    6,2776,679
    
    
    
    6,567
    
    
    
    6,315Balance, End of Year
    
    $
    32,264
    
    
    $
    29,549
    
    
    $
    26,906
 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 AND CASH
EQUIVALENTS - Cash equivalents consist of highly liquid instruments with original maturities at the time of purchase
of three months or less. The carrying amount approximates fair value. 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, 2004 and 2003, the estimated fair
value of the
Companys long-term debt was $59,149,000 and $73,678,000, respectively, as compared to the carrying
amounts of $66,399,000 and $64,754,000, respectively. 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. INTEREST RATE SWAP- In 2004, the Connecticut Water Company entered into a five-year interest rate
swap associated with its $12.5 million 2004 series variable rate unsecured water facilities revenue
refinancing bonds. This was done to manage the Companys exposure to fluctuations in prevailing
interest rates. The swap agreement qualifies for hedge treatment under FAS No. 133 Accounting for
Derivative Instruments and Hedging Activities. The fair value of the interest rate swap included
in the Companys Consolidated Balance sheet in Deferred Charges and Other Costs was approximately
$145,000 at December 31, 2004. Changes in the fair value of this derivative instrument are
recorded in Accumulated Other Comprehensive Income in Common Stockholders Equity.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-15 NOTE 7: LONG-TERM DEBT Long-Term Debt at December 31, consisted of the following: (in thousands)
    
    
    
    2004
    
    
    2003The Connecticut Water CompanyFirst Mortgage Bonds:5.75%
    
    Series T, Due 2028
    
    $
    
    
    
    $
    5,0005.3%
    
    Series U, Due 2028
    
    
    
    
    
    
    4,5506.94%
    
    Series V, Due 2029
    
    
    
    
    
    
    12,050
    
    
    
    21,600Unsecured Water Facilities Revenue Refinancing Bonds5.05%
    
    1998 Series A, Due 2028
    
    
    9,640
    
    
    
    9,6405.125%
    
    1998 Series B, Due 2028
    
    
    7,685
    
    
    
    7,6954.40%
    
    2003A Series, Due 2020
    
    
    8,000
    
    
    
    8,0005.00%
    
    2003C Series, Due 2022
    
    
    14,930
    
    
    
    14,930Var.
    
    2004 Series Variable Rate, Due 2029
    
    
    12,500
    
    
    
    Var.
    
    2004 Series A, Due 2028
    
    
    5,000
    
    
    
    Var.
    
    2004 Series B. Due 2028
    
    
    4,550
    
    
    
    62,305
    
    
    
    40,265Total Connecticut Water Company
    
    
    62,305
    
    
    
    61,865Crystal Water Utilities Corporation8.0%
    
    Westbank, Due 2017
    
    
    111
    
    
    
    117Crystal Water Company of Danielson7.82%
    
    Connecticut Development Authority, Due 2020
    
    
    455
    
    
    

    469Chester Realty6%
    
    Note Payable, Due 2006
    
    
    35
    
    
    
    57Barnstable Water Company10.2%
    
    Indianapolis Life Insurance, Due 2011
    
    
    1,325
    
    
    
    1,425Unionville Water Company8.125%
    
    Farmington Savings Bank, Due 2011
    
    
    963
    
    
    
    1,0753.56%
    
    State of Connecticut, Due 2023
    
    
    1,531
    
    
    
    Total Connecticut Water Service, Inc.
    
    
    66,725
    
    
    
    65,008Less Current Portion
    
    
    (326
    )
    
    
    (254
    )Total Long-Term Debt
    
    $
    66,399
    
    
    $
    64,754
 The Companys principal payments required for years 2005 - 2009 are as follows: (In thousands)2005 -
    
    $
    3262006 -
    
    $
    3282007 -
    
    $
    3322008 -
    
    $
    3492009 -
    
    $
    367
 At December 31, 2004 a portion of the Companys utility plant was pledged as collateral for
long-term debt.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-16 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, were used to redeem the $12,050,000 aggregate principal amount of Connecticut Waters First
Mortgage Bongs (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. In June 2004, Unionville secured $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
were used to pay off a portion of the balances outstanding under bank lines of credit. On September 1, 2004, The Company refinanced a portion of its existing bond indebtedness. The
Company borrowed $9.55 Million in sale proceeds from the issuance of Water Facilities Refunding
Revenue Bonds by the Connecticut Development Authority (the Authority). The bonds were sold in two
series with the following terms: 2004 A Series: $5,000,000 Variable Interest Maturing 7/1/2028
2004 B Series: $4,550,000 Variable Interest Maturing 9/1/2028 The proceeds of the transaction were used to redeem prior obligations to the Authority that were
secured by the Series T and Series U first mortgage bonds of the Company. 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
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 - 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, 2004 and 2003. 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.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-17 NOTE 8: PREFERRED STOCK The Companys Preferred Stock at December 31, consisted of the following: (in thousands, except share data)
    
    2004
    
    
    2003Connecticut 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. 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 2004, 2003 and 2002. 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s total
available lines of credit totaled
$15,500,000 and $12,500,000 at December 31, 2004 and 2003,
respectively. All of the lines
have one year lives and will expire at different dates in 2005. The Company expects the lines of
credit to be renewed in 2005. As of December 31, 2004 and 2003, the outstanding
bank lines of credit were $5,650,000 and $9,700,000, respectively. Bank commitment fees associated with the lines of credit were
approximately $37,500, $30,000, and $30,000 in 2004, 2003, and 2002 respectively. At December 31, 2004 and 2003, the weighted average interest rates on short-term borrowings
outstanding were 2.83% and 1.52%, respectively. NOTE 10: UTILITY PLANT AND CONSTRUCTION PROGRAM The components of utility plant and equipment at December 31, were as follows: (in thousands)
    
    2004
    
    
    2003Land
    
    $
    9,652
    
    
    $
    9,604Source of Supply
    
    
    20,724
    
    
    
    19,417Pumping
    
    
    25,348
    
    
    
    24,375Water Treatment
    
    
    47,726
    
    
    
    47,547Transmission and Distribution
    
    
    209,887
    
    
    
    199,660General
    
    
    20,228
    
    
    
    18,548Held for Future Use
    
    
    420
    
    
    
    465Total
    
    $
    333,985
    
    
    $
    319,616
 The amounts of depreciable utility plant at December 31, 2004 and 2003 included in total utility
plant were $291,641,000 and $284,561,000, respectively.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-18 NOTE 11: TAXES OTHER THAN INCOME TAXES Taxes Other than Income Taxes consist of the following: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Municipal Property Taxes
    
    $
    4,608
    
    
    $
    4,452
    
    
    $
    4,149Payroll Taxes
    
    
    695
    
    
    
    681
    
    
    
    647Total
    
    $
    5,303
    
    
    $
    5,133
    
    
    $
    4,796
 NOTE 12: PENSION AND OTHER POST-RETIREMENT EMPLOYEE BENEFITS GENERAL- As of December 31, 2004, Connecticut Water had 166 employees, Gallup 4, Crystal 7,
Barnstable Water 9, and Unionville 7 for a total of 193 employees. The Companys officers are
employees of Connecticut Water. Employee expenses are charged between companies as appropriate. 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 targeted asset allocation ratios for those plans as set by the Committee at December 31, 2004 and 2003 were: 2004
    
    
    2003Equity
    
    
    65
    %
    
    
    65
    %Fixed Income
    
    
    35
    %
    
    
    35
    %Total
    
    
    100
    %
    
    
    100
    %
 The Committee recognizes that a variation of up to 5% in either direction from its targeted asset
allocation mix is acceptable due to market fluctuations. Our expected long-term rate of return on the various benefit plan assets is based upon the plans
expected asset allocation, expected returns on various classes of plan assets as well as historical
returns. PENSION Defined Contribution Plan- Through 2003, one of the Companys subsidiaries, Unionville, had 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 pay. The Unionville contribution charged to expense under this plan for the
twelve months ended December 31, 2003 was $31,000. 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. A contribution of $2,009,000 is expected to be made in 2005 for 2004 plan year.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-19 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)
    
    2004
    
    
    2003Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    23,812
    
    
    $
    21,929Service Cost
    
    
    951
    
    
    
    843Interest Cost
    
    
    1,458
    
    
    
    1,390Plan Amendments
    
    
    
    
    
    
    (2
    )Actuarial loss/(gain)
    
    
    1,807
    
    
    
    535Benefits paid
    
    
    (979
    )
    
    
    (883
    )Benefit obligation, end of year
    
    $
    27,049
    
    
    $
    23,812Change in Plan Assets:Fair Value, beginning of year
    
    $
    20,311
    
    
    $
    17,742Actual return on plan assets
    
    
    2,004
    
    
    
    3,452Employer contribution
    
    
    914
    
    
    
    Benefits paid
    
    
    (979
    )
    
    
    (883
    )Fair Value, end of year
    
    $
    22,250
    
    
    $
    20,311Funded Status
    
    $
    (4,799
    )
    
    $
    (3,501
    )Unrecognized net actuarial (gain) loss
    
    
    1,577
    
    
    
    298Unrecognized transition obligation
    
    
    24
    
    
    
    36Unrecognized prior service cost
    
    
    827
    
    
    
    935Accrued Cost
    
    $
    (2,371
    )
    
    $
    (2,232
    )
 The accumulated benefit obligation for all defined benefit pension plans was approximately
$21,195,000 and $18,800,000 at December 31, 2004 and 2003, respectively. 2004
    
    
    2003Weighted-average assumptions used to determine benefit
obligations at December 31:Discount rate
    
    
    5.75
    %
    
    
    6.25
    %Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
 2004
    
    
    2003Weighted-average assumptions used to determine net periodic
cost for years ended December 31:Discount rate
    
    
    6.25
    %
    
    
    6.50
    %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.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-20 Pension Benefits(in thousands)
    
    2004
    
    
    2003
    
    
    2002Components of net periodic benefit costsService cost
    
    $
    951
    
    
    $
    843
    
    
    $
    705Interest cost
    
    
    1,458
    
    
    
    1,390
    
    
    
    1,345Expected return on plan assets
    
    
    (1,572
    )
    
    
    (1,544
    )
    
    
    (1,543
    )Amortization of:Unrecognized net transition asset
    
    
    12
    
    
    
    12
    
    
    
    13Unrecognized net (gain)/loss
    
    
    95
    
    
    
    (2
    )
    
    
    (252
    )Unrecognized prior service cost
    
    
    108
    
    
    
    108
    
    
    
    108Net Periodic Pension Benefit Costs
    
    $

    1,052
    
    
    $
    807
    
    
    $
    376
 Plan Assets The Companys pension plan weighted-average asset allocations at December 31, 2004, and 2003 by
asset category were as follows: 2004
    
    
    2003Equity Securities
    
    
    67
    %
    
    
    66
    %Fixed Income
    
    
    33
    
    
    
    34Total
    
    
    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 $2,009,000 contribution for plan year 2004 in 2005. The Plans expected future benefit payments are: Year
    
    Amount2005
    
    $
    1,162,0002006
    
    
    1,136,0002007
    
    
    1,254,0002008
    
    
    2,011,0002009
    
    
    1,526,000Years 2010-2014
    
    
    10,566,000
 POST-RETIREMENT BENEFITS OTHER THAN PENSION (PBOP)- In addition to providing pension
benefits, a subsidiary company, Connecticut Water Company, 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 2004 and 2003 was $473,100 for each year. A 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.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-21 The Company has concluded that the postretirement welfare plans benefits will be
considered actuarially equivalent to the benefits provided by Medicare Part D. The Company does
not intend to apply for the government subsidy for postretirement prescription drug benefits, even
though it expects to be eligible. Therefore, the impact of the subsidy on the plans liabilities
are not reflected in the December 31, 2004 disclosure. 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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)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Change in Benefit Obligation:Benefit obligation, beginning of year
    
    $
    5,234
    
    
    $
    5,507
    
    
    $
    94
    
    
    $
    98Service Cost
    
    
    311
    
    
    
    270
    
    
    
    2
    
    
    
    2Interest Cost
    
    
    323
    
    
    
    314
    
    
    
    6
    
    
    
    6Plan Participant Contributions
    
    
    75
    
    
    
    52
    
    
    
    
    
    
    
    Plan Amendments
    
    
    
    
    
    
    (400
    )
    
    
    
    
    
    
    Actuarial loss/(gain)
    
    
    1,067
    
    
    
    (129
    )
    
    
    2
    
    
    
    (8
    )Benefits paid
    
    
    (405
    )
    
    
    (380
    )
    
    
    (4
    )
    
    
    (4
    )Benefit obligation, end of year
    
    $
    6,605
    
    
    $
    5,234
    
    
    $
    100
    
    
    $
    94Change in Plan Assets:Fair Value, beginning of year
    
    $
    3,179
    
    
    $
    2,592
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    244
    
    
    
    442
    
    
    
    
    
    
    
    Employer contribution
    
    
    473
    
    
    
    473
    
    
    
    4
    
    
    
    4Participants contributions
    
    
    75
    
    
    
    52
    
    
    
    
    
    
    
    Benefits paid
    
    
    (405
    )
    
    
    (380
    )
    
    
    (4
    )
    
    
    (4
    )Fair Value, end of year
    
    $
    3,566
    
    
    $
    3,179
    
    
    $
    
    
    
    $
    Funded Status
    
    $
    (3,039
    )
    
    $
    (2,055
    )
    
    $
    (100
    )
    
    $
    (94
    )Unrecognized net actuarial (gain) loss
    
    
    988
    
    
    
    25
    
    
    
    (40
    )
    
    
    (46
    )Unrecognized transition obligation
    
    
    963
    
    
    
    1,084
    
    
    
    58
    
    
    
    64Accrued Cost
    
    $
    (1,088
    )
    
    $
    (946
    )
    
    $
    (82
    )
    
    $
    (76
    )Weighted-average assumptions used to determine
benefit obligations at December 31:Discount rate
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.75
    %
    
    
    6.25
    %Weighted-average assumptions used to determine net
periodic benefit cost for years ended December 31:Discount rate
    
    
    6.25
    %
    
    
    6.50
    %
    
    
    6.25
    %
    
    
    6.50
    %Expected long-term return on plan assets
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    
    
    
    
    Rate of compensation increase
    
    
    4.50
    %
    
    
    4.50
    %
    
    
    
    
    
    
    
  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-22 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
    
    
    Barnstable Water(in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Components of net periodic benefit costsService cost
    
    $
    311
    
    
    $
    270
    
    
    $
    223
    
    
    $
    2
    
    
    $
    2
    
    
    $
    2Interest cost
    
    
    323
    
    
    
    314
    
    
    
    309
    
    
    
    6
    
    
    
    6
    
    
    
    7Expected return on plan assets
    
    
    (158
    )
    
    
    (145
    )
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of:Unrecognized net transition asset
    
    
    121
    
    
    
    165
    
    
    
    165
    
    
    
    6
    
    
    
    6
    
    
    
    6Recognized net (gain)/loss
    
    
    18
    
    
    
    (31
    )
    
    
    (84
    )
    
    
    (3
    )
    
    
    (4
    )
    
    
    (3
    )Net Periodic Pension and Post Retirement
Benefit Costs
    
    $
    615
    
    
    $
    573
    
    
    $
    472
    
    
    $
    11
    
    
    $
    10
    
    
    $
    12
 Assumed health care cost trend rates at December 31: 2004
    
    
    2003Medical
    
    
    Dental
    
    
    Medical
    
    
    DentalHealth care cost trend rate
assumed for next year
    
    
    8.5
    %
    
    
    8.5
    %
    
    
    8.5
    %
    
    
    8.0
    %Rate to which the cost trend
rate is assumed to decline
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    3.5
    %Year that the rate reaches
the ultimate trend rate
    
    
    2014
    
    
    
    2014
    
    
    
    2013
    
    
    
    2013
 Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following
effects on Connecticut Waters plan and would have no impact on the Barnstable Water plan: 1-Percentage-Point
    
    
    1-Percentage-Point(in thousands)
    
    Increase
    
    
    DecreaseEffect on total of service and interest cost components
    
    $
    100
    
    
    $
    (82
    )Effect on post-retirement benefit obligation
    
    $
    851
    
    
    $
    (711
    )
 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, 2004 and 2003, by
asset category were as follows: 2004
    
    
    2003Equity Securities
    
    
    57
    %
    
    
    55
    %Fixed Income
    
    
    43
    
    
    
    45Total
    
    
    100
    %
    
    
    100
    %
 Cash Flows Connecticut Water contributed $473,100 to its other post-retirement benefit plan in 2004 for plan
year 2004 and expects to contribute $473,100 in 2005 for plan year 2005.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-23 Expected future benefit payments are: Year
    
    Connecticut Water
    
    
    Barnstable2005
    
    $
    248,000
    
    
    $
    8,0002006
    
    
    264,000
    
    
    
    8,0002007
    
    
    289,000
    
    
    
    8,0002008
    
    
    316,000
    
    
    
    7,0002009
    
    
    346,000
    
    
    
    7,000Years 2010  2014
    
    
    2,223,000
    
    
    
    37,000
 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN- Connecticut Water and Barnstable Water provide additional
pension benefits to senior management through supplemental executive
retirement contracts. At
December 31, 2004 and at December 31, 2003 the actuarial present value of the projected benefit
obligation of these contracts were $1,301,000 and $964,000,
respectively. Expense associated with these contracts were
approximately $105,000 for 2004, $152,000 for 2003, and $106,000 for 2002. SAVINGS PLAN -The Company and certain of its subsidiaries maintain 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 2004, 2003 and 2002 was $174,000, $166,000, and $161,000, 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. An incentive bonus of .6% of base pay, or a total of $51,000 was awarded
in 2004. No incentive bonus was awarded in 2003. An incentive bonus of .4% of base pay, or
$30,000 was awarded in 2002. NOTE 13: STOCK-BASED COMPENSATION PLANS The Company has two components to its Stock-Based Compensation Plans (the Plans): The Stock Option
Program (SOP) and the Performance Stock Program (PSP). In total under the original Plans (1994
Plan) there were 700,000 shares authorized and 224,696 shares available for grant at December 31,
2004. The Plans terminated on April 22, 2004. The Board of Directors has adopted the 2004
Performance Stock Program, which was approved by shareholders on April 23, 2004. There are 700,000
shares authorized under the 2004 PSP and no shares have been issued as of December 31, 2004. 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, 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002Expected life (years)
    
    
    
    
    
    
    5.00
    
    
    
    6.00Risk-free interest rate (percentage)
    
    
    
    
    
    
    2.79
    
    
    
    3.09Volatility (percentage)
    
    
    
    
    
    
    30.00
    
    
    
    30.00Dividend yield
    
    
    
    
    
    
    2.91
    
    
    
    3.13
 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 and 2002 was $6.42
and $5.82 respectively.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-24 For the Years Ended December 31,2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions:Outstanding, beginning of year
    
    
    251,835
    
    
    $
    22.85
    
    
    
    235,101
    
    
    $
    21.41
    
    
    
    229,811
    
    
    $
    20.18Granted
    
    
    
    
    
    
    
    
    
    
    36,053
    
    
    
    29.05
    
    
    
    39,254
    
    
    
    25.78Terminated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (19,319
    )
    
    
    16.91
    
    
    
    (33,964
    )
    
    
    18.12Outstanding, end of year
    
    
    251,835
    
    
    
    22.85
    
    
    
    251,835
    
    
    
    22.85
    
    
    
    235,101
    
    
    
    21.41Exercisable, end of year
    
    
    196,731
    
    
    $
    21.48
    
    
    
    119,992
    
    
    $
    21.35
    
    
    
    71,581
    
    
    $
    20.74
 No options were exercised during 2004. The following table summarizes the price ranges of the
options outstanding and options exercisable as of December 31, 2004: Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Life (years)
    
    
    Price
    
    
    Shares
    
    
    PriceRange of prices:$12.00 - $14.99
    
    
    49,252
    
    
    
    4.3
    
    
    $
    14.83
    
    
    
    49,252
    
    
    $
    14.83$15.00 - $17.99
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    --$18.00 - $20.99
    
    
    35,516
    
    
    
    5.9
    
    
    
    20.42
    
    
    
    35,516
    
    
    
    20.42$21.00 - $23.99
    
    
    58,010
    
    
    
    4.9
    
    
    
    22.33
    
    
    
    58,010
    
    
    
    22.33$24.00 - $26.99
    
    
    39,254
    
    
    
    7.9
    
    
    
    25.78
    
    
    
    19,630
    
    
    
    25.78$27.00 - $29.99
    
    
    69,803
    
    
    
    7.6
    
    
    
    28.52
    
    
    
    34,323
    
    
    
    28.24251,835
    
    
    
    6.2
    
    
    $
    22.85
    
    
    
    196,731
    
    
    $
    21.48
 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:  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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##### Table of Contents



F-25 InterestExpenseandPreferredOther
    
    
    
    
    
    
    DividendOperating
    
    
    Other Income
    
    
    (net of
    
    
    Income
    
    
    Net(in thousands)
    
    Revenues
    
    
    Depreciation
    
    
    Expenses
    
    
    (Deductions)
    
    
    AFUDC)
    
    
    Taxes
    
    
    IncomeFor the year ended
December 31, 2004Water Activities
    
    $
    48,493
    
    
    $
    5,801
    
    
    $
    29,290
    
    
    $
    99
    
    
    $
    3,514
    
    
    $
    2,742
    
    
    $
    7,245Real Estate Transactions
    
    
    (12
    )
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    1,206Services and Rentals
    
    
    4,818
    
    
    
    33
    
    
    
    3,304
    
    
    
    
    
    
    
    
    
    
    
    576
    
    
    
    905Total
    
    $
    53,299
    
    
    $
    5,834
    
    
    $
    32,621
    
    
    $
    99
    
    
    $
    3,514
    
    
    $
    2,073
    
    
    $
    9,356For the year ended
December 31, 2003Water 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, 2002Water Activities
    
    $
    45,830
    
    
    $
    5,187
    
    
    $
    24,356
    
    
    $
    87
    
    
    $
    4,104
    
    
    $
    4,412
    
    
    $
    7,858Real Estate Transactions
    
    
    5
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    (466
    )
    
    
    440Services and Rentals
    
    
    2,928
    
    
    
    20
    
    
    
    2,134
    
    
    
    
    
    
    
    
    
    
    
    330
    
    
    
    444Total
    
    $
    48,763
    
    
    $
    5,207
    
    
    $
    26,521
    
    
    $
    87
    
    
    $
    4,104
    
    
    $
    4,276
    
    
    $
    8,742
 At December 31 (in thousands)
    
    2004
    
    
    2003Total Plant and Other Investments:Water
    
    $
    245,085
    
    
    $
    237,947Non-Water
    
    
    989
    
    
    
    980246,074
    
    
    
    238,927Other Assets:Water
    
    
    39,897
    
    
    
    37,205Non-Water
    
    
    4,969
    
    
    
    5,21344,866
    
    
    
    42,418Total Assets
    
    $
    290,940
    
    
    $
    281,345
  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-26 NOTE 15: COMMITMENTS AND CONTINGENCIES SECURITY The Bioterrorism Response Act of 2001 required every public water system serving over
3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last
of these assessments required to be filed by our companies were submitted to the U.S. Environmental
Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December
2004, per statutory requirements. The information within the VA is not subject to release to the
public and is protected from Freedom of Information Act inquiries. Investment in security-related improvements is a continuing process 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. As previously disclosed on March 11, 2005, the Company entered into an agreement to sell the
assets of its Massachusetts subsidiary, Barnstable Water, and the assets of its BARLACO real
estate subsidiary to the Town of Barnstable, Massachusetts. The total value of the transaction is
$11 million, with $10 million to be received by Barnstable Water in 2005 for the water utility
assets and associated liabilities. A separate real estate transaction for the BARLACO assets will
take place in 2006 with additional proceeds of $1 million. Assuming that the Company completes the
sales of the assets of Barnstable Water and BARLACO during 2005 and 2006 as described above, the
Company estimates that it will record after tax gains of approximately $2.7 million and $1.4
million, respectively, from the sale of those companies assets in those years. At the closing of
the sale of water utility assets, the Company will also enter into a management contract with the
Town to provide full operating and management services for the Barnstable Water utility operation.
Under this full service contract, the customers will continue to receive the same full range of
field and customer services presently provided by Barnstable Water 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 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 assessed and evaluated 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.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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F-27 During the quarter ended March 31, 2004, the Company received notice from the State of Connecticut
Department of Environmental Protection (DEP) that its review of our approximately 7,600 acres of
Class I, II, and III land was complete. The DEP notice indicated that the DEP had identified 240
parcels representing 6,823 acres of land and land underwater as land that the State of Connecticut
would be interested in acquiring as open space, by either fee ownership or a conservation easement.
During October 2004, the Company received notice from the DEP indicating that the State of
Connecticut does not have sufficient funds available for the possible acquisition of Company lands
by the State. The DEP also requested that the Company extend the sales moratorium set forth in the
Memorandum of Understanding (MOU) entered into by the DEP and the Company in December 2002 beyond
its current expiration date of December 31, 2004. The Company chose not to extend the MOU, thus
causing it to expire on December 31, 2004. The Company is now free to consider disposition of
lands to other interested parties, subject to the applicable statutory and regulatory requirements. RATE RELIEF Our four Connecticut operating subsidiaries, Connecticut Water, Crystal, Gallup and
Unionville, are regulated public utilities which provide water services to their customers. The
rates that these companies charge their water customers are subject to the jurisdiction of the
regulatory authority of the Connecticut DPUC, which sets water rates for each company independently
because the systems are not interconnected. Similarly, the Massachusetts Department of
Telecommunications and Energy (DTE) regulates the operations and rates of the Barnstable Water
Company. The DPUC and DTE may authorize the Companys operating subsidiaries to charge rates which the DPUC
and the DTE consider to be sufficient to recover the normal operating expenses of our operating
subsidiaries, to provide funds for adding new or replacing water infrastructure, and to allow our
operating subsidiaries to earn what the DPUC and the DTE consider to be a fair and reasonable
return on our invested capital. The Company believes it is likely that is will apply for rate increases for one or more of its
Connecticut subsidiaries during the next 18 months. LAND DISPOSITIONS Starting with its first land donation in 2000, the Company has engaged in a
program of land donations to municipalities in Connecticut, which has
resulted in net income (tax
benefits) to the Company of approximately $4.9 million. As previously disclosed, the land donation
program under the Companys agreement with the Town of Killingly, CT was completed in January 2004
with the donation of the remaining parcel to the Town. The donation of this final parcel resulted
in a net profit (tax benefit) to the Company of $706,000 during the first quarter of 2004. The
donation of land to the Town of Plymouth, CT in December 2004 resulted in an additional $498,000
net income. The Company and its subsidiaries own additional parcels of land in Connecticut and Massachusetts
which may be suitable in the future for disposition, either by sale or by donation to
municipalities, other local governments or private charitable entities. These additional parcels
would include certain Class I and II parcels previously identified by the Connecticut DEP in the
DEP notice noted above, as well as certain lands owned by BARLACO in Barnstable, Massachusetts. During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in
Connecticut for public and/or open space purposes. These donations
contributed approximately $.9 million and $1.2 million, respectively to net income in those years, as a result of favorable tax
treatment under federal and Connecticut tax laws. The Company currently anticipates that it will
continue to pursue selected land sales and/or donations during fiscal years 2005, 2006 and 2007,
but at a reduced level. The Company currently does not project completing any material land
transactions in 2005. The Company is unable to predict if and when any sales or donations of some
or all of these parcels may occur in the future and, if so, what
amount of net income (tax
benefits) may result from any such sales or donations.  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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##### Table of Contents



F-28 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. NOTE 16: QUARTERLY FINANCIAL DATA (Unaudited) Selected quarterly financial data for the years ended December 31, 2004 and 2003 appears below: (in thousands, except for per share data) Net Income
    
    
    Basic Earnings PerUtility
    
    
    Applicable to
    
    
    AverageOperating Revenues
    
    
    Operating Income
    
    
    Common Stock
    
    
    Common Share2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003First Quarter
    
    $
    10,919
    
    
    $
    10,901
    
    
    $
    1,906
    
    
    $
    2,016
    
    
    $
    1,975
    
    
    $
    2,110
    
    
    $
    0.25
    
    
    $
    0.27Second Quarter
    
    
    11,959
    
    
    
    10,841
    
    
    
    2,763
    
    
    
    2,048
    
    
    
    2,126
    
    
    
    1,222
    
    
    
    0.26
    
    
    
    0.15Third Quarter
    
    
    13,916
    
    
    
    13,673
    
    
    
    4,388
    
    
    
    4,606
    
    
    
    3,740
    
    
    
    3,873
    
    
    
    0.47
    
    
    
    0.49Fourth Quarter
    
    
    11,699
    
    
    
    11,700
    
    
    
    1,594
    
    
    
    2,861
    
    
    
    1,515
    
    
    
    1,967
    
    
    
    0.19
    
    
    
    0.24Year
    
    $
    48,493
    
    
    $
    47,115
    
    
    $
    10,651
    
    
    $
    11,531
    
    
    $
    9,356
    
    
    $
    9,172
    
    
    $
    1.17
    
    
    $
    1.15
  CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES




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##### Table of Contents



E-1 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).3.5
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
Connecticut Water Service, Inc. dated April 23, 2004. (Exhibit 3.5 to Form 10-Q for the
quarter ended 3/31/04).4.1
    
    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).4.2
    
    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).4.3
    
    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).4.4
    
    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).4.5
    
    Loan Agreement dated as of October 1, 2003 between the Connecticut Development Authority and
The Connecticut Water Company. (Exhibit 4.12 to Form 10-K for the year ended 12/31/03).4.6
    
    Indenture of Trust dated as of October 1, 2003 between the Connecticut Development Authority
and The Connecticut Water Company. (Exhibit 4.13 to Form 10-K for the year ended 12/31/03).4.7
    
    Loan Agreement dated as of October 1, 2003 between the Connecticut Development Authority and
The Connecticut Water Company. (Exhibit 4.14 to Form 10-K for the year ended 12/31/03).




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##### Table of Contents



E-2 ExhibitNumber
    
    Description4.8
    
    Indenture of Trust dated as of October 1, 2003 between the Connecticut Development Authority
and The Connecticut Water Company. (Exhibit 4.15 to Form 10-K for the year ended 12/31/03).4.9
    
    Bond Purchase Agreement dated as of October 10, 2003 among Connecticut Development Authority,
The Connecticut Water Company and A.G. Edwards and Sons, Inc. (Exhibit 4.16 to Form 10-K for
the year ended 12/31/03).4.10
    
    Line of Credit Agreement dated as of March 12, 2004 between Webster Bank and Connecticut
Water Service, Inc. (Exhibit 4.17 to Form 10-Q for the quarter ended 3/31/04).4.11
    
    Bond Purchase Agreement dated as of March 12, 2004, among The Connecticut
Water Company and A.G. Edwards & Sons, Inc. (Exhibit 4.18 to Form 10-Q for the
quarter ended 3/31/04).4.12
    
    Indenture of Trust, dated as of March 1, 2004, between The Connecticut Water Company and U.S.
Bank National Association, as Trustee. (Exhibit 4.19 to Form 10-Q for the quarter ended
3/31/04).4.13
    
    Reimbursement and Credit Agreement, dated as of March 1, 2004, between The Connecticut Water
Company and Citizens Bank of Rhode Island. (Exhibit 4.20 to Form 10-Q for the quarter ended
3/31/04).4.14
    
    Letter of Credit issued by Citizens Bank of Rhode Island, dated as of March 4, 2004.
(Exhibit 4.21 to Form 10-Q for the quarter ended 3/31/04).4.15
    
    Agreement No. DWSRF 200103-C Project Loan Agreement between the State of Connecticut and
Unionville Water Company under the Drinking Water State Revolving Fund (DWSRF) Program, dated
as of April 19, 2004. (Exhibit 4.22 to Form 10-Q for the quarter ended 6/30/04).4.16
    
    Collateral Assignment of Water Service Charges and Right to Receive Water Service Expense
Assessments and Security Agreement between Unionville Water Company and the State of
Connecticut, dated as of June 3, 2004. (Exhibit 4.23 to Form 10-Q for the quarter ended
6/30/04).4.17
    
    Bond Purchase Agreement, dated September 1, 2004, among The Connecticut Water Company,
Connecticut Development Authority, and A.G. Edwards & Sons, Inc. (Exhibit 4.24 to Form 10-Q
for the quarter ended 9/30/04).4.18
    
    Indenture of Trust, dated August 1, 2004, between The Connecticut Water Company and U.S. Bank
National Association, as Trustee, 2004A Series. (Exhibit 4.25 to Form 10-Q for the quarter
ended 9/30/04).




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##### Table of Contents



E-3 ExhibitNumber
    
    Description4.19
    
    Indenture of Trust, dated August 1, 2004, between The Connecticut Water Company and U.S. Bank
National Association, as Trustee, 2004B Series. (Exhibit 4.26 to Form 10-Q for the quarter
ended 9/30/04).4.20
    
    Loan Agreement, dated August 1, 2004, between The Connecticut Water Company and Connecticut
Development Authority for 2004 Series. (Exhibit 4.27 to Form 10-Q for the quarter ended
9/30/04).4.21
    
    Loan Agreement, dated August 1, 2004, between The Connecticut Water Company and Connecticut
Development Authority for 2004B Series. (Exhibit 4.28 to Form 10-Q for the quarter ended
9/30/04).4.22
    
    Reimbursement and Credit Agreement, dated as of August 1, 2004, between The Connecticut Water
Company and Citizens Bank of Rhode Island, 2004A Series. (Exhibit 4.29 to Form 10-Q for the
quarter ended 9/30/04).4.23
    
    Reimbursement and Credit Agreement, dated as of August 1, 2004, between The Connecticut Water
Company and Citizens Bank of Rhode Island, 2004B Series. (Exhibit 4.30 to Form 10-Q for the
quarter ended 9/30/04).4.24
    
    Letters of Credit, each dated September 2, 2004, between The Connecticut Water Company and
Citizens Bank of Rhode Island, with respect to each of the 2004A and 2004B Series Bonds.
(Exhibit 4.31 to Form 10-Q for the quarter ended 9/30/04).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 12/31/84).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. Chiaraluceb.
    
    David C. Benoitc.
    
    James R. McQueend.
    
    Kenneth W. Kells




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##### Table of Contents



E-4 ExhibitNumber
    
    Description10.5.a*
    
    The Connecticut Water Company Amended and Restated Deferred Compensation Agreement with
Thomas R. Marston, dated December 2, 2004.10.6
    
    The Connecticut Water Company Supplemental Executive Retirement Agreement
with William C. Stewart. (Exhibit 10.6a to Form 10-K for year ended
12/31/91).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.
(Exhibit 10.7.1a to Form 10-K for the year ended 12/31/03).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.
(Exhibit 10.7.2a to Form 10-K for the year ended 12/31/03).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.a*
    
    The Connecticut Water Company Supplemental Executive Retirement Agreement with Thomas R.
Marston dated December 2, 2004.10.8.1
    
    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. (Exhibit 10.8.2 to Form 10-K for
the year ended 12/31/03).
 a)
    
    David C. Benoitb)
    
    Peter J. Bancroftc)
    
    James R. McQueend)
    
    Terrance P. ONeille)
    
    Maureen P. Westbrook




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##### Table of Contents



E-5 ExhibitNumber
    
    Description10.9
    
    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. Chiaraluceb)
    
    Michele G. DiAcric)
    
    James R. McQueend)
    
    David C. Benoite)
    
    Peter J. Bancroftf)
    
    Maureen P. Westbrookg)
    
    Terrance P. ONeill
 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).10.9.2*
    
    Employment agreement between The Connecticut Water Company and Connecticut Water Service,
Inc. with Thomas R. Marston, amended and restated as of December 2, 2004.10.10
    
    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).10.11.1*
    
    Employment and Consulting Agreement between James R. McQueen and The Connecticut Water
Company dated December 10, 2004.10.12
    
    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. (Exhibit 10.12.1 to Form 10-K for the year ended
12/31/03).10.12.2
    
    Post-EGTRRA Amendment to the Savings Plan of The Connecticut Water Company, effective
January 1, 2002. (Exhibit 10.12.2 to Form 10-K for the year
ended 12/31/03).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.
(Exhibit 10.12.3 to Form 10-K for the
year ended 12/31/03).




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##### Table of Contents



E-6 ExhibitNumber
    
    Description10.12.4
    
    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. (Exhibit 10.12.4 to
Form 10-K for the year ended 12/31/03).10.12.5*
    
    Supplemental Participation Agreement to the Savings Plan of The Connecticut Water Company
between Unionville Water Company and Connecticut Water Company, dated February 23, 2004.10.13
    
    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).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. (Exhibit 10.13.6 to Form 10-K
for the year ended 12/31/03).10.13.7*
    
    Seventh amendment, dated May 12, 2004 to the amended and restated Connecticut Water
Employees Retirement Plan effective January 1, 1997.10.14
    
    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 12/31/94).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 12/31/94).




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##### Table of Contents



E-7 ExhibitNumber
    
    Description10.16
    
    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 12/31/75).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 12/31/86).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
    
    Bond Exchange Agreements between Connecticut Water Service, Inc., The Connecticut Water
Company Bankers Life Company and Connecticut Mutual Life Insurance Company dated October 23,
1978. (Exhibit 14 to Form 10-K for the year ended 12/31/78).10.20
    
    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).10.21
    
    Contract for Supplying Bradley International Airport. (Exhibit 10.21 to Form 10-K for the
year ended 12/31/84).10.22
    
    Report of South Windsor Task Force. (Exhibit 10.23 to Form 10-K for the year ended
12/31/87).10.23
    
    Trust Agreement for The Connecticut Water Company Welfare Benefits Plan (VEBA) dated January
1, 1989. (Exhibit 10.21 to Form 10-K for year ended 12/31/89).10.24
    
    1994 Performance Stock Program, as amended and restated as of April 26, 2002.
(Exhibit A to Proxy Statement dated 3/19/02).10.25
    
    2004 Performance Stock Program, as of April 23, 2004. (Appendix A to Proxy Statement dated
3/12/04).10.25a
    
    Connecticut Water Service, Inc. Performance Stock Program Incentive Stock Option Grant Form.
(Exhibit 10.1 to Form 10-Q for the quarter ended 9/30/04).10.25.b
    
    Connecticut Water Service, Inc. Performance Stock Program Non-Qualified Stock Option Grant
Form. (Exhibit 10.2 to Form 10-Q for the quarter ended 9/30/04).10.26
    
    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).




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##### Table of Contents



E-8 ExhibitNumber
    
    Description10.27
    
    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*
    
    Asset Purchase Agreement by and among Connecticut Water Service, Inc., Barnstable Holding
Company, Barnstable Water Company, BARLACO, Inc., and The Town of Barnstable, Massachusetts,
dated as of March 10, 2005.23.1*
    
    Consent of Independent Registered Public Accounting Firm24.*
    
    Power of Attorney31.1*
    
    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 10-K.




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##### Table of Contents



36 
 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. ChiaraluceMarch 31, 2005
    
    
    
    Marshall T. ChiaralucePresident, Chairman of the Board and ChiefExecutive 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. ChiaraluceMarshall T. Chiaraluce
    
    Director, President Chairman
    
    March 31, 2005(Principal Executive Officer)
    
    of the Board, and ChiefExecutive Officer/s/ David C. BenoitDavid C. Benoit
    
    Vice President  Finance,
    
    March 31, 2005(Principal Financial and Accounting Officer)
    
    Chief Financial Officer andTreasurer




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##### Table of Contents



37 /s/ Roger Engle*
    
    Director
    
    March 31, 2005Roger Engle/s/ Mary Ann Hanley*
    
    Director
    
    March 31, 2005Mary Ann Hanley/s/ Marcia Hincks*
    
    Director
    
    March 31, 2005Marcia Hincks/s/ Mark G. Kachur*
    
    Director
    
    March 31, 2005Mark G. Kachur/s/ David A. Lentini*
    
    Director
    
    March 31, 2005David A. Lentini/s/ Ronald D. Lengyel*
    
    Director
    
    March 31, 2005Ronald D. Lengyel/s/ Robert F. Neal*
    
    Director
    
    March 31, 2005Robert F. Neal/s/ Arthur C. Reeds*
    
    Director
    
    March 31, 2005Arthur C. Reeds/s/ Lisa J. Thibdaue*
    
    Director
    
    March 31, 2005Lisa J. Thibdaue/s/ Carol P. Wallace*
    
    Director
    
    March 31, 2005Carol P. Wallace/s/ Donald B. Wilbur*
    
    Director
    
    March 31, 2005Donald B. Wilbur* - Signed by David
C. Benoit, Power of Attorney




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##### Table of Contents



S-1 CONNECTICUT WATER SERVICE, INC. and SUBSIDIARIES 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance
    
    
    Additions
    
    
    Deductions
    
    
    Balance(In thousands)
    
    Beginning
    
    
    Charged to
    
    
    From
    
    
    End ofDescription
    
    of Year
    
    
    Income
    
    
    Reserves(1)
    
    
    YearAllowance for Uncollectible
AccountsYear Ended December 31, 2004
    
    $
    271
    
    
    $
    61
    
    
    $
    120
    
    
    $
    212Year Ended December 31, 2003
    
    $
    240
    
    
    $
    186
    
    
    $
    155
    
    
    $
    271Year Ended December 31, 2002
    
    $
    234
    
    
    $
    165
    
    
    $
    159
    
    
    $
    240
   (1)