8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): November 26, 2018

SJW Group

(Exact Name of Registrant as Specified in its Charter)

Delaware	001-8966	77-0066628
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

110 W. Taylor Street

San Jose, California 95110

(Address of principal executive offices, including zip code)

(408) 279-7800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company  ☐

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

Item 8.01 Other Events.

In connection with the Registration Statement on Form S-3 of SJW Group, a Delaware corporation (the “Company”), to be filed on or about the date of this report (the “Registration Statement”), we are filing this Current Report on Form 8-K to provide certain historical financial information regarding Connecticut Water Service, Inc., a Connecticut corporation (“CTWS”), and its subsidiaries, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations of CTWS, and certain unaudited pro forma financial information regarding the Company required to be incorporated by reference into the Registration Statement. The unaudited pro forma financial information gives effect to the Company’s proposed acquisition of CTWS (the “CTWS Acquisition”) pursuant to the previously announced Second Amended and Restated Agreement and Plan of Merger, dated as of August 5, 2018, by and among the Company, Hydro Sub, Inc., a Connecticut corporation and a direct wholly owned subsidiary of the Company, and CTWS.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “strategy,” or “anticipates,” or the negative of those words or other comparable terminology.

The accuracy of such statements is subject to a number of risks, uncertainties and assumptions including, but not limited to, the following factors: (1) the risk that the conditions to the closing of the CTWS Acquisition are not satisfied; (2) the risk that the regulatory approvals required for the CTWS Acquisition are not obtained at all, or if obtained, on the terms expected or on the anticipated schedule; (3) the risk that the California Public Utilities Commission’s (“CPUC”) investigation may cause delays in or otherwise adversely affect the CTWS Acquisition and that the Company may be required to consummate the CTWS Acquisition prior to the CPUC’s issuance of an order with respect to its investigation; (4) the effect of water, utility, environmental and other governmental policies and regulations; (5) litigation relating to the CTWS Acquisition; (6) the ability of each party to meet expectations regarding timing, completion and accounting and tax treatments of the CTWS Acquisition; (7) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement between the parties to the CTWS Acquisition; (8) changes in demand for water and other products and services; (9) unanticipated weather conditions; (10) catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, terrorist acts, physical attacks, cyber-attacks, or other similar occurrences that could adversely affect the facilities, operations, financial condition, results of operations and reputation of CTWS or the Company; (11) risks that the CTWS Acquisition disrupts the current plans and operations of CTWS or the Company; (12) potential difficulties by CTWS or the Company in employee retention as a result of the CTWS Acquisition; (13) unexpected costs, charges or expenses resulting from the CTWS Acquisition; (14) the effect of the announcement or pendency of the CTWS Acquisition on business relationships, operating results, and business generally, including, without limitation, competitive responses to the CTWS Acquisition; (15) risks related to diverting management’s attention from ongoing business operations of CTWS or the Company; and (16) legislative and economic developments. These risks, as well as other risks associated with the CTWS Acquisition, will be more fully discussed in the prospectus supplement to be included in the Registration Statement.

In addition, actual results are subject to other risks and uncertainties that relate more broadly to the Company’s overall business, including those more fully described in its filings with the SEC, including, without limitation, its Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Forward-looking statements are not guarantees of performance, and speak only as of the date made, and none of the Company, its management, CTWS or its management undertakes any obligation to update or revise any forward-looking statements except as required by law.

Item 9.01 — Financial Statements and Exhibits

(a) Financial statements of businesses acquired.

The unaudited condensed consolidated financial statements of CTWS as of September 30, 2018 and for the nine months ended September 30, 2018 and 2017 are filed as Exhibit 99.1 hereto. The audited consolidated financial statements of CTWS as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 are filed as Exhibit 99.2 hereto.

(b) Pro forma financial information.

The unaudited pro forma condensed combined balance sheet as of September 30, 2018 and the unaudited pro forma condensed combined income statements for the nine months ended September 30, 2018 and the year ended December 31, 2017 of the Company are filed as Exhibit 99.5 hereto. Such unaudited pro forma condensed combined financial statements are not necessarily indicative of the financial position that actually would have existed or the operating results that actually would have been achieved had the CTWS Acquisition occurred, or the other adjustments set forth therein been in effect, as of the dates and for the periods indicated or that may be achieved in future periods and should be read in conjunction with the historical financial statements of the Company and CTWS.

(d) Exhibits

Exhibit Index

Exhibit No.	Description
23.1	Consent of Baker Tilly Virchow Krause, LLP
99.1	Unaudited Condensed Consolidated Financial Statements of Connecticut Water Service, Inc. as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017
99.2	Audited Consolidated Financial Statements of Connecticut Water Service, Inc. as of December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015
99.3	Management’s Discussion and Analysis of Financial Condition and Results of Operations of Connecticut Water Service, Inc. as of September  30, 2018 and for the nine months ended September 30, 2018 and 2017
99.4	Management’s Discussion and Analysis of Financial Condition and Results of Operations of Connecticut Water Service, Inc. as of December  31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015
99.5	Unaudited Pro Forma Condensed Combined Financial Statements of SJW Group for the nine months ended September 30, 2018 and the year ended December 31, 2017

SIGNATURE

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

	SJW GROUP
Date: November 26, 2018	/s/ James P. Lynch
	James P. Lynch, Chief Financial Officer and Treasurer

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-105010 and 333-195796) of SJW Group of our reports dated March 15, 2018, relating to the consolidated financial statements, financial statement schedule and the effectiveness of internal control over financial reporting of Connecticut Water Service Inc., which appear in the Current Report on Form 8-K of SJW Group dated November 26, 2018.

/s/ Baker Tilly Virchow Krause, LLP

Philadelphia, Pennsylvania

November 26, 2018

EX-99.1

Exhibit 99.1

CONNECTICUT WATER SERVICE, INC.

TABLE OF CONTENTS

	Page
Condensed Consolidated Balance Sheets as of September  30, 2018 and December 31, 2017		2
Condensed Consolidated Statements of Income for the three months ended September 30, 2018 and 2017		3
Condensed Consolidated Statements of Income for the nine months ended September 30, 2018 and 2017		4
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017		5
Condensed Consolidated Statements of Retained Earnings for the three and nine months ended September 30, 2018 and 2017		6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017		7
Notes to Condensed Consolidated Financial Statements		8

1

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

ASSETS	September 30, 2018			December 31, 2017
Utility Plant	$	955,127		$	927,289
Construction Work in Progress		19,849			11,761
		974,976			939,050
Accumulated Provision for Depreciation		(253,488	)		(241,327	)
Net Utility Plant		721,488			697,723
Other Property and Investments		12,111			10,662
Cash and Cash Equivalents		4,603			3,618
Accounts Receivable (Less Allowance, 2018 – $1,281; 2017 – $1,265)		16,443			14,965
Accrued Unbilled Revenues		11,742			8,481
Materials and Supplies, at Average Cost		1,752			1,593
Prepayments and Other Current Assets		12,426			7,021
Total Current Assets		46,966			35,678
Unrecovered Income Taxes – Regulatory Asset		75,227			66,631
Pension Benefits – Regulatory Asset		9,804			11,339
Post-Retirement Benefits Other Than Pension – Regulatory Asset		106			116
Goodwill		66,403			67,016
Deferred Charges and Other Costs		11,936			9,618
Total Regulatory and Other Long-Term Assets		163,476			154,720
Total Assets	$	944,041		$	898,783
CAPITALIZATION AND LIABILITIES
Common Stockholders’ Equity:
Common Stock Without Par Value: Authorized – 25,000,000 Shares Issued and Outstanding: 2018 – 12,049,724; 2017 – 12,065,016	$	189,927		$	191,641
Retained Earnings		108,422			102,417
Accumulated Other Comprehensive (Loss)		(149	)		(428	)
Common Stockholders’ Equity		298,200			293,630
Preferred Stock		—			772
Long-Term Debt		250,877			253,367
Total Capitalization		549,077			547,769
Current Portion of Long-Term Debt		4,321			6,173
Interim Bank Loans Payable		58,541			19,281
Accounts Payable and Accrued Expenses		8,529			11,319
Accrued Interest		1,637			1,439
Current Portion of Refund to Customers – Regulatory Liability		326			64
Other Current Liabilities		3,291			3,262
Total Current Liabilities		76,645			41,538
Advances for Construction		19,324			20,024
Deferred Federal and State Income Taxes		34,168			33,579
Unfunded Future Income Taxes		66,849			58,384
Long-Term Compensation Arrangements		30,666			32,649
Unamortized Investment Tax Credits		1,076			1,133
Excess Accumulated Deferred Income Tax – Regulatory Liability		30,861			30,937
Refund to Customers – Regulatory Liability		109			—
Other Long-Term Liabilities		1,307			1,241
Total Long-Term Liabilities		184,360			177,947
Contributions in Aid of Construction		133,959			131,529
Commitments and Contingencies		—			—
Total Capitalization and Liabilities	$	944,041		$	898,783

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

2

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands, except per share amounts)

	2018			2017
Operating Revenues	$	36,269		$	31,797
Operating Expenses
Operation and Maintenance		12,416			11,912
Depreciation		4,605			4,283
Income Tax Expense (Benefit)		(1,326	)		235
Taxes Other Than Income Taxes		3,210			2,822
Total Operating Expenses		18,905			19,252
Net Operating Revenues		17,364			12,545
Other Utility Income, Net of Taxes		200			264
Total Utility Operating Income		17,564			12,809
Other (Deductions) Income, Net of Taxes
Gain on Real Estate Transactions		626			—
Non-Water Sales Earnings		469			252
Allowance for Funds Used During Construction		146			101
Merger and Acquisition Costs		(2,114	)		(11	)
Other		(303	)		(23	)
Total Other (Loss) Income, Net of Taxes		(1,176	)		319
Interest and Debt Expense
Interest on Long-Term Debt		2,607			2,230
Other Interest Expense (Income), Net		69			150
Amortization of Debt Expense and Premium, Net		49			32
Total Interest and Debt Expense		2,725			2,412
Net Income		13,663			10,716
Preferred Stock Dividend Requirement		—			10
Net Income Applicable to Common Stock	$	13,663		$	10,706
Weighted Average Common Shares Outstanding:
Basic		11,951			11,817
Diluted		12,045			12,041
Earnings Per Common Share:
Basic	$	1.15		$	0.92
Diluted	$	1.13		$	0.90
Dividends Per Common Share	$	0.3125		$	0.2975

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

3

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands, except per share amounts)

	2018			2017
Operating Revenues	$	91,026		$	82,162
Operating Expenses
Operation and Maintenance		38,156			34,331
Depreciation		13,670			11,959
Income Tax Expense (Benefit)		(706	)		(579	)
Taxes Other Than Income Taxes		8,685			7,904
Total Operating Expenses		59,805			53,615
Net Operating Revenues		31,221			28,547
Other Utility Income, Net of Taxes		715			619
Total Utility Operating Income		31,936			29,166
Other (Deductions) Income, Net of Taxes
Gain on Real Estate Transactions		626			33
Non-Water Sales Earnings		1,297			842
Allowance for Funds Used During Construction		304			668
Merger and Acquisition Costs		(7,766	)		(266	)
Other		(1,121	)		(964	)
Total Other (Loss) Income, Net of Taxes		(6,660	)		313
Interest and Debt Expense
Interest on Long-Term Debt		7,775			6,397
Other Interest Expense (Income), Net		185			(221	)
Amortization of Debt Expense and Premium, Net		151			101
Total Interest and Debt Expense		8,111			6,277
Net Income		17,165			23,202
Preferred Stock Dividend Requirement		10			29
Net Income Applicable to Common Stock	$	17,155		$	23,173
Weighted Average Common Shares Outstanding:
Basic		11,899			11,436
Diluted		12,069			11,661
Earnings Per Common Share:
Basic	$	1.44		$	2.03
Diluted	$	1.42		$	1.99
Dividends Per Common Share	$	0.9225		$	0.8775

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

4

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands)

	2018		2017
Net Income	$	13,663	$	10,716
Other Comprehensive Income, net of tax
Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax (expense) of $(21) and $(30) in 2018 and 2017		58		48
Unrealized gain on investments, net of tax (expense) of $(35) and $(17) in 2018 and 2017		94		26
Other Comprehensive Income, net of tax		152		74
Comprehensive Income	$	13,815	$	10,790

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands)

	2018		2017
Net Income	$	17,165	$	23,202
Other Comprehensive Income, net of tax
Reclassification to Pension and Post-Retirement Benefits Other than Pension, net of tax (expense) of $(64) and $(91) in 2018 and 2017		175		144
Unrealized gain on investments, net of tax (expense) of $(39) and $(76) in 2018 and 2017		104		119
Other Comprehensive Income, net of tax		279		263
Comprehensive Income	$	17,444	$	23,465

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

5

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

For the Three Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands, except per share amounts)

	2018		2017
Balance at Beginning of Period	$	98,523	$	96,975
Net Income		13,663		10,716
		112,186		107,691
Dividends Declared:
Cumulative Preferred, Class A, $0.20 per share in 2017		—		3
Cumulative Preferred, Series $0.90, $0.225 per share in 2017		—		7
Common Stock – 2018 $0.3125 per share; 2017 $0.2975 per share		3,764		3,590
		3,764		3,600
Balance at End of Period	$	108,422	$	104,091

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands, except per share amounts)

	2018			2017
Balance at Beginning of Period	$	102,417		$	91,213
Net Income		17,165			23,202
		119,582			114,415
Premium on Redemption of Preferred Stock		(15	)		—
Dividends Declared:
Cumulative Preferred, Class A, $0.40 and $0.60 per share in 2018 and 2017, respectively		4			9
Cumulative Preferred, Series $0.90, $0.45 and $0.675 per share in 2018 and 2017, respectively		6			20
Common Stock – 2018 $0.9225 per share; 2017 $0.8775 per share		11,135			10,295
		11,145			10,324
Balance at End of Period	$	108,422		$	104,091

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

6

CONNECTICUT WATER SERVICE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2018 and 2017

(Unaudited)

(In thousands)

	2018			2017
Operating Activities:
Net Income	$	17,165		$	23,202
Adjustments to Reconcile Net Income to Net Cash and Cash Equivalents Provided by
Operating Activities:
Deferred Revenues		(1,875	)		(5,283	)
Provision for Deferred Income Taxes and Investment Tax Credits, Net		(114	)		406
Allowance for Funds Used During Construction		(304	)		(668	)
Depreciation and Amortization (including $1,074 and $593 in 2018 and 2017, respectively, charged to other accounts)		14,744			12,552
Gain on Real Estate Transactions		(626	)		(33	)
Change in Assets and Liabilities:
Increase (Decrease) in Accounts Receivable and Accrued Unbilled Revenues		(4,739	)		(3,155	)
Increase in Prepaid Income Taxes and Prepayments and Other Current Assets		(5,434	)		(6,038	)
Increase in Other Non-Current Items		(1,037	)		1,675
Decrease in Accounts Payable, Accrued Expenses and Other Current Liabilities		(595	)		(2,760	)
Total Adjustments		20			(3,304	)
Net Cash and Cash Equivalents Provided by Operating Activities		17,185			19,898
Investing Activities:
Net Additions to Utility Plant		(38,063	)		(36,986	)
Cash portion of The Avon Water Company Acquisition		—			(6,134	)
Proceeds from the Sale of Land		1,350			212
Cash Acquired in Business Combinations		—			1,791
Net Cash and Cash Equivalents Used in Investing Activities		(36,713	)		(41,117	)
Financing Activities:
Net Proceeds from Interim Bank Loans		58,541			16,047
Net Repayment of Interim Bank Loans		(19,281	)		(32,953	)
Redemption of Preferred Stock		(787	)		—
Purchase of Treasury Stock		(3,525	)		—
Proceeds from the Issuance of Long-Term Debt		—			55,000
Costs to Issue Long-Term Debt and Common Stock		—			(2	)
Proceeds from Issuance of Common Stock		1,088			1,044
Repayment of Long-Term Debt Including Current Portion		(4,494	)		(1,866	)
Advances from Others for Construction		116			983
Cash Dividends Paid		(11,145	)		(10,324	)
Net Cash and Cash Equivalents Provided by Financing Activities		20,513			27,929
Net Increase in Cash and Cash Equivalents		985			6,710
Cash and Cash Equivalents at Beginning of Period		3,618			1,564
Cash and Cash Equivalents at End of Period	$	4,603		$	8,274
Non-Cash Investing and Financing Activities:
Stock-for-stock acquisition of The Heritage Village Water Company	$	—		$	16,903
Stock-for-stock acquisition of The Avon Water Company	$	—		$	26,949
Non-Cash Contributed Utility Plant	$	1,668		$	2,349
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest	$	7,921		$	5,669
State and Federal Income Taxes	$	370		$	392

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

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Preparation of Financials

The condensed consolidated financial statements included herein have been prepared by Connecticut Water Service, Inc. (“CTWS” or the “Company”) and its wholly-owned subsidiaries, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the results for interim periods. Certain information and footnote disclosures have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company’s primary operating subsidiaries are: The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”) and The Avon Water Company (“Avon Water”) in the State of Connecticut and The Maine Water Company (“Maine Water”) in the State of Maine. The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in Exhibit 99.2 to the Current Report on Form 8-K of SJW Group to which these Unaudited Condensed Consolidated Financial Statements are attached.

The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors. Effective February 27, 2017 and July 1, 2017, the Company acquired HVWC and Avon Water, respectively, discussed further in Note 12 below. As a result, the Company’s Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Retained Earnings and Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2017 include only three months of activity related to Avon Water after its acquisition on July 1, 2017 and approximately seven months of activity related to HVWC after its acquisition on February 27, 2017. The Condensed Consolidated Statements of Net Income, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements Retained Earnings and the Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2018 include HVWC’s and Avon Water’s results. HVWC’s and Avon Water’s assets and liabilities are included in the Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017.

As noted in Note 12 below, HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut. The results of the wastewater line of business are included in the Company’s Water Operations segment. Additionally, as noted in Note 12, Avon Water serves approximately 4,800 water customers in the Towns of Avon, Farmington, and Simsbury, Connecticut.

Proposed Merger with SJW Group

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

The Board of Directors approved, adopted and declared advisable and resolved to recommend to the Company’s shareholders the approval of the Revised Merger Agreement and the Merger following a comprehensive review of the transaction.

The Merger is subject to certain customary closing conditions, including, among other things, approval of the Revised Merger Agreement by the Company’s shareholders and regulatory approvals (including the approval of the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”)). The required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR Act”), was terminated early on April 27, 2018. On October 15, 2018, the Federal Communications Commission (“FCC”) consented to the joint application for transfer of control filed by the Company and SJW on October 4, 2018 and amended on October 12, 2018, and no further clearance from the FCC is required.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On May 4, 2018, Maine Water filed with the MPUC an application for approval of the Merger. On May 7, 2018, the Company and SJW filed with the PURA a joint application for approval of the Merger. Following the start on May 31, 2018 of a 45-day go-shop process permitted by the First Amended and Restated Merger Agreement, the Company and SJW withdrew their joint PURA application on June 19, 2018, and filed a new joint application on July 18, 2018, following the end of the go-shop process.

On July 20, 2018, the California Public Utilities Commission (“CPUC”) formally issued an Order Instituting Investigation (“Order”) providing that the CPUC will investigate whether the Merger is subject to CPUC approval and the Merger’s anticipated impacts within California. The Order states that the CPUC plans to substantially complete its investigation in a manner sufficiently timely to allow the Merger to go forward by the end of 2018, if appropriate.

The Company and SJW expect the closing of the Merger to occur during the first quarter of 2019.

Regulatory Matters

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

As of September 30, 2018	Allowed Return on Equity			Allowed Return on Rate Base
Connecticut Water		9.75	%		7.32	%
HVWC (blended water and wastewater rates)		10.10	%		7.19	%
Avon Water		10.00	%		7.79	%
Maine Water		9.50	%		7.96	%

The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC, Avon Water and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain costs associated with approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, in Connecticut, as discussed in more detail below. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of September 30, 2018, however, HVWC, as ordered by PURA, began to utilize Water Revenue Adjustments for water and wastewater as of March 31, 2017.

On January 3, 2018, PURA filed a motion to reopen the most recent rate case decisions for the Company’s Connecticut Regulated Companies to determine what, if any, adjustments to rates are appropriate to account for revisions to tax laws, including corporate tax rates, contained in the Tax Cuts and Jobs Act (“Tax Act”). PURA held a hearing on July 30, 2018 for regulated water companies. As discussed below, Connecticut Water has entered into a settlement agreement with the Connecticut Office of Consumer Counsel (“OCC”), which was approved by PURA, that covers treatment of the Tax Act.

On January 11, 2018, the MPUC issued a notice of investigation to determine the impact of the Tax Act on Maine Water. The investigation will allow the MPUC to determine the specific impact of the Tax Act and whether any rate adjustments are warranted. Following discovery, technical conferences were held on April 19, 2018 and July 17, 2018. In addition to determining the impact of the Tax Act on the justness and reasonableness of Maine Water’s rates, the MPUC will consider whether to issue an accounting order to establish a regulatory liability which defers for future return to ratepayers the impact of the tax changes. During the three months ended September 30, 2018, the Company reserved approximately $100,000 in revenues from Maine Water in anticipation of a rate order from the MPUC that will establish lower rates as a result of the Tax Act.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Maine Water Land Sale

On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,300 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land had a book value of approximately $600,000 at September 30, 2018 and December 31, 2017 and is included in “Utility Plant” on the Company’s Consolidated Balance Sheets. The easements and purchase prices are as follows:

1. Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and

2. Grassy Pond conservation Easement: $600,000.

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

Connecticut Rates

Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 0.00% and 8.25% at September 30, 2018 and 2017, respectively. Connecticut Water’s WICA was reset to zero as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of September 30, 2018 and 2017, respectively, Avon Water’s WICA surcharge was 7.51% and 8.09%. As of September 30, 2018, HVWC has not filed for a WICA surcharge.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case proceeding (previously reopened in 2013) for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the OCC (the “Agreement”). The Agreement proposes a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:

1. Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;

2. Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates to be effective before January 1, 2020;

3. The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and

4. Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA and apply WRA charges as authorized.

PURA issued a Proposed Final Decision on July 6, 2018 that rejected the Settlement Agreement, due to the proposed treatment of income tax expense resulting from the Tax Act. The Company and the Office of Consumer Council each filed written exceptions to the draft decision and a hearing was held on a revised settlement agreement submitted from both parties that would include an adjustment to reflect the impacts of the Tax Act but at a lower dollar amount than recommended in the PURA draft decision. On August 15, 2018, PURA issued a final decision that accepted the conditions of the revised settlement agreement. The primary facets of the revised settlement agreement were the revenue requirements associated with the Rockville Water Treatment Plant, discussed above, and the folding of previously approved WICA surcharges into base rates, which reset Connecticut Water’s WICA to zero and resolution of the Company’s obligations related to the Tax Act. Rates were effective retroactive to April 1, 2018.

Since 2013, Connecticut law has authorized a Water Revenue Adjustment (“WRA”) to reconcile actual water revenues with the revenues projected in the last general rate case and allows companies to adjust rates as necessary to recover the revenues

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

approved by PURA in the last general rate case. The WRA removes the financial disincentive for water utilities to develop and implement effective water conservation programs. The WRA allows water companies to defer on the balance sheet, as a regulatory asset or liability, for later collection from or crediting to customers the amount by which actual revenues deviate from the revenues allowed in the most recent general rate proceedings, including WICA proceedings. Additionally, projects eligible for WICA surcharges were expanded to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to certain acquired systems.

Connecticut Water’s and HVWC’s allowed revenues for the nine months ended September 30, 2018, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $64.9 million. Through normal billing for the nine months ended September 30, 2018, revenue for Connecticut Water and HVWC would have been approximately $58.7 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $6.2 million in additional revenue for the nine months ended September 30, 2018. Avon Water does not currently have PURA approval to apply the WRA surcharge to its customers’ bills and, therefore, does not currently use the WRA mechanism.

Maine Rates

In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 6.80% and 6.47% as of September 30, 2018 and 2017, respectively. The WISC rates for the Biddeford and Saco division were reset to zero with the approval of the general rate increase discussed below.

On June 29, 2017, Maine Water filed for a rate increase in its Biddeford and Saco division. The rate request was for an approximate $1.6 million, or 25.1%, increase in revenues. The rate request was designed to recover higher operating expenses, depreciation and property taxes since Biddeford and Saco’s last rate increase in 2015. Maine Water and the Maine Office of the Public Advocate reached an agreement that increases annual revenue by $1.56 million. The agreement was approved by the MPUC on December 5, 2017, with new rates effective December 1, 2017.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates in the Biddeford and Saco division due to provisions in the settlement agreement with the MPUC. As the stay-out periods for other divisions expire, Maine Water expects to request usage of this mechanism as Maine Water files rate cases for those divisions.

2. Pension and Other Post-Retirement Benefits

The following tables set forth the components of pension and other post-retirement benefit costs for the three and nine months ended September 30, 2018 and 2017.

Pension Benefits

Components of Net Periodic Cost (in thousands):

	Three Months						Nine Months
Period ended September 30,	2018			2017			2018			2017
Service Cost	$	486		$	482		$	1,461		$	1,446
Interest Cost		778			800			2,333			2,400
Expected Return on Plan Assets		(1,165	)		(1,073	)		(3,496	)		(3,218	)
Amortization of:
Prior Service Cost		4			4			12			12
Net Recognized Loss		649			517			1,948			1,548
Net Periodic Benefit Cost	$	752		$	730		$	2,258		$	2,188

The Company made a total contribution of approximately $3,800,000 in 2018 for the 2017 plan year.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Post-Retirement Benefits Other Than Pension (PBOP)

Components of Net Periodic Cost (in thousands):

	Three Months						Nine Months
Period ended September 30,	2018			2017			2018			2017
Service Cost	$	76		$	85		$	242		$	252
Interest Cost		127			128			378			384
Expected Return on Plan Assets		(92	)		(89	)		(279	)		(266	)
Other		—			57			—			169
Amortization of:
Prior Service Credit		—			(46	)		(1	)		(136	)
Recognized Net Loss (Gain)		8			(20	)		(3	)		(60	)
Net Periodic Benefit Cost	$	119		$	115		$	337		$	343

3. Earnings per Share

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

Three months ended September 30,	2018			2017
Common Shares Outstanding End of Period		12,049,724			12,068,299
Weighted Average Shares Outstanding (Days Outstanding Basis):
Basic		11,951,237			11,816,553
Diluted		12,045,435			12,041,432
Basic Earnings per Share	$	1.15		$	0.92
Dilutive Effect of Stock Awards		(0.02	)		(0.02	)
Diluted Earnings per Share	$	1.13		$	0.90
Nine months ended September 30,
Weighted Average Shares Outstanding (Days Outstanding Basis):
Basic		11,899,362			11,435,545
Diluted		12,069,369			11,660,674
Basic Earnings per Share	$	1.44		$	2.03
Dilutive Effect of Stock Awards		(0.02	)		(0.04	)
Diluted Earnings per Share	$	1.42		$	1.99

Total unrecognized compensation expense for all stock awards was approximately $0.9 million as of September 30, 2018 and will be recognized over a weighted average period of 1.3 years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.    Recently Adopted and New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU No. 2014-09”) which amended its guidance related to revenue recognition. ASU No. 2014-09 requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 became effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2016, and could be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, however early adoption is not permitted. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of ASU No. 2014-09, making ASU No. 2014-09 effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company engaged in a project to analyze the impact that adoption of this standard would have on our consolidated financial statements, disclosures, and internal controls. The project included identification of the Company’s revenue streams, creation of an inventory of its contracts with customers, evaluation of a representative sample of these contracts with respect to the new guidance and documentation of any required changes in reporting. The Company derives more than 90% of its revenue from regulated delivery of water and wastewater services to its retail customers, which is considered a contract with customers under ASU 2014-09, excluding revenue recognized as WRA. The majority of the remainder of the Company’s revenue is derived from contract operations and unregulated revenues generated from its Linebacker^® program, also considered a contract with customers under ASU 2014-09. The Company determined that revenue generated from the attachment of telecommunications equipment to its facilities through leases with third parties is outside the scope of ASU No. 2014-09. In 2017, the American Institute of Certified Public Accountants (AICPA) power and utility entities revenue recognition task force determined that contributions in aid of construction are not in the scope of ASU No. 2014-09. The Company’s adoption of ASU No. 2014-09 on January 1, 2018 did not result in any change in the measurement and timing of recognition of its revenues. The Company used the modified retrospective approach when implementing ASU No. 2014-09. See Note 5 for more details.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, (“ASU No. 2016-02”), which will require lessees to recognize the following for all leases at the commencement date of a lease: a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Public business entities should apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact of this standard on its consolidated financial statements and footnote disclosures, but does not expect that the adoption of this guidance will materially impact our consolidated financial position.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). The amendments to ASU No. 2016-15 clarify the classification for eight different types of activities, including debt prepayment and extinguishment costs, proceeds from insurance claims and distributions from equity method investees. For public business entities, ASU No. 2016-15 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company’s adoption of this guidance did not materially impact our consolidated financial position or cash flows.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” (“ASU 2017-07”) which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

benefit cost to the service component. As a result of the adoption of ASU 2017-07 in the first quarter of 2018, the Company reclassified $221,000 and $664,000 out of Operation and Maintenance expense and moved it to the “Other” line item in the “Other (Deductions) Income, Net of Taxes” section of the quarter to date and year to date, respectively, September 30, 2017 Condensed Consolidated Statement of Income to conform with the requirements of ASU 2017-07.

In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, (ASU No. 2018-02) to help businesses and other organizations present some effects from the Tax Act’s reduction in the corporate tax rate in their income statements. ASU No. 2018-02 gives the option of reclassifying what are called the “stranded” tax effects within accumulated other comprehensive income to retained earnings during each fiscal year or quarter in which the effect of the lower tax rate is recorded. ASU No. 2018-02 instructs businesses and other organizations to provide a disclosure in their financial statement footnotes that describes the accounting policy they used to release the income tax effects from accumulated other comprehensive income, whether they are reclassifying the stranded income tax effects from the Tax Cut and Jobs Act, and information about the other effects on taxes from the reclassification. ASU 2018-02 is effective for all organizations for fiscal years that begin after December 15, 2018, and the quarterly and other interim periods in those years, with early adoption permissible. The Company adopted ASU No. 2018-02 effective December 31, 2017. The adoption of ASU No. 2018-02 resulted in an approximate $70,000 increase to Retained Earnings at December 31, 2017.

5. Revenues from Contracts with Customers

Accounting Policy

Our revenues are primarily from tariff-based sales. We provide water and wastewater services to customers under these tariffs without a defined contractual term (at-will). As the revenue from these arrangements is based upon the amount of the water and wastewater services supplied and billed in that period (including estimated billings), there was not a shift in the timing or pattern of revenue recognition for such sales when compared to our revenue recognition prior to the adoption of ASU 2014-09. We have also completed the evaluation of our other revenue streams, including those tied to longer term contractual commitments and the Company’s Linebacker program.

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

Nature of Goods and Services

Water Operations – We currently provide retail water and wastewater services to five primary customer classes. Our largest customer class consists of residential customers, which include single private dwellings and individual apartments. Our commercial class consists primarily of main street businesses, our industrial class consists primarily of manufacturing and processing businesses that turn raw materials into products, our public authority class represents services provided primarily to municipality or other government customers, and, finally, our fire protection class consists of services related to fire suppression systems and fire hydrants. Connecticut Water’s management has determined that tariff-based receipts; except for the WRA and other deferred revenue mechanisms, which are considered alternative revenue programs; are considered revenues from contracts with customers.

• The Company has performance obligations for the service of standing ready to deliver water to customers. The Company recognizes revenue at a fixed rate as it provides these services, as approved by regulators. These arrangements generally do not have fixed terms and remain in effect as long as the customer consumes the utility service. The rates are set by PURA and the MPUC through the rate-making process and represent the stand-alone selling price of Company’s service to stand ready to deliver.

• The Company has performance obligations for the service of delivering the commodity of water to customers. The Company recognizes revenue at a price per unit of water delivered (gallons, cubic feet, etc.), based on the tariffs established by our regulators. These arrangements generally do not have fixed terms and remain in effect as long as the customer consumes the utility service. The rates are set by PURA and the MPUC through the rate-making process and represent the stand-alone selling price of a bundled product comprising the commodity and the service of delivering such commodity.

• The Company has a performance obligation related to administrative services such as turn-on/turn-off services, assessment of late charges, etc. The Company views that these services are not distinct in the context of the contract because they are highly interdependent for the effective delivery of water service provided to consumers.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Services and Rentals – We provide contracted services to water utilities and other clients and also lease certain of our properties to third parties. The types of services provided include contract operations of water; Linebacker, our service line protection plan for public drinking water customers; and providing bulk deliveries of emergency drinking water to businesses and residences via tanker truck. Our lease and rental income comes primarily from the renting of residential and commercial property. The goods and services provided by Linebacker have been determined to be based on the stand ready nature of the Company to provide the goods and services and, therefore, customers simultaneously receive and consume the benefits provided by the Company. The other revenue streams in the Services and Rentals segment, including contracted services to water utilities and other clients, have performance obligations that are satisfied at a point in time, and likewise will not have a shift in the timing or pattern of revenue recognition.

Disaggregation of Revenue

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

	Three Months Ended					Nine Months Ended
	September 30, 2018		September 30, 2017			September 30, 2018		September 30, 2017
Water Operations
Residential	$	20,678	$	18,161		$	50,842	$	45,621
Commercial		4,520		4,091			10,751		9,605
Industrial		990		848			2,445		2,288
Public Authority		1,293		1,017			2,801		2,610
Fire Protection		5,230		4,869			15,536		14,425
Other (including non-metered accounts)		830		880			2,590		2,249
Water Operations Revenues from Contracts with Customers		33,541		29,866			84,965		76,798
Alternative Revenue Program		2,728		1,931			6,061		5,364
Other		348		455			1,084		1,096
Total Revenue from Water Operations		36,617		32,252			92,110		83,258
Services and Rentals
Contract Operations		667		673			1,814		1,878
Linebacker		636		614			1,889		1,857
Services and Rentals Revenues from Contracts with Customers		1,303		1,287			3,703		3,735
Other		30		(31	)		112		10
Total Revenue from Services and Rentals		1,333		1,256			3,815		3,745
Total Revenue from Real Estate Transactions		1,350		—			1,350		212
Total Revenues from Contracts with Customers		34,844		31,153			88,668		80,533
Total Revenue	$	39,300	$	33,508		$	97,275	$	87,215

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

	September 30, 2018		December 31, 2017
Accounts Receivable
Water Operations Segment	$	14,669	$	12,885
Services and Rentals Segment		194		107
Accounts Receivable from Contracts with Customers		14,863		12,992
Other accounts receivable		1,580		1,973
Total Accounts Receivable	$	16,443	$	14,965
Accrued Unbilled Revenues from Contracts with Customers	$	11,742	$	8,481

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Accumulated Other Comprehensive Income

The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax, for the three and nine months ended September 30, 2018 and 2017 are as follows (in thousands):

Three months ended September 30, 2018	Unrealized Gains on Investments		Defined Benefit Items			Total
Beginning Balance (a)	$	452	$	(753	)	$	(301	)
Other Comprehensive Loss Before Reclassification		—		—			—
Amounts Reclassified from AOCI		94		58			152
Net current-period Other Comprehensive (Loss) Income		94		58			152
Ending Balance	$	546	$	(695	)	$	(149	)

Three months ended September 30, 2017	Unrealized Gains on Investments			Defined Benefit Items			Total
Beginning Balance (a)	$	328		$	(1,063	)	$	(735	)
Other Comprehensive Income Before Reclassification		(2	)		—			(2	)
Amounts Reclassified from AOCI		28			48			76
Net current-period Other Comprehensive Income		26			48			74
Ending Balance	$	354		$	(1,015	)	$	(661	)

Nine months ended September 30, 2018	Unrealized Gains on Investments		Defined Benefit Items			Total
Beginning Balance (a)	$	442	$	(870	)	$	(428	)
Other Comprehensive Income Before Reclassification		—		—			—
Amounts Reclassified from AOCI		104		175			279
Net current-period Other Comprehensive Income		104		175			279
Ending Balance	$	546	$	(695	)	$	(149	)

Nine months ended September 30, 2017	Unrealized Gains on Investments		Defined Benefit Items			Total
Beginning Balance (a)	$	235	$	(1,159	)	$	(924	)
Other Comprehensive (Loss) Income Before Reclassification		83		—			83
Amounts Reclassified from AOCI		36		144			180
Net current-period Other Comprehensive (Loss) Income		119		144			263
Ending Balance	$	354	$	(1,015	)	$	(661	)

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

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017 (in thousands):

Details about Other AOCI Components	Amounts Reclassified from AOCI Three Months Ended September 30, 2018(a)			Amounts Reclassified from AOCI Three Months Ended September 30, 2017(a)			Affected Line Items on Income Statement
Realized Gains on Investments	$	129		$	47		Other Income
Tax expense		(35	)		(19	)	Other Income
		94			28
Amortization of Recognized Net Gain from Defined Benefit Items		79			78		Other Income (b)
Tax expense		(21	)		(30	)	Other Income
		58			48
Total Reclassifications for the period, net of tax	$	152		$	76

Details about Other AOCI Components	Amounts Reclassified from AOCI Nine Months Ended September 30, 2018(a)			Amounts Reclassified from AOCI Nine Months Ended September 30, 2017(a)			Affected Line Items on Income Statement
Realized Gains on Investments	$	143		$	60		Other Income
Tax expense		(39	)		(24	)	Other Income
		104			36
Amortization of Recognized Net Gain from Defined Benefit Items		239			235		Other Income (b)
Tax expense		(64	)		(91	)	Other Income
		175			144
Total Reclassifications for the period, net of tax	$	279		$	180

(a) Amounts in parentheses indicate loss/expense.

(b) Included in computation of net periodic pension cost (see Note 2 for additional details).

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Long-Term Debt

Long-Term Debt at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

			2018			2017
4.09%	CTWS	Term Loan Note	$	11,521		$	12,358
4.15%	CTWS	CoBank Term Note Payable, Due 2037		14,510			14,881
Total CTWS				26,031			27,239
Var.	Connecticut Water	2004 Series Variable Rate, Due 2029		12,500			12,500
Var.	Connecticut Water	2004 Series A, Due 2028		5,000			5,000
Var.	Connecticut Water	2004 Series B, Due 2028		4,550			4,550
5.00%	Connecticut Water	2011 A Series, Due 2021		22,768			22,920
3.16%	Connecticut Water	CoBank Note Payable, Due 2020		8,000			8,000
3.51%	Connecticut Water	CoBank Note Payable, Due 2022		14,795			14,795
4.29%	Connecticut Water	CoBank Note Payable, Due 2028		17,020			17,020
4.72%	Connecticut Water	CoBank Note Payable, Due 2032		14,795			14,795
4.75%	Connecticut Water	CoBank Note Payable, Due 2033		14,550			14,550
4.36%	Connecticut Water	CoBank Note Payable, Due May 2036		30,000			30,000
4.04%	Connecticut Water	CoBank Note Payable, Due July 2036		19,930			19,930
3.53%	Connecticut Water	NY Life Senior Note, Due September 2037		35,000			35,000
Total Connecticut Water				198,908			199,060
4.75%	HVWC	2011 Farmington Bank Loan, Due 2034		4,341			4,464
3.05%	Avon Water	Mortgage Note Payable, due 2033		3,176			3,302
8.95%	Maine Water	1994 Series G, Due 2024		6,300			6,300
2.68%	Maine Water	1999 Series J, Due 2019		85			170
0.00%	Maine Water	2001 Series K, Due 2031		533			574
2.58%	Maine Water	2002 Series L, Due 2022		53			60
1.53%	Maine Water	2003 Series M, Due 2023		271			321
1.73%	Maine Water	2004 Series N, Due 2024		311			341
0.00%	Maine Water	2004 Series O, Due 2034		107			113
1.76%	Maine Water	2006 Series P, Due 2026		331			361
1.57%	Maine Water	2009 Series R, Due 2029		197			207
0.00%	Maine Water	2009 Series S, Due 2029		493			538
0.00%	Maine Water	2009 Series T, Due 2029		1,383			1,509
0.00%	Maine Water	2012 Series U, Due 2042		142			148
1.00%	Maine Water	2013 Series V, Due 2033		1,285			1,310
4.24%	Maine Water	CoBank Note Payable, Due 2024		4,500			4,500
4.18%	Maine Water	CoBank Note Payable, Due 2026		5,000			5,000
7.72%	Maine Water	Series L, Due 2018		—			2,250
2.40%	Maine Water	Series N, Due 2022		826			1,026
1.86%	Maine Water	Series O, Due 2025		750			750
2.23%	Maine Water	Series P, Due 2028		1,234			1,264
0.01%	Maine Water	Series Q, Due 2035		1,584			1,678
1.00%	Maine Water	Series R, Due 2025		2,009			2,009
Various	Maine Water	Various Capital Leases		—			2
Total Maine Water				27,394			30,431
Add: Acquisition Fair Value Adjustment				(154	)		(51	)
Less: Current Portion				(4,321	)		(6,173	)
Less: Unamortized Debt Issuance Expense				(4,498	)		(4,905	)
Total Long-Term Debt			$	250,877		$	253,367

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

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

On January 10, 2017, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated January 10, 2017 (the “Third Promissory Note”). On the terms and subject to the conditions set forth in the Third Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $5,000,000 at 4.18%, due December 30, 2026. The proceeds of the Loan will be used to finance new capital expenditures and refinance existing debt owed to the Company, incurred in connection with general water system improvements.

On August 28, 2017, the Company executed and delivered to CoBank a new Promissory Note and Supplement (2017 Single Advance Term Loan) (the “2017 Promissory Note”). On the terms and subject to the conditions set forth in the 2017 Promissory Note issued pursuant to the Company’s Master Loan Agreement, CoBank agreed to make a term loan (the “Loan”) to the Company in the principal amount of $15,000,000. Under the 2017 Promissory Note, the Company will pay interest on the Loan at a fixed rate of 4.15% per year through August 20, 2037, the maturity date of the Loan.

On September 28, 2017, Connecticut Water completed the issuance of $35,000,000 aggregate principal amount of its 3.53% unsecured Senior Notes due September 25, 2037 (the “Senior Notes”). The Senior Notes were issued pursuant to the Note Purchase Agreement dated as of September 28, 2017 (the “Purchase Agreement”) between and among Connecticut Water, NYL Investors, LLC (“NY Life”), as agent, and the Purchasers listed in the Purchaser Schedule attached to the Purchase Agreement, in a private placement financing exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The proceeds of the sale of the Senior Notes will be used by Connecticut Water to repay loans from the Company the proceeds of which were used for capital expenditure projects by Connecticut Water. The Senior Notes bear interest at the rate of 3.53% per annum, payable semi-annually on March 27 and September 27 of each year commencing on March 27, 2018. The principal amount of the Senior Notes, if not previously paid, shall be due on September 25, 2037. The Senior Notes are callable in whole or in part, subject to a make-whole amount.

During the first nine months of 2018, the Company paid approximately $1,208,000 related to Connecticut Water Service’s 2017 CoBank issuance as well as the Company’s Term Note Payable issued as part of the 2012 acquisition of Maine Water, approximately $3,037,000 in sinking funds related to Maine Water’s outstanding bonds, approximately $123,000 in sinking funds related to HVWC’s bank loan and $126,000 related to Avon Water’s mortgage note payable.

Financial Covenants – The Company and its subsidiaries are required to comply with certain covenants in connection with various long term loan agreements. The most restrictive of these covenants is to maintain a consolidated debt to capitalization ratio of not more than 60%. Additionally, Maine Water has restrictions on cash dividends paid based on restricted net assets. The Company and its subsidiaries were in compliance with all covenants at September 30, 2018.

8. Fair Value Disclosures

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

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

Level 1 – Quoted market prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are either directly or indirectly observable.

Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of September 30, 2018 (in thousands):

	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	147	$	—	$	—	$	147
Mutual Funds:
Equity Funds (1)		2,149		—		—		2,149
Fixed Income Funds (2)		639		—		—		639
Total	$	2,935	$	—	$	—	$	2,935

The following table summarizes our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2017 (in thousands):

	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	70	$	—	$	—	$	70
Mutual Funds:
Equity Funds (1)		2,051		—		—		2,051
Fixed Income Funds (2)		642		—		—		642
Total	$	2,763	$	—	$	—	$	2,763

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

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

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

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

Company Owned Life Insurance – The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the “Other Property and Investments” line item of the Company’s Consolidated Balance Sheets. The value of Company Owned Life Insurance at September 30, 2018 and December 31, 2017 was $4,521,000 and $4,018,000, respectively.

Long-Term Debt – The fair value of the Company’s fixed rate long-term debt is based upon borrowing rates currently available to the Company. As of September 30, 2018 and December 31, 2017, the estimated fair value of the Company’s long-term debt was $255,759,000 and $268,628,000, respectively, as compared to the carrying amounts of $255,375,000 and $258,272,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A-rated MMD (Municipal Market Data) Index which is a benchmark of current municipal bond yields. Under the fair value hierarchy, the fair value of long term debt is classified as a Level 2 measurement.

Advances for Construction – Customer advances for construction had a carrying amount of $19,324,000 and $20,024,000 at September 30, 2018 and December 31, 2017, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

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

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Segment Reporting

The Company operates principally in three business segments: Water Operations, Real Estate Transactions, and Services and Rentals. Financial data for the segments is as follows (in thousands):

Three months ended September 30, 2018
Segment	Revenues		Pre-Tax Income		Income Tax (Benefit) Expense			Net Income
Water Operations	$	36,617	$	11,044	$	(1,524	)	$	12,568
Real Estate Transactions		1,350		934		308			626
Services and Rentals		1,333		567		98			469
Total	$	39,300	$	12,545	$	(1,118	)	$	13,663

Three months ended September 30, 2017
Segment	Revenues		Pre-Tax Income		Income Tax Expense		Net Income
Water Operations	$	32,252	$	10,500	$	36	$	10,464
Real Estate Transactions		—		—		—		—
Services and Rentals		1,256		465		213		252
Total	$	33,508	$	10,965	$	249	$	10,716

Nine months ended September 30, 2018
Segment	Revenues		Pre-Tax Income		Income Tax (Benefit) Expense			Net Income
Water Operations	$	92,110	$	13,904	$	(1,338	)	$	15,242
Real Estate Transactions		1,350		934		308			626
Services and Rentals		3,815		1,672		375			1,297
Total	$	97,275	$	16,510	$	(655	)	$	17,165

Nine months ended September 30, 2017
Segment	Revenues		Pre-Tax Income		Income Tax (Benefit) Expense			Net Income
Water Operations	$	83,258	$	21,112	$	(1,215	)	$	22,327
Real Estate Transactions		212		55		22			33
Services and Rentals		3,745		1,461		619			842
Total	$	87,215	$	22,628	$	(574	)	$	23,202

The revenues shown in Water Operations above consisted of revenues from water customers of $36,269,000 and $31,797,000 for the three months ended September 30, 2018 and 2017. Additionally, there were revenues associated with utility plant leased to others of $348,000 and $455,000 for the three months ended September 30, 2018 and 2017, respectively. The revenues from water and wastewater customers for the three months ended September 30, 2018 and 2017 include $2,735,000 and $1,989,000 in additional revenues related to the application of the WRA, respectively.

The revenues shown in Water Operations above consisted of revenues from water customers of $91,026,000 and $82,162,000 for the nine months ended September 30, 2018 and 2017. Additionally, there were revenues associated with utility plant leased to others of $1,084,000 and $1,096,000 for the nine months ended September 30, 2018 and 2017, respectively. The revenues from water and wastewater customers for the nine months ended September 30, 2018 and 2017 include $6,239,000 and $5,542,000 in additional revenues related to the application of the WRA, respectively.

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

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Assets by segment (in thousands):

	September 30, 2018		December 31, 2017
Total Plant and Other Investments:
Water Operations	$	732,483	$	707,362
Non-Water		1,116		1,023
		733,599		708,385
Other Assets:
Water Operations		206,109		188,590
Non-Water		4,333		1,808
		210,442		190,398
Total Assets	$	944,041	$	898,783

10. Income Taxes

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

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the Company’s Federal tax return were to be reviewed by the IRS. While the Company believes that the deductions taken on its tax returns are appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of the position through the quarter ended June 30, 2017, the impact of the new information on the Connecticut subsidiary caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ending September 30, 2017, the portion of the provision related to the tax year ending December 31, 2013, in the amount of $810,000, was reversed due to statute expiration. Through September 30, 2017, the Company has recorded, as required by FASB ASC 740, a provision of $1,085,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. During the quarter ending September 30, 2018, the portion of the provision related to the tax year ending December 31, 2014, in the amount of $1,300,000, was reversed due to statute expiration. For the nine months ended September 30, 2018, the Company recorded a provision of $910,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $4.6 million in prior years for a cumulative total of $4.2 million.

On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowered the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. While we are able to make reasonable estimates of the impact of the reduction in corporate rate, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact. Provisional amounts have been recorded as a Regulatory Liability to the extent that the tax savings over time will be returned to customers in utility rates, and a non-cash adjustment was recognized to record additional income tax expense to the extent revalued deferred income taxes are not believed to be recoverable in utility customer rates. Accounting for the income tax effects of the Tax Act is expected to be completed when a decision is reached by both PURA and the MPUC regarding the impact that shall be included in utility customer rates. During the first nine months of 2018, the Company

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

performed further analysis on the impact of the enacted legislation. Through the quarter ended September 30, 2018, the Company recorded an excess accumulated deferred tax liability of $31 million, of which $28 million relates to the Tax Act. The additional analysis resulted in no change to the Unrecovered Income Taxes and Unfunded Future Income Taxes or income tax expense.

From time to time, the Company may be assessed interest and penalties by taxing authorities. In those cases, the charges would appear on the Other line item within the Other Income (Deductions), Net of Taxes section of the Company’s Condensed Consolidated Statements of Income. There were no such charges for the nine months ended September 30, 2018 and 2017. Additionally, there were no accruals relating to interest or penalties as of September 30, 2018 and December 31, 2017. The Company remains subject to examination by federal and state tax authorities for the 2015 through 2017 tax years. On April 26, 2017, Avon Water was notified by the IRS that its stand-alone Federal tax filing for 2015 was selected to be reviewed beginning in the second quarter of 2017 and the audit was expanded to include the 2016 standalone tax year. On March 20, 2018, Avon Water received a notice of adjustment from the IRS related to the Federal tax audit for the tax years ended December 31, 2015 and 2016. As a result, a reduction in the net operating loss carryover of $56,000 was recorded during the nine months ended September 30, 2018.

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

The Company’s effective income tax rate for the three months ended September 30, 2018 and 2017 was (8.9)% and 2.3%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended September 30, 2018 and 2017, was 2.7% and 0.1%, respectively. In both 2018 and 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut and a change in estimate of prior year income taxes. Excluding discrete items, there was an increase in the effective tax rate year over year for the three month period of approximately 2%. The increase in the effective tax rate for this period can be attributed to a lower tax deductible pension contribution deduction in 2018 than in 2017.

The Company’s effective income tax rate for the nine months ended September 30, 2018 and 2017 was (4.0)% and (2.5)%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the nine months ended September 30, 2018 and 2017, was (2.2)% and 9.2%, respectively. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, purchase accounting adjustments to goodwill, change in estimate of prior year income taxes, an IRS audit adjustment, and adjustments required under the Tax Act. In 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut. Excluding discrete items, there was a decrease in the effective tax rate year over year for the nine month period of approximately 11%. The decrease in the effective tax rate for this period can be attributed to a higher estimated repair deduction and higher performance stock deduction in 2018 than in 2017. The blended Federal and State statutory income tax rates during the three and nine months ended September 30, 2018 and 2017 were 28% and 41%, respectively. In determining its annual estimated effective tax rate for interim periods, the Company reflects its estimated permanent and flow-through tax differences for the taxable year, including the basis difference for the adoption of the tangible property regulations.

11. Lines of Credit

As of September 30, 2018, the Company maintained a $15.0 million line of credit agreement with CoBank, that is currently scheduled to expire on July 1, 2020. The Company maintained an additional line of credit of $45.0 million with Citizens Bank, N.A., with an expiration date of April 25, 2021. Additionally, Avon Water maintains a $3.0 million line of credit with Northwest Community Bank, which expired on September 30, 2018. As of September 30, 2018, the total lines of credit available to the Company were $60.0 million. As of September 30, 2018 and December 31, 2017, the Company had $58.5 million and $19.3 million, respectively, of Interim Bank Loans Payable. As of September 30, 2018, the Company had $1.5 million in unused lines of credit. Interest expense charged on lines of credit will fluctuate based on market interest rates.

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Acquisitions

The Heritage Village Water Company Acquisition

On May 10, 2016, the Company announced that it had reached an agreement to acquire HVWC, pending a vote of HVWC shareholders, approval by PURA and MPUC and the satisfaction of other various closing conditions, pursuant to the terms of Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut.

The acquisition was executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock received shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflected a total enterprise value of HVWC of approximately $21.5 million, with the $16.9 million paid to shareholders in a stock exchange and the assumption by the Company of approximately $4.6 million of debt held by HVWC at the time of the acquisition.

The Company received regulatory approval from MPUC on September 28, 2016 and from PURA on December 5, 2016, to proceed with the transaction. The shareholders of HVWC voted to approve the acquisition at a special meeting of HVWC’s shareholders held on February 27, 2017.

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of the Company’s wholly-owned subsidiary HAC, Inc. with and into HVWC, with HVWC as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the merger, the holders of HVWC’s 1,620 issued and outstanding shares of common stock became entitled to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange, which exchange was commenced promptly by the issuance of a letter of transmittal and related materials by Connecticut Water’s exchange agent.

The Avon Water Company Acquisition

On October 12, 2016, the Company announced that it had reached an agreement to acquire Avon Water, pending a vote of Avon Water shareholders, approval by PURA and the MPUC and the satisfaction of other various closing conditions, pursuant to the terms of that certain Agreement and Plan of Merger dated October 11, 2016 as amended on March 29, 2017 between and among Avon Water, the Company, and WC-A I, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). Avon Water serves approximately 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut.

On February 10, 2017, Connecticut Water received regulatory approval from MPUC and on April 12, 2017, Connecticut Water received regulatory approval from the PURA to proceed with the transaction. The shareholders of Avon Water voted to approve the acquisition at a special meeting of Avon Water’s shareholders held on June 16, 2017.

Effective July 1, 2017, the Company completed the acquisition of Avon Water by completing the merger of Connecticut Water’s wholly-owned subsidiary WC-A I, Inc. with and into Avon Water, with Avon Water as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the merger, the holders of Avon Water’s 122,289 issued and outstanding shares of common stock became entitled to receive the following merger consideration for each share of Avon Water common stock held: (i) a cash payment of $50.11; and (ii) a stock consideration component, consisting of 3.97 shares of the Company’s common stock.

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $26.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $33.0 million. The transaction reflects a total enterprise value of approximately $39.1 million, with the $33.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt of Avon Water.

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the fair value of the HVWC assets acquired on February 27, 2017 and the Avon Water assets on July 1, 2017, the dates of the acquisitions (in thousands):

	HVWC		Avon Water
Net Utility Plant	$	28,861	$	28,330
Cash and Cash Equivalents		1,336		455
Accounts Receivable, net		355		379
Prepayments and Other Current Assets		179		243
Accrued Unbilled Revenues		47		467
Materials and Supplies, at Average Cost		63		151
Goodwill		12,777		23,472
Unrecovered Income Taxes – Regulatory Asset		—		3,619
Deferred Charges and Other Costs		343		799
Total Assets Acquired	$	43,961	$	57,915
Long-Term Debt, including current portion	$	4,642	$	3,145
Accounts Payable and Accrued Expenses		149		584
Interim Bank Loans Payable		—		2,500
Other Current Liabilities		238		32
Advances for Construction		1,897		1,537
Deferred Federal and State Income Taxes		1,680		1,880
Unfunded Future Income Taxes		—		3,619
Other Long-Term Liabilities		—		314
Total Liabilities Assumed	$	8,606	$	13,611
Contributions in Aid of Construction		18,452		11,560
Net Assets Acquired	$	16,903	$	32,744

The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurement under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value analysis assumes the highest and best use of the assets by market participants. The allocation of the purchase price includes an adjustment to fair value related to the fair value of HVWC’s and Avon Water’s long term debt and any associated deferred taxes. Additionally, adjustments were made to deferred taxes based on the Company’s ability to utilize net operating loss carryforwards that had valuation allowances at the acquired companies. The excess of the purchase price paid over the estimated fair value of the assets acquired and the liabilities assumed was recognized as goodwill, none of which is deductible for tax purposes. Goodwill recognized as part of the acquisitions of HVWC and Avon Water are a part of the Company’s Water Operations segment.

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following unaudited pro forma summary for the three and nine months ended September 30, 2018 and 2017 presents information as if HVWC and Avon Water had each been acquired on January 1, 2017 and assumes that there were no other changes in our operations. The following pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the businesses since January 1, 2017, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):

Three months ended September 30,	2018		2017
Operating Revenues	$	36,269	$	31,797
Other Water Activities Revenues		348		455
Real Estate Revenues		1,350		—
Service and Rentals Revenues		1,333		1,256
Total Revenues	$	39,300	$	33,508
Net (Loss) Income	$	13,663	$	10,716
Basic Earnings per Average Share Outstanding	$	1.15	$	0.92
Diluted Earnings per Average Share Outstanding	$	1.13	$	0.90

Nine months ended September 30,	2018		2017
Operating Revenues	$	91,026	$	84,823
Other Water Activities Revenues		1,084		1,179
Real Estate Revenues		1,350		212
Service and Rentals Revenues		3,815		3,754
Total Revenues	$	97,275	$	89,968
Net Income	$	17,165	$	23,188
Basic Earnings per Average Share Outstanding	$	1.44	$	1.96
Diluted Earnings per Average Share Outstanding	$	1.42	$	1.92

27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes the results of HVWC and Avon Water for the three and nine months ended September 30, 2018 and from the dates of acquisition to September 30, 2017 (from February 27, 2017 for HVWC and July 1, 2017 for Avon Water) and is included in the Consolidated Statement of Income for the period (in thousands):

Three Months Ended	2018		2017
Operating Revenues	$	2,942	$	2,368
Other Water Activities Revenues		50		42
Real Estate Revenues		—		—
Service and Rentals Revenues		11		—
Total Revenues	$	3,003	$	2,410
Net (Loss) Income	$	941	$	476
Basic Earnings per Average Share Outstanding	$	0.08	$	0.04
Diluted Earnings per Average Share Outstanding	$	0.08	$	0.04

Nine Months Ended	2018		2017
Operating Revenues	$	6,997	$	3,721
Other Water Activities Revenues		98		42
Real Estate Revenues		—		—
Service and Rentals Revenues		49		—
Total Revenues	$	7,144	$	3,763
Net (Loss) Income	$	718	$	693
Basic Earnings per Average Share Outstanding	$	0.06	$	0.06
Diluted Earnings per Average Share Outstanding	$	0.06	$	0.06

28

EX-99.2

Exhibit 99.2

CONNECTICUT WATER SERVICE, INC.

TABLE OF CONTENTS

	Page
Management’s Report on Internal Control Over Financial Reporting		2
Report of Independent Registered Public Accounting Firm		3
Consolidated Statements of Income for the years ended December  31, 2017, 2016 and 2015		5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015		5
Consolidated Balance Sheets at December 31, 2017 and 2016		6
Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016 and 2015		7
Notes to Consolidated Financial Statements		8

Management’s Report on Internal Control Over Financial Reporting

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

Management of Connecticut Water Service Inc. (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 (2013 framework) in conducting management’s evaluation of the effectiveness of the internal control over financial reporting. On February 27, 2017 and July 1, 2017, the Company acquired HVWC and Avon Water, respectively. After a brief transition period following their acquisition dates, HVWC and Avon Water were incorporated into the Company’s internal control framework. Based on management’s evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by Baker Tilly Virchow Krause, 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.

2

Report of Independent Registered Public Accounting Firm

To the stockholders and the board of directors of Connecticut Water Service, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Connecticut Water Service, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, and cash flows, for each of the years in the three-year period ended December 31, 2017, and the related notes and consolidated financial statement schedule listed in Item 15(a)2 (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures, as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

3

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/ Baker Tilly Virchow Krause, LLP

We have served as the Company’s auditor since 2013.

Philadelphia, Pennsylvania

March 15, 2018

4

CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, (in thousands, except per share data)	2017			2016			2015
Operating Revenues	$	107,054		$	98,667		$	96,041
Operating Expenses
Operation and Maintenance		48,017			44,191			48,052
Depreciation		16,684			13,905			12,871
Income Taxes		(1,993	)		2,570			(818	)
Taxes Other Than Income Taxes		10,941			9,796			9,294
Total Operating Expenses		73,649			70,462			69,399
Net Operating Revenues		33,405			28,205			26,642
Other Utility Income, Net of Taxes		824			744			797
Total Utility Operating Income		34,229			28,949			27,439
Other Income (Deductions), Net of Taxes (Loss) Gain on Real Estate Transactions		33			(54	)		349
Non-Water Sales Earnings		1,167			1,219			1,394
Allowance for Funds Used During Construction		774			1,198			530
Other		(2,308	)		(1,009	)		(214	)
Total Other Income (Loss), Net of Taxes		(334	)		1,354			2,059
Interest and Debt Expenses
Interest on Long-Term Debt		9,054			7,714			7,087
Other Interest Income, Net		(359	)		(922	)		(458	)
Amortization of Debt Expense and Premium, Net		146			124			108
Total Interest and Debt Expenses		8,841			6,916			6,737
Net Income		25,054			23,387			22,761
Preferred Stock Dividend Requirement		38			38			38
Total Net Income Applicable to Common Stock	$	25,016		$	23,349		$	22,723
Weighted Average Common Shares Outstanding:
Basic		11,540			11,009			10,958
Diluted		11,762			11,228			11,164
Earnings Per Common Share:
Basic	$	2.17		$	2.12		$	2.07
Diluted	$	2.13		$	2.08		$	2.04

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, (in thousands)	2017		2016			2015
Net Income	$	25,054	$	23,387		$	22,761
Other Comprehensive Income (Loss), net of tax
Adjustment to post-retirement benefit plans, net of tax benefit (expense) of $(419), $15, and $(505) in 2017, 2016, and 2015, respectively		289		(24	)		765
Unrealized Investment gain (loss), net of tax (expense) benefit of $(13), $(22) and $62, in 2017, 2016, and 2015, respectively		207		35			(97	)
Other Comprehensive Income, net of tax	$	496	$	11		$	668
Comprehensive Income	$	25,550	$	23,398		$	23,429

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED BALANCE SHEETS

December 31, (in thousands, except share amounts)	2017			2016
ASSETS
Utility Plant	$	927,289		$	777,860
Construction Work in Progress		11,761			33,748
	939,050			811,608
Accumulated Provision for Depreciation		(241,327	)		(210,212	)
Net Utility Plant		697,723			601,396
Other Property and Investments		10,662			9,071
Cash and Cash Equivalents		3,618			1,564
Accounts Receivable (Less Allowance, 2017 - $1,265; 2016 - $1,100)		14,965			13,024
Accrued Unbilled Revenues		8,481			8,171
Materials and Supplies, at Average Cost		1,593			1,536
Prepayments and Other Current Assets		7,021			5,069
Total Current Assets		35,678			29,364
Unrecovered Income Taxes—Regulatory Asset		66,631			93,264
Pension Benefits—Regulatory Asset		11,339			12,266
Post-Retirement Benefits Other Than Pension—Regulatory Asset		116			265
Goodwill		67,016			30,427
Deferred Charges and Other Costs		9,618			8,449
Total Regulatory and Other Long-Term Assets		154,720			144,671
Total Assets	$	898,783		$	784,502
CAPITALIZATION AND LIABILITIES
Common Stockholders’ Equity:
Common Stock Without Par Value: Authorized - 25,000,000 Shares Issued and Outstanding: 2017 - 12,065,016; 2016 - 11,248,458	$	191,641		$	145,739
Retained Earnings		102,417			91,213
Accumulated Other Comprehensive Loss		(428	)		(924	)
Common Stockholders’ Equity		293,630			236,028
Preferred Stock		772			772
Long-Term Debt		253,367			197,047
Total Capitalization		547,769			433,847
Current Portion of Long-Term Debt		6,173			4,859
Interim Bank Loans Payable		19,281			32,953
Accounts Payable and Accrued Expenses		11,319			13,116
Accrued Interest		1,439			1,012
Current Portion of Refund to Customers—Regulatory Liability		64			855
Other Current Liabilities		3,262			2,330
Total Current Liabilities		41,538			55,125
Advances for Construction		20,024			19,127
Deferred Federal and State Income Taxes		33,579			50,558
Unfunded Future Income Taxes		58,384			90,977
Long-Term Compensation Arrangements		32,649			33,540
Unamortized Investment Tax Credits—Regulatory Liability		1,133			1,189
Excess Accumulated Deferred Income Tax—Regulatory Liability		30,937			4,373
Refund to Customers—Regulatory Liability		—			108
Other Long-Term Liabilities		1,241			701
Total Long-Term Liabilities		177,947			200,573
Contributions in Aid of Construction		131,529			94,957
Commitments and Contingencies		—			—
Total Capitalization and Liabilities	$	898,783		$	784,502

The accompanying notes are an integral part of these Consolidated Financial Statements.

6

CONNECTICUT WATER SERVICE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, (in thousands)	2017			2016			2015
Operating Activities:
Net Income	$	25,054		$	23,387		$	22,761
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Revenues		(3,945	)		(893	)		(1,344	)
Provision for Deferred Income Taxes and Investment Tax Credits, Net		3,387			2,950			(7,502	)
Allowance for Funds Used During Construction		(774	)		(1,198	)		(530	)
Depreciation and Amortization (including $775 in 2017, $732 in 2016, and $27 in 2015 charged to other accounts)		17,459			13,173			12,898
Loss (Gain) on Real Estate Transactions		(33	)		54			(349	)
Change in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable and Accrued Unbilled Revenues		(1,053	)		(1,925	)		984
Decrease (Increase) in Other Current Assets		(1,278	)		338			6,540
(Increase) Decrease in Other Non-Current Items, Net		200			(2,741	)		11,383
Increase (Decrease) in Accounts Payable, Accrued Expenses and Other Current Liabilities		(2,404	)		176			(3,695	)
Total Adjustments		11,559			9,934			18,385
Net Cash and Cash Equivalents Provided by Operating Activities		36,613			33,321			41,146
Investing Activities:
Additions to Utility Plant		(53,022	)		(66,689	)		(48,025	)
Cash portion of The Avon Water Company Acquisition		(6,134	)		—			—
Proceeds on Real Estate Transactions		212			9			14
Cash Acquired		1,791			—			—
Release (Receipt) of Restricted Cash		—			846			(846	)
Net Cash and Cash Equivalents Used in Investing Activities		(57,153	)		(65,834	)		(48,857	)
Financing Activities:
Net Proceeds from Interim Bank Loans		19,281			32,953			16,085
Net Repayment of Interim Bank Loans		(35,453	)		(16,085	)		(1,991	)
Repayment of Long-Term Debt		(5,195	)		(22,772	)		(2,476	)
Proceeds from Issuance of Long-Term Debt		55,000			49,930			4,352
Proceeds from Issuance of Common Stock		1,404			1,610			1,536
Costs Incurred to Issue Long-Term Debt and Common Stock		(2	)		(88	)		(37	)
Advances from Others for Construction		1,479			350			251
Cash Dividends Paid		(13,920	)		(12,552	)		(11,753	)
Net Cash and Cash Equivalents Provided by Financing Activities		22,594			33,346			5,967
Net Increase (Decrease) in Cash and Cash Equivalents		2,054			833			(1,744	)
Cash and Cash Equivalents at Beginning of Year		1,564			731			2,475
Cash and Cash Equivalents at End of Year	$	3,618		$	1,564		$	731
Non-Cash Investing and Financing Activities:
Stock-for-stock acquisition of The Heritage Village Water Company	$	16,903		$	—		$	—
Stock-for-stock acquisition of The Avon Water Company	$	26,949		$	—		$	—
Non-Cash Contributed Utility Plant (see Note 1 for details)	$	2,741		$	1,394		$	1,282
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest	$	8,445		$	6,678		$	6,761
State and Federal Income Taxes	$	572		$	445		$	537

The accompanying notes are an integral part of these Consolidated Financial Statements.

7

CONNECTICUT WATER SERVICE, INC.

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION – The Consolidated Financial Statements include the operations of Connecticut Water Service, Inc. (the “Company”), an investor-owned holding company and its wholly-owned subsidiaries, including:

The Connecticut Water Company (“Connecticut Water”)

The Maine Water Company (“Maine Water”)

The Heritage Village Water Company (“HVWC”)

The Avon Water Company (“Avon Water”)

Chester Realty, Inc. (“Chester Realty”)

New England Water Utility Services, Inc. (“NEWUS”)

As of December 31, 2017, Connecticut Water, Maine Water, HVWC and Avon Water were our regulated public water utility companies (collectively the “Regulated Companies”), which together served 135,645 customers in 80 towns throughout Connecticut and Maine.

Chester Realty is a real estate company whose net profits from rental of property are included in the “Other Income (Deductions), Net of Taxes” section of the Consolidated Statements of Income in the “Non-Water Sales Earnings” category.

NEWUS is engaged in water-related services, including the Linebacker^® program, emergency drinking water, and contract operations. Its earnings are included in the “Non-Water Sales Earnings” category of the Consolidated Statements of Income.

Intercompany accounts and transactions have been eliminated.

The results for interim periods are not necessarily indicative of results to be expected for the year since the consolidated earnings are subject to seasonal factors. Effective February 27, 2017 and July 1, 2017, the Company acquired HVWC and Avon Water, respectively, discussed further in Note 15 below. As a result, the Company’s Consolidated Balance Sheet at December 31, 2016, the Consolidated Statements of Net Income, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Cash Flows for the year-ended December 31, 2016 and 2015 do not include HVWC or Avon Water. The Consolidated Statements of Net Income, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Cash Flows for the year-ended December 31, 2017 do include HVWC’s and Avon Water’s results for the periods the Company owned HVWC and Avon Water. HVWC’s and Avon Water’s assets and liabilities are included in the Consolidated Balance Sheet as of December 31, 2017.

As noted in Note 15 below, HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut. The results of the wastewater line of business are included in the Company’s Water Operations segment. Additionally, as noted in Note 15, Avon Water serves approximately 4,800 water customers in the Towns of Avon, Farmington, and Simsbury, Connecticut.

During the preparation of the Condensed Consolidated Financial Statements for the quarter ended June 30, 2016, the Company identified two errors related to the accounting treatment of stock based performance awards granted to officers of the Company. First, the Company had mistakenly classified certain stock based performance awards as equity awards and, secondly, incorrectly marked those awards to the market price of the Company’s common stock price at the end of each reporting period. A portion of these awards should have been classified as liability awards and only those awards should have been marked-to-market based on the Company’s common stock price. During the second quarter of 2016, the Company reversed all of the incorrectly recorded mark-to-market expense as a cumulative out-of-period adjustment resulting in a one-time benefit of approximately $2.6 million on the Operation and Maintenance line item on its Condensed Consolidated Statements of Income for the three months ended June 30, 2016. Approximately $1.6 million of the out of period adjustment pertained to years prior to 2016, with the remaining $1.0 million related to the first quarter of 2016. Additionally, the Company decreased its Common Stock Without Par Value and increased its Long-Term Compensation Arrangement line items on the Condensed Consolidated Balance Sheet as of June 30, 2016 by approximately $0.6 million to reflect both the awards that should have been classified as liability awards and their corresponding mark-to-market adjustments.

The Company performed various quantitative and qualitative analyses and determined that these errors were not material to the previously reported quarterly and annual results. The Company also determined that recording these entries as an out-of-period adjustment during the second quarter of 2016 was not material to the full year ended December 31, 2016 results of operations.

8

CONNECTICUT WATER SERVICE, INC.

PUBLIC UTILITY REGULATION – Connecticut Water, HVWC and Avon Water are subject to regulation for rates and other matters by the Connecticut Public Utility Regulatory Authority (“PURA”) and follow accounting policies prescribed by PURA. Maine Water is subject to regulation for rates and other matters by the Maine Public Utilities Commission (“MPUC”). The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which includes the provisions of Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 980 “Regulated Operations” (“FASB ASC 980”). FASB ASC 980 requires cost-based, rate-regulated enterprises, such as the Regulated Companies, to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets and liabilities that result when costs and benefits are allowed for ratemaking purposes in a period after the period in which the costs or benefits would be charged to expense by an unregulated enterprise. The Consolidated Balance Sheets include regulatory assets and liabilities as appropriate, primarily related to income taxes, post-retirement benefit costs and deferred revenues associated with the Water Revenue Adjustment (“WRA”) used by Connecticut Water and HVWC. In accordance with FASB ASC 980, costs which benefit future periods are amortized over the periods they benefit. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are probable to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

Regulatory assets and liabilities are comprised of the following:

(in thousands)	December 31,
	2017		2016
Assets:
Pension Benefits and Post-Retirement Benefits Other Than Pension	$	11,455	$	12,531
Unrecovered Income Taxes		66,631		93,264
Deferred revenue (included in Prepayments and Other Current Assets and Deferred Charges and Other Costs)		6,574		3,910
Other (included in Prepayments and Other Current Assets and Deferred Charges and Other Costs)		5,202		4,276
Total regulatory assets	$	89,862	$	113,981
Liabilities:
Other (included in Other Current Liabilities)	$	1,117	$	1,710
Unamortized Investment Tax Credits		1,133		1,189
Refunds to Customers (including Current Portion of Refund to Customers)		64		963
Unfunded Future Income Taxes (including Other Long-Term Liabilities)		58,384		90,977
Excess Accumulated Deferred Income Tax		30,937		4,373
Total regulatory liabilities	$	91,635	$	99,212

Pension and post-retirement benefits include costs in excess of amounts funded. The Company believes these costs will be recoverable in future years, through rates, as funding is required and has recorded regulatory assets for those costs. The recovery period is dependent on contributions made to the plans and remaining life expectancy.

Certain items giving rise to deferred state income taxes, as well as a portion of deferred federal income taxes related primarily to differences between book and tax depreciation expense, are recognized for ratemaking purposes on a cash or flow-through basis and are recognized as unrecovered future income taxes that will be recovered in rates in future years as they reverse. In addition, basis differences resulting from the repair tax deduction adopted in 2013 contribute to the change in unfunded future income taxes.

Unrecovered Income Taxes, Unfunded Future Income Taxes and Excess Accumulated Deferred Income Tax all changed significantly between 2016 and 2017 primarily as a result of recognition of lower corporate tax rate resulting from the adoption of the Tax Act.

Deferred revenue represents a portion of the rate increase granted in Connecticut Water’s 2007 rate decision. PURA decision required the Company to defer for future collection, beginning in 2008, a portion of the increase. Additionally, revenue recorded under the WRA, discussed below, is included in deferred revenue.

9

CONNECTICUT WATER SERVICE, INC.

Regulatory liabilities include deferred investment tax credits and amounts to be refunded to customers as a result of the adoption of the tangible property regulations in Connecticut and Maine. These liabilities will be given back to customers in rates as tax deductions occur in the future.

Regulatory Matters

The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and MPUC, respectively. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. Connecticut Water’s allowed return on equity and return on rate base, effective as of December 31, 2017 were 9.75% and 7.32%, respectively. HVWC’s blended water and wastewater allowed return on equity and return on rate base, effective December 31, 2017, were 10.10% and 7.19%, respectively. Avon Water’s allowed return on equity and return on rate base, effective December 31, 2017, were 10.00% and 7.79%, respectively. Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2017 were 9.50% and 7.96%, respectively. PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC, Avon Water and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain costs associated with approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, in Connecticut, as discussed in more detail below. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of December 31, 2017, however, HVWC, as authorized by PURA, began to utilize Water Revenue Adjustments as of March 31, 2017.

On January 3, 2018, PURA filed a motion to reopen the most recent rate case decisions for the Company’s Connecticut Regulated Companies to determine what, if any, adjustments to rates are appropriate to account for revisions to tax laws, including corporate tax rates, contained in the Tax Cuts and Jobs Act (“Tax Act”). As discussed below, Connecticut Water has entered into a settlement agreement with the state’s consumer advocate that covers treatment of the Tax Act. On January 11, 2018, the MPUC issued a notice of investigation to determine the impact of the Tax Act on Maine Water. The investigation will allow the MPUC to determine the specific impact of the Tax Act and whether any rate adjustments are warranted. Following discovery, a technical conference is scheduled for April 19, 2018. In addition to determining the impact of the Tax Act on the justness and reasonableness of Maine Water’s rates, the MPUC will consider whether to issue an accounting order to establish a regulatory liability which defers for future flow-through to ratepayers the impact of the tax changes.

Maine Water Land Sale

On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,300 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land had a book value of approximately $600,000 at December 31, 2015 and is included in “Utility Plant” on the Company’s Consolidated Balance Sheets. The easements and purchase prices are as follows:

1. Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and

2. Grassy Pond conservation Easement: $600,000.

On October 13, 2017, an amendment to the agreement was made to extend closing of the first transaction to June 30, 2018, from December 31, 2017. This is also expected to extend the second closing into 2020. Maine Water will make a $200,000 contribution to the Land Trust upon completion of the closing of the first easement sale. Maine Water also expects to claim a charitable deduction for the $600,000 in excess of the fair market value of the second easement over the $600,000 sale price.

Connecticut Rates

Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 9.81%, 7.13% and 4.19% above base rates at December 31, 2017, 2016, and 2015, respectively. As of December 31, 2017, Avon Water’s WICA surcharge was 8.09%. As of December 31, 2017, HVWC has not filed for a WICA surcharge.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case (previously reopened in 2013) proceeding for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the Connecticut Office of Consumer Counsel (“OCC”) (the “Agreement”). The Agreement contemplates a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:

1. Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;

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2. Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates to be effective before January 1, 2020;

3. The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and

4. Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA.

The Agreement provides that, if PURA does not fully approve the Agreement in its entirety, it shall be deemed withdrawn. Accordingly, the Agreement has no operative effect unless and until it is approved by PURA. Connecticut Water is not able to predict with certainty the ultimate timing of PURA’s final action on the Agreement. No assurance can be given that PURA will approve the Agreement and permit some or all of the terms contained in the Agreement requested by the parties. PURA has agreed to the request to reopen the rate proceeding. We expect a decision by the end of the second quarter of 2018 with provisions of the Agreement becoming effective soon thereafter.

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

Connecticut Water and HVWC’s allowed revenues for the year ended December 31, 2017, as approved by PURA during each company’s last general rate case and including subsequently approved WICA surcharges, were approximately $80.7 million. Through normal billing for the year ended December 31, 2017 operating revenue for Connecticut Water and HVWC would have been approximately $76.4 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $4.3 million in additional revenue for the year ended December 31, 2017. During the years ended December 31, 2016 and 2015, Connecticut Water recorded $1.1 million and $1.6 million, respectively, in additional revenue related to the WRA. Avon Water does not currently use the WRA mechanism.

Maine Rates

In Maine, the overall, approved cumulative Water Infrastructure Charge (“WISC”) for all of Maine Water’s divisions was 5.6%, 4.7% and 1.6% above base rates as of December 31, 2017, 2016, and 2015, respectively. Five pending WISC filings as of December 31, 2017 have since been approved in the first quarter of 2018, bringing the total to 6.9%. The WISC rates for the Biddeford and Saco division were reset to zero with the approval of the general rate increase discussed below.

On June 29, 2017, Maine Water filed for a rate increase in its Biddeford and Saco division. The rate request was for an approximate $1.6 million, or 25.1%, increase in revenues. The rate request is designed to recover higher operating expenses, depreciation and property taxes since Biddeford and Saco’s last rate increase in 2015. Maine Water and the Maine Office of the Public Advocate reached an agreement that increases annual revenue by $1.56 million. The agreement was approved by the MPUC on December 5, 2017, with new rates effective December 1, 2017.

In 2014 and 2015, Maine Water petitioned the MPUC for approval of accounting orders that would address (1) the return to its customers a federal income tax refund stemming from the adoption of the Internal Revenue Service (“IRS”) Revenue Procedure 2012-19 (“Repair Regulations”), and (2) the treatment of any benefit resulting from the elimination of deferred tax liabilities previously recorded on these qualifying fixed assets that are now deducted under the Repair Regulations.

On February 26, 2015, the MPUC approved a stipulation between Maine Water and the Office of the Public Advocate that refunds $2.9 million to the customers of the eight divisions over a two-year period starting no later than July 1, 2015, and allows the flow-through treatment of the repair deduction as of January 1, 2014. In addition, Maine Water agreed not to file a general rate case during the two-year refund period in any of the eight divisions that were allowed the refund.

On June 22, 2015, the MPUC approved a settlement agreement between Maine Water and the Office of the Public Advocate that allowed for the amortization of the deferred tax liabilities over a one to nine year period, depending on the division. Maine Water commenced amortization per the agreed upon schedule.

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With the completion of these two dockets, Maine Water recorded in the quarter ended June 30, 2015 the retroactive benefit associated with the flow-through of the Repair Regulations from January 1, 2014. The 2014 benefit, reflected in the second quarter of 2015, was approximately $931,000, or $0.09 per basic share outstanding.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates in the Biddeford and Saco division due to provisions in the settlement agreement with the MPUC. As the stay-out periods for other divisions expire, Maine Water expects to request usage of this mechanism as Maine Water file rate cases for those divisions.

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.

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

Water Operations – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as certain public and private fire protection customers who are billed monthly. Most customers, except fire protection customers, are metered. Revenues from metered customers are based on their water usage multiplied by approved, regulated rates and are earned when water is delivered. Public fire protection revenues are based on the length of the water main, and number of hydrants in service and are earned on a monthly basis. Private fire protection charges are based on the diameter of the connection to the water main. Our Regulated Companies accrue an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter, which is reflected as “Accrued Unbilled Revenues” in the accompanying Consolidated Balance Sheets. Beginning in 2013, Connecticut Water began to record deferred revenue related to the WRA, which represent under collection from customers based upon allowed revenues as approved by PURA. On March 31, 2017, HVWC calculated its actual revenues compared to allowed revenues dating back to May 1, 2015, for collection from customers, as allowed by a PURA order. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred. Net income from the Real Estate Transactions segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Income. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation. Net income from the Services and Rentals segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Income. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting”.

UTILITY PLANT – Utility plant is stated at the original cost of such property when first devoted to public service. Utility plant accounts are charged with the cost of improvements and replacements of property including an Allowance for Funds Used During Construction (“AFUDC”). Retired or disposed depreciable plant is charged to accumulated provision for depreciation together with any costs applicable to retirement, less any salvage received. Maintenance of utility plant is charged to expense. Accounting policies relating to other areas of utility plant are listed below:

Allowance For Funds Used During Construction – AFUDC is the cost of debt and equity funds used to finance the construction of utility plant. The amount shown on the Consolidated Statements of Income relates to the equity portion. The debt portion is included as an offset to “Other Interest Income, Net”. 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 assets.

Our Regulated Companies’ allowed rate of return on rate base is used to calculate AFUDC.

Customers’ Advances For Construction, Contributed Plant and Contributions In Aid Of Construction – Under the terms of construction contracts with real estate developers and others, the Regulated Companies periodically receive either advances for the costs of new main installations or title to the main after it is constructed and financed by the developer. Refunds are made, without interest, as services are connected to the main, over periods not exceeding fifteen years and not in excess of the original advance. Unrefunded balances, at the end of the contract period, are credited to contributions in aid of construction (“CIAC”) and are no longer refundable.

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Utility Plant is added in two ways. The majority of the Company’s plant additions occur from direct investment of Company funds that originated through operating or financings activities. The Company manages the construction of these plant additions. These plant additions are part of the Company’s depreciable utility plant and are generally part of rate base. The Company’s rate base is a key component of how its regulated rates are set, and is recovered through the depreciation component of the Company’s rates. The second way in which plant additions occur are through developer advances and contributions. Under this scenario either the developer funds the additions through payments to the Company, who in turn manages the construction of the project, or the developer pays for the plant construction directly and contributes the asset to the Company after it is complete. Plant additions that are financed by a developer, either directly or indirectly, are excluded from the Company’s rate base and not recovered through the rates process, and are also not depreciated.

The components that comprise net additions to Utility Plant during the last three years ending December 31 are as follows:

(in thousands)	2017		2016		2015
Additions to Utility Plant:
Company Financed	$	51,543	$	66,339	$	47,774
Allowance for Funds Used During Construction		774		1,198		530
Subtotal – Utility Plant Increase to Rate Base		52,317		67,537		48,304
Advances from Others for Construction		1,479		350		251
Net Additions to Utility Plant	$	53,796	$	67,887	$	48,555

Depreciation – 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 Company to recover the investment in utility plant over its useful life. The overall consolidated company depreciation rate, based on the average balances of depreciable property, was 2.0%, 1.9%, and 1.9% for 2017, 2016, and 2015, respectively.

INCOME TAXES – The Company provides income tax expense for its utility operations in accordance with the regulatory accounting policies of the applicable jurisdictions. The Company’s income tax provision is calculated on a separate return basis. For Connecticut Water , PURA requires the flow-through method of accounting for most state tax temporary differences as well as for certain federal temporary differences. For Avon Water , PURA requires the flow-through method of accounting for most state temporary differences and normalized accounting for most federal temporary differences. PURA has allowed the flow-through method of accounting stemming from Avon Water’s adoption of the IRS’ Repair Regulations. For HVWC, PURA requires normalized accounting for federal and state temporary differences. The MPUC requires the flow-through method of accounting for most state temporary differences and normalized accounting for most federal temporary differences. In its approvals of the stipulation agreements between Maine Water and the Office of the Public Advocate, issued in 2015, the MPUC has allowed the flow-through method of accounting stemming from Maine Water’s adoption of the IRS’ Repair Regulations in all of its divisions.

The Company computes deferred tax liabilities for all temporary book-tax differences using the liability method prescribed in FASB ASC 740 “Income Taxes” (“FASB ASC 740”). Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting and tax bases of assets and liabilities. Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. Deferred tax liabilities that have not been reflected in tax expense due to regulatory treatment are reflected as Unfunded Future Income Taxes, and are expected to be included in future years’ rates. During the quarter ended December 31, 2017 the Company recorded the impact of the Tax Cuts and Jobs Act (“Tax Act”). As a result, the Company re-measured Deferred Tax Assets and Liabilities to reflect the enacted legislation and recorded a Regulatory Liability of $27.1 million to capture the excess accumulated deferred income taxes for items included in rates that follow the normalized method of accounting. Unrecovered Income Taxes and Unfunded Future Income Taxes were written down by $32 million to reflect the reduced tax rate for items that follow the flow-through method of accounting. Pursuant to ASU 2018-02, the Company has elected to reclassify the stranded tax effects of the 2017 Tax Act from AOCI to Retained Earnings in the amount of $70,482. These stranded taxes relate to post-retirement obligations of the Company. For more information on the Tax Act, please see Note 2.

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The Company believes that deferred income tax assets, net of provisions, will be realized in the future. The majority of Unfunded Future Income Taxes, prior to 2013, relate to deferred state income taxes regarding book to tax depreciation differences. Beginning in 2013, basis differences resulting from the repair tax deduction contributed to the change in unfunded income taxes.

Deferred Federal and State Income Taxes include amounts that have been provided for accelerated depreciation subsequent to 1981, as required by federal income tax regulations, as well as the basis differences associated with expenditures qualifying for repair tax deductions as clarified by the IRS in regulations issued in 2013. Deferred taxes have also been provided for temporary differences in the recognition of certain expenses for tax and financial statement purposes as allowed by regulatory ratemaking policies.

MUNICIPAL TAXES – Municipal taxes are reflected as “Taxes Other Than Income Taxes” and are generally expensed over the twelve-month period beginning on July 1 following the lien date, corresponding with the period in which the municipal services are provided.

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 PURA and the MPUC.

GOODWILL – As part of the purchase of regulated water companies, the Company recorded goodwill of $67.0 million and

$30.4 million as of December 31, 2017 and 2016, respectively, representing the amount of the purchase price over net book value of the assets acquired. The increase of $36.6 million during 2017 is related to the acquisitions of HVWC and Avon Water during the year. The Company accounts for goodwill in accordance with Accounting Standards Codification 350 “Intangibles – Goodwill and Other” (“FASB ASC 350”).

As part of FASB ASC 350, the Company is required to perform an annual review of goodwill for any potential impairment, which we perform as of December 31 each year. We update the assessment between the annual testing if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performed a quantitative analysis of impairment as of December 31, 2017, which concluded that the estimated fair value of the Water Operations reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount by at least 122% as of December 31, 2017. Additionally, the Company believes that no event has occurred which would trigger impairment.

As allowed under FASB ASC 350, the Company performed a qualitative analysis of its goodwill for the year ended December 31, 2016. A qualitative analysis includes a review of internal and external factors that could have an impact on a reporting unit’s fair value when compared to its carrying amount. These factors included a review of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific events, changes in reporting units and a review of the Company’s stock price. Based on these factors and other factors considered in its quantitative analysis, the Company believes that it is more likely than not that the fair market value is more than the carrying value of the Water Operation Segment and therefore, no goodwill impairment was recognized in 2017 and 2016.

We may be required to recognize an impairment of goodwill in the future due to market conditions or other factors that are beyond our control and unrelated to our performance. Those market events could include a decline in the forecasted results in our business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively impact our reported results of operation and total capitalization, the effects of which could be material and could make it more difficult to maintain our credit ratings, secure financing on favorable terms, maintain compliance with debt covenants and meet expectations of our regulators.

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EARNINGS PER SHARE – The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share for the years ended December 31:

Years ended December 31, Numerator (in thousands)	2017		2016		2015
Basic Net Income Applicable to Common Stock	$	25,016	$	23,349	$	22,723
Diluted Net Income Applicable to Common Stock	$	25,016	$	23,349	$	22,723
Denominator (in thousands)
Basic Weighted Average Shares Outstanding		11,540		11,009		10,958
Dilutive Effect of Stock Awards		222		219		206
Diluted Weighted Average Shares Outstanding		11,762		11,228		11,164
Earnings per Share
Basic Earnings per Share	$	2.17	$	2.12	$	2.07
Dilutive Effect of Stock Awards		0.04		0.04		0.03
Diluted Earnings per Share	$	2.13	$	2.08	$	2.04

NEW ACCOUNTING PRONOUNCEMENTS – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU No. 2014-09”) which amends its guidance related to revenue recognition. ASU No. 2014-09 requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. ASU No. 2014-09 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, however early adoption is not permitted. On April 1, 2015, the FASB voted for a one-year deferral of the effective date of ASU No. 2014-09, making ASU No. 2014-09 effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has been engaged in a project to analyze the impact that adoption of this standard will have on our consolidated financial statements, disclosures, and internal controls. The project includes identification of the Company’s revenue streams, creation of an inventory of its contracts with customers, evaluation of a representative sample of these contracts with respect to the new guidance and documentation of any required changes in reporting. The Company derives more than 90% of its revenue from regulated delivery of water and wastewater services to its retail customers, which is considered a contract with customers under ASU 2014-09, excluding revenue recognized as WRA. The majority of the remainder of the Company’s revenue is derived from contract operations and unregulated revenues generated from its Linebacker program, also considered a contract with customer under ASU 2014-09. Certain of the identified revenue streams are judgmental in nature. The Company has determined that revenue generated from the attachment of telecommunications equipment to its facilities through leases with third parties is outside the scope of ASU No. 2014-09. In 2017, the American Institute of Certified Public Accountants (AICPA) power and utility entities revenue recognition task force has determined that contributions in aid of construction are not in the scope of ASU No. 2014-09. The Company’s adoption of ASU No. 2014-09 on January 1, 2018 did not result in any change in the measurement and timing of recognition of its revenues. The Company used the modified retrospective approach when implementing ASU No. 2014-09.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU No. 2015-11”), which applies to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged under the updated guidance for inventory that is measured using last-in, last-out (“LIFO”). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company uses average cost to value its inventory and, therefore, ASU No. 2015-11 did not have an impact on the Company.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”) which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers would now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. ASU No. 2015-16 is effective for the Company on January 1, 2017 and was adopted on a prospective basis. The adoption did not have a material impact on our consolidated financial position.

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In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, (“ASU No. 2016-02”), which will require lessees to recognize the following for all leases at the commencement date of a lease: a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Public business entities should apply the amendments in ASU No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact of this standard on its consolidated financial position and results of operations, but does not expect that the adoption of this guidance will have a material impact on the Company.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU No. 2016-15”). The amendments ASU No. 2016-15 clarify the classification for eight different types of activities, including debt prepayment and extinguishment costs, proceeds from insurance claims and distributions from equity method investees. For public business entities, ASU No. 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017. ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Statements of Cash Flows.

In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” (“No. ASU 2017-07”) which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under No. ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The adoption of ASU 2017-07 did not have an impact on the presentation of costs associated with the Company’s defined benefit pension and other postretirement benefit plans.

In February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, (ASU No. 2018-02) to help businesses and other organizations present some effects from the Tax Act’s reduction in the corporate tax rate in their income statements. ASU No. 2018-02 gives the option of reclassifying what are called the “stranded” tax effects within accumulated other comprehensive income to retained earnings during each fiscal year or quarter in which the effect of the lower tax rate is recorded. ASU No. 2018-02 instructs businesses and other organizations to provide a disclosure in their financial statement footnotes that describes the accounting policy they used to release the income tax effects from accumulated other comprehensive income, whether they are reclassifying the stranded income tax effects from the Tax Cut and Jobs Act, and information about the other effects on taxes from the reclassification. ASU 2018-02 is effective for all organizations for fiscal years that begin after December 15, 2018, and the quarterly and other interim periods in those years, with early adoption permissible. The Company adopted ASU No. 2018-02 effective December 31, 2017. The adoption of ASU No. 2018-02 resulted in an approximate $70,000 increase to Retained Earnings.

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NOTE 2: INCOME TAX EXPENSE

Under ASC 740, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. From time to time, the Company is assessed interest and penalties by taxing authorities. In those cases, the charges are recorded on the “Other” line item, within the “Other Income (Deductions), Net of Taxes” section of the Consolidated Statements of Income. There were no such charges or accruals for the years ended December 31, 2017, 2016, and 2015.

On December 22, 2017 H.R. 1, originally known as the Tax Act was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 35% to 21% effective January 1, 2018. In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. While we are able to make reasonable estimates of the impact of the reduction in corporate rate, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the IRS, and other actions we may take. We are continuing to gather additional information to determine the final impact. Provisional amounts have been recorded as a Regulatory Liability to the extent that the tax savings over time will be returned to customers in utility rates, and a non-cash adjustment was recognized to record additional income tax expense to the extent revalued deferred income taxes are not believed to be recoverable in utility customer rates. Accounting for the income tax effects of the Tax Act is expected to be completed when a decision is reached by both PURA and the MPUC regarding the impact that shall be included in utility customer rates.

As of December 31, 2017, the Company can determine a reasonable estimate for remeasuring its net deferred tax assets and liabilities using the Federal Tax Rate that will apply when these amounts are expected to reverse. The Company is recording that estimate as a provisional amount. The effect of the remeasurement is reflected entirely in the interim period that includes the enactment date and is allocated directly to income tax expense from continuing operations. The remeasurement of the deferred tax assets and liabilities resulted in a $1.5 million discrete tax expense which increased the effective tax rate by 6.1% in the year ended December 31, 2017. The Company remeasured Deferred Tax Assets and Liabilities to reflect the enacted legislation and recorded a Regulatory Liability of $27.1 million to capture the excess accumulated deferred income taxes for items included in rates that follow the normalized method of accounting. Unrecovered Income Taxes and Unfunded Future Income Taxes were written down by $32 million to reflect the reduced tax rate for items that follow the flow-through method of accounting.

On June 11, 2013, the Company was notified by the Connecticut Department of Revenue Services that its state tax filings for the years 2009 through 2011 would be reviewed beginning in the fourth quarter of 2013. On March 24, 2015, the Company was notified by the Connecticut Department of Revenue Services that the audit was expanded to include the 2012 and 2013 tax years. The State focused its review on tax credits associated with fixed capital investment. The Company and the State came to an agreement (“Closing Agreement”) regarding investments eligible for the credit. The Closing Agreement was executed on May 4, 2015. The Company had previously recorded a provision for the possible disallowance of these credits and, therefore, there was minimal impact in 2015.

On the 2012 tax return, filed in September 2013, Connecticut Water filed a change in accounting method to adopt the IRS temporary tangible property regulations. On the 2013 Federal tax return, filed in September 2014, Maine Water filed the same change in accounting method. This method change allowed the Company to take a current year deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS has issued final regulations. On February 11, 2014, the Company was notified by the IRS that its Federal tax filing for 2012 would be reviewed. This review, which began in the first quarter of 2014 and was completed in the first quarter of 2015, resulted in no change to the tax liability. Since the Company had previously recorded a provision for the possible disallowance of the repair deduction in those prior periods, the completion of the audit resulted in the reversal of the reserves in the amount of $1,185,000. During the year ended December 31, 2017 new information caused the Company to undertake a review of its provision recorded associated with the repair deduction. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of the position through the quarter ended

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CONNECTICUT WATER SERVICE, INC.

June 30, 2017, the impact of new information on Connecticut Water caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ended September 30, 2017 an additional $810,000 was reversed due to statute expiration. In the quarter ended December 31, 2017, continued analysis resulted in the reversal of a portion of the provision in the amount of $1,620,000 for a total reversal of $6,039,000. In addition, as required by FASB ASC 740, during the year ended December 31, 2017, the Company recorded a provision of $1.2 million for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $9.4 million in the prior year for a cumulative total of $4.6 million.

The Company remains subject to examination by federal and state tax authorities for the 2014 through 2016 tax years. On April 26, 2017, Avon Water was notified by the IRS that its stand-alone Federal tax filing for 2015 was selected to be reviewed beginning in the second quarter of 2017. The Company believes that the deductions taken on Avon Water’s tax return are appropriate; therefore no provision was recorded during the year ended December 31, 2017 as required by FASB ASC 740.

Income Tax (Benefit) Expense for the years ended December 31, is comprised of the following:

(in thousands)	2017			2016			2015
Federal Classified as Operating (Benefit) Expense	$	(1,277)		$	1,782		$	(562	)
Federal Classified as Other Utility Income		434			385			409
Federal Classified as Other Income (Deduction)
Land Sales and Donations		17			57			(70	)
Non-Water Sales		774			702			664
Other		503			(686	)		(832	)
Total Federal Income Tax (Benefit) Expense		451			2,240			(391	)
State Classified as Operating (Benefit) Expense		(716	)		788			(257	)
State Classified as Other Utility Income		104			92			98
State Classified as Other Income (Expense)
Land Sales and Donations		5			—			(287	)
Non-Water Sales		175			172			196
Other		149			(126	)		(128	)
Total State Income Tax (Benefit) Expense		(283	)		926			(378	)
Total Income Tax (Benefit) Expense	$	168		$	3,166		$	(769	)

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CONNECTICUT WATER SERVICE, INC.

The components of the Federal and State income tax provisions are:

(in thousands)	2017			2016			2015
Current Income Taxes
Federal	$	—		$	(15	)	$	315
State		521			463			201
Total Current		521			448			516
Deferred Income Taxes, Net
Federal
Investment Tax Credit		(76	)		(75	)		(75	)
Excess Accumulated Deferred Taxes		(293	)		(110	)		192
Excess Accumulated Deferred Taxes—Tax Act		1,538			—			—
Deferred Revenue		731			(353	)		(754	)
Land Donations		—			37			(179	)
Depreciation		2,151			1,769			660
Net Operating Loss Carry-forwards		817			(1,258	)		(1,171	)
NOL Carry-forwards valuation allowance		(613	)		—			—
Provision for uncertain positions		(3,876	)		2,487			874
Other		72			(242	)		(253	)
Total Federal		451			2,255			(706	)
State
Land Donations		—			55			41
Provision for uncertain positions		(958	)		611			41
Other		154			(203	)		(661	)
Total State		(804	)		463			(579	)
Total Deferred Income Taxes		(353	)		2,718			(1,285	)
Total Income Tax	$	168		$	3,166		$	(769	)

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

(in thousands)	2017			2016
Unrecovered Income Taxes—Regulatory Asset	$	(66,631	)	$	(93,264	)
Deferred Federal and State Income Taxes		33,579			50,558
Unfunded Future Income Taxes		58,384			90,977
Unamortized Investment Tax Credits—Regulatory Liability		1,133			1,189
Net Deferred Income Tax Liability	$	26,465		$	49,460

Net deferred income tax liability decreased from December 31, 2016 to December 31, 2017. The increase from recording the acquisitions of HVWC and Avon Water, along with the increase attributed to the current year tax effects of temporary differences, mostly related to plant items, was offset by the remeasurement due to the Tax Act and the releasing of provisions for uncertain tax positions.

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CONNECTICUT WATER SERVICE, INC.

Deferred income tax (assets) and liabilities are comprised of the following:

(in thousands)	2017			2016
Tax Credit Carry-forward (1)	$	(1,092	)	$	(968	)
Charitable Contribution Carry-forwards (2)		(257	)		(389	)
Valuation Allowance on Charitable Contributions		63			107
Prepaid Income Taxes on CIAC		31			58
Net Operating Loss Carry-forwards (3)		(3,806	)		(5,132	)
Valuation Allowance on Net Operating Losses		1,671			1,471
Deferred Revenue		1,644			1,513
Other Comprehensive Income		(158	)		(589	)
Accelerated Depreciation		34,989			51,119
Provision on Repair Deductions		4,630			9,464
Long-Term Compensation Agreements		(3,260	)		(4,416	)
Unamortized Investment Tax Credits		1,133			1,189
Gross-up on Regulatory Liability—Excess Accumulated Deferred Taxes		(8,247	)		(2,287	)
Other		(876	)		(1,680	)
Net Deferred Income Tax Liability	$	26,465		$	49,460

(1) State tax credit carry-forwards expire beginning in 2019 and ending in 2040.

(2) Charitable Contribution carry-forwards expire beginning with the filing of the 2017 Federal and State Tax Returns in 2018 and ending in 2021.

(3) Net operating loss carry-forwards expire beginning in 2029 and ending in 2036.

The calculation of Pre-Tax Income is as follows:

(in thousands)	2017		2016		2015
Pre-Tax Income
Net Income	$	25,054	$	23,387	$	22,761
Income Taxes		168		3,166		(769	)
Total Pre-Tax Income	$	25,222	$	26,553	$	21,992

In accordance with required regulatory treatment, certain deferred income taxes are not provided for certain timing differences. This treatment, along with other items, causes differences between the statutory income tax rate and the effective income tax rate. The differences between the effective income tax rate recorded by the Company and the statutory federal tax rate are as follows:

	2017			2016			2015
Federal Statutory Tax Rate		34.0	%		34.0	%		34.0	%
Tax Effect Differences:
State Income Taxes Net of Federal Benefit		(0.9	)%		2.6	%		—	%
Property Related Items		(19.9	)%		(30.4	)%		(19.2	)%
Pension Costs		(2.3	)%		(0.4	)%		(1.7	)%
Repair Regulatory Liability		(1.2	)%		(3.9	)%		(11.5	)%
Change in Estimate of Prior Year Income Tax Expense		2.7	%		0.3	%		(10.6	)%
Provision for Uncertain Tax Positions		(16.7	)%		10.2	%		4.1	%
Valuation Allowance		(2.3	)%		0.2	%		—	%
Impact of Tax Act		6.1	%		—	%		—	%
Other		1.2	%		(0.7	)%		1.4	%
Effective Income Tax Rate		0.7	%		11.9	%		(3.5	)%

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CONNECTICUT WATER SERVICE, INC.

In the second quarter of 2015, the MPUC approved the flow through treatment of the repair tax deduction. The flow through treatment of the deductions taken on the Company’s 2013 tax return is reflected in the change in estimate of prior year income tax expense. In addition, the adoption of the repair tax deduction allowed for a benefit which is reflected in property related items. Beginning in the second quarter of 2014, the return to customers of the repair tax benefit is reflected under Repair Regulatory Liability. This will be fully returned to customers in 2018. Provisions for uncertain tax positions were recorded to reflect the possible challenge of the Company’s methodology for determining its repair deduction as required by FASB ASC 740. In 2017, the Company assessed new information in regards the previously recorded provision for uncertain tax positions and released a portion of the provision. In the quarter ended December 31, 2017 the Company recorded provisional charges to tax expense to account for the estimated impact of the Tax Act.

NOTE 3: COMMON STOCK

The Company has 25,000,000 authorized shares of common stock, no par value. A summary of the changes in the common stock accounts for the period January 1, 2015 through December 31, 2017, appears below:

(in thousands, except share data)	Shares		Issuance Amount			Expense			Total
Balance, January 1, 2015		11,124,630	$	145,774		$	(4,090	)	$	141,684
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures		25,575		1,314			—			1,314
Dividend Reinvestment Plan		42,677		1,536			—			1,536
Balance, December 31, 2015		11,192,882		148,624			(4,090	)		144,534
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures		22,128		(405	)		—			(405	)
Dividend Reinvestment Plan		33,448		1,610			—			1,610
Balance, December 31, 2016		11,248,458		149,829			(4,090	)		145,739
Stock and equivalents issued through Performance Stock Program, Net of Forfeitures		5,925		645			—			645
Shares issued to acquire regulated water companies		785,814		43,853			—			43,853
Dividend Reinvestment Plan		24,819		1,404			—			1,404
Balance, December 31, 2017 (1)		12,065,016	$	195,731		$	(4,090	)	$	191,641

(1) Includes 56,523 restricted shares and 205,329 common stock equivalent shares issued through the Performance Stock Programs through December 31, 2017.

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.

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CONNECTICUT WATER SERVICE, INC.

NOTE 4: RETAINED EARNINGS

The summary of the changes in Retained Earnings for the period January 1, 2015 through December 31, 2017, appears below:

(in thousands, except per share data)	2017		2016		2015
Balance, beginning of year	$	91,213	$	80,378	$	69,370
Net Income		25,054		23,387		22,761
Sub-total		116,267		103,765		92,131
Impact of Tax Act on excess accumulated deferred income tax		70		—		—
Dividends declared:
Cumulative Preferred Stock, Series A, $0.80 per share		12		12		12
Cumulative Preferred Stock, Series $0.90, $0.90 per share		26		26		26
Common Stock:
$1.175, $1.115 and $1.05 per Common Share in 2017, 2016 and 2015, respectively		13,882		12,514		11,715
Total Dividends Declared		13,920		12,552		11,753
Balance, end of year	$	102,417	$	91,213	$	80,378

NOTE 5: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in Accumulated Other Comprehensive Income/(Loss) (“AOCI”) by component, net of tax, for the years ended December 31, 2017, 2016, and 2015, appear below:

(in thousands)	Unrealized Gains on Investments			Defined Benefit Items			Total
Balance as of January 1, 2015 (a)	$	298		$	(1,901	)	$	(1,603	)
Other Comprehensive Income (Loss) Before Reclassification		(195	)		582			387
Amounts Reclassified from AOCI		97			184			281
Net current-period Other Comprehensive Income (Loss)		(98	)		766			668
Balance as of December 31, 2015	$	200		$	(1,135	)	$	(935	)
Other Comprehensive (Loss) Income Before Reclassification		24			(227	)		(203	)
Amounts Reclassified from AOCI		11			203			214
Net current-period Other Comprehensive (Loss) Income		35			(24	)		11
Balance as of December 31, 2016	$	235		$	(1,159	)	$	(924	)
Other Comprehensive Income (Loss) Before Reclassification		152			74			226
Amounts Reclassified from AOCI		55			215			270
Net current-period Other Comprehensive Income (Loss)		207			289			496
Balance as of December 31, 2017	$	442		$	(870	)	$	(428	)

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

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CONNECTICUT WATER SERVICE, INC.

The following table sets forth the amounts reclassified from AOCI by component and the affected line item on the Consolidated Statements of Income for the for the years ended December 31, 2017, 2016, and 2015:

Details about Other AOCI Components (in thousands)	Amounts Reclassified from AOCI for the Year Ended December 31, 2017(a)			Amounts Reclassified from AOCI for the Year Ended December 31, 2016(a)			Amounts Reclassified from AOCI for the Year Ended December 31, 2015(a)			Affected Line Items on Income Statement
Realized Gains on Investments	$	84		$	17		$	148			Other
Tax expense		(29	)		(6	)		(51	)		Other
Total Reclassified from AOCI		55			11			97
Amortization of Recognized Net Gain from Defined Benefit Items		325			308			281			Other	(b)
Tax expense		(110	)		(105	)		(97	)		Other
Total Reclassified from AOCI		215			203			184
Total Reclassifications for the period, net of tax	$	270		$	214		$	281

(a) Amounts in parentheses indicate loss/expense.

(b) Included in computation of net periodic pension cost (see Note 12 “Long-Term Compensation Arrangements” for additional details).

NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Level 1 – Quoted market prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are either directly or indirectly observable.

Level 3 – Unobservable inputs developed using the Company’s estimates and assumptions, which reflect those that the Company believes market participants would use.

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CONNECTICUT WATER SERVICE, INC.

The following tables summarize our financial instruments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2017 and 2016. These instruments are included in “Other Property and Investments” on the Company’s Consolidated Balance Sheets:

December 31, 2017 (in thousands)	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	70	$	—	$	—	$	70
Mutual Funds:
Equity Funds (1)		2,051		—		—		2,051
Fixed Income Funds (2)		642		—		—		642
Total	$	2,763	$	—	$	—	$	2,763

December 31, 2016 (in thousands)	Level 1		Level 2		Level 3		Total
Asset Type:
Money Market Fund	$	122	$	—	$	—	$	122
Mutual Funds:
Equity Funds (1)		1,662		—		—		1,662
Fixed Income Funds (2)		534		—		—		534
Total	$	2,318	$	—	$	—	$	2,318

(1) Mutual funds consisting primarily of equity securities.

(2) Mutual funds consisting primarily of fixed income securities.

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

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

COMPANY OWNED LIFE INSURANCE – The fair value of Company Owned Life Insurance is based on the cash surrender value of the contracts. These contracts are based principally on a referenced pool of investment funds that actively redeem shares and are observable and measurable and are presented on the “Other Property and Investments” line item of the Company’s Consolidated Balance Sheets. The value of Company Owned Life Insurance at December 31, 2017 and 2016 was $3,925,000 and $3,075,000, respectively.

LONG-TERM DEBT – The fair value of the Company’s fixed rate long-term debt is based upon borrowing rates currently available to the Company for similar marketable securities. As of December 31, 2017 and 2016, the estimated fair value of the Company’s long-term debt was $268,628,000 and $210,463,000, respectively, as compared to the carrying amounts of $258,272,000 and $202,365,000, respectively. The estimated fair value of long term debt was calculated using a discounted cash flow model that uses comparable interest rates and yield curve data based on the A-rated MMD (Municipal Market Data) Index which is the benchmark of current municipal bond yields. Under the fair value hierarchy, the fair value of long term debt is classified as a Level 2 measurement.

ADVANCES FOR CONSTRUCTION – Customer advances for construction have a carrying amount of $20,024,000 and $19,127,000 at December 31, 2017 and 2016, respectively. Their relative fair values cannot be accurately estimated since future refund payments depend on several variables, including new customer connections, customer consumption levels and future rate increases.

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

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CONNECTICUT WATER SERVICE, INC.

NOTE 7: LONG-TERM DEBT

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

(in thousands)			2017			2016
4.09%	CTWS	Term Loan Note and Supplement A, Due 2027	$	12,358		$	13,437
4.15%	CTWS	CoBank Term Note Payable, Due 2037		14,881			—
Total CTWS				27,239			13,437
Var.	Connecticut Water	2004 Series Variable Rate, Due 2029		12,500			12,500
Var.	Connecticut Water	2004 Series A, Due 2028		5,000			5,000
Var.	Connecticut Water	2004 Series B, Due 2028		4,550			4,550
5.00%	Connecticut Water	2011 A Series, Due 2021		22,920			23,115
3.16%	Connecticut Water	CoBank Note Payable, Due 2020		8,000			8,000
3.51%	Connecticut Water	CoBank Note Payable, Due 2022		14,795			14,795
4.29%	Connecticut Water	CoBank Note Payable, Due 2028		17,020			17,020
4.72%	Connecticut Water	CoBank Note Payable, Due 2032		14,795			14,795
4.75%	Connecticut Water	CoBank Note Payable, Due 2033		14,550			14,550
4.36%	Connecticut Water	CoBank Note Payable, Due May 2036		30,000			30,000
4.04%	Connecticut Water	CoBank Note Payable, Due July 2036		19,930			19,930
3.53%	Connecticut Water	NY Life Senior Note, Due September 2037		35,000			—
Total The Connecticut Water Company				199,060			164,255
4.75%	HVWC	2011 Farmington Bank Loan, Due 2034		4,464			—
3.05%	Avon Water	Mortgage Note Payable, Due 2033		3,302			—
8.95%	Maine Water	1994 Series G, Due 2024		6,300			7,200
2.68%	Maine Water	1999 Series J, Due 2019		170			254
0.00%	Maine Water	2001 Series K, Due 2031		574			615
2.58%	Maine Water	2002 Series L, Due 2022		60			67
1.53%	Maine Water	2003 Series M, Due 2023		321			341
1.73%	Maine Water	2004 Series N, Due 2024		341			371
0.00%	Maine Water	2004 Series O, Due 2034		113			120
1.76%	Maine Water	2006 Series P, Due 2026		361			391
1.57%	Maine Water	2009 Series R, Due 2029		207			217
0.00%	Maine Water	2009 Series S, Due 2029		538			583
0.00%	Maine Water	2009 Series T, Due 2029		1,509			1,634
0.00%	Maine Water	2012 Series U, Due 2042		148			154
1.00%	Maine Water	2013 Series V, Due 2033		1,310			1,335
2.52%	Maine Water	CoBank Note Payable, Due 2017		—			1,965
4.24%	Maine Water	CoBank Note Payable, Due 2024		4,500			4,500
4.18%	Maine Water	CoBank Note Payable, Due 2026		5,000			—
7.72%	Maine Water	Series L, Due 2018		2,250			2,250
2.40%	Maine Water	Series N, Due 2022		1,026			1,101
1.86%	Maine Water	Series O, Due 2025		750			790
2.23%	Maine Water	Series P, Due 2028		1,264			1,294
0.01%	Maine Water	Series Q, Due 2035		1,678			1,771
1.00%	Maine Water	Series R, Due 2025		2,009			2,250
Various	Maine Water	Various Capital Leases		2			8
Total The Maine Water Company				30,431			29,211
Add: Acquisition Fair Value Adjustment				(51	)		321
Less: Current Portion				(6,173	)		(4,859	)
Less: Unamortized Debt Issuance Expense				(4,905	)		(5,318	)
Total Long-Term Debt			$	253,367		$	197,047

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CONNECTICUT WATER SERVICE, INC.

The Company’s required principal payments for the years 2018 through 2022 are as follows:

(in thousands)
2018	$	6,173
2019	$	4,054
2020	$	12,086
2021	$	26,227
2022	$	19,125

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

In April 2016, Connecticut Water filed an application with PURA to issue promissory notes in the aggregate principal amount of up to $49,930,000 with CoBank, ACB (“CoBank”) under its existing Master Loan Agreement by and between Connecticut Water and CoBank dated October 29, 2012, in order for Connecticut Water to redeem its $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds previously issued by the Connecticut Development Authority (the “2009A Bonds”) and to provide $30,000,000 to partially fund its ongoing construction program. On June 1, 2016, Connecticut Water issued $30,000,000, at 4.36%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of May 20, 2036. On July 7, 2016, Connecticut Water issued $19,930,000, at 4.04%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of July 7, 2036. Connecticut Water used the proceeds to immediately pay off the $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds.

On January 10, 2017, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated January 10, 2017 (the “Third Promissory Note”). On the terms and subject to the conditions set forth in the Third Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $5,000,000 at 4.18%, due December 30, 2026. The proceeds of the Loan will be used to finance new capital expenditures and refinance existing debt owed to the Company, incurred in connection with general water system improvements.

On August 28, 2017, the Company executed and delivered to CoBank a new Promissory Note and Supplement (2017 Single Advance Term Loan) (the “2017 Promissory Note”). On the terms and subject to the conditions set forth in the 2017 Promissory Note issued pursuant to the Company’s Master Loan Agreement, CoBank agreed to make a term loan (the “Loan”) to the Company in the principal amount of $15,000,000. Under the 2017 Promissory Note, the Company will pay interest on the Loan at a fixed rate of 4.15% per year through August 20, 2037, the maturity date of the Loan.

On September 28, 2017, Connecticut Water completed the issuance of $35,000,000 aggregate principal amount of its 3.53% unsecured Senior Notes due September 25, 2037 (the “Senior Notes”). The Senior Notes were issued pursuant to the Note Purchase Agreement dated as of September 28, 2017 (the “Purchase Agreement”) between and among Connecticut Water, NYL Investors, LLC (“NY Life”), as agent, and the Purchasers listed in the Purchaser Schedule attached to the Purchase Agreement, in a private placement financing exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The proceeds of the sale of the Senior Notes were used by Connecticut Water to repay loans from the Company the proceeds of which were used for capital expenditure projects by Connecticut Water. The Senior Notes bear interest at the rate of 3.53% per annum, payable semi-annually on March 27 and September 27 of each year commencing on March 27, 2018. The principal amount of the Senior Notes, if not previously paid, shall be due on September 25, 2037. The Senior Notes are callable in whole or in part, subject to a make-whole amount.

During the year ending December 31, 2017, the Company paid approximately $119,000 related to CTWS’s 2017 CoBank issuance as well as $1,079,000 related to CTWS’s Term Loan Note issued as part of the 2012 acquisition of Maine Water, approximately $1,815,000 in sinking funds related to Maine Water’s outstanding bonds, an additional $1,965,000 related to a CoBank loan to Maine Water that matured in 2017, approximately $88,000 related to HVWC’s mortgage loan and $129,000 related to Avon Water’s mortgage loan.

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Financial Covenants – The Company is required to comply with certain covenants in connection with various long term loan agreements. The most restrictive of these covenants is to maintain a consolidated debt to capitalization ratio of not more than 60%. Additionally, Maine Water has restrictions on cash dividends paid based on restricted net assets. The Company was in compliance with all covenants at December 31, 2017.

NOTE 8: PREFERRED STOCK

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

(in thousands, except share data)	2017		2016
Connecticut Water Service, Inc.
Cumulative Series A Voting, $20 Par Value; Authorized, Issued and Outstanding 15,000 Shares	$	300	$	300
Cumulative Series $0.90 Non-Voting, $16 Par Value; Authorized 50,000 Shares, Issued and Outstanding 29,499		472		472
Total Preferred Stock	$	772	$	772

All or any part of any series of either class of the Company’s issued Preferred Stock may be called for redemption by the Company at any time. The per share redemption prices of the Series A and Series $0.90 Preferred Stock, if called by the Company, are $21.00 and $16.00, respectively.

The Company is authorized to issue 400,000 shares of an additional class of Preferred Stock, $25 par value, the general preferences, voting powers, restrictions and qualifications of which are similar to the Company’s existing Preferred Stock. No shares of the $25 par value Preferred Stock have been issued.

The Company is also authorized to issue 1,000,000 shares of $1 par value Preference Stock, junior to the Company’s existing Preferred Stock in rights to dividends and upon liquidation of the Company. 150,000 of such shares have been designated as “Series A Junior Participating Preference Stock”.

NOTE 9: BANK LINES OF CREDIT

The Company maintains a $15.0 million line of credit agreement with CoBank, ACB, that is currently scheduled to expire on July 1, 2020. The Company maintains an additional line of credit of $45.0 million with RBS Citizens, N.A., with an expiration date of April 25, 2021. Additionally, Avon Water maintains a $3.0 million line of credit with Northwest Community Bank, with an expiration date of September 30, 2018. As of December 31, 2017 the total lines of credit available to the Company were $63.0 million. As of December 31, 2017 and 2016, the Company had $19.3 million and $33.0 million of “Interim Bank Loans Payable”, respectively. As of December 31, 2017, the Company had $43.7 million in unused lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2017 and 2016, the weighted average interest rates on these short-term borrowings outstanding was 3.4% and 2.7%, respectively.

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CONNECTICUT WATER SERVICE, INC.

NOTE 10: UTILITY PLANT

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

(in thousands)	2017			2016
Land	$	15,120		$	13,724
Source of supply		38,448			36,405
Pumping		51,639			38,902
Water treatment		129,428			84,594
Transmission and distribution		605,587			530,716
General		88,492			75,438
Held for future use		219			432
Acquisition Adjustment		(1,644	)		(2,351	)
Total	$	927,289		$	777,860

The amounts of depreciable utility plant at December 31, 2017 and 2016 included in total utility plant were $830,907,000 and $719,070,000, respectively. Non-depreciable plant is primarily funded through CIAC.

NOTE 11: TAXES OTHER THAN INCOME TAXES

Taxes Other than Income Taxes consist of the following:

(in thousands)	2017		2016		2015
Municipal Property Taxes	$	9,580	$	8,501	$	7,896
Payroll Taxes		1,361		1,295		1,398
Total Taxes Other than Income Taxes	$	10,941	$	9,796	$	9,294

NOTE 12: LONG-TERM COMPENSATION ARRANGEMENTS

The Company has accrued for long-term compensation arrangements as of December 31 as follows:

(in thousands)	2017		2016
Defined Benefit Pension Plan	$	15,486	$	16,628
Post-Retirement Benefit Other than Pension		5,060		5,246
Supplemental Executive Retirement Plan		8,796		8,688
Deferred Compensation		3,289		2,932
Other Long-Term Compensation		18		46
Total Long-Term Compensation Arrangements	$	32,649	$	33,540

Investment Strategy – The Corporate Finance and Investments Committee (the “Committee”) reviews and approves the investment strategy of the investments made on behalf of various pension and post-retirement benefit plans provided by the Company and certain of its subsidiaries. The Company uses a variety of mutual funds, managed by different fund managers, to achieve its investment goals. The Committee wants to ensure that the plans establish a target mix that is expected to achieve investment objectives, by assuring a broad diversification of investment assets among investment types, while avoiding short-term changes to the target asset mix, unless unusual market conditions make such a move appropriate to reduce risk.

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The targeted asset allocation ratios for those plans as set by the Committee at December 31:

	2017			2016
Equity		65	%		65	%
Fixed Income		35	%		35	%
Total		100	%		100	%

The Committee recognizes that a variation of up to 5% in either direction from its targeted asset allocation mix is acceptable due to market fluctuations.

Our expected long-term rate of return on the various benefit plan assets is based upon the plan’s expected asset allocation, expected returns on various classes of plan assets as well as historical returns. The expected long-term rate of return on the Company’s pension plan assets is 7.25%.

PENSION

Defined Benefit Plan – The Company and certain of its subsidiaries have a noncontributory defined benefit pension plan covering qualified employees. In general, the Company’s policy is to fund accrued pension costs as permitted by federal income tax and The Employee Retirement Income Security Act of 1974 regulations. The Company amortizes actuarial gains and losses over the average remaining service period of active participants. A contribution of $2,971,000 was made in 2017 for the 2016 plan year. The Company expects to make a contribution of approximately $3,807,000 in 2018 for the 2017 plan year.

Effective January 1, 2015, the Pension Plan was further amended and restated to consolidate prior amendments, and to comply with various legislative and regulatory developments. The amended and restated Plan was submitted to the IRS with the Company’s application for a Determination Letter on January 29, 2016. The Plan received a determination letter from the IRS dated June 29, 2017.

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

Pension Benefits (in thousands)	2017			2016
Change in benefit obligation:
Benefit obligation, beginning of year	$	79,307		$	75,845
Service cost		1,927			1,895
Interest cost		3,201			3,212
Actuarial loss (gain)		7,533			2,017
Benefits paid		(3,295	)		(3,553	)
Administrative expenses		(75	)		(109	)
Benefit obligation, end of year	$	88,598		$	79,307
Change in plan assets:
Fair value, beginning of year	$	62,679		$	56,613
Actual return on plan assets		10,832			4,203
Employer contributions		2,971			5,525
Benefits paid		(3,295	)		(3,553	)
Administrative expenses		(75	)		(109	)
Fair value, end of year	$	73,112		$	62,679
Funded Status	$	(15,486	)	$	(16,628	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability		—			—
Non-current liability		(15,486	)		(16,628	)
Net amount recognized	$	(15,486	)	$	(16,628	)

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CONNECTICUT WATER SERVICE, INC.

The accumulated benefit obligation for all defined benefit pension plans was approximately $79,352,000 and $70,748,000 at December 31, 2017 and 2016, respectively.

Weighted-average assumptions used to determine benefit obligations at December 31:	2017			2016
Discount rate		3.60	%		4.10	%
Rate of compensation increase		4.00	%		4.00	%

Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2017			2016			2015
Discount rate		4.10	%		4.30	%		3.95	%
Expected long-term return on plan assets		7.25	%		7.25	%		7.25	%
Rate of compensation increase		4.00	%		4.00	%		4.00	%

The Company based its discount rate assumptions the Citigroup Above Median AA Pension Discount Curve.

The following table shows the components of periodic benefit costs:

Pension Benefits (in thousands)	2017			2016			2015
Components of net periodic benefit costs
Service cost	$	1,927		$	1,895		$	2,152
Interest cost		3,201			3,212			3,114
Expected return on plan assets		(4,291	)		(4,080	)		(3,847	)
Amortization of:
Prior service cost		16			16			16
Net loss		2,064			2,049			2,979
Net Periodic Pension Benefit Costs	$	2,917		$	3,092		$	4,414

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

Pension Benefits (in thousands)	2017			2016
Change in net loss	$	1,104		$	1,866
Change in prior service cost		—			—
Other—regulatory action		—			—
Amortization of prior service cost		(16	)		(16	)
Amortization of net loss		(2,015	)		(1,998	)
Total recognized to Regulatory Asset	$	(927	)	$	(148	)

The following table shows the other changes in plan assets and benefit obligations recognized in Other Comprehensive Income (“OCI”):

Pension Benefits (in thousands)	2017			2016
Change in net (gain) loss	$	(112	)	$	28
Change in prior service cost		—			—
Amortization of prior service cost		—			—
Amortization of net loss		(49	)		(51	)
Total recognized to OCI	$	(161	)	$	(23	)

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CONNECTICUT WATER SERVICE, INC.

Amounts Recognized as a Regulatory Asset at December 31: (in thousands)	2017		2016
Prior service cost	$	55	$	70
Net loss		11,284		12,196
Total Recognized as a Regulatory Asset	$	11,339	$	12,266

Amounts Recognized in OCI at December 31: (in thousands)	2017		2016		2015
Transition obligation	$	—	$	—	$	—
Prior service cost		—		—		—
Net loss		154		315		338
Total Recognized in Other Comprehensive Income	$	154	$	315	$	338

Estimated Net Periodic Benefit Cost Amortizations for the periods January 1 - December 31,: (in thousands)	2018
Amortization of transition obligation	$	—
Amortization of prior service cost		15
Amortization of net loss		2,679
Total Estimated Net Periodic Benefit Cost Amortizations	$	2,694

Plan Assets

The Company’s pension plan weighted-average asset allocations at December 31, 2017 and 2016 by asset category were as follows:

	2017			2016
Equity		65	%		65	%
Fixed Income		35	%		35	%
Total		100	%		100	%

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See Note 6, “Fair Value of Financial Instruments”, for discussion on how fair value is determined. The fair values of the Company’s pension plan assets at December 31, 2017 and 2016 were as follows:

2017 (in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	1,579	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)		23,752		—		—
Equity Funds (2)		47,781		—		—
Total	$	73,112	$	—	$	—

2016 (in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market Fund	$	1,174	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)		21,070		—		—
Equity Funds (2)		40,435		—		—
Total	$	62,679	$	—	$	—

(1) Mutual funds consisting primarily of fixed income securities.

(2) Mutual funds consisting primarily of equity securities.

The plan’s expected future benefit payments are:

(in thousands)
2018	$	4,680
2019		5,104
2020		5,042
2021		5,215
2022		5,230
Years 2021 – 2025		27,896

POST-RETIREMENT BENEFITS OTHER THAN PENSION (“PBOP”) – In addition to providing pension benefits, Connecticut Water and Maine Water, provide certain medical, dental and life insurance benefits to retired employees partially funded by a 501(c)(9) Voluntary Employee Beneficiary Association Trust. Covered 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 2017 and 2016 was $12,000 and $12,000, respectively.

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

The Company amortizes actuarial gains and losses over the average remaining service period of active participants. 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.

A former subsidiary company, Barnstable Holding, which was dissolved effective December 29, 2016, also provided certain health care benefits to eligible retired employees. These health care benefits to former employees are now the responsibility of the Company. Former employees of Barnstable Holding became eligible for these benefits if they retired on or after age 65 with at least 15 years of service. Post-65 medical coverage was provided for retired employees up to a maximum coverage of

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$500 per quarter. Barnstable Holding’s PBOP currently is not funded. Barnstable Holding no longer has any employees; therefore, no new participants will be entering Barnstable Holding’s PBOP. The tables below do not include Barnstable Holding’s PBOP. Barnstable Holding’s PBOP had a Benefit Obligation of $47,000 and $49,000 at December 31, 2017 and 2016, respectively. Additionally, this plan did not hold any assets as of December 31, 2017 and 2016. Barnstable Holding’s PBOP’s net periodic benefit costs were less than $1,000 in 2017 and 2016.

The following tables set forth the benefit obligation and fair value of the assets of Connecticut Water and Maine Water’s PBOP at December 31, the latest valuation date:

PBOP Benefits (in thousands)	2017			2016
Change in benefit obligation:
Benefit obligation, beginning of year	$	13,542		$	13,192
Service cost		335			376
Interest cost		511			541
Plan participant contributions		163			151
Actuarial (gain)		384			(351	)
Benefits paid		(462	)		(367	)
Benefit obligation, end of year	$	14,473		$	13,542
Change in plan assets:
Fair value, beginning of year	$	8,345		$	8,203
Actual return on plan assets		1,402			346
Employer contributions		12			12
Plan participant contributions		163			151
Benefits paid		(462	)		(367	)
Fair value, end of year	$	9,460		$	8,345
Funded Status	$	(5,013	)	$	(5,197	)
Amount Recognized in Consolidated Balance Sheets Consisted of:
Non-current asset	$	—		$	—
Current liability		—			—
Non-current liability		(5,013	)		(5,197	)
Net amount recognized	$	(5,013	)	$	(5,197	)

Weighted-average assumptions used to determine benefit obligations at December 31:	2017			2016
Discount rate		3.50	%		3.95	%

Weighted-average assumptions used to determine net periodic cost for years ended December 31:	2017			2016			2015
Discount rate		3.95	%		4.15	%		3.80	%
Expected long-term return on plan assets		4.50	%		4.50	%		4.50	%

The Company based its discount rate assumptions the Citigroup Above Median AA Pension Discount Curve.

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The following table shows the components of periodic benefit costs:

PBOP Benefits (in thousands)	2017			2016			2015
Components of net periodic benefit costs
Service cost	$	335		$	376		$	458
Interest cost		511			541			562
Expected return on plan assets		(354	)		(341	)		(324	)
Other		225			225			225
Amortization of:
Prior service credit		(181	)		(400	)		(571	)
Recognized net loss		(78	)		39			388
Net Periodic Post Retirement Benefit Costs	$	458		$	440		$	738

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

PBOP Benefits (in thousands)	2017			2016
Change in net gain	$	(664	)	$	(356	)
Amortization of prior service cost		181			400
Amortization of net loss		78			(39	)
Other regulatory amortization		(67	)		(236	)
Total recognized to Regulatory Liability	$	(472	)	$	(231	)

Amounts Recognized as a Regulatory Liability Asset at December 31: (in thousands)	2017			2016
Transition obligation	$	—		$	—
Prior service cost		(1	)		(182	)
Net loss		(1,116	)		(531	)
Other regulatory asset		186			254
Total Recognized as a Regulatory Liability	$	(931	)	$	(459	)

The “Other regulatory amortization” and “Other regulatory asset” shown above refers to costs whose recovery was authorized by PURA and MPUC with the adoption of Statement of Financial Accounting Standard 106, “Employers’ Accounting for Post-Retirement Benefits Other than Pension”, now ASU No. 715. There were no other changes in plan assets and benefit obligations recognized as a regulatory asset.

Estimated Benefit Cost Amortizations for the periods January 1 - December 31: (in thousands)	2018
Amortization of transition obligation	$	—
Amortization of prior service credit		(1	)
Amortization of net loss		(20	)
Total Estimated Net Periodic Benefit Cost Amortizations	$	(21	)

Assumed health care cost trend rates at December 31:	2017						2016
	Medical			Dental			Medical			Dental
Health care cost trend rate assumed for next year (1)		8.25	%		8.25	%		8.25	%		8.25	%
Rate to which the cost trend rate is assumed to decline		4.75	%		4.75	%		4.75	%		4.75	%
Year that the rate reaches the ultimate trend rate		2025			2025			2024			2024

⁽¹⁾ – Zero percent trend rate from 2016 to 2017.

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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 and Maine Water’s plan and would have no impact on the Barnstable Holding plan:

(in thousands)	1 Percentage-Point
	Increase		Decrease
Effect on total of service and interest cost components	$	44	$	(41	)
Effect on post-retirement benefit obligation	$	681	$	(634	)

Plan Assets

Connecticut Water and Maine Water’s other post-retirement benefit plan weighted-average asset allocations at December 31, 2017 and 2016 by asset category were as follows:

	2017			2016
Equity		69	%		64	%
Fixed Income		31	%		36	%
Total		100	%		100	%

See Note 6, “Fair Value of Financial Instruments”, for discussion on how fair value is determined. The fair values of the Company’s PBOP assets at December 31, 2017 and 2016 were as follows:

2017 (in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	139	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)		2,821		—		—
Equity Funds (2)		6,500		—		—
Total	$	9,460	$	—	$	—

2016 (in thousands)	Level 1		Level 2		Level 3
Asset Type:
Money Market	$	222	$	—	$	—
Mutual Funds:
Fixed Income Funds (1)		2,770		—		—
Equity Funds (2)		5,353		—		—
Total	$	8,345	$	—	$	—

(1) Mutual funds consisting primarily of fixed income securities.

(2) Mutual funds consisting primarily of equity securities.

Cash Flows

The Company contributed $12,000 to its other post-retirement benefit plan in 2017 for plan year 2017. The Company does not expect to make a contribution in 2018 for plan year 2018.

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Expected future benefit payments are:

(in thousands)
2018	$	475
2019		545
2020		622
2021		693
2022		743
Years 2021 – 2025		4,688

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (“SERP”) – The Company and certain of its subsidiaries provide additional pension benefits to senior management through supplemental executive retirement contracts. The additional pension supplement from the SERP results in participants receiving the same overall relative benefit as other eligible employees enrolled in the Company’s pension plan. At December 31, 2017 and 2016, the actuarial present values of the projected benefit obligation of these contracts were $8,718,000 and $8,570,000, respectively. Expense associated with these contracts was approximately $970,000 for 2017, $1,012,000 for 2016, and $1,034,000 for 2015 and is reflected in “Other Income (Deductions), Net of Taxes” in the Consolidated Statements of Income.

Included in “Other Property and Investments” at December 31, 2017 and 2016 is $6,688,000 and $5,393,000 of investments purchased by the Company to fund these obligations, primarily consisting of life insurance contracts. The remaining assets are carried at cash surrender value and are included in Note 6, “Fair Value of Financial Instruments”.

SAVINGS PLAN (“401(k)”) – The Company and certain of its subsidiaries maintain an employee savings plan which allows participants to contribute from 1% to 50% of pre-tax compensation, plus for those aged 50 years and older, catch-up contributions as allowed by law. Effective January 1, 2009, the Company changed its 401(k) plan to meet the requirements of a special IRS safe harbor. Under the provisions of this safe harbor plan, the Company will make an automatic contribution of 3% of compensation for all eligible employees, even if employees do not make their own contributions. For employees hired after January 1, 2009 and ineligible to participate in the Company’s pension plan, the Company will contribute an additional 1.5% of compensation. The plan was further amended and restated, effective as of January 1, 2016, as required to comply with IRS rules regarding pre-approved volume submitter plans. The savings plan was amended by the Board of Directors effective February 27, 2017 to admit eligible HVWC employees and effective July 1, 2017 to admit eligible employees who were previously employed by Avon Water. The Company contribution charged to expense in 2017, 2016, and 2015 was $750,000, $663,000, and $601,000, respectively.

NOTE 13: STOCK BASED COMPENSATION PLANS

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

For purposes of calculating the fair value of each option at the date of grant, the Company used the Black Scholes Option Pricing model. For other share based awards, the Company uses the market price the day before the stock grant to value awards. The Company has not issued any stock options since 2003, and does not anticipate issuing any for the foreseeable future.

The Company’s 2014 Performance Stock Program (“2014 PSP”), approved by shareholders in 2014, authorizes the issuance of up to 450,000 shares of Company Common Stock. As of December 31, 2017, there were 370,293 shares available for grant and payment of dividend equivalents on shares previously awarded under the 2014 PSP. There are five forms of awards available under the 2014 PSP: Restricted Stock, Performance Shares, Cash Units, Stock Appreciation Rights (“SAR”) and Other Awards, including Restricted Stock Units.

The Company’s 2004 Performance Stock Program (“2004 PSP”), approved by shareholders in 2004, authorized the issuance of up to 700,000 shares of Company Common Stock. As of December 31, 2017, there were 259,712 shares available for payment of dividend equivalents on shares previously awarded under the 2004 PSP.

Under the original Plan (“1994 PSP”) there were 700,000 shares authorized for issuance and 218,105 shares available for payment of dividend equivalents on shares previously awarded under the 1994 PSP as performance shares at December 31, 2017.

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CONNECTICUT WATER SERVICE, INC.

Under the 2014 PSP, restricted shares of Common Stock, common stock equivalents, cash units, SAR or other awards may be awarded annually to officers and key employees. Based upon the occurrence of certain events, including the achievement of goals established by the Compensation Committee, the restrictions on the stock can be removed. Amounts charged to expense on account of restricted shares of Common Stock, common stock equivalents or cash units pursuant to the 2014 PSP, 2004 PSP and 1994 PSP were $1,554,000, $948,000, and $1,677,000, for 2017, 2016, and 2015, respectively.

RESTRICTED STOCK AND COMMON STOCK EQUIVALENTS – Prior to May 2014, the Company granted restricted shares of Common Stock and Performance Shares to key members of management under the 2004 PSP. All grants made after May 2014 are being made under the 2014 PSP. These Common Stock share awards provide the grantee with the dividend rights of a shareholder, but not the right to sell or otherwise transfer the shares during the restriction period. Restricted shares also have the voting rights of a shareholder, while the Performance Shares do not. The value of these restricted shares is based on the market price of the Company’s Common Stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

Restricted Stock and Common Stock Equivalents (Performance-Based) – The following tables summarize the performance-based restricted stock amounts and activity for the years ended December 31, 2017 and 2016:

	2017					2016
	Number of Shares			Grant Date Weighted Average Fair Value		Number of Shares			Grant Date Weighted Average Fair Value
Non-vested at beginning of year		35,142		$	37.66		39,997		$	34.59
Granted		9,719			53.73		21,110			39.70
Vested		(8,066	)		37.86		(19,077	)		34.16
Forfeited		(11,020	)		42.84		(6,888	)		35.81
Non-vested at end of year		25,775		$	41.44		35,142		$	37.66

Upon meeting specific performance targets, approximately 16,000 shares, reduced for actual performance targets achieved in 2017, will begin vesting in the first quarter of 2018 and the remaining earned shares will vest over two years. The cost is being recognized ratably over the vesting period. The aggregate intrinsic value of performance-based restricted stock as of December 31, 2017 was $722,000.

NOTE 14: SEGMENT REPORTING

Our Company operates principally in three segments: water operations, real estate transactions, and services and rentals. The water segment is comprised of our core regulated water operations 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.

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CONNECTICUT WATER SERVICE, INC.

Financial data for reportable segments is as follows:

(in thousands)	Revenues		Depreciation		Other Operating Expenses		Other Income (Deductions)			Interest Expense (net of AFUDC)		Income Taxes			Net Income (Loss)
For the year ended December 31, 2017
Water Operations	$	108,525	$	16,684	$	59,068	$	(1,682	)	$	8,067	$	(830	)	$	23,854
Real Estate Transactions		212		—		157		—			—		22			33
Services and Rentals		5,112		5		2,964		—			—		976			1,167
Total	$	113,849	$	16,689	$	62,189	$	(1,682	)	$	8,067	$	168		$	25,054
For the year ended December 31, 2016
Water Operations	$	100,001	$	13,905	$	54,100	$	(1,822	)	$	5,718	$	2,234		$	22,222
Real Estate Transactions		8		—		4		—			—		58			(54	)
Services and Rentals		5,307		25		3,189		—			—		874			1,219
Total	$	105,316	$	13,930	$	57,293	$	(1,822	)	$	5,718	$	3,166		$	23,387
For the year ended December 31, 2015
Water Operations	$	97,472	$	12,871	$	57,474	$	(1,158	)	$	6,206	$	(1,255	)	$	21,018
Real Estate Transactions		14		—		22		—			—		(357	)		349
Services and Rentals		5,602		3		3,362		—			—		843			1,394
Total	$	103,088	$	12,874	$	60,858	$	(1,158	)	$	6,206	$	(769	)	$	22,761

The Revenues shown in Water Operations above consist of revenues from water and wastewater customers of $107,054,000, $98,667,000 and $96,041,000 in the years 2017, 2016, and 2015, respectively. Additionally, there were revenues associated with utility plant leased to others of $1,471,000, $1,334,000 and $1,431,000 in the years 2017, 2016, and 2015, respectively which are reflected in “Other Utility Income, Net of Taxes” on the Consolidated Statements of Income. The revenues from water and wastewater customers for the the years ended December 31, 2017, 2016, and 2015 include $4,286,000, $1,132,000 and $1,583,000 in additional revenues related to the implementation of the WRA, respectively.

The table below shows assets by segment at December 31:

in thousands):	2017		2016
Total Plant and Other Investments:
Water	$	707,362	$	609,508
Non-Water		1,023		959
Total Plant and Other Investments		708,385		610,467
Other Assets:
Water		188,590		171,674
Non-Water		1,808		2,361
Total Other Assets		190,398		174,035
Total Assets	$	898,783	$	784,502

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CONNECTICUT WATER SERVICE, INC.

NOTE 15: ACQUISITIONS

The Heritage Village Water Company Acquisition

On May 10, 2016, the Company announced that it had reached an agreement to acquire HVWC, pending a vote of HVWC shareholders, approval by PURA and MPUC and the satisfaction of other various closing conditions, pursuant to the terms of Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut.

The acquisition was executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock received shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflected a total enterprise value of HVWC of approximately $21.5 million, with the $16.9 million paid to shareholders in a stock exchange and the assumption by the Company of approximately $4.6 million of debt held by HVWC at the time of the acquisition.

The Company received regulatory approval from MPUC on September 28, 2016 and from PURA on December 5, 2016, to proceed with the transaction. The shareholders of HVWC voted to approve the acquisition at a special meeting of HVWC’s shareholders held on February 27, 2017.

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of the Companys’s wholly-owned subsidiary HAC, Inc. with and into HVWC, with HVWC as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of HVWC’s 1,620 issued and outstanding shares of common stock to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange.

The Avon Water Company Acquisition

On October 12, 2016, the Company announced that it had reached an agreement to acquire Avon Water, pending a vote of Avon Water shareholders, approval by PURA and the MPUC and the satisfaction of other various closing conditions, pursuant to the terms of that certain Agreement and Plan of Merger dated October 11, 2016 as amended on March 29, 2017 between and among Avon Water, the Company, and WC-A I, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). Avon Water serves approximately 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut.

On February 10, 2017, Connecticut Water received regulatory approval from MPUC and on April 12, 2017, Connecticut Water received regulatory approval from PURA to proceed with the transaction. The shareholders of Avon Water voted to approve the acquisition at a special meeting of Avon Water’s shareholders held on June 16, 2017.

Effective July 1, 2017, the Company completed the acquisition of Avon Water by completing the merger of Connecticut Water’s wholly-owned subsidiary WC-A I, Inc. with and into Avon Water, with Avon Water as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of Avon Water’s 122,289 issued and outstanding shares of common stock became entitled to receive the following merger consideration for each share of Avon Water common stock held: (i) a cash payment of $50.11; and (ii) a stock consideration component, consisting of 3.97 shares of the Company’s common stock.

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $26.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $33.0 million. The transaction reflects a total enterprise value of approximately $39.1 million, with the $33.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt of Avon Water.

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CONNECTICUT WATER SERVICE, INC.

While the purchase price allocation of HVWC has been completed, the Company is still in the process of finalizing the purchase price allocation of Avon Water as additional information becomes available. The following table summarizes the fair value of the HVWC assets acquired on February 27, 2017 and the Avon Water assets on July 1, 2017, the dates of the acquisitions (in thousands):

	HVWC		Avon Water
Net Utility Plant	$	28,861	$	28,330
Cash and Cash Equivalents		1,336		455
Accounts Receivable, net		355		379
Prepayments and Other Current Assets		179		243
Accrued Unbilled Revenues		47		467
Materials and Supplies, at Average Cost		63		151
Goodwill		12,777		23,812
Unrecovered Income Taxes—Regulatory Asset		—		3,619
Deferred Charges and Other Costs		343		799
Total Assets Acquired	$	43,961	$	58,255
Long-Term Debt, including current portion	$	4,642	$	3,145
Accounts Payable and Accrued Expenses		149		584
Interim Bank Loans Payable		—		2,500
Other Current Liabilities		238		32
Advances for Construction		1,897		1,537
Deferred Federal and State Income Taxes		1,680		1,880
Unfunded Future Income Taxes		—		3,619
Other Long-Term Liabilities		—		314
Total Liabilities Assumed	$	8,606	$	13,611
Contributions in Aid of Construction		18,452		11,560
Net Assets Acquired	$	16,903	$	33,084

The estimated fair values of the assets acquired and the liabilities assumed were determined based on the accounting guidance for fair value measurement under GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value analysis assumes the highest and best use of the assets by market participants. The allocation of the purchase price includes an adjustment to fair value related to the fair value of HVWC’s and Avon Water’s long term debt and any associated deferred taxes. Since HVWC and Avon Water are regulated companies, the book value of most of the assets and liabilities acquired are considered fair value because those assets and liabilities are used in the rate setting process. The excess of the purchase price paid over the estimated fair value of the assets acquired and the liabilities assumed was recognized as goodwill, none of which is deductible for tax purposes. Goodwill recognized as part of the acquisitions of HVWC and Avon Water are a part of the Company’s Water Operations segment.

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CONNECTICUT WATER SERVICE, INC.

The following unaudited pro forma summary for the years ended December 31, 2017, 2016, and 2015 presents information as if HVWC and Avon Water had each been acquired on January 1, 2015 and assumes that there were no other changes in our operations. The following pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the businesses since January 1, 2015, nor is it necessarily indicative of the future results of operations of the combined companies (in thousands):

	2017		2016		2015
Operating Revenues	$	109,715	$	107,309	$	103,617
Other Water Activities Revenues		1,554		1,498		1,583
Real Estate Revenues		212		8		14
Service and Rentals Revenues		5,121		5,417		5,680
Total Revenues	$	116,602	$	114,232	$	110,894
Net Income	$	25,040	$	24,300	$	23,843
Basic Earnings per Average Share Outstanding	$	2.12	$	2.06	$	2.03
Diluted Earnings per Average Share Outstanding	$	2.08	$	2.02	$	2.00

The following table summarizes the results of HVWC and Avon Water from the dates of acquisition to December 31, 2017 (from February 27, 2017 for HVWC and July 1, 2017 for Avon Water) and is included in the Consolidated Statement of Income for the period (in thousands):

Period ending December 31, 2017
Operating Revenues	$	5,802
Other Water Activities Revenues		74
Real Estate Revenues		—
Service and Rentals Revenues		28
Total Revenues	$	5,904
Net Income	$	1,519
Basic Earnings per Average Share Outstanding	$	0.13
Diluted Earnings per Average Share Outstanding	$	0.13

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CONNECTICUT WATER SERVICE, INC.

NOTE 16: COMMITMENTS AND CONTINGENCIES

Water Supply – Connecticut Water has an agreement with the South Central Connecticut Regional Water Authority (“RWA”) to purchase water from RWA. The agreement was signed in April 2006 and became effective upon the receipt of all regulatory approvals in 2008 and remains in effect for a minimum of fifty years upon the effective date. Connecticut Water will pay RWA $75,000 per year, for a total of 14 years, starting on the effective date of the agreement. In addition, Connecticut Water is able, but under no obligation, to purchase up to one million gallons of water per day at the then current wholesale rates per the agreement. Connecticut Water has an agreement with The Metropolitan District (“MDC”) to purchase water from MDC to serve the Unionville system. The agreement became effective on October 6, 2000 and has a term of fifty years beginning May 19, 2003, the date the water supply facilities related to the agreement were placed in service. Connecticut Water agrees to purchase 283 million gallons of water annually from MDC. Connecticut Water has a 99 year lease with 19 Perry Street to obtain well water for its public water supply system. The agreement became effective in 1975 and is based on current water rates in effect each year. There is no limitation on the amount of water that can be withdrawn from the leased property. Maine Water has an agreement with the Kenebec Water District for potable water service. The agreement was extended and became effective on November 7, 2015 for a new term of 5 years. Water sales to Maine Water are billed at a flat rate per gallon plus the monthly minimum tariff rate for a 4-inch metered service. During 2017, 2016, and 2015, the Company spent $1,532,000, $1,556,000 and $1,112,000, respectively, on water purchased under these agreements. The Company’s expected payments related to these agreements for the years 2018 through 2022 will be as follows:

(in thousands)
2018	$	1,524
2019	$	1,567
2020	$	1,528
2021	$	1,476
2022	$	1,524

Reviews by Taxing Authorities – On June 11, 2013, the Company was notified by the Connecticut Department of Revenue Services that its state tax filings for the years 2009 through 2011 would be reviewed beginning in the fourth quarter of 2013. On March 24, 2015, the Company was notified by the Connecticut Department of Revenue Services that the audit was expanded to include the 2012 and 2013 tax years. The State focused its review on tax credits associated with fixed capital investment. The Company and the State came to an agreement (“Closing Agreement”) regarding investments eligible for the credit. The Closing Agreement was executed on May 4, 2015. The Company had previously recorded a provision for the possible disallowance of these credits and, therefore, there was minimal impact in 2015.

On the 2012 tax return, filed in September 2013, Connecticut Water filed a change in accounting method to adopt the IRS temporary tangible property regulations. On the 2013 Federal tax return, filed in September 2014, Maine Water filed the same change in accounting method. This method change allowed the Company to take a current year deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS has issued final regulations. On February 11, 2014, the Company was notified by the IRS that its Federal tax filing for 2012 would be reviewed. This review, which began in the first quarter of 2014 and was completed in the first quarter of 2015, resulted in no change to the tax liability. Since the Company had previously recorded a provision for the possible disallowance of the repair deduction in those prior periods, the completion of the audit resulted in the reversal of the reserves in the amount of $1,185,000. During the year ended December 31, 2017 new information caused the Company to undertake a review of its provision recorded associated with the repair deduction. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of the position through the quarter ended June 30, 2017, the impact of new information on Connecticut Water caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ended September 30, 2017 an additional $810,000 was reversed due to statute expiration. In the quarter ended December 31, 2017, continued analysis resulted in the reversal of a portion of the provision in the amount of $1,620,000 for a total reversal of $6,039,000. In addition, as required by FASB ASC 740, during the year ended December 31, 2017, the Company recorded a provision of $1.2 million for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $9.4 million in the prior year for a cumulative total of $4.6 million.

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CONNECTICUT WATER SERVICE, INC.

The Company remains subject to examination by federal and state tax authorities for the 2014 through 2016 tax years. On April 26, 2017, Avon Water was notified by the IRS that its stand-alone Federal tax filing for 2015 was selected to be reviewed beginning in the second quarter of 2017. The Company believes that the deductions taken on Avon Water’s tax return are appropriate; therefore no provision was recorded during the year ended December 31, 2017 as required by FASB ASC 740.

Purchases of Equity Securities by the Company – In May 2005, the Company adopted a common stock repurchase program (“Share Repurchase Program”). The Share Repurchase Program allows the Company to repurchase up to 10% of its outstanding common stock, at a price or prices that are deemed appropriate. As of December 31, 2017, no shares have been repurchased. Currently, the Company has no plans to repurchase shares under the Share Repurchase Program.

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

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.

Rate Relief – The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and MPUC, respectively. Connecticut Water’s allowed return on equity and return on rate base, effective as of December 31, 2017 were 9.75% and 7.32%, respectively. HVWC’s blended water and wastewater allowed return on equity and return on rate base, effective December 31, 2017, were 10.10% and 7.19%, respectively. Avon Water’s allowed return on equity and return on rate base, effective December 31, 2017, were 10.00% and 7.79%, respectively. Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2017 were 9.50% and 7.96%, respectively.

Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut and Maine, which may be suitable in the future for disposition or for further protection through conservation easements, through sale or by donation to municipalities, other local governments or private charitable entities such as local land trusts. In Connecticut, these additional parcels would include certain Class I and II parcels previously identified for long term conservation by the Connecticut Department of Energy and Environmental Protection (“DEEP”), which have restrictions on development and resale based on provisions of the Connecticut General Statutes. In Maine, these parcels include primarily company-owned land used for water supply protection, and a permanent conservation easement may be appropriate for some parcels to ensure the permanent protection of the watersheds, while balancing the appropriate community and recreational use of the land.

Capital Expenditures – The Company has received approval from its Board of Directors to spend $66.2 million on capital expenditures in 2018, in part to fund improvements to water treatment plants and increased spending related to infrastructure improvements.

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CONNECTICUT WATER SERVICE, INC.

NOTE 17: QUARTERLY FINANCIAL DATA (Unaudited)

Selected quarterly financial data for the years ended December 31, 2017 and 2016 appears below:

(in thousands, except for per share data)	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	2017		2016		2017		2016		2017		2016		2017		2016
Operating Revenues	$	22,463	$	21,552	$	27,902	$	26,055	$	31,797	$	29,477	$	24,892	$	21,583
Total Utility Operating
Income		5,285		4,178		10,629		11,217		12,588		10,939		5,727		2,615
Net Income		4,068		3,148		8,418		9,943		10,716		9,535		1,852		761
Basic Earnings per Common Share		0.36		0.29		0.75		0.90		0.92		0.86		0.14		0.07
Diluted Earnings per Common Share		0.36		0.28		0.73		0.89		0.90		0.84		0.14		0.07

NOTE 18: SUBSEQUENT EVENTS

Proposed Merger with SJW

On March 14, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SJW Group, a Delaware corporation (“SJW”), and Hydro Sub, Inc., a Connecticut corporation and a direct wholly owned subsidiary of SJW (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of SJW (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of our common stock (other than certain cancelled shares) will be converted into the right to receive 1.1375 shares of SJW common stock.

The Board of Directors approved, adopted and declared advisable and resolved to recommend to the Company’s shareholders the approval of the Merger Agreement and the Merger following a comprehensive review of the transaction. The Merger is subject to certain customary closing conditions, including, among other things, approval of the Merger Agreement by the Company’s shareholders, approval of the issuance of SJW common stock in the Merger by SJW’s stockholders, and regulatory approvals (including the approval of PURA and MPUC). The Merger is expected to close by year-end 2018.

44

EX-99.3

Exhibit 99.3

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited financial statements and related notes thereto contained in Exhibit 99.1 to the Current Report on Form 8-K of SJW Group to which this discussion is attached and the audited financial statements and the notes thereto contained in Exhibit 99.2 to the Current Report on Form 8-K of SJW Group to which this discussion is attached (the “Audited Consolidated Financial Statements”). As used in this “Management’s Discussion and Analysis of Financial Condition and Result of Operations,” the terms “we,” “our,” “us” and the “Company” refer to Connecticut Water Service, Inc., a Connecticut corporation, and do not, unless otherwise specified, include its subsidiaries.

General Information

Proposed Merger with SJW Group

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

The Board of Directors approved, adopted and declared advisable and resolved to recommend to the Company’s shareholders the approval of the Revised Merger Agreement and the Merger following a comprehensive review of the transaction.

The Merger is subject to certain customary closing conditions, including, among other things, approval of the Revised Merger Agreement by the Company’s shareholders and regulatory approvals (including the approval of the Connecticut Public Utilities Regulatory Authority (“PURA”) and the Maine Public Utilities Commission (“MPUC”)). The required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder (the “HSR Act”), was terminated early on April 27, 2018. On October 15, 2018, the Federal Communications Commission (“FCC”) consented to the joint application for transfer of control filed by the Company and SJW on October 4, 2018 and amended on October 12, 2018, and no further clearance from the FCC is required.

On May 4, 2018, Maine Water filed with the MPUC an application for approval of the Merger. On May 7, 2018, the Company and SJW filed with the PURA a joint application for approval of the Merger. Following the start on May 31, 2018 of a 45-day go-shop process permitted by the First Amended and Restated Merger Agreement, the Company and SJW withdrew their joint PURA application on June 19, 2018, and filed a new joint application on July 18, 2018, following the end of the go-shop process.

On July 20, 2018, the California Public Utilities Commission (“CPUC”) formally issued an Order Instituting Investigation (“Order”) providing that the CPUC will investigate whether the Merger is subject to CPUC approval and the Merger’s anticipated impacts within California. The Order states that the CPUC plans to substantially complete its investigation in a manner sufficiently timely to allow the Merger to go forward by the end of 2018, if appropriate.

The Company and SJW expect the closing of the Merger to occur during the first quarter of 2019.

Regulatory Matters

The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and the MPUC, respectively. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. The allowed returns on equity and allowed returns on rate base of the Company’s subsidiaries, The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”) and The Maine Water Company (“Maine Water”) (collectively the “Regulated Companies”) are as follows:

As of September 30, 2018	Allowed Return on Equity			Allowed Return on Rate Base
Connecticut Water		9.75	%		7.32	%
HVWC (blended water and wastewater rates)		10.10	%		7.19	%
Avon Water		10.00	%		7.79	%
Maine Water		9.50	%		7.96	%

The PURA establishes rates in Connecticut on a company-wide basis while the MPUC approves Maine Water’s rates on a division-by-division basis. Each of Connecticut Water, HVWC, Avon Water and Maine Water are allowed to add surcharges to customers’ bills in order to recover certain costs associated with approved capital projects in between full rate cases, as well as approved surcharges for Water Revenue Adjustments, in Connecticut, as discussed in more detail below. HVWC has not added surcharges to customers’ bills in order to recover certain approved capital projects as of September 30, 2018, however, HVWC, as ordered by PURA, began to utilize Water Revenue Adjustments for water and wastewater as of March 31, 2017.

On January 3, 2018, PURA filed a motion to reopen the most recent rate case decisions for the Company’s Connecticut Regulated Companies to determine what, if any, adjustments to rates are appropriate to account for revisions to tax laws, including corporate tax rates, contained in the Tax Cuts and Jobs Act (“Tax Act”). PURA held a hearing on July 30, 2018 for regulated water companies. As discussed below, Connecticut Water has entered into a settlement agreement with the Connecticut Office of Consumer Counsel (“OCC”), which was approved by PURA, that covers treatment of the Tax Act.

On January 11, 2018, the MPUC issued a notice of investigation to determine the impact of the Tax Act on Maine Water. The investigation will allow the MPUC to determine the specific impact of the Tax Act and whether any rate adjustments are warranted. Following discovery, technical conferences were held on April 19, 2018 and July 17, 2018. In addition to determining the impact of the Tax Act on the justness and reasonableness of Maine Water’s rates, the MPUC will consider whether to issue an accounting order to establish a regulatory liability which defers for future flow-through to ratepayers the impact of the tax changes. During the three months ended September 30, 2018, the Company reversed approximately $100,000 in revenues from Maine Water in anticipation of a rate order from the MPUC that will establish lower rates as a result of the Tax Act.

The Heritage Village Water Company Acquisition

On May 10, 2016, the Company announced that it had reached an agreement to acquire HVWC, pending a vote of HVWC shareholders, approval by PURA and MPUC and the satisfaction of other various closing conditions, pursuant to the terms of Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut.

The acquisition was executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock received shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflected a total enterprise value of HVWC of approximately $21.5 million, with the $16.9 million paid to shareholders in a stock exchange and the assumption by the Company of approximately $4.6 million of debt held by HVWC at the time of the acquisition.

The Company received regulatory approval from MPUC on September 28, 2016 and from PURA on December 5, 2016, to proceed with the transaction. The shareholders of HVWC voted to approve the acquisition at a special meeting of HVWC’ s shareholders held on February 27, 2017.

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of the Company’s wholly-owned subsidiary HAC, Inc. with and into HVWC, with HVWC as the surviving corporation,

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pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the merger, the holders of HVWC’ s 1,620 issued and outstanding shares of common stock became entitled to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange, which exchange was commenced promptly by the issuance of a letter of transmittal and related materials by Connecticut Water’s exchange agent.

The Avon Water Company Acquisition

On October 12, 2016, the Company announced that it had reached an agreement to acquire Avon Water, pending a vote of Avon Water shareholders, approval by PURA and the MPUC and the satisfaction of other various closing conditions, pursuant to the terms of that certain Agreement and Plan of Merger dated October 11, 2016 as amended on March 29, 2017 between and among Avon Water, the Company, and WC-A I, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). Avon Water serves approximately 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut.

On February 10, 2017, Connecticut Water received regulatory approval from MPUC and on April 12, 2017, Connecticut Water received regulatory approval from PURA to proceed with the transaction. The shareholders of Avon Water voted to approve the acquisition at a special meeting of Avon Water’s shareholders held on June 16, 2017.

Effective July 1, 2017, the Company completed the acquisition of Avon Water by completing the merger of Connecticut Water’s wholly-owned subsidiary WC-A I, Inc. with and into Avon Water, with Avon Water as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the merger, the holders of Avon Water’s 122,289 issued and outstanding shares of common stock became entitled to receive the following merger consideration for each share of Avon Water common stock held: (i) a cash payment of $50.11; and (ii) a stock consideration component, consisting of 3.97 shares of the Company’s common stock.

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $26.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $33.0 million. The transaction reflects a total enterprise value of approximately $39.1 million, with the $33.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt of Avon Water.

Maine Water Land Sale

On March 11, 2016, Maine Water entered into a purchase and sale agreement with the Coastal Mountains Land Trust, a Maine nonprofit corporation (the “Land Trust”) pursuant to which Maine Water agreed to sell two conservation easements to the Land Trust on approximately 1,300 acres of land located in the towns of Rockport, Camden and Hope, in Knox County, Maine valued in the aggregate at $3.1 million. The land had a book value of approximately $600,000 at September 30, 2018 and December 31, 2017 and is included in “Utility Plant” on the Company’s Consolidated Balance Sheets. The easements and purchase prices are as follows:

1. Ragged Mountain Mirror Lake Conservation Easement: $1,875,000; and

2. Grassy Pond conservation Easement: $600,000.

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

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Connecticut Rates

Connecticut Water’s Water Infrastructure Conservation Adjustment (“WICA”) was 0.00% and 8.25% at September 30, 2018 and 2017, respectively. Connecticut Water’s WICA was reset to zero as a result of a rate ruling on the Company’s limited reopener and settlement agreement issued by PURA, as discussed below. As of September 30, 2018 and 2017, respectively, Avon Water’s WICA surcharge was 7.51% and 8.09%. As of September 30, 2018, HVWC has not filed for a WICA surcharge.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case proceeding (previously reopened in 2013) for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the OCC (the “Agreement”). The Agreement proposes a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:

1. Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;

2. Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates to be effective before January 1, 2020;

3. The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and

4. Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA and apply WRA charges as authorized.

PURA issued a Proposed Final Decision on July 6, 2018 that rejected the Agreement, due to the proposed treatment of income tax expense resulting from the Tax Act. The Company and the OCC each filed written exceptions to the draft decision and a hearing was held on a revised settlement agreement submitted from both parties that would include an adjustment to reflect the impacts of the Tax Act but at a lower dollar amount than recommended in the PURA draft decision. On August 15, 2018, PURA issued a final decision that accepted the conditions of the revised settlement agreement. The primary facets of the revised settlement agreement were the revenue requirements associated with the Rockville Water Treatment Plant, discussed above, and the folding of previously approved WICA surcharges into base rates, which reset Connecticut Water’s WICA to zero and resolution of the Company’s obligations related to the Tax Act. Rates were effective retroactive to April 1, 2018.

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

Connecticut Water’s and HVWC’ s allowed revenues for the nine months ended September 30, 2018, as approved by PURA during each company’s most recent general rate case and including subsequently approved WICA surcharges, are approximately $64.9 million. Through normal billing for the nine months ended September 30, 2018,

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revenue for Connecticut Water and HVWC would have been approximately $58.7 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $6.2 million in additional revenue for the nine months ended September 30, 2018. Avon Water does not currently have PURA approval to apply the WRA surcharge to its customers’ bills and, therefore, does not currently use the WRA mechanism.

Maine Rates

In Maine, the overall, cumulative Water Infrastructure Charge (“WISC”) for all divisions was 6.80% and 6.47% as of September 30, 2018 and 2017, respectively. The WISC rates for the Biddeford and Saco division were reset to zero with the approval of the general rate increase discussed below.

On June 29, 2017, Maine Water filed for a rate increase in its Biddeford and Saco division. The rate request was for an approximate $1.6 million, or 25.1%, increase in revenues. The rate request was designed to recover higher operating expenses, depreciation and property taxes since Biddeford and Saco’s last rate increase in 2015. Maine Water and the Maine Office of the Public Advocate reached an agreement that increases annual revenue by $1.56 million. The agreement was approved by the MPUC on December 5, 2017, with new rates effective December 1, 2017.

A water revenue adjustment mechanism law in Maine became available to regulated water utilities in Maine on October 15, 2015. Maine Water is currently precluded from seeking new rates in the Biddeford and Saco division due to provisions in the settlement agreement with the MPUC. As the stay-out periods for other divisions expire, Maine Water expects to request usage of this mechanism as Maine Water files rate cases for those divisions.

Critical Accounting Policies and Estimates

The Company maintains its accounting records in accordance with accounting principles generally accepted in the United States of America and as directed by the PURA and the MPUC, to which the Company’s regulated water utility subsidiaries are subject. Significant accounting policies employed by the Company, including the use of estimates, were presented in the Notes to the Audited Consolidated Financial Statements.

Critical accounting policies are those that are the most important to the presentation of the Company’s financial condition and results of operations. The application of such accounting policies requires management’s most difficult, subjective, and complex judgments and involves uncertainties and assumptions. The Company’s most critical accounting policies pertain to public utility regulation related to ASC 980 “Regulated Operations”, revenue recognition (including the WRA), goodwill impairment, income taxes and accounting for pension and other post-retirement benefit plans. Each of these accounting policies and the application of critical accounting policies and estimates were discussed in the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the years ended December 31, 2015, 2016 and 2017 included in Exhibit 99.4 to the Current Report on Form 8-K of SJW Group to which this discussion is attached.

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

Outlook

The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water. The water revenues of Maine Water and Avon Water can be dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. This risk has been mitigated by Connecticut Water and HVWC with the implementation of the WRA. The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to control our operating costs, customer growth in the Company’s core regulated water utility businesses, growth in revenues attributable to non-water sales operations, availability and desirability of land no longer needed for water delivery for land sales, and the timing and adequacy of rate relief when requested, from time to time, by our regulated water companies.

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The Company expects Net Income from its Water Operations segment to decrease in 2018 over 2017 levels, primarily due to the following factors: the costs associated with the merger with SJW. Partially offsetting these costs, the Company expects accretive effects of the HVWC acquisition, completed on February 27, 2017 and the Avon Water acquisition, completed on July 1, 2017; revenue increases resulting from the recently issued rate increase for Connecticut Water; Biddeford and Saco rate decision issued late in 2017; and increased surcharges related to WISC in Maine and WICA in Connecticut.

The Company believes that the factors described above and those described in detail under the heading “Commitments and Contingencies” below may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2018 and beyond.

Our Use of Non-GAAP Financial Measures

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

We define Adjusted Net Income as Net Income excluding certain material items outside of normal business operations. For this Non-GAAP financial measure, we consider these items to be income or expenses that have not been recorded within the prior two years and are not expected to recur within the next two years. Such items include costs incurred for merger and acquisition activities such as the proposed merger with SJW.

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

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

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

We also urge you to review the reconciliation of this Non-GAAP financial measure included in the Results of Operations section of this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the Condensed Consolidated Financial Statements and related notes included elsewhere in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, and to not rely on any single financial measure to evaluate our business. In addition, because the Adjusted Net Income measure is susceptible to varying calculations, such Non-GAAP financial measures may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.

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Results of Operations

Three months ended September 30

Net Income for the three months ended September 30, 2018 increased from the same period in the prior year by $2,947,000 to $13,663,000. Earnings per basic average common share were $1.15 and $0.92 during the three months ended September 30, 2018 and 2017, respectively.

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

Business Segment	September 30, 2018		September 30, 2017		Increase/(Decrease)
Water Operations	$	12,568	$	10,464	$	2,104
Real Estate Transactions		626		—		626
Services and Rentals		469		252		217
Total	$	13,663	$	10,716	$	2,947

Adjusted Net Income

Adjusted Net Income for the three months ended September 30, 2018 and 2017 is as follows (in follows):

	2018		2017		Increase/(Decrease)
Net Income	$	13,663	$	10,716	$	2,947
Merger and Acquisition Costs		2,114		11		2,103
Adjusted Net Income	$	15,777	$	10,727	$	5,050

Non-GAAP Adjusted Net Income for the three months ended September 30, 2018 increased from the same period in the prior year by $5,050,000.

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

Revenue

Revenue from our regulated customers increased by $4,472,000, or 14.1%, to $36,269,000 for the three months ended September 30, 2018 when compared to the same period in 2017. The primary cause in the increase in revenues related to increased rates at Connecticut Water, which was retroactive to April 1, 2018, and higher WISC surcharges in Maine, as well as the increase in rates, effective December 1, 2017, in the Biddeford and Saco division of Maine Water.

Operation and Maintenance Expense

Operation and Maintenance (“O&M”) expense increased by $504,000, or 4.2%, for the three months ended September 30, 2018 when compared to the same period of 2017. The following table presents the components of O&M expense for the three months ending September 30, 2018 and 2017 (in thousands):

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Expense Components	September 30, 2018		September 30, 2017		Increase/ (Decrease)
Purchased Water	$	769	$	490	$	279
Maintenance		1,141		984		157
Medical		882		728		154
Other benefits		197		70		127
Vehicles		506		394		112
Customer		475		407		68
Payroll		4,288		4,229		59
Utility costs		1,196		1,138		58
Property and liability insurance		444		392		52
Pension		488		485		3
Investor relations		91		175		(84	)
Outside services		664		1,102		(348	)
Other		1,275		1,408		(133	)
Total	$	12,416	$	11,912	$	504

The changes in individual items are described below:

• Purchased water increased primarily due to an increase in rates charged when purchasing water from neighboring utilities in the Unionville division of Connecticut Water in the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Additionally, the Company intentionally used more of its contractually allowed purchased water during the summer months of 2018 rather than ratably throughout the year as was the Company’s practice in years past;

• Medical costs increased in the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to an increase in costs associated with claims filed by employees and their families and the costs associated with the administration of the Company’s medical plans;

• During the three months ended September 30, 2018, the Company saw an increase in Other benefits when compared to the same period in 2017 primarily due to an increase in costs associated with our performance stock plans awarded to certain key members of management, primarily due to the resignation of the Company’s previous Chief Executive Officer in the third quarter of 2017. As a result of the former Chief Executive Officer’s departure, he forfeited previously awarded performance stock awards that had not vested and, in the third quarter of 2017, the Company reversed the expense recognized in previous periods associated with those unvested awards;

• Customer costs increased in the period ended September 30, 2018 when compared to the same period in 2017 primarily due to an increase in costs associated with collections and bank fees, partially offset by a decrease in costs associated with customer communication;

• Utility costs increased in the period primarily due to an increase in fuel oil and electrical costs; and

• Property and liability insurance costs increased primarily due to an increase in the amount of plant covered under our policies.

The increases described above were partially offset by the following decreases to O&M expense:

• Outside services decreased in the three months ended September 30, 2018 primarily due to a decrease in costs associated with consulting services and temporary outside labor; and

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• Investor relations decreased due to lower costs associated with directors fees, primarily due to timing, and a reduction in costs associated with the Company’s transfer agent.

The Company saw an approximate $322,000, or 7.5%, increase in its Depreciation expense for the three months ended September 30, 2018 compared to the same period in 2017. The increase was primarily due to higher Utility Plant in Service as of September 30, 2018 compared to September 30, 2017, driven by the completion of a large treatment plant in Connecticut in the second quarter of 2017 and continued spending on WICA and WISC projects in Connecticut and Maine, respectively.

The Company had $1,326,000 in above-the-line Income Tax benefits in the three months ended September 30, 2018 compared to a $235,000 expense in the same period of 2017. The Company’s effective income tax rate for the three months ended September 30, 2018 and 2017 was (8.9)% and 2.3%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the three months ended September 30, 2018 and 2017, was 2.7% and 0.1%, respectively. In both 2018 and 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut and a change in estimate of prior year income taxes. Excluding discrete items, there was an increase in the effective tax rate year over year for the three month period of approximately 2%. The increase in the effective tax rate for this period can be attributed to a lower tax deductible pension contribution deduction in 2018 than in 2017.

Other Income (Deductions), Net of Taxes decreased for the three months ended September 30, 2018 by $1,495,000. The primary driver of this decrease was after-tax costs associated with the announced merger with SJW, which were $2,114,000 in the quarter ending September 30, 2018. Partially offsetting these decreases was an increase in Non-Water Sales earnings and the completion of the first half of a previously announced conservation easement sale in Maine during the three months ended September 30, 2018.

Total Interest and Debt Expense increased by $313,000 in the three months ended September 30, 2018 when compared to the same period in 2017. The increase was primarily due to higher debt balances outstanding and increased borrowing under our lines of credit at September 30, 2018 when compared to September 30, 2017.

Nine months ended September 30

Net Income for the nine months ended September 30, 2018 decreased from the same period in the prior year by $6,037,000 to $17,165,000. Earnings per basic average common share decreased by $0.59 to $1.44 during the nine months ended September 30, 2018.

This decrease in Net Income is broken down by business segment as follows (in thousands):

Business Segment	September 30, 2018		September 30, 2017		Increase/ (Decrease)
Water Operations	$	15,242	$	22,327	$	(7,085	)
Real Estate Transactions		626		33		593
Services and Rentals		1,297		842		455
Total	$	17,165	$	23,202	$	(6,037	)

Adjusted Net Income

Adjusted Net Income for the nine months ended September 30, 2018 and 2017 is as follows (in thousands):

	2018		2017		Increase/ (Decrease)
Net Income	$	17,165	$	23,202	$	(6,037	)
Merger and Acquisition Costs		7,766		266		7,500
Adjusted Net Income	$	24,931	$	23,468	$	1,463

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Non-GAAP Adjusted Net Income for the nine months ended September 30, 2018 increased from the same period in the prior year by $1,463,000.

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

Revenue

Revenue from our regulated customers increased by $8,864,000, or 10.8%, to $91,026,000 for the nine months ended September 30, 2018 when compared to the same period in 2017. Approximately $3,275,000 of the increase in revenues was related to the acquisitions of HVWC and Avon Water on February 27, 2017 and July 1, 2017, respectively. The primary cause in the increase in revenues related to increased rates at Connecticut Water, and higher WISC surcharges in Maine, as well as the increase in rates, effective December 1, 2017, in the Biddeford and Saco division of Maine Water.

Operation and Maintenance Expense

O&M expense increased by $3,825,000, or 11.1%, for the nine months ended September 30, 2018 when compared to the same period of 2017, including the impact of O&M expense incurred after the acquisitions of HVWC and Avon Water on February 27, 2017 and July 1, 2017, respectively, which contributed $2,043,000 of incremental O&M expense during the period. The following table presents the components of O&M expense for the nine months ended September 30, 2018 and 2017, both including and excluding the impact of the HVWC and Avon Water acquisitions (in thousands):

Expense Components	September 30, 2018		September 30, 2017		Increase/ (Decrease)			HVWC and Avon Water O&M Impact			Adjusted Increase/ (Decrease)
Medical	$	2,761	$	2,103	$	658		$	22		$	636
Payroll		13,462		12,327		1,135			659			476
Maintenance		3,266		2,699		567			246			321
Purchased water		1,484		1,247		237			47			190
Vehicles		1,466		1,266		200			13			187
Customer		1,298		1,148		150			37			113
Utility costs		3,586		3,179		407			299			108
Property and liability insurance		1,391		1,151		240			136			104
Water treatment (including chemicals)		2,162		1,971		191			121			70
Outside services		2,761		2,651		110			90			20
Pension		1,361		1,452		(91	)		(2	)		(89	)
Investor relations		523		629		(106	)		—			(106	)
Other benefits		787		844		(57	)		95			(152	)
Post-retirement medical		243		421		(178	)		—			(178	)
Other		1,605		1,243		362			280			82
Total	$	38,156	$	34,331	$	3,825		$	2,043		$	1,782

The increase in O&M expenses excluding the incremental expense as a result of the acquisitions of HVWC and Avon Water, was approximately $1,782,000, or approximately 5.2%, in the nine months ended September 30, 2018 when compared to the same period in 2017. The changes in individual items, excluding the impact of HVWC and Avon Water, are described below:

• Medical costs increased in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to an increase in costs associated with claims filed by employees and their families and the costs associated with the administration of the Company’s medical plans;

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• Payroll costs increased primarily due to more employee time spent on capital projects in 2017 than in 2018, and therefore less time to O&M expense, and higher wages in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017;

• Purchased water increased primarily due to an increase in rates charged when purchasing water from neighboring utilities in the Unionville division of Connecticut Water in nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Additionally, the Company intentionally used more of its contractually allowed purchased water during the summer months of 2018 rather than ratably throughout the year as was the Company’s practice in years past;

• Customer costs increased primarily due to increased customer communications as well as an increase in bad debt expense. These increases were partially offset by a decrease in costs associated with a voluntary water conservation program that rewards customers for reducing their consumption by 10%;

• Utility costs increased in the period primarily due to an increase in electrical costs; and

• Property and liability insurance costs increased primarily due to an increase in the amount of plant covered under our policies.

The increases described above were partially offset by the following decreases to O&M expense:

• Investor relations decreased due to lower costs associated with directors fees, due to timing, and a reduction in costs associated with the Company’s transfer agent;

• Other benefits decreased primarily due to an increase in capitalized benefits, which reduces O&M expense, partially offset by higher costs associated with stock awards granted to certain named executives, primarily due to the resignation of the Company’s the previous Chief Executive Officer in the third quarter of 2017. As a result of the former Chief Executive Officer’s departure, he forfeited previously awarded performance stock awards that had not vested and, in the third quarter of 2017, the Company reversed the expense recognized in previous periods associated with those unvested awards; and

• Post-retirement medical costs decreased due to a regulatory asset established by the PURA that was fully amortized during 2017.

The Company saw an approximate $1,711,000, or 14.3%, increase in its Depreciation expense from the nine months ended September 30, 2018 compared to the same period in 2017. Of this increase, approximately $593,000 was attributable to the acquisitions of HVWC and Avon Water. The remaining increase was primarily due to higher Utility Plant in Service as of September 30, 2018 compared to September 30, 2017 driven by the completion of a large treatment plant in Connecticut in the second quarter of 2017 and continued spending on WICA and WISC projects in Connecticut and Maine, respectively.

The Company recorded an above-the-line Income Tax benefit of $706,000 for the nine months ended September 30, 2018 compared to $579,000 of an above-the-line benefit in the same period of 2017. The Company’s effective income tax rate for the nine months ended September 30, 2018 and 2017 was (4.0)% and (2.5)%, respectively. The Company’s effective tax rate, excluding discrete items recorded during the nine months ended September 30, 2018 and 2017, was (2.2)% and 9.2%, respectively. In 2018, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut, purchase accounting adjustments to goodwill, change in estimate of prior year income taxes, an IRS audit adjustment, and adjustments required under the Tax Act. In 2017, these discrete items include adjustments related to uncertain tax positions for the repair deduction in Connecticut. Excluding discrete items, there was a decrease in the effective tax rate year over year for the six month period of approximately 11%. The decrease in the effective tax rate for this period can be attributed to a higher estimated repair deduction and higher performance stock deduction in 2018 than in 2017.

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Other (Deductions) Income, Net of Taxes decreased for the nine months ended September 30, 2018 by $6,973,000. The primary driver of this decrease is costs associated with the announced SJW merger of approximately $7,766,000. Additionally, the Company saw a decrease in AFUDC due to the completion of a large treatment plant in the second quarter of 2017. Partially offsetting these decreases in Other (Deductions) Income, the Company saw an increase in net income from the Company’s Service and Rentals and Real Estate segments during the nine months ended September 30, 2018.

Total Interest and Debt Expense increased by $1,834,000 in the nine months ended September 30, 2018 when compared to the same period in 2017. Of this increase, approximately $172,000 was attributable to the acquisitions of HVWC and Avon Water. The remaining increase was primarily due to higher debt balances outstanding and increased borrowing under our lines of credit at September 30, 2018 when compared to September 30, 2017.

Liquidity and Capital Resources

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

Borrowing Facilities

As of September 30, 2018, the Company maintained a $15.0 million line of credit agreement with CoBank, that is currently scheduled to expire on July 1, 2020. The Company maintained an additional line of credit of $45.0 million with Citizens Bank, N.A., with an expiration date of April 25, 2021. Additionally, Avon Water maintains a $3.0 million line of credit with Northwest Community Bank, which expired on September 30, 2018. As of September 30, 2018, the total lines of credit available to the Company were $60.0 million. As of September 30, 2018 and December 31, 2017, the Company had $58.5 million and $19.3 million, respectively, of Interim Bank Loans Payable. As of September 30, 2018, the Company had $1.5 million in unused lines of credit. Interest expense charged on lines of credit will fluctuate based on market interest rates.

On January 10, 2017, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated January 10, 2017 (the “Third Promissory Note”). On the terms and subject to the conditions set forth in the Third Promissory Note issued pursuant to the Company’s Master Loan Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $5,000,000 at 4.18%, due December 30, 2026. The proceeds of the Loan will be used to finance new capital expenditures and refinance existing debt owed to the Company, incurred in connection with general water system improvements.

On August 28, 2017, the Company executed and delivered to CoBank a new Promissory Note and Supplement (2017 Single Advance Term Loan) (the “2017 Promissory Note”). On the terms and subject to the conditions set forth in the 2017 Promissory Note issued pursuant to the Company’s Master Loan Agreement, CoBank agreed to make a term loan (the “Loan”) to the Company in the principal amount of $15,000,000. Under the 2017 Promissory Note, the Company will pay interest on the Loan at a fixed rate of 4.15% per year through August 20, 2037, the maturity date of the Loan.

On September 28, 2017, Connecticut Water completed the issuance of $35,000,000 aggregate principal amount of its 3.53% unsecured Senior Notes due September 25, 2037 (the “Senior Notes”). The Senior Notes were issued pursuant to the Note Purchase Agreement dated as of September 28, 2017 (the “Purchase Agreement”) between and among Connecticut Water, NYL Investors, LLC (“NY Life”), as agent, and the Purchasers listed in the Purchaser Schedule attached to the Purchase Agreement, in a private placement financing exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The proceeds of the sale of the Senior Notes will be used by Connecticut Water to repay loans from the Company the proceeds of which were used for capital expenditure projects by Connecticut Water. The Senior Notes bear interest at the rate of 3.53% per annum, payable semi-annually on March 27 and September 27 of each year commencing on March 27, 2018. The principal amount of the Senior Notes, if not previously paid, shall be due on September 25, 2037. The Senior Notes are callable in whole or in part, subject to a make-whole amount.

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During the first nine months of 2018, the Company paid approximately $1,208,000 related to Connecticut Water Service’s 2017 CoBank issuance as well as the Company’s Term Note Payable issued as part of the 2012 acquisition of Maine Water, approximately $3,037,000 in sinking funds related to Maine Water’s outstanding bonds, approximately $123,000 in sinking funds related to HVWC’ s bank loan and $126,000 related to Avon Water’s mortgage note payable.

Credit Rating

In January 2018, Standard & Poor’s Rating Services (“S&P”) affirmed its ‘A’ corporate credit rating on the Company. Additionally, S&P revised the Company’s ratings outlook to negative due to their view that the recently revised corporate tax code could potentially strain cash flows if our regulators determine a reduction in revenue requirements is appropriate and a potential weakening of consolidated financial measures due to our growth strategy and high capital spending requirements.

Stock Plans

The Company offers a dividend reinvestment and stock purchase plan (“DRIP”) for all registered shareholders and for the customers and employees of our regulated water companies, whereby participants can opt to have cash dividends directly reinvested into additional shares of the Company. In August 2011, the Board of Directors approved amendments to the DRIP (effective as of January 1, 2012) that permit the Company to add, at the Company’s discretion, an “up to 5.00% purchase price discount” feature to the DRIP which is intended to encourage greater shareholder, customer and employee participation in the DRIP. In August 2014, the Board of Directors approved further amendments to the DRIP to reflect the Company’s appointment of a new common stock transfer agent. On August 11, 2017, the Board of Directors approved a Third Amended and Restated DRIP which expanded the class of participants to include any persons other than registered shareholders, customers and employees described above, upon an initial minimum purchase of $500. The DRIP was also amended to add 129,000 additional shares to the DRIP’s share reserve and to revise certain monthly and quarterly share purchase requirements. During the nine months ended September 30, 2018 and 2017, plan participants invested $1,088,000 and $1,044,000, respectively, in additional shares as part of the DRIP.

2018 Construction Budget

The Board of Directors approved a $66.2 million construction budget for 2018, net of amounts to be financed by customer advances and contributions in aid of construction. The Company will fund the capital budget through a combination of its internally generated funds, borrowing under its available lines of credit and potential new debt issuances by both Connecticut Water and Maine Water in 2018.

As the Company looks forward to the remainder of 2018 and 2019, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery of these costs through periodic WICA and WISC applications. The total cost of that investment may exceed the amount of internally generated funds. The Company expects to rely upon its internally generated funds and short-term borrowing facilities and proceeds from a potential debt issuance during the remainder of 2018.

Commitments and Contingencies

The Company adopted the Internal Revenue Service (“IRS”) temporary tangible property regulations on the Company’s 2012 Federal tax return. Since that time, the Company has been recording a provision for any possible disallowance of a portion of the repair deduction if the Company’s Federal tax return were to be reviewed by the IRS. While the Company believes that the deductions taken on its tax returns are appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously

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recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of the position through the quarter ended June 30, 2017, the impact of the new information on the Connecticut subsidiary caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ended September 30, 2017, the portion of the provision related to the tax year ended December 31, 2013, in the amount of $810,000, was reversed due to statute expiration. Through September 30, 2017, the Company has recorded, as required by FASB ASC 740, a provision of $1,805,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. During the quarter ended September 30, 2018, the portion of the provision related to the tax year ended December 31, 2014, in the amount of $1,300,000, was reversed due to statute expiration. For the nine months ended September 30, 2018, the Company recorded a provision of $910,000 for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $4.6 million in prior years for a cumulative total of $4.2 million.

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

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EX-99.4

Exhibit 99.4

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the accompanying audited financial statements and related notes thereto contained in Exhibit 99.2 to the Current Report of SJW Group to which this discussion is attached (the “Audited Consolidated Financial Statements”). As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the terms “we,” “our,” “us” and the “Company” refer to Connecticut Water Service, Inc., a Connecticut corporation, and do not, unless otherwise specified, include its subsidiaries.

FINANCIAL CONDITION

Executive Overview

Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its six wholly-owned subsidiary companies, as of December 31, 2017: The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”), The Maine Water Company (“Maine Water”), New England Water Utility Services, Inc. (“NEWUS”), and Chester Realty Company (“Chester Realty”). Connecticut Water, HVWC, Avon Water and Maine Water are our regulated water companies (together, the “Regulated Companies”).

In 2017, approximately 95% of the Company’s net income was attributable to the water operations of the Regulated Companies, which combined had 135,645 customers throughout 80 municipalities in Connecticut and Maine, as of December 31, 2017. The rates charged for service by Connecticut Water, HVWC and Avon Water are subject to review and approval by the Connecticut Public Utilities Regulatory Authority (“PURA”). The rates charged for service by Maine Water are subject to review and approval by the Maine Public Utilities Commission (“MPUC”).

The Heritage Village Water Company Acquisition

As previously reported, on May 10, 2016, the Company announced that it had reached an agreement to acquire HVWC, pending a vote of HVWC shareholders, approval by PURA and MPUC and the satisfaction of other various closing conditions, pursuant to the terms of Agreement and Plan of Merger dated May 10, 2016 between and among HVWC, the Company, and HAC, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). HVWC serves approximately 4,700 water customers in the Towns of Southbury, Middlebury, and Oxford, Connecticut and approximately 3,000 wastewater customers in the Town of Southbury, Connecticut.

The acquisition was executed through a stock-for-stock merger transaction valued at approximately $16.9 million. Holders of HVWC common stock received shares of the Company’s common stock in a tax-free exchange. In addition, the transaction reflected a total enterprise value of HVWC of approximately $21.5 million, with the $16.9 million paid to shareholders in a stock exchange and the assumption by the Company of approximately $4.6 million of debt held by HVWC at the time of the acquisition.

The Company received regulatory approval from MPUC on September 28, 2016 and from PURA on December 5, 2016, to proceed with the transaction. The shareholders of HVWC voted to approve the acquisition at a special meeting of HVWC’s shareholders held on February 27, 2017.

On February 27, 2017, the Company completed the acquisition of HVWC by completing the merger of the Company’s wholly-owned subsidiary HAC, Inc. with and into HVWC, with HVWC as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of HVWC’s 1,620 issued and outstanding shares of common stock became entitled to receive an aggregate of 300,445 shares of the Company’s common stock in a tax-free exchange, which exchange was commenced promptly by the issuance of a letter of transmittal and related materials by Connecticut Water’s exchange agent.

The Avon Water Company Acquisition

As previously reported, on October 12, 2016, the Company announced that it had reached an agreement to acquire Avon Water, pending a vote of Avon Water shareholders, approval by PURA and the MPUC and the satisfaction of other various closing conditions, pursuant to the terms of that certain Agreement and Plan of Merger dated October 11, 2016 as amended on March 29, 2017 between and among Avon Water, the Company, and WC-A I, Inc., the Company’s wholly-owned Connecticut subsidiary (the “Merger Agreement”). Avon Water serves approximately 4,800 customers in the Farmington Valley communities of Avon, Farmington, and Simsbury, Connecticut.

On February 10, 2017, Connecticut Water received regulatory approval from MPUC and on April 12, 2017, Connecticut Water received regulatory approval from PURA to proceed with the transaction. The shareholders of Avon Water voted to approve the acquisition at a special meeting of Avon Water’s shareholders held on June 16, 2017.

Effective July 1, 2017, the Company completed the acquisition of Avon Water by completing the merger of Connecticut Water’s wholly-owned subsidiary WC-A I, Inc. with and into Avon Water, with Avon Water as the surviving corporation, pursuant to the terms of the Merger Agreement and Connecticut corporate law. Upon the effective time of the Merger, the holders of Avon Water’s 122,289 issued and outstanding shares of common stock became entitled to receive the following merger consideration for each share of Avon Water common stock held: (i) a cash payment of $50.11; and (ii) a stock consideration component, consisting of 3.97 shares of the Company’s common stock.

The transaction was completed through a stock-for-stock exchange where Avon Water shareholders received the Company’s common stock valued at approximately $26.9 million, in a tax-free exchange, and a cash payment of $6.1 million for a total payment to shareholders of $33.0 million. The transaction reflects a total enterprise value of approximately $39.1 million, with the $33.0 million paid to shareholders and the assumption by the Company of approximately $6.1 million of debt held by Avon Water at the time of acquisition.

In 2007, the Connecticut General Assembly passed the Water Infrastructure and Conservation Adjustment (“WICA”) Act. WICA allows Connecticut Water to add a surcharge to customers’ bills, subject to an expedited review and approval by PURA and no more than twice a year, to reflect the replacement of certain types of aging utility plant; principally water mains, meters, service lines and water conservation related investments. Connecticut Water has been using the WICA surcharge since 2009. Similarly, beginning in June 2013, a Water Infrastructure Charge (“WISC”) became available in Maine that allows for expedited recovery of investment in water system infrastructure replacement, both treatment and distribution. Maine Water implemented the WISC mechanism in all of their systems in 2014.

Since 2013, Connecticut law has authorized a Water Revenue Adjustment (“WRA”) to reconcile actual water demands with the demands projected in the last general rate case and allows companies to adjust rates as necessary to recover the revenues approved by PURA in the last general rate case. The WRA removes the financial disincentive for water utilities to develop and implement effective water conservation programs. The WRA allows water companies to defer on the balance sheet, as a regulatory asset or liability, for later collection from or crediting to customers the amount by which actual revenues deviate from the revenues allowed in the most recent general rate proceedings, including WICA proceedings. Additionally, the cap for WICA charges has been raised to 10%, from 7.5%, between general rate cases and expands the eligible projects to include energy conservation projects, improvements required to comply with streamflow regulations, and improvements to acquired systems. Currently, Connecticut Water and HVWC make use of the WRA mechanism.

Connecticut Water and HVWC’s allowed revenues for the year ended December 31, 2017, as approved by PURA during our 2010 general rate case and including subsequently approved WICA surcharges, were approximately $80.7 million. Through normal billing for the year ended December 31, 2017 operating revenue for Connecticut Water and HVWC would have been approximately $76.4 million had the WRA not been implemented. As a result of the implementation of the WRA, Connecticut Water and HVWC recorded $4.3 million in additional revenue for the year ended December 31, 2017. During the years ended December 31, 2016 and 2015, Connecticut Water recorded $1.1 million and $1.6 million, respectively, in additional revenue related to the WRA. Avon Water does not currently use the WRA mechanism.

On February 6, 2018, Connecticut Water filed a petition with PURA to reopen Connecticut Water’s 2010 rate case (previously reopened in 2013) proceeding for the limited purpose of approving a Settlement Agreement entered into by Connecticut Water and the Connecticut Office of Consumer Counsel (“OCC”) (the “Agreement”). The Agreement contemplates a change in Connecticut Water’s customer rates effective for bills rendered on and after April 1, 2018 made up of the following two components: (1) the revenue requirements associated with a $36.3 million addition to rate base to reflect necessary upgrades to Connecticut Water’s Rockville Water Treatment Plant; and (2) the folding in to base rates of the Company’s present WICA surcharges. In addition, the Agreement provides that:

1. Upon implementation of new rates under the Agreement, until such time as new rates are adopted in a general rate case, through a temporary modification of the earnings sharing mechanism, Connecticut Water customers will receive one hundred percent of any earnings in excess of levels allowed by law rather than limiting such customer credits to 50% as contemplated by applicable law;

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2. Connecticut Water agrees it will not file for a general increase of Connecticut Water’s base rates to be effective before January 1, 2020;

3. The pending proceeding initiated by PURA in Docket No. 09-12-11RE03, Application of The Connecticut Water Company for Amended Rates – Federal Tax Cuts and Jobs Act shall be closed; and

4. Connecticut Water shall continue to make investments in infrastructure replacement consistent with its approved WICA plan. Connecticut Water shall be allowed to continue to pursue recovery of eligible projects through WICA.

The Agreement provides that, if PURA does not fully approve the Agreement in its entirety, it shall be deemed withdrawn. Accordingly, the Agreement has no operative effect unless and until it is approved by PURA. Connecticut Water is not able to predict with certainty the ultimate timing of PURA’s final action on the Agreement. No assurance can be given that PURA will approve the Agreement and permit some or all of the terms contained in the Agreement requested by the parties.

The Company has and will continue to focus on minimizing operating costs that are passed along to its customers without sacrificing the quality service it values and the customers demand. At the same time, the Company will continue to employ its current strategy of timely collection of appropriate costs and a fair rate of return for its shareholders through appropriate rates for its regulated water service while looking to expand through targeted acquisitions.

While the Company plans to file timely rate cases, continue to make acquisitions, similar to the completed HVWC and Avon Water acquisitions, and, in the future, utilize the WICA and WISC adjustments to allow for more timely recovery of investment in utility plant, it will also look to NEWUS and Maine Water to increase its earnings in unregulated businesses. The Company will continue to seek out maintenance and service contracts with new customers and renew existing contracts that have proven to be beneficial to the Company, as well as to continue the expansion of the Linebacker^® program.

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.

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

Our regulated water utilities are also subject to environmental and water quality regulations, which are continually modified and refined to ensure the safety of the Company’s water sources and, ultimately, the public’s health. Costs to comply with environmental and water quality regulations are substantial. The costs to comply with future changes in state or federal regulations, which could require us to modify current filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial. While there can be no guarantee that all expenditures related to increased regulation will be recoverable in rate proceedings, the Company believes that the regulatory environment in Connecticut and Maine would allow prudent expenditures to be recovered in rates. To date, the Company has never had any costs associated with water quality and environmental spending refused in a general rate proceeding. The Company believes that it is in compliance with current regulations, but the regulations are subject to change at any time.

Recognizing the increasing importance of managing and protecting electronic data, the Company, beginning in 2014, partnered with a consulting firm to evaluate the Company’s cyber security strengths and vulnerabilities and to help in creating an evaluation of the Company’s current information technology (“IT”) structure within the

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organization. In April 2014, a cyber security assessment analysis identified and prioritized steps that the Company should take to enhance its security surrounding cyber security. In September 2014, the consultant delivered a report related to the IT structure which contained recommendations aimed at strengthening the IT organization. The Company has implemented the recommendations contained in the cyber security assessment. Since the implementation of those recommendations, the Company has focused on the following initiatives:

• Cyber security architecture;

• Disaster recovery automation;

• Web security;

• Systems controls;

• Program awareness;

• Cyber training for employees;

• Phishing campaigns;

• Systems patch management; and

• Supporting cyber policy for all projects or ongoing practices.

Critical Accounting Policies and Estimates

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

Public Utility Regulation – Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 980 “Regulated Operations” (“FASB ASC 980”), requires cost-based, rate-regulated enterprises such as the Regulated 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, post-retirement benefit costs and deferred revenues associated with the WRA. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are probable to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FASB ASC 980.

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

Water Operations – Most of our water customers are billed quarterly, with the exception of larger commercial and industrial customers, as well as certain public and private fire protection customers who are billed monthly. Most customers, except fire protection customers, are metered. Revenues from metered customers are based on their water usage multiplied by approved, regulated rates and are earned when water is delivered. Public fire protection revenues are based on the length of the water main, and number of hydrants in service and are earned on a monthly basis. Private fire protection charges are based on the diameter of the connection to the water main. Our Regulated Companies accrue an estimate for metered customers for the amount of revenues earned relating to water delivered but unbilled at the end of each quarter, which is reflected as “Accrued Unbilled Revenues” in the balance sheets included in the Audited Consolidated Financial Statements. Beginning in 2013, Connecticut Water began to record deferred revenue to represent under collection from customers based upon allowed revenues as approved by PURA. On March 31, 2017, HVWC calculated its actual revenues compared to allowed revenues dating back to May 1, 2015, for collection from customers, as allowed by a PURA order. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting” in the Company’s “Notes to the Consolidated Financial Statements” included in the Audited Consolidated Financial Statements.

Real Estate Transactions – Revenues are recorded when a sale or other transaction has been completed and title to the real estate has been transferred. Net income from the Real Estate Transactions segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Net Income included in the Company’s Audited Consolidated Financial Statements. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting” in the Company’s “Notes to the Consolidated Financial Statements” included in the Company’s Audited Consolidated Financial Statements.

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Services and Rentals – Revenues are recorded when the Company has delivered the services called for by contractual obligation. Net income from the Services and Rentals segment is shown net in the “Other Income (Deductions), Net of Taxes” portion of the Company’s Consolidated Statements of Income included in the Company’s Audited Consolidated Financial Statements. More detailed information, including revenues, costs and income taxes associated with the segment can be found in Note 14, “Segment Reporting” in the Company’s “Notes to the Consolidated Financial Statements” included in the Company’s Audited Consolidated Financial Statements.

Income Taxes – The Company provides income tax expense for its utility operations in accordance with the regulatory accounting policies of the applicable jurisdictions. The Company’s income tax provision is calculated on a separate return basis. For Connecticut Water , PURA requires the flow-through method of accounting for most state tax temporary differences as well as for certain federal temporary differences. For Avon Water , PURA requires the flow-through method of accounting for most state temporary differences and normalized accounting for most federal temporary differences. PURA has allowed the flow-through method of accounting stemming from Avon Water’s adoption of the IRS’ Repair Regulations. For HVWC, PURA requires normalized accounting for federal and state temporary differences. The MPUC requires the flow-through method of accounting for most state temporary differences and normalized accounting for most federal temporary differences. In its approvals of the stipulation agreements between Maine Water and the Office of the Public Advocate, issued in 2015, the MPUC has allowed the flow-through method of accounting stemming from Maine Water’s adoption of the IRS’ Repair Regulations in all of its divisions.

The Company computes deferred tax liabilities for all temporary book-tax differences using the liability method prescribed in FASB ASC 740 “Income Taxes” (“FASB ASC 740”). Under the liability method, deferred income taxes are recognized at currently enacted income tax rates to reflect the tax effect of temporary differences between the financial reporting and tax bases of assets and liabilities. Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. Deferred tax liabilities that have not been reflected in tax expense due to regulatory treatment are reflected as Unfunded Future Income Taxes, and are expected to be included in future years’ rates. During the quarter ended December 31, 2017 the Company recorded the impact of the Tax Cuts and Jobs Act (“Tax Act”). As a result, the Company re-measured Deferred Tax Assets and Liabilities to reflect the enacted legislation and recorded a Regulatory Liability of $27.1 million to capture the excess accumulated deferred income taxes for items included in rates that follow the normalized method of accounting. Unrecovered Income Taxes and Unfunded Future Income Taxes were written down by $32 million to reflect the reduced tax rate for items that follow the flow-through method of accounting. Pursuant to ASU 2018-02, the Company has elected to reclassify the stranded tax effects of the 2017 Tax Act from AOCI to Retained Earnings in the amount of $70,482. These stranded taxes relate to post-retirement obligations of the Company. For more information on the Tax Act, please see Note 2 of the Audited Consolidated Financial Statements.

The Company believes that deferred income tax assets, net of provisions, will be realized in the future. The majority of Unfunded Future Income Taxes, prior to 2013, relate to deferred state income taxes regarding book to tax depreciation differences. Beginning in 2013, basis differences resulting from the repair tax deduction contributed to the change in unfunded income taxes.

Deferred Federal and State Income Taxes include amounts that have been provided for accelerated depreciation subsequent to 1981, as required by federal income tax regulations, as well as the basis differences associated with expenditures qualifying for repair tax deductions as clarified by the IRS in regulations issued in 2013. Deferred taxes have also been provided for temporary differences in the recognition of certain expenses for tax and financial statement purposes as allowed by regulatory ratemaking policies.

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

The discount rate assumption we use to value our pension and post-retirement benefit obligations has a material impact on the amount of expense we record in a given period. Our 2017 and 2016 pension expense was calculated

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using assumed discount rates of 4.10% and 4.30%, respectively. Our 2017 and 2016 post-retirement welfare expense was calculated using assumed discount rates of 3.95% and 4.15%, respectively. In 2018, our pension and post-retirement welfare expense will be calculated using assumed discount rates of 3.60% and 3.50%, respectively. The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2017 pension and post-retirement expense:

	Increase (Decrease) in Pension Expense			Increase (Decrease) in Post-retirement Expense
1% Increase in the discount rate	$	(1,462,000	)	$	(177,000	)
1% Decrease in the discount rate	$	1,762,000		$	208,000

Other assumptions that affect the costs associated with our benefit plans include the assumed rate of return on plan assets and the expected rate of compensation increase. The Company has assumed an 7.25% return on plan investments for 2017 and 2016, and a 4.00% rate of compensation increase for our pension and post-retirement welfare plans, in 2017 and 2016. The assumed health care trend rate was 8.25% and 8.25% at December 31, 2017 and 2016, respectively. RP 2017, a mortality table issued by the Society of Actuaries in 2017, was used in determination of our pension and post-retirement benefit obligations as of December 31, 2017 and projected costs for 2018.

Goodwill – As part of the purchase of regulated water companies, the Company recorded goodwill of $67.0 million and $30.4 million as of December 31, 2017 and 2016, respectively, representing the amount of the purchase price over net book value of the assets acquired. The increase of $36.6 million during 2017 is related to the acquisitions of HVWC and Avon Water during the year. The Company accounts for goodwill in accordance with Accounting Standards Codification 350 “Intangibles – Goodwill and Other” (“FASB ASC 350”).

As part of FASB ASC 350, the Company is required to perform an annual review of goodwill for any potential impairment, which we perform as of December 31 each year. We update the assessment between the annual testing if events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performed a quantitative analysis of impairment as of December 31, 2017, which concluded that the estimated fair value of the Water Operations reporting unit, which has goodwill recorded, exceeded the reporting unit’s carrying amount by at least 122% as of December 31, 2017. Additionally, the Company believes that no event has occurred which would trigger impairment.

As allowed under FASB ASC 350, the Company performed a qualitative analysis of its goodwill for the year ended December 31, 2016. A qualitative analysis includes a review of internal and external factors that could have an impact on a reporting unit’s fair value when compared to its carrying amount. These factors included a review of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, company specific events, changes in reporting units and a review of the Company’s stock price. Based on these factors and other factors considered in its quantitative analysis, the Company believes that it is more likely than not that the fair market value is more than the carrying value of the Water Operation Segment and therefore, no goodwill impairment was recognized in 2017 and 2016.

We may be required to recognize an impairment of goodwill in the future due to market conditions or other factors that are beyond our control and unrelated to our performance. Those market events could include a decline in the forecasted results in our business plan, significant adverse rate case results, changes in capital investment budgets or changes in interest rates that could permanently impair the fair value of a reporting unit. Recognition of impairments of a significant portion of goodwill would negatively impact our reported results of operation and total capitalization, the effects of which could be material and could make it more difficult to maintain our credit ratings, secure financing on favorable terms, maintain compliance with debt covenants and meet expectations of our regulators.

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FINANCIAL CONDITION

Liquidity and Capital Resources

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

Borrowing Facilities

The Company maintains a $15.0 million line of credit agreement with CoBank, ACB, that is currently scheduled to expire on July 1, 2020. The Company maintains an additional line of credit of $45.0 million with RBS Citizens, N.A., with an expiration date of April 25, 2021. Additionally, Avon Water maintains a $3.0 million line of credit with Northwest Community Bank, with an expiration date of September 30, 2018. As of December 31, 2017 the total lines of credit available to the Company were $63.0 million. As of December 31, 2017 and 2016, the Company had $19.3 million and $33.0 million of “Interim Bank Loans Payable”, respectively. As of December 31, 2017, the Company had $43.7 million in unused lines of credit. Interest expense charged on interim bank loans will fluctuate based on market interest rates.

At December 31, 2017 and 2016, the weighted average interest rates on these short-term borrowings outstanding was 3.4% and 2.7%, respectively.

In April 2016, Connecticut Water filed an application with PURA to issue promissory notes in the aggregate principal amount of up to $49,930,000 with CoBank, ACB (“CoBank”) under its existing Master Loan Agreement by and between Connecticut Water and CoBank dated October 29, 2012, in order for Connecticut Water to redeem its $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds previously issued by the Connecticut Development Authority (the “2009A Bonds”) and to provide $30,000,000 to partially fund its ongoing construction program. On June 1, 2016, Connecticut Water issued $30,000,000, at 4.36%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of May 20, 2036. On July 7, 2016, Connecticut Water issued $19,930,000, at 4.04%, in debt under its existing Master Loan Agreement with CoBank, with a maturity date of July 7, 2036. Connecticut Water used the proceeds to immediately pay off the $19,930,000 2009A Series of outstanding Water Facility Revenue Bonds.

7

On January 10, 2017, Maine Water executed and delivered to CoBank a new Promissory Note and Single Advance Term Loan Supplement, dated January 10, 2017 (the “Third Promissory Note”). On the terms and subject to the conditions set forth in the Third Promissory Note issued pursuant to the Agreement, CoBank agreed to make an unsecured loan (the “Loan”) to Maine Water in the principal amount of $5,000,000 at 4.18%, due December 30, 2026. The proceeds of the Loan will be used to finance new capital expenditures and refinance existing debt owed to the Company, incurred in connection with general water system improvements.

On August 28, 2017, the Company executed and delivered to CoBank a new Promissory Note and Supplement (2017 Single Advance Term Loan) (the “2017 Promissory Note”). On the terms and subject to the conditions set forth in the 2017 Promissory Note issued pursuant to the Company’s Master Loan Agreement, CoBank agreed to make a term loan (the “Loan”) to the Company in the principal amount of $15,000,000. Under the 2017 Promissory Note, the Company will pay interest on the Loan at a fixed rate of 4.15% per year through August 20, 2037, the maturity date of the Loan.

On September 28, 2017, Connecticut Water completed the issuance of $35,000,000 aggregate principal amount of its 3.53% unsecured Senior Notes due September 25, 2037 (the “Senior Notes”). The Senior Notes were issued pursuant to the Note Purchase Agreement dated as of September 28, 2017 (the “Purchase Agreement”) between and among Connecticut Water, NYL Investors, LLC (“NY Life”), as agent, and the Purchasers listed in the Purchaser Schedule attached to the Purchase Agreement, in a private placement financing exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The proceeds of the sale of the Senior Notes were used by Connecticut Water to repay loans from the Company the proceeds of which were used for capital expenditure projects by Connecticut Water. The Senior Notes bear interest at the rate of 3.53% per annum, payable semi-annually on March 27 and September 27 of each year commencing on March 27, 2018. The principal amount of the Senior Notes, if not previously paid, shall be due on September 25, 2037. The Senior Notes are callable in whole or in part, subject to a make-whole amount.

During the year ending December 31, 2017, the Company paid approximately $119,000 related to CTWS’s 2017 CoBank issuance as well as $1,079,000 related to CTWS’s Term Loan Note issued as part of the 2012 acquisition of Maine Water, approximately $1,815,000 in sinking funds related to Maine Water’s outstanding bonds, an additional $1,965,000 related to a CoBank loan to Maine Water that matured in 2017, approximately $88,000 related to HVWC’s mortgage loan and $129,000 related to Avon Water’s mortgage loan.

Capital Budget

In 2017, the Company spent $51.5 million on capital projects. The Company used a combination of its internally generated funds, borrowings under its lines of credit, the August and September 2017 long term debt issuances by the Company and Connecticut Water, respectively, and the January 2017 long term debt issuance by Maine Water to fund this construction budget.

The following table shows the total construction expenditures excluding non-cash contributed utility plant for each of the last three years and what we expect to invest on construction projects in 2018.

	Gross Construction Expenditures		Construction Funded by Developers & Others		Construction Funded by Company
2017	$	53,796,000	$	2,253,000	$	51,543,000
2016	$	67,887,000	$	1,548,000	$	66,339,000
2015	$	48,555,000	$	781,000	$	47,774,000
2018 (Projected)	$	66,200,000		**	$	66,200,000

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

8

Credit Rating

In January 2018, Standard & Poor’s Rating Services (“S&P”) affirmed its ‘A’ corporate credit rating on the Company. Additionally, S&P revised the Company’s ratings outlook as negative due to their view that the recently revised corporate tax code could potentially strain cash flows if our regulators determine a reduction in revenue requirements is appropriate and a potential weakening of consolidated financial measures due to our growth strategy and high capital spending requirements.

Stock Plans

The Company offers a dividend reinvestment and stock purchase plan (“DRIP”) to all registered shareholders, and to the customers and employees of our regulated water companies, whereby participants can opt to have cash dividends directly reinvested into additional shares of the Company. In August 2011, the Board of Directors approved amendments to the DRIP (effective as of January 1, 2012) that permit the Company to add, at the Company’s discretion, an “up to 5.00% purchase price discount” feature to the DRIP which is intended to encourage greater shareholder, customer and employee participation in the DRIP. In August 2014, the Board of Directors approved further amendments to the DRIP to reflect the Company’s appointment of a new common stock transfer agent. In August 2017, the Board of Directors approved amendments to the DRIP to permit persons who are not registered shareholders of the Company to participate in the plan with a minimum purchase of $500 and to modify the monthly minimum and quarterly maximum cash purchases permitted under the plan. During the years ended December 31, 2017 and 2016, participants reinvested $1,404,000 and $1,610,000, respectively, as part of the DRIP.

Construction Expenditures

During 2017, the Company incurred approximately $53.8 million of construction expenditures, including approximately $2,253,000 funded by developers and others. The Company financed the expenditures through internally generated funds, long-term debt issuances, proceeds from its dividend reinvestment plan, customers’ advances, contributions in aid of construction and short-term borrowings.

Our Board of Directors has approved a $66.2 million construction budget for 2018, net of amounts to be financed by customer advances and contributions in aid of construction. The Company will fund the capital budget through a combination of its internally generated funds, borrowing under its available lines of credit and a potential new debt issuance by Maine Water in 2018.

As the Company looks forward to 2018 and 2019, it anticipates continued reinvestment to replace aging infrastructure and to seek recovery of these costs through periodic WICA and WISC applications. The total cost of that investment may exceed the amount of internally generated funds. The Company expects to rely upon its internally generated funds and short-term borrowing facilities and new debt issuances over the next 12-24 months.

Off-Balance Sheet Arrangements and Contractual Obligations

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

The following table summarizes the Company’s future contractual cash obligations as of December 31, 2017:

Payments due by Periods

(in thousands)

Contractual Obligations	Total		Less than 1 year		Years 2 and 3		Years 4 and 5		More than 5 years
Long-Term Debt (LTD)	$	263,626	$	6,173	$	16,140	$	45,352	$	195,961
Interest on LTD		124,240		10,325		19,853		18,862		75,200
Operating Lease Obligations		155		113		36		4		2
Purchase Obligations (1) (2) (3) (4)		83,672		1,524		3,096		3,000		76,052
Long-Term Compensation Agreements (5)		52,542		4,428		7,767		7,765		32,582
Total (6) (7)	$	524,235	$	22,563	$	46,892	$	74,983	$	379,797

9

1. Connecticut Water has an agreement with the South Central Connecticut Regional Water Authority (“RWA”) to purchase water from RWA. The agreement was signed in April 2006 and became effective upon the receipt of all regulatory approvals in 2008 and will remain in effect for a minimum of fifty years upon becoming effective. Connecticut Water will pay RWA $75,000 per year as part of a capacity agreement, for a total of 14 years, starting on the effective date of the agreement. In addition, Connecticut Water is able, but under no obligation, to purchase up to one million gallons of water per day at the then current wholesale rates per the agreement.

2. Connecticut Water has an agreement with The Metropolitan District (“MDC”) to purchase water from MDC to serve the Unionville system. The agreement became effective on October 6, 2000 and has a term of fifty years beginning May 19, 2003, the date the water supply facilities related to the agreement were placed in service. Connecticut Water agrees to purchase 283 million gallons of water annually from MDC.

3. Connecticut Water has a 99 year lease with 19 Perry Street to obtain well water for its public water supply system. The agreement became effective in 1975 and is based on current water rates in effect each year. There is no limitation on the amount of water that can be withdrawn from the leased property.

4. Maine Water has an agreement with the Kenebec Water District for potable water service. The agreement was extended and became effective on November 7, 2015 for a new term of 5 years. Maine Water guarantees a minimum consumption of 63.5 million gallons of water annually. Water sales to Maine Water are billed at a flat rate per gallon plus the monthly minimum tariff rate for a 4-inch metered service.

5. Pension and post retirement contributions cannot be reasonably estimated beyond 2018 and may be impacted by such factors as return on pension assets, changes in the number of plan participants and future salary increases.

6. We pay refunds on Advances for Construction over a specific period of time based on operating revenues related to developer-installed water mains or as new customers are connected to and take service from such mains. After all refunds are paid, any remaining balance is transferred to Contributions in Aid of Construction. The refund amounts are not included in the above table because the refund amounts and timing are dependent upon several variables, including new customer connections, customer consumption levels and future rate increases, which cannot be accurately estimated. Portions of these refund amounts are payable annually through 2027 and amounts not paid by the contract expiration dates become non-refundable.

7. We intend to fund these contractual obligations with cash flows from operations and liquidity sources held by or available to us.

In addition to the obligations disclosed in the contractual obligations table above, we have uncertain tax positions of $4.6 million. Although we believe our tax positions comply with applicable law, we have made judgments as to the sustainability of each uncertain tax position based on its technical merits. Due to the uncertainty of future cash outflows, if any, associated with our uncertain tax positions, we are unable to make a reasonable estimate of the timing or amounts that may be paid.

10

RESULTS OF OPERATIONS

Overview of 2017 Results from Operations

Net Income for 2017 was $25,054,000, or $2.17 basic earnings per share, an increase of $1,667,000, or $0.05 basic earnings per share, compared to 2016. The increase in earnings was principally due to higher net income in our Water Operations segment due to ongoing investment in water infrastructure and the recovery of that investment through WICA and WISC, the incremental impact the acquisitions of HVWC and Avon Water added in 2017, and the reduction in federal tax reserves no longer deemed necessary. Changes in net income for our segments were as follows (in thousands):

Business Segment	2017 Net Income		2016 Net Income			Increase (Decrease)
Water Operations	$	23,854	$	22,222		$	1,632
Real Estate		33		(54	)		87
Services and Rentals		1,167		1,219			(52	)
Total	$	25,054	$	23,387		$	1,667

Water Operations

The increase in net income from Water Operations for 2017 compared to 2016 was $1,632,000, or 7.3%. The Net Income from Water Operations for the years ended December 31, 2017 and 2016 were each impacted by non-recurring items. During the year ended December 31, 2017, the Company recorded the impact of the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017. Among other provisions, the Tax Act reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018. As a result, the Company remeasured deferred tax assets and liabilities and incurred expense for the remeasurement of the deferred tax assets of $1.5 million on our income tax expense related to long-term deferred tax assets during the quarter ended December 31, 2017, which impacted the Other line on the Other Income (Deductions), Net of Taxes portion of the Consolidated Statement of Income included in the Company’s Audited Consolidated Financial Statements.

The Net Income from Water Operations for the year ended December 31, 2017 were impacted positively by a partial reversal of previously established tax provisions. During the year ended December 31, 2017, new information caused the Company to undertake a review of its provision recorded associated with the repair deduction. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000. During the Company’s review of the position through the quarter ended June 30, 2017, the impact of new information on Connecticut Water caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ended September 30, 2017 an additional $810,000 was reversed due to statute expiration. In the quarter ended December 31, 2017, continued analysis resulted in the reversal of a portion of the provision in the amount of $1,620,000 for a total reversal of $6,039,000 during the year ended December 31, 2017. In future years, the Company expects to add to this provision based on capital spending and also decrease the provision based on statute expirations.

During the year ended December 31, 2016, the Company reversed incorrectly recorded mark-to-market expense as an out-of-period adjustment resulting in a one-time benefit (reduction) of approximately $1.6 million in Operation and Maintenance expense.

A breakdown of the components of the increase in net income from Water Operations is as follows (in thousands):

	2017			2016			Increase (Decrease)
Operating Revenues	$	107,054		$	98,667		$	8,387
Operation and Maintenance		48,017			44,191			3,826
Depreciation		16,684			13,905			2,779
Income Taxes		(1,993	)		2,570			(4,563	)
Taxes Other than Income Taxes		10,941			9,796			1,145
Other Utility Income		824			744			80
Other (Deductions) Income		(2,308	)		(1,009	)		(1,299	)
Interest and Debt Expense (net of AFUDC)		8,067			5,718			2,349
Total Net Income from Water Operations	$	23,854		$	22,222		$	1,632

11

Revenue from our water customers increased by $8,387,000, or 8.5%, to $107,054,000 for the year ended December 31, 2017 when compared to the same period in 2016. The primary drivers of higher revenues were the acquisitions of HVWC and Avon Water on February 27 and July 1, respectively. These acquisitions added approximately $5,802,000 in new revenues during 2017. The remaining $2,585,000 increase is primarily attributable to increased rates in 2017 associated with recurring WICA charges in Connecticut and WISC charges in Maine.

Operation and Maintenance (“O&M”) expense increased by $3,826,000, or 8.7%, during the year ended December 31, 2017 when compared to the 2016 period, primarily due to the acquisitions of HVWC and Avon Water on February 27 and July 1, respectively. HVWC and Avon Water added approximately $2,711,000 of additional O&M expense during 2017. The following table presents the components of O&M expense for the year ended December 31, 2017 and 2016, both including and excluding the impact of the HVWC and Avon Water acquisitions (in thousands):

	2017		2016			Increase / (Decrease)			HVWC and Avon Water O&M		Adjusted Increase / (Decrease)
Mark-to-market	$	13	$	(1,401	)	$	1,414		$	—	$	1,414
Outside services		3,793		3,284			509			127		382
Maintenance		3,976		3,312			664			389		275
Payroll		16,941		15,812			1,129			948		181
Subscriptions and dues		393		247			146			3		143
Property and liability insurance		1,661		1,542			119			68		51
Investor relations		809		775			34			34
Medical		2,629		2,597			32			39		(7	)
Utility costs		4,354		3,899			455			459		(4	)
Vehicles		1,748		1,793			(45	)		34		(79	)
Purchased water		1,559		1,675			(116	)		35		(151	)
Pension		2,925		3,096			(171	)		2		(173	)
Customer		1,734		1,829			(95	)		96		(191	)
Water treatment (including chemicals)		2,695		2,702			(7	)		201		(208	)
Other benefits		1,123		1,947			(824	)		79		(903	)
Other		1,664		1,082			582			231		351
Total	$	48,017	$	44,191		$	3,826		$	2,711	$	1,115

12

The changes in individual items are described below:

• The increase in mark-to-market expense was related to an out-of-period adjustment made during the second quarter of 2016 related to stock-based performance awards previously granted to officers of the Company. The Company had mistakenly marked certain stock-based performance awards classified as equity awards to the market price of the Company’s common stock price at the end of each reporting period. During the second quarter of 2016, the Company reversed all of the incorrectly recorded mark-to-market expense resulting in a one-time benefit of $2.6 million, including a reversal of approximately $1.0 million in expense related to the first quarter of 2016 for a net out-of-period adjustment of $1.6 million;

• The increase in Outside services was primarily due to higher auditing fees, higher outside labor costs and an increase in the use of consultants during the year ended December 31, 2017 when compared to the year ending December 31, 2016. These increases were partially offset by a decrease in legal fees during 2017;

• Payroll costs increased primarily due higher wages in the year ended December 31, 2017 compared to 2016;

• Subscriptions and dues increased primarily due to a new training module in use by the Company in 2017 that was not fully in use in 2016; and

• Property and liability insurance costs increased in 2017 over 2016 due to higher premiums on the Company’s insurance coverage stemming from growth of insurable assets.

The O&M increases detailed above were offset by the following decreases to O&M expense:

• The decrease in the Other benefits was primarily due to the resignation of the Company’s former Chief Executive Officer. As a result of his departure, the executive forfeited previously awarded performance stock awards that had not vested and, in the third quarter of 2017, the Company reversed the expense recognized in previous periods associated with those unvested awards;

• Water treatment costs decreased due to a decrease in the cost of chemicals used in the treatment process;

• Customer costs decreased due to a reduction in costs associated with a voluntary water conservation program that rewards customers for reducing their consumption by 10% that was in effect during 2016, lower uncollectible accounts charges, reduced costs associated with customer communications, and a decrease in outside collection efforts during the year ended December 31, 2017;

• Pension costs decreased primarily due to the plan’s 2016 asset returns which were higher than expected and the Company’s $5.5 million contribution to the pension plan in the first half of 2016. The higher asset value led to a higher expected return component in the 2017 expense as well as a lower recognized gain/loss component. This decrease was partially offset by a decrease in the discount rate used in determining 2017 expense compared to the discount rate used to determine the 2016 expense; and

• Purchased water decreased in 2017 primarily due to the end of drought like conditions that persisted through much of 2016, causing the Company to purchase water from neighboring utilities to meet customer demand. As the drought conditions improved during 2017, the need to purchase water lessened.

The Company’s Depreciation expense increased $2,779,000, or 20.0%, when comparing 2017 to 2016, of which, approximately $1,137,000 is associated with depreciation at HVWC and Avon Water. The primary driver of the increase in Depreciation expense was a higher Utility Plant balance in 2017 than in 2016 due to normal plant additions, including the upgrades to Connecticut Water’s Rockville Water Treatment Plant that was completed in 2017.

Income Tax expense associated with “above the line” Water Operations decreased by $4,563,000 in the year ended December 31, 2017 when compared to the same period in 2016 due to the reversal of previously established provisions, as discussed above.

Total Interest and Debt Expense, net of Allowance for Funds Used During Construction (“AFUDC”) increased by $2,349,000 in the year ended December 31, 2017 when compared to the same period in 2016. Approximately

13

$307,000 of this increase is attributable to the acquisitions of HVWC and Avon Water. The primary reason for the remainder of the increase was the higher interest costs related to new debt issued by the Company, Connecticut Water and Maine Water in 2017 and full year’s worth of interest on Connecticut Water’s 2016 issuance.

Real Estate

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land. This typically occurs when utility-owned land is deemed to be unnecessary to protect water sources. During 2017, Maine Water sold a small parcel of land and Connecticut Water sold a small property, together these transactions generated approximately $33,000 in net income in the Real Estate segment.

During 2016, the Company recorded a valuation allowance on a previously completed land donation and the sale of a small parcel of land in Connecticut. These transactions generated $54,000 in net loss in the Real Estate segment.

Other

The increase in net loss seen in the year ended December 31, 2017 in “Other” under “Other Income (Deductions), Net of Taxes” was primarily due to the impacts of the implementation of the Tax Act and the resulting treatment of previously deferred federal income taxes, as discussed above.

Overview of 2016 Results from Operations

Net Income for 2016 was $23,387,000, or $2.12 basic earnings per share, an increase of $626,000, or $0.05 basic earnings per share, compared to 2015. The increase in earnings was principally due to higher net income in our Water Operations segment due to ongoing investment in water infrastructure and the recovery of that investment through WICA and WISC. These investments drove both a revenue increase and lower current income tax expense as a result of the continued application of the Repair Regulations. Changes in net income for our segments were as follows (in thousands):

Business Segment	2016 Net Income			2015 Net Income		Increase (Decrease)
Water Operations	$	22,222		$	21,018	$	1,204
Real Estate		(54	)		349		(403	)
Services and Rentals		1,219			1,394		(175	)
Total	$	23,387		$	22,761	$	626

14

Water Operations

The increase in net income from Water Operations for 2016 compared to 2015 was $1,204,000, or 5.7%. The Net Income from Water Operations for the years ended December 31, 2016 and 2015 were each impacted positively by non-recurring items. During the year ended December 31, 2016, the Company reversed incorrectly recorded mark-to-market expense as an out-of-period adjustment resulting in a one-time benefit (reduction) of approximately $1.6 million in O&M expense. During the twelve months ended December 31, 2015, the Company recorded an approximate $2.1 million reduction to Income Tax expense related to a June 2015 MPUC approval of a settlement agreement between Maine Water and the State of Maine’s Office of Public Advocate that in part allowed for the flow through benefit of Maine Water’s adoption of the IRS’s Repair Regulations and the reversal of previously established reserves after the completion of an IRS audit of the Company’s 2012 federal tax return. The items discussed in detail below reflect the approximate $1.1 million increase in Net Income related to Water Operations for the year ended December 31, 2016 after the impact of the above non-recurring items. A breakdown of the components of this increase was as follows (in thousands):

	2016			2015			Increase (Decrease)
Operating Revenues	$	98,667		$	96,041		$	2,626
Operation and Maintenance		44,191			48,052			(3,861	)
Depreciation		13,905			12,871			1,034
Income Taxes		2,570			(818	)		3,388
Taxes Other than Income Taxes		9,796			9,294			502
Other Utility Income		744			797			(53	)
Other (Deductions) Income		(1,009	)		(214	)		(795	)
Interest and Debt Expense (net of AFUDC)		5,718			6,207			(489	)
Total Net Income from Water Operations	$	22,222		$	21,018		$	1,204

Revenue from our water customers increased by $2,626,000, or 2.7%, to $98,667,000 for the year ended December 31, 2016 when compared to the same period in 2015. The primary drivers of higher revenues were the increased rates in 2016 associated with recurring WICA charges in Connecticut and WISC charges in Maine. In 2016, WRA revenues were $1,132,000 compared to $1,583,000 in 2015. The reduction in WRA revenues was due primarily to an increase in billed revenues in 2016 compared to 2015.

O&M expense decreased by $3,861,000, or 8.0%, during the year ended December 31, 2016 when compared to the 2015 period, primarily due a decrease in expenses related to pension and post-retirement medical costs due to higher discount rates used to determine yearly expense and to the out-of-period adjustment related to stock-based compensation made during 2016. The following table presents the major components of O&M expense (in thousands):

Expense Components	2016			2015		Increase (Decrease)
Mark-to-market	$	(1,401	)	$	265	$	(1,666	)
Pension		3,096			4,382		(1,286	)
Outside services		3,284			4,224		(940	)
Payroll		15,812			16,110		(298	)
Post-retirement medical		440			729		(289	)
Maintenance		3,312			3,567		(255	)
Utility costs		3,899			4,126		(227	)
Water treatment (including chemicals)		2,702			2,740		(38	)
Property and liability insurance		1,542			1,530		12
Vehicles		1,793			1,666		127
Purchased water		1,675			1,423		252
Customer		1,829			1,494		335
Medical		2,597			2,126		471
Other benefits		1,946			1,211		735
		1,665			2,459		(794	)
Total	$	44,191		$	48,052	$	(3,861	)

15

The changes in individual items are described below:

• The decrease in mark-to-market expense was related to an out-of-period adjustment made during the second quarter of 2016 related to stock-based performance awards previously granted to officers of the Company. The Company had mistakenly marked certain stock-based performance awards classified as equity awards to the market price of the Company’s common stock price at the end of each reporting period. During the second quarter of 2016, the Company reversed all of the incorrectly recorded mark-to-market expense resulting in a one-time benefit of $2.6 million, including a reversal of approximately $1.0 million in expense related to the first quarter of 2016 for a net out-of-period adjustment of $1.6 million;

• Pension and post-retirement medical costs decreased primarily due to an increase in the discount rate used in determining 2016 expense compared to the discount rate used to determine the 2015 expense;

• Outside services expenses decreased in 2016 primarily due to a reduction in costs associated with contractors and consultants. During 2015, the Company was involved in initiatives surrounding succession planning and risk management that were heavily reliant on consultants to assist with assessments prior to the Company implementing the assessments with internal labor;

• Payroll costs decreased in 2016 when compared to 2015 primarily due to the amount of employee time charged to capital projects increasing in 2016 when compared to 2015; and

• Utility costs decreased primarily due to decreased primarily due to a reduction in telephone related expenses, as well as a decrease in heating and electric costs.

The decreases detailed above were offset by the following increases to O&M expense:

• Other benefits increased in 2016 when compared to 2015 primarily due to increased costs associated with a non-officer incentive plan and the Company’s performance stock plan offered to officers;

• Medical costs in 2016 were higher than 2015 primarily due to an increase in medical claims made by employees and their families;

• Customer related expenses increased from 2015 levels due to an increase in uncollectible accounts during 2016 and costs associated with a Company sponsored conservation drive that rewarded customers that were able to reduce their annual consumption by 10%; and

• Purchased water costs increased primarily due to an increase in the amount of water purchased from neighboring utilities, particularly in the Company’s Shoreline Region in Connecticut which has experienced continuing drought conditions throughout 2016.

The Company’s Depreciation expense increased $1,034,000, or 8.0%, when comparing 2016 to 2015. The primary driver of the increase in Depreciation expense was a higher Utility Plant balance in 2016 due to normal plant additions.

Income Tax expense associated with Water Operations increased by $3,388,000 in the year ended December 31, 2016 when compared to the same period in 2015 due to a higher effective tax rate. The Company had a negative effective tax rate in 2015 primarily due to reversal of previously established provisions, the impact of returning of the repair tax benefit to customers in both Connecticut and Maine and the implementation of the MPUC order allowing flow through treatment of the repair deduction which was recorded in 2015.

Total Interest and Debt Expense, net of AFUDC decreased by $489,000 in the year ended December 31, 2016 when compared to the same period in 2015 due, primarily, to higher AFUDC earnings related to increased construction during 2016 when compared to 2015, partially offset by higher interest costs related to new debt issued by Connecticut Water in 2016 and full year’s worth of interest on Maine Water’s 2015 issuances.

Real Estate

Income from the Real Estate segment is largely dependent on the tax deductions received on donations and, or, sales of available land. This typically occurs when utility-owned land is deemed to be unnecessary to protect water sources. During 2016, the Company recorded a valuation allowance on a previously completed land donation and the sale of a small parcel of land in Connecticut. These transactions generated $54,000 in net loss in the Real Estate segment.

16

During 2015, the Company donated land associated with a previously sold land conservation easement in Connecticut and the sale of three small parcels of land in Maine. These transactions generated $349,000 in net income in the Real Estate segment.

Other

The increase in net loss seen in the year ended December 31, 2016 in “Other” under “Other Income (Deductions), Net of Taxes” was primarily due to costs due to the acquisitions of Heritage Village and Avon Water.

COMMITMENTS AND CONTINGENCIES

Water Supply – Connecticut Water has an agreement with the South Central Connecticut Regional Water Authority (“RWA”) to purchase water from RWA. The agreement was signed in April 2006 and became effective upon the receipt of all regulatory approvals in 2008 and remains in effect for a minimum of fifty years upon the effective date. Connecticut Water will pay RWA $75,000 per year, for a total of 14 years, starting on the effective date of the agreement. In addition, Connecticut Water is able, but under no obligation, to purchase up to one million gallons of water per day at the then current wholesale rates per the agreement. Connecticut Water has an agreement with The Metropolitan District (“MDC”) to purchase water from MDC to serve the Unionville system. The agreement became effective on October 6, 2000 and has a term of fifty years beginning May 19, 2003, the date the water supply facilities related to the agreement were placed in service. Connecticut Water agrees to purchase 283 million gallons of water annually from MDC. Connecticut Water has a 99 year lease with 19 Perry Street to obtain well water for its public water supply system. The agreement became effective in 1975 and is based on current water rates in effect each year. There is no limitation on the amount of water that can be withdrawn from the leased property. Maine Water has an agreement with the Kenebec Water District for potable water service. The agreement was extended and became effective on November 7, 2015 for a new term of 5 years. Water sales to Maine Water are billed at a flat rate per gallon plus the monthly minimum tariff rate for a 4-inch metered service. During 2017, 2016, and 2015, the Company spent $1,532,000, $1,556,000 and $1,112,000, respectively, on water purchased under these agreements. The Company’s expected payments related to these agreements for the years 2018 through 2022 will be as follows:

(in thousands)
2018	$	1,524
2019	$	1,567
2020	$	1,528
2021	$	1,476
2022	$	1,524

Reviews by Taxing Authorities – On June 11, 2013, the Company was notified by the Connecticut Department of Revenue Services that its state tax filings for the years 2009 through 2011 would be reviewed beginning in the fourth quarter of 2013. On March 24, 2015, the Company was notified by the Connecticut Department of Revenue Services that the audit was expanded to include the 2012 and 2013 tax years. The State focused its review on tax credits associated with fixed capital investment. The Company and the State came to an agreement (“Closing Agreement”) regarding investments eligible for the credit. The Closing Agreement was executed on May 4, 2015. The Company had previously recorded a provision for the possible disallowance of these credits and, therefore, there was minimal impact in 2015.

On the 2012 tax return, filed in September 2013, Connecticut Water filed a change in accounting method to adopt the IRS temporary tangible property regulations. On the 2013 Federal tax return, filed in September 2014, Maine Water filed the same change in accounting method. This method change allowed the Company to take a current year deduction for expenses that were previously capitalized for tax purposes. Since the filing of the 2012 tax return, the IRS has issued final regulations. On February 11, 2014, the Company was notified by the IRS that its Federal tax filing for 2012 would be reviewed. This review, which began in the first quarter of 2014 and was completed in the first quarter of 2015, resulted in no change to the tax liability. Since the Company had previously recorded a provision for the possible disallowance of the repair deduction in those prior periods, the completion of the audit resulted in the reversal of the reserves in the amount of $1,185,000. During the year ended December 31, 2017 new

17

information caused the Company to undertake a review of its provision recorded associated with the repair deduction. While the Company maintains the belief that the deduction taken on its tax return is appropriate, the methodology for determining the deduction has not been agreed to by the taxing authorities. During the Company’s review of the position through the quarter ended March 31, 2017, new information caused management to reassess the previously recorded provision. This reassessment resulted in the reversal of a portion of the provision related to the Maine subsidiary, in the amount of $1,164,000 in the first quarter of 2017. During the Company’s review of the position through the quarter ended June 30, 2017, the impact of new information on Connecticut Water caused management to reassess the previously recorded provision. The reassessment resulted in the reversal of a portion of the provision in the amount of $2,445,000. During the quarter ended September 30, 2017 an additional $810,000 was reversed due to statute expiration. In the quarter ended December 31, 2017, continued analysis resulted in the reversal of a portion of the provision in the amount of $1,620,000 for a total reversal of $6,039,000. In addition, as required by FASB ASC 740, during the year ended December 31, 2017, the Company recorded a provision of $1.2 million for a portion of the benefit that is not being returned to customers resulting from any possible tax authority challenge. The Company had previously recorded a provision of $9.4 million in the prior year for a cumulative total of $4.6 million.

The Company remains subject to examination by federal and state tax authorities for the 2014 through 2016 tax years. On April 26, 2017, Avon Water was notified by the IRS that its stand-alone Federal tax filing for 2015 was selected to be reviewed beginning in the second quarter of 2017. The Company believes that the deductions taken on Avon Water’s tax return are appropriate; therefore no provision was recorded during the year ended December 31, 2017 as required by FASB ASC 740.

Purchases of Equity Securities by the Company – In May 2005, the Company adopted a common stock repurchase program (“Share Repurchase Program”). The Share Repurchase Program allows the Company to repurchase up to 10% of its outstanding common stock, at a price or prices that are deemed appropriate. As of December 31, 2017, no shares have been repurchased. Currently, the Company has no plans to repurchase shares under the Share Repurchase Program.

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

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.

Rate Relief – The rates we charge our water and waste water customers in Connecticut and Maine are established under the jurisdiction of and are approved by PURA and MPUC, respectively. Connecticut Water’s allowed return on equity and return on rate base, effective as of December 31, 2017 were 9.75% and 7.32%, respectively. HVWC’s blended water and wastewater allowed return on equity and return on rate base, effective December 31, 2017, were 10.10% and 7.19%, respectively. Avon Water’s allowed return on equity and return on rate base, effective December 31, 2017, were 10.00% and 7.79%, respectively. Maine Water’s average allowed return on equity and return on rate base, as of December 31, 2017 were 9.50% and 7.96%, respectively.

Land Dispositions – The Company and its subsidiaries own additional parcels of land in Connecticut and Maine, which may be suitable in the future for disposition or for further protection through conservation easements, through sale or by donation to municipalities, other local governments or private charitable entities such as local land trusts. In Connecticut, these additional parcels would include certain Class I and II parcels previously identified for long term conservation by the Connecticut Department of Energy and Environmental Protection (“DEEP”), which have restrictions on development and resale based on provisions of the Connecticut General Statutes. In Maine, these parcels include primarily company-owned land used for water supply protection, and a permanent conservation easement may be appropriate for some parcels to ensure the permanent protection of the watersheds, while balancing the appropriate community and recreational use of the land.

18

Capital Expenditures – The Company has received approval from its Board of Directors to spend $66.2 million on capital expenditures in 2018, in part to fund improvements to water treatment plants and increased spending related to infrastructure improvements.

19

EX-99.5

Exhibit 99.5

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The Unaudited Pro Forma Condensed Combined Financial Statements (the “Pro Forma Financial Statements”) have been derived from the unaudited condensed consolidated financial statements of SJW as of September 30, 2018 and for the nine months then ended included in SJW’s Quarterly Report on Form 10-Q for the fiscal quarter then ended, the unaudited condensed consolidated financial statements of CTWS as of September 30, 2018 and for the nine months then ended included in Exhibit 99.1 to the Current Report on Form 8-K of SJW filed on November 26, 2018 (the “November 26 Form 8-K”), the audited consolidated financial statements of SJW for the year ended December 31, 2017 included in SJW’s Annual Report on Form 10-K for the fiscal year then ended and the audited consolidated financial statements of CTWS for the year ended December 31, 2017 included in Exhibit 99.2 to the November 26 Form 8-K, each of which is incorporated herein by reference.

The Unaudited Pro Forma Condensed Combined Balance Sheet (the “Pro Forma Balance Sheet”) as of September 30, 2018 gives effect to the proposed acquisition of Connecticut Water Service, Inc. (the “CTWS Acquisition”) and related financing as if they had been completed on September 30, 2018. The Unaudited Pro Forma Condensed Combined Statements of Operations (the “Pro Forma Statements of Operations”) for the nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to the CTWS Acquisition and related financing as if they had been completed on January 1, 2017.

The Second Amended and Restated Agreement and Plan of Merger (“the Merger Agreement”) provides that SJW will acquire CTWS for total cash consideration of $70.00 for each CTWS common share outstanding. The total equity purchase price is approximately $843.5 million. The Pro Forma Financial Statements assume that SJW will finance the acquisition by issuing new common equity shares for gross proceeds of approximately $438.5 million, including $16.7 million for estimated offering costs, and $425.1 million in new fixed rate debt financing (the “Debt Financing”), including $3.4 million for estimated debt issuance costs. If and to the extent that the issuance of new common equity shares is not completed or is completed for less proceeds than anticipated, SJW would fund any shortfall with additional Debt Financing.

The historical consolidated financial information has been adjusted in the Pro Forma Financial Statements to give effect to pro forma events that are: (1) directly attributable to the transaction, (2) factually supportable and (3) with respect to the Pro Forma Statements of Operations, expected to have continuing impact on the combined results of SJW and CTWS. As such, the impact of non-recurring transaction-related expenses is not included in the Pro Forma Statements of Operations. However, the impact of such expenses is reflected in the Pro Forma Balance Sheet as an increase to liabilities and deferred tax assets and a decrease to retained earnings.

The Pro Forma Financial Statements do not reflect any cost savings (or associated costs to achieve such savings) from operating efficiencies or synergies that could result from the transaction. Further, the Pro Forma Financial Statements do not reflect the effect of any regulatory actions that may impact the Pro Forma Financial Statements when the transaction is completed. In addition, the Pro Forma Financial Statements do not purport to project the future financial position or operating results of the combined company.

United States Generally Accepted Accounting Principles (“GAAP”) require that one party to the transaction be identified as the acquirer. In accordance with such principles, the merger of SJW and CTWS will be accounted for as an acquisition of CTWS common stock by SJW, which we refer to as the “CTWS Acquisition”, and will follow the acquisition method of accounting for business combinations. As described above, SJW expects to finance the CTWS Acquisition with a combination of debt and equity. The number of new common equity shares assumed to be issued in the Pro Forma Financial Statements is based on the closing price of SJW’s common stock on the NYSE on November 19, 2018 of $64.96 per share (See Note 3 to the Pro Forma Financial Statements for additional information related to the preliminary purchase price).

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

At September 30, 2018

(In thousands)

	Historical Results (as reported)						Reclassification Adjustments			Pro Forma Adjustments				Pro Forma
	SJW Group			Connecticut Water			(Note 2)			(Note 5)				Combined
ASSETS
Utility plant:
Land	$	18,300		$	—		$	15,022		$	—			$	33,322
Depreciable plant and equipment		1,783,654			—			837,255			—				2,620,909
Nondepreciable plant		—			—			102,850			—				102,850
Construction in progress		79,475			19,849			1,839			—				101,163
Utility plant		—			955,127			(955,127	)		—				—
Intangible assets		15,748			—			—			—				15,748
Total utility plant		1,897,177			974,976			1,839			—				2,873,992
Less accumulated depreciation and amortization		(593,916	)		(253,488	)		—			—				(847,404	)
Net utility plant		1,303,261			721,488			1,839			—				2,026,588
Nonutility plant		56,336			12,111			(11,528	)		—				56,919
Less accumulated depreciation		(12,029	)		—			—			—				(12,029	)
Net nonutility property		44,307			12,111			(11,528	)		—				44,890
CURRENT ASSETS:
Cash and equivalents		13,327			4,603			—			—				17,930
Accounts receivable:
Customers, net of allowance		22,595			16,443			(1,101	)		—				37,937
Other		826			—			1,351			—				2,177
Unbilled utility revenue		38,097			11,742			—			—				49,839
Current regulatory assets		—			—			7,471			395		b		7,866
Other current assets		5,522			14,178			(4,798	)		—				14,902
Total current assets		80,367			46,966			2,923			395				130,651
OTHER ASSETS:
Investments		—			—			11,528			—				11,528
Regulatory assets and deferred charges, less current portion		104,670			97,073			(5,322	)		1,616		b		198,037
Other intangible assets		—			—			—			15,000		a		15,000
Goodwill		—			66,403			—			542,661		c		609,064
Other		4,263			—			—			—				4,263
Total other assets		108,933			163,476			6,206			559,277				837,892
	$	1,536,868		$	944,041		$	(560	)	$	559,672			$	3,040,021
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stock	$	21		$	189,927		$	—		$	(189,920	)	h		28
Additional paid-in capital		84,045			—			—			421,743		h		505,788
Retained earnings		390,891			108,422			—			(124,291	)	e,h		375,022
Accumulated other comprehensive income		—			(149	)		—			149		h		—
Total stockholders’ equity		474,957			298,200			—			107,681				880,838
Long-term debt, less current portion		431,341			250,877			—			421,471		d,e		1,103,689
Total capitalization		906,298			549,077			—			529,152				1,984,527
CURRENT LIABILITIES:
Line of credit		76,000			58,541			—			—				134,541
Current portion of long-term debt		—			4,321			—			(282	)	d		4,039
Accrued ground water extraction charge, purchased water and power		22,856			—			—			—				22,856
Accounts payable		26,956			8,529			(2,506	)		22,040		e,h		55,019
Accrued interest		7,402			1,637			—			—				9,039
Accrued taxes		4,056			—			—			—				4,056
Accrued payroll		4,568			—			2,506			—				7,074
Other current liabilities		9,842			3,617			(560	)		14,933		f		27,832
Total current liabilities		151,680			76,645			(560	)		36,691				264,456
DEFERRED INCOME TAXES		80,901			34,168			66,849			(6,171	)	e,g,h		175,747
ADVANCES FOR CONSTRUCTION		80,124			19,324			—			—				99,448
CONTRIBUTION IN AID OF CONSTRUCTION		167,769			133,959			—			—				301,728
POSTRETIREMENT BENEFIT PLANS		75,877			30,666			—			—				106,543
REGULATORY LIABILITY		60,650			30,970			—			—				91,620
UNFUNDED FUTURE INCOME TAXES		—			66,849			(66,849	)		—				—
OTHER NONCURRENT LIABILITIES		13,569			2,383			—			—				15,952
	$	1,536,868		$	944,041		$	(560	)	$	559,672			$	3,040,021

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

NINE MONTHS ENDED September 30, 2018

(In Thousands)

	Historical Results (as reported)						Reclassification Adjustments (Note 2)			Pro Forma Adjustments (Note 5)				Pro Forma Combined
	SJW Group			Connecticut Water
OPERATING REVENUE	$	298,981		$	91,026			—			—			$	390,007
OPERATING EXPENSE:
Production expenses:
Purchased water		72,673			—			1,484			—				74,157
Ground water extraction charges		34,341			—			—			—				34,341
Other production expenses		18,448			—			9,600			—				28,048
Operations and maintenance		—			38,156			(38,156	)		—				—
Total production expenses		125,462			38,156			(27,072	)		—				136,546
Administrative and general		36,278			—			20,022			—				56,300
Maintenance		14,036			—			7,699			—				21,735
Taxes, other than income		11,332			8,685			—			—				20,017
Depreciation and amortization		40,921			13,670			—			750		a, j		55,341
Acquisition transaction expenses		14,994			7,766			135			(22,895	)	i, h		—
Total operating expense		243,023			68,277			784			(22,145	)			289,939
OPERATING INCOME		55,958			22,749			(784	)		22,145				100,068
Interest on long-term debt		(18,213	)		(8,111	)		(495	)		(14,935	)	d,k		(41,754	)
Pension non-service cost		(1,767	)		—			(1,015	)		—				(2,782	)
Unrealized loss on investments		(527	)		—			—			—				(527	)
Other, net		2,084			1,821			2,346			—				6,251
Income before income taxes		37,535			16,459			52			7,210				61,256
Provision for income taxes		7,591			(706	)		52			2,019		l		8,956
NET INCOME	$	29,944		$	17,165			—		$	5,191			$	52,300
Earnings Per Share and Common Shares Outstanding, Assuming an Exchange Ratio of 1.1375
-Basic	$	1.45		$	1.44									$	1.91
-Diluted	$	1.45		$	1.42									$	1.90
Weighted Average Common Shares Outstanding
-Basic		20,593,570			11,899,000						(5,149,289	)	m		27,343,281
-Diluted		20,721,970			12,069,000						(5,319,289	)	m		27,471,681

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2017

(In Thousands)

	Historical Results (as reported)						Reclassification Adjustments (Note 2)			Pro Forma Adjustments (Note 5)				Pro Forma Combined
	SJW Group			Connecticut Water
OPERATING REVENUE	$	389,225		$	107,054			—			—				496,279
OPERATING EXPENSE:
Production expenses:
Purchased water		86,456			—			1,559			—				88,015
Ground water extraction charges		47,817			—			—			—				47,817
Other production expenses		22,498			—			11,401			—				33,899
Operations and maintenance		—			48,017			(48,017	)		—				—
Total production expenses		156,771			48,017			(35,057	)		—				169,731
Administrative and general		55,011			—			26,674			—				81,685
Maintenance		17,430			—			9,462			—				26,892
Taxes, other than income		13,642			10,941			—			—				24,583
Depreciation and amortization		48,292			16,684			—			1,000		a,j		64,976
Total operating expense		291,146			75,642			1,079			1,000				368,867
OPERATING INCOME		98,079			31,412			(1,079	)		(1,000	)			127,412
Interest on long-term debt		(22,610	)		(9,054	)		199			(19,909	)	d,k		(51,374	)
Interest on mortgages and other		(319	)		—			—			—				(319	)
Gain on sale of real estate investments		6,903			33			22			—				6,958
Gain on sale of TWA		12,499			—			—			—				12,499
Other utility income, net of taxes		—			824			(824	)		—				—
Dividend income		75			—			—			—				75
Non-water sales earnings		—			1,167			(1,167	)		—				—
Allowance for funds used during construction		—			774			(774	)		—				—
Other interest and investment income		—			359			837			—				1,196
Other, net		1,866			(2,454	)		4,947			—				4,359
Income before income taxes	$	96,493		$	23,061		$	2,161		($	20,909	)		$	100,806
Provision for income taxes	$	35,393		($	1,993	)	$	2,161		($	8,573	)	l	$	26,988
Net income before noncontrolling interest	$	61,100		$	25,054			—		($	12,336	)		$	73,818
Less net income attributable to noncontrolling interest	$	1,896			—			—			—			$	1,896
NET INCOME	$	59,204		$	25,054			—		($	12,336	)		$	71,922
Earnings Per Share and Common Shares Outstanding, Assuming an Exchange Ratio of 1.1375
-Basic	$	2.89		$	2.17									$	2.64
-Diluted	$	2.86		$	2.13									$	2.62
Weighted Average Common Shares Outstanding
-Basic		20,506,960			11,540,000						(4,790,289	)	m		27,256,671
-Diluted		20,685,118			11,762,000						(5,012,289	)	m		27,434,829

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL STATEMENTS

Note 1. Basis of Pro Forma Presentation

The Pro Forma Balance Sheet as of September 30, 2018 gives effect to the CTWS Acquisition and related financing as if they had been completed on September 30, 2018. The Pro Forma Statements of Operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to the CTWS Acquisition and related financing as if they had been completed on January 1, 2017.

The Pro Forma Financial Statements have been derived primarily from the September 30, 2018 unaudited condensed consolidated financial statements of SJW included in SJW’s Quarterly Report on Form 10-Q for the fiscal quarter then ended, the unaudited condensed consolidated financial statements of CTWS as of September 30, 2018 and for the nine months then ended included in Exhibit 99.1 to the November 26 Form 8-K, the audited consolidated financial statements of SJW for the year ended December 31, 2017 included in SJW’s Annual Report on Form 10-K for the fiscal year then ended and the audited consolidated financial statements of CTWS for the year ended December 31, 2017 included in Exhibit 99.2 to the November 26 Form 8-K, each of which is incorporated herein by reference. Assumptions and estimates underlying the pro forma adjustments are described in the Notes to Unaudited Pro Forma Condensed Combined Financial Statements, which should be read in conjunction with the Pro Forma Financial Statements. Since the Pro Forma Financial Statements have been prepared based upon preliminary estimates, the final amounts recorded at the date of the CTWS Acquisition may differ materially from the information presented herein. These preliminary estimates are subject to change pending further review of the assets acquired and the liabilities assumed.

The CTWS Acquisition is reflected in the Pro Forma Financial Statements as an acquisition of CTWS by SJW, based on the guidance provided by GAAP for business combinations. In accordance with such accounting guidance, the total estimated purchase price is calculated as described in Note 3 to the Pro Forma Financial Statements, and the CTWS assets acquired and the liabilities assumed have been measured at estimated fair value. For purpose of measuring the estimated fair value of assets acquired and liabilities assumed, SJW has applied the accounting guidance for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The fair value measurements utilize estimates based on key assumptions of the transaction, including historical and current market data. The pro forma adjustments included herein are preliminary and will be revised when SJW has completed detailed fair value valuations and additional analyses and the final purchase price allocation is determined. As such, the final purchase price allocation may differ materially from the preliminary purchase price allocation presented herein.

Transaction costs recorded by SJW and CTWS in each of the respective companies’ September 30, 2018 unaudited condensed consolidated financial statements have been excluded from the Pro Forma Statement of Operations for the nine months ended September 30, 2018 as they reflect non-recurring charges directly related to the transaction. In addition, transaction costs estimated by SJW and CTWS for the year ended December 31, 2017 have been excluded from the Pro Forma Statement of Operations for the year ended December 31, 2017 because they also reflect non-recurring charges directly related to the transaction. However, the transaction costs recorded in the SJW and CTWS unaudited condensed consolidated financial statements as of September 30, 2018 and the estimated remaining transaction costs are reflected in the Pro Forma Balance Sheet as an increase to liabilities and deferred tax assets and a decrease to retained earnings as of September 30, 2018.

The Pro Forma Financial Statements do not reflect any cost savings (or associated costs to achieve such savings) from operating efficiencies, synergies, or other restructuring costs or restructuring related cost savings that could result from the CTWS Acquisition. Further, the Pro Forma Financial Statements do not reflect the effect of any regulatory actions that may impact the Pro Forma Financial Statements once the CTWS Acquisition is completed.

The SJW historical consolidated 2017 financial statements include the sale of its Texas Water Alliance Limited (“TWA”) subsidiary. SJW recognized a pre-tax gain on the sale of TWA of $12.5 million. The TWA sale was not considered to be an unusual event, as defined in Article 11-02(c)(4) of Regulation S-X, and as a result, no separate pro forma condensed statement of operations is presented for this transaction.

CTWS’s regulated operations are comprised of water and waste water service activities. The operations are subject to the rate-setting authority of PURA in Connecticut and the MPUC in Maine and are accounted for pursuant to GAAP, including the GAAP accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for CTWS’s regulated operations provide revenues derived from costs, including a return on investments of assets included in rate base. The fair values of CTWS’s tangible and intangible assets that are subject to these rate-setting provisions will be determined when detailed asset information can be obtained and a fair value analysis can be performed. The amounts presented in the Pro Forma Financial Statements for CTWS’s regulated utility plant tangible and intangible assets are presented at carrying value. Fair value amounts may differ materially from the carrying value of the CTWS assets presented herein once the fair value analysis is completed.

Note 2. Reclassification Adjustments

Certain CTWS historical consolidated financial statement information has been reclassified in the Pro Forma Financial Statements to conform to the historical consolidated financial statement presentation of SJW. Additionally, based on SJW’s review of CTWS’s summary of significant accounting policies disclosed in CTWS’s unaudited condensed consolidated financial statements as of September 30, 2018 and for the nine months then ended and CTWS’s audited consolidated financial statements for the year ended December 31, 2017 and based on preliminary discussions with CTWS’s management, certain historical consolidated financial information has been reclassified in the Pro Forma Financial Statements to conform the CTWS accounting policies and presentation to those of SJW.

The following reclassification adjustments have been made to the CTWS historical financial information in the Pro Forma Balance Sheet as of September 30, 2018 (in thousands):

	Pro Forma Balance Sheet
	Reclassification Adjustments (Increase/(Decrease))
	As of September 30, 2018
							Reclass						Reclass						Reclass
							Customer			Reclass			Current						Unfunded
	Reclass			Reclass			Accounts			Prepaid			Regulatory			Reclass			Future
Account Description	Utility Plant			Investments			Receivable			Income Taxes			Assets			Payroll			Income Taxes
Land	$	15,022			—			—			—			—			—			—
Depreciable plant and equipment	$	837,255			—			—			—			—			—			—
Non depreciable plant and equipment	$	102,850			—			—			—			—			—			—
Utility plant	$	(955,127	)		—			—			—			—			—			—
Construction in progress	$	1,839			—			—			—			—			—			—
Nonutility plant		—		$	(11,528	)		—			—			—			—			—
Investments		—		$	11,528			—			—			—			—			—
Accounts receivable-Customers, net		—			—		$	(1,101	)		—			—			—			—
Accounts Receivable-Other		—			—		$	1,101		$	250			—			—			—
Current regulatory asset		—			—			—			—		$	7,471			—			—
Other current assets		—			—			—		$	(250	)	$	(4,548	)		—			—
Accounts payable		—			—			—			—			—		$	(2,506	)		—
Accrued payroll		—			—			—			—			—		$	2,506			—
Regulatory assets and deferred charges, less current portion	$	(1,839	)		—			—			—		$	(3,483	)		—			—
Other current liabilities		—			—			—			—		$	560			—			—
Deferred income taxes		—			—			—			—			—			—		$	66,849
Unfunded future income taxes		—			—			—			—			—			—		$	(66,849	)

The following reclassification adjustments have been made to the CTWS historical financial information in the Pro Forma Statement of Operations for the nine months ended September 30, 2018 (in thousands):

	Pro Forma Statement of Operations
	Reclassification Adjustments (Increase/(Decrease))
	Nine-Months Ended September 30, 2018
Account Description	Reclass Other Income		Reclass Operations and Maintenance			Reclass Non-Service Pension Cost			Reclass AFUDC Interest			Reclass SERP Expense		Reclass Income Taxes			Reclass Total
Purchase water		—	$	1,484			—			—			—		—		$	1,484
Other production expenses		—	$	9,600			—			—			—		—		$	9,600
Operations and maintenance		—	$	(38,156	)		—			—			—		—		$	(38,156	)
Administrative and general		—	$	19,373			—			—		$	649		—		$	20,022
Maintenance		—	$	7,699			—			—			—		—		$	7,699
Merger related expenses		—		—			—			—			—	$	135		$	135
Interest on long-term debt		—		—			—		$	(495	)		—		—		$	(495	)
Pension non-service cost		—		—		$	(1,015	)		—			—		—		$	(1,015	)
Other utility income, net of income taxes		—		—			—			—			—		—			—
Other, net	$	264		—		$	1,015		$	495		$	649	$	(77	)	$	2,346
Provision for income taxes	$	264		—			—			—			—	$	(212	)	$	52

The following reclassification adjustments have been made to the CTWS historical financial information in the Pro Forma Statement of Operations for the year ended December 31, 2017 (in thousands):

	Pro Forma Statement of Operations
	Reclassification Adjustments (Increase/(Decrease))
	Year Ended December 31, 2017
Account Description	Reclass Other Income			Reclass Operations and Maintenance			Reclass AFUDC Interest			Reclass Other Interest and Investment Income			Reclass SERP Expense		Reclass Non Water Sales Earnings			Reclass Income Taxes			Reclass Total
Purchase water		—		$	1,559			—			—			—		—			—		$	1,559
Other production expenses		—		$	11,401			—			—			—		—			—		$	11,401
Operations and maintenance		—		$	(48,017	)		—			—			—		—			—		$	(48,017	)
Administrative and general		—		$	25,704			—			—		$	970		—			—		$	26,674
Maintenance	$	109		$	9,353			—			—			—		—			—		$	9,462
Interest on long-term debt	$	36			—		$	163			—			—		—			—		$	199
Allowance for funds used during construction		—			—		$	(774	)		—			—		—			—		$	(774	)
Gain on sale of real estate		—			—			—			—			—		—		$	22		$	22
Non-water sales earnings		—			—			—			—			—	$	(1,167	)		—		$	(1,167	)
Other utility income, net of income taxes	$	(824	)		—			—			—			—		—			—		$	(824	)
Other interest and investment income	$	(360	)		—		$	611		$	586			—		—			—		$	837
Other, net	$	1,795			—			—		$	(586	)	$	970	$	2,143		$	625		$	4,947
Provision for income taxes	$	(538	)		—			—			—			—	$	(976	)	$	(647	)	$	(2,161	)

Upon completion of the CTWS Acquisition, further review of CTWS’s historical consolidated financial statements and accounting policies may result in additional reclassifications to CTWS’s historical financial information to conform to the accounting policies and presentation of SJW.

Note 3. Preliminary Purchase Price

On the terms and subject to the conditions contained in the Merger Agreement and upon completion of the transaction contemplated by the Merger Agreement, SJW will acquire all of the outstanding shares of CTWS stock for total cash consideration of approximately $843.5 million dollars or $70.00 per CTWS common outstanding share. The Pro Forma Financial Statements assume that SJW will finance the acquisition by issuing new common equity shares for gross proceeds of approximately $438.5 million, including $16.7 million for estimated offering costs, and $425.1 million in Debt Financing,

including $3.4 million for estimated debt issuance costs. If and to the extent that the issuance of new common equity shares is not completed or is completed for less proceeds than anticipated, SJW would fund any shortfall with additional Debt Financing. Each CTWS restricted share unit, CTWS deferred share unit, CTWS performance share unit and CTWS performance cash unit will be treated in a manner specific to such awards as described in the Merger Agreement. For further information regarding the consideration to be paid in settlement of equity-based awards, see Section 6.05 (Awards under CTWS Stock Plan) of the Merger Agreement.

The preliminary purchase price for the merger is estimated as follows:

CTWS common shares outstanding as of September 30, 2018 (in thousands):		12,050
Purchase price per share	$	70.00
Total purchase price for common stock (in thousands)	$	843,500

The preliminary purchase price was computed using CTWS’s outstanding shares as of September 30, 2018, including outstanding stock equivalents and restricted stock shares. The estimated 6.75 million new SJW shares to be issued in connection with the CTWS Acquisition is based on the closing price of SJW’s common stock on the NYSE on November 19, 2018 of $64.96 per share.

The outstanding number of shares of CTWS common stock used in the preliminary purchase price calculation will change prior to the closing of the transaction due to share activity in the ordinary course of business, including the vesting of outstanding CTWS equity awards. These changes are not expected to have a material impact on the Pro Forma Financial Statements.

The market price of SJW’s common stock will fluctuate, and the interest rate on SJW’s debt raised to finance the transaction may vary, until reflected on an actual basis when the CTWS Acquisition and the Debt Financing are completed. An increase or decrease in SJW’s common share price by 10% from the price used to calculate the preliminary purchase price would decrease or increase the number of SJW Shares issued to finance the transaction by approximately 614 thousand shares. An increase or decrease by 10% in the interest rate on the Debt Financing would result in an increase/decrease in annual interest expense of approximately $2.0 million.

Note 4. Preliminary Purchase Price Allocation

The allocation of the preliminary purchase price to the fair values of assets acquired and liabilities assumed includes certain pro forma adjustments to the fair values of CTWS’s assets and liabilities. The allocation of the preliminary purchase price is as follows (in thousands):

	September 30,2018 CTWS Historical Information		Fair Value Adjustments			Purchase Price Allocation
Utility plant, net	$	723,327		—		$	723,327
Nonutility plant, net	$	583		—		$	583
Current assets	$	49,889	$	395		$	50,284
Investments	$	11,528		—		$	11,528
Regulatory assets and deferred charges, less current portion	$	91,751	$	1,616		$	93,367
Other intangible assets	$	—	$	15,000		$	15,000
Goodwill	$	66,403	$	542,661		$	609,064
Total assets acquired	$	943,481	$	559,672		$	1,503,153
Long-term debt	$	250,877	$	(279	)	$	250,598
Current liabilities, including maturities of long-term debt	$	76,085	$	(282	)	$	75,803
Deferred income taxes	$	101,017		—		$	101,017
Regulatory liabilities	$	30,970		—		$	30,970
Post retirement benefit plans	$	30,666	$	14,933		$	45,599
Contributions in aid of construction and construction advances	$	153,283		—		$	153,283
Other long-term liabilities and preferred stock	$	2,383		—		$	2,383
Total liabilities assumed	$	645,281	$	14,372		$	659,653

Note 5. Adjustments to the Pro Forma Financial Statements

Adjustments to the Pro Forma Balance Sheet

(a) Intangible Assets. The pro forma adjustment reflects the fair value of an identified acquired intangible asset for non-regulated operations that consists of customer relationships ($15,000). The asset was valued using the Excess Earnings Method. The fair value estimate is preliminary and determined based on assumptions that a market participant would use in pricing an asset using the most advantageous market (i.e., the highest and best use). The final fair value determination of the customer relationships intangible asset may differ materially from this preliminary estimate.

(b) Regulatory Assets and Deferred Charges. The pro forma adjustment reflects a net increase to regulatory assets ($395 thousand in current regulatory assets and $1.6 million in regulatory assets and deferred charges) to reflect the write-up to fair value of the long-term debt of CTWS’s regulated subsidiaries (an increase to current portion of long-term debt and a decrease to long-term debt of $395 thousand and $3.0 million, respectively) and the elimination of $4.6 million in unamortized debt issuance costs and acquisition fair value adjustments related to prior acquisitions. See also Note 5(d).

(c) Acquisition Goodwill. The pro forma adjustment reflects a preliminary estimate of the purchase price paid over the fair value of CTWS’s identifiable assets acquired and liabilities assumed (the “Acquisition Goodwill”). The Acquisition Goodwill was calculated as follows (in thousands):

Preliminary purchase price	$	843,500
Less: Fair value of net assets acquired (*)	$	(234,436	)
Pro forma goodwill	$	609,064

(*) After elimination of CTWS goodwill

(d) Long-Term Debt. The pro forma adjustment reflects an estimated net increase in Debt Financing of $425.1 million incurred to partially finance the transaction, offset by $3.4 million of estimated new deferred debt issuance costs. The final type and amount of long-term debt incurred and the related terms will not be finalized until a later date and may differ in material respects from the estimates provided herein. See also Note 5(k).

The pro forma adjustment also presents fair value adjustments to decrease CTWS’s parent company long-term debt (current portion of long-term debt and long-term debt of $113 thousand and $1.4 million, respectively) and decrease CTWS’s regulated companies’ long-term debt (current portion of long-term debt increase and long-term debt decrease of $395 thousand and $3.0 million, respectively) based on prevailing market prices for the individual debt securities as of September 30, 2018. In addition, unamortized debt issuance costs and acquisition fair value adjustments related to prior acquisitions of $67 thousand for the parent company and $4.5 million for the regulated operating companies were eliminated upon the fair value re-measurement.

The final fair value determination of assumed long-term debt will be based on prevailing market prices upon completion of the CTWS Acquisition. The resulting adjustment to parent company debt will be amortized as an adjustment to interest expense over the remaining life of the debt, as described in Note 5(k). The portion of the adjustment related to regulated company debt will be offset by a decrease to regulatory assets such that amortization of the two adjustments will be offsetting with no effect on earnings. The preliminary estimated annual fair value debt premium amortization adjustment for the parent company is $100 thousand for the year ended December 31, 2017 and $75 thousand for the nine months ended September 30, 2018. This preliminary estimate is based on the preliminary fair value re-measurement of parent company long-term debt and may differ materially when the final long-term debt fair value adjustment is completed.

(e) Accounts Payable. The pro forma adjustment represents an accrual for estimated non-recurring transaction costs of $42.1 million for the combined companies to be incurred subsequent to September 30, 2018, including $16.7 million recorded in additional paid-in capital related to estimated stock issuance costs, $3.4 million recorded as deferred debt issuance costs and $15.9 million, net of $6.2 million of deferred taxes, recorded as an adjustment to retained earnings. See also Note 5(h).

(f) Other Current Liabilities. In connection with the CTWS Acquisition, certain CTWS officers are eligible to receive severance and other separation benefits related to preexisting employment agreements with double-trigger provisions. These double-trigger agreements result in cash payments to eligible officers following the occurrence of two events: a change of control (as defined) and, where applicable, the named officer experiences a qualifying termination of employment other than for cause, death, or attainment of age 65, by the company or by the participant for good reason (as defined) as determined with respect to such eligible officer at the closing of a merger or as of a specified date

following such closing. The fair value of such liabilities as of September 30, 2018 is estimated to be $14.9 million. The amount has been calculated assuming the CTWS Acquisition was completed on September 24, 2018 and, where applicable, each participating officer experienced a qualifying termination of employment on such date using a price per share of CTWS stock of $70.00 (the acquisition consideration). The estimate is based on multiple assumptions that may or may not occur and as a result, the actual amount may differ in material respects from the estimate.

(g) Deferred Income Taxes. The pro forma adjustment for deferred income taxes represents the net deferred tax asset, based on the estimated post-transaction composite statutory tax rate of 28% multiplied by certain purchase accounting adjustments recorded to acquire assets and assumed liabilities, excluding goodwill. The estimated rate is different than SJW’s effective tax rate for the nine months ended September 30, 2018, which includes, among other items, excess tax benefits related to share-based payment awards recognized during the period and the revaluation of deferred tax assets and liabilities in accordance with the 2017 Tax Cuts and Jobs Act. In addition, the composite statutory rate does not take into account any historical or future tax events that may impact the combined company. See also Note 5(l).

(h) Shareholders’ Equity. The pro forma balance sheet reflects the elimination of CTWS’s historical equity balances as of September 30, 2018 and the recognition of approximately 6.75 million new SJW common shares ($0.001 par value common stock of 7 thousand and $438.5 million in additional paid-in capital) assumed to be issued to partially finance the CTWS Acquisition. Additional paid-in-capital has also been adjusted to reflect the estimated cost of issuing the new SJW shares ($16.7 million). See also Note 3 regarding future changes to the market price of SJW’s common stock prior to the closing of the CTWS Acquisition.

Pro forma retained earnings were reduced by $15.9 million (net of tax, with the tax benefit of $6.2 million reflected as an increase in deferred tax assets and the pre-tax amount of $22.0 million reflected as an increase in accounts payable) for the remaining estimated transaction costs of the combined companies directly related to the CTWS Acquisition that would be expensed. Incurred and remaining estimated transaction costs have been excluded from the Pro Forma Statements of Operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 as they reflect non-recurring charges directly related to the CTWS Acquisition. See also Note 5(e).

Adjustments to the Pro Forma Statement of Operations

(i) Transaction Costs. The pro forma adjustment reflects the elimination of historical acquisition-related transaction costs of $22.8 million incurred by SJW and CTWS during the nine months ended September 30, 2018. The transaction costs consist principally of legal and advisory fees and have been eliminated as they are directly related to the CTWS Acquisition and are non-recurring in nature. See also Note 5(h).

(j) Amortization of intangible assets. The pro forma adjustment represents the amortization of the fair value adjustment related to a finite-lived, identified intangible asset. The asset, customer relationships, is being amortized on a straight-line basis over a 15-year estimated useful life. The preliminary estimated annual fair value intangible asset adjustment is $750 thousand for the nine months ended September 30, 2018 and $1.0 million for the year ended December 31, 2017. See also Note 5(a). The final amortization amount will be determined once a final fair value determination of the customer relationship intangible asset is completed.

(k) Interest expense. The pro forma adjustment reflects a net increase in interest expense related to the estimated $425.1 million in Debt Financing to be incurred in connection with the CTWS Acquisition and the amortization of the related $3.4 million of estimated new deferred debt issuance costs. Interest expense includes $14.9 million and $19.8 million for the nine months period ended September 30, 2018 and the year ended December 31, 2017, respectively, related to the new Debt Financing. The pro forma adjustments assume a blended interest rate of 4.62% per annum on the Debt Financing. An increase or decrease by 10% in the interest rate on the Debt Financing would result in an increase/decrease in annual interest expense of approximately $2.0 million. Estimated new debt issuance costs are being amortized over a period of 20 years in the Pro Forma Statement of Operations. Annual amortization is $169 thousand. The final amortization amount will be determined once the new debt and related issuance costs have been incurred.

The pro forma adjustment also reflects a net increase in interest expense for the nine months ended September 30, 2018 of $75 thousand and an increase in interest expense of $100 thousand for the year ended December 31, 2017 as a result of amortization of the pro forma fair value adjustment to CTWS’s parent company long-term debt, partially offset by the elimination of deferred costs related to such debt. The effect of the fair value adjustment is being amortized over the remaining life of the individual debt issuances, with the average amortization period being approximately 15 years. The final fair value determination will be based on prevailing market interest rates at the completion of the CTWS Acquisition, and the necessary fair value adjustment will be amortized as an adjustment to interest expense over the remaining life of the individual debt issuances. See also Note 5(d).

(l) Income Tax Expense. The pro forma adjustments include the income tax effects of the pro forma adjustments for the nine months ended September 30, 2018, calculated using an estimated statutory composite income tax rate of 28%, and for the year ended December 31, 2017, calculated using an estimated statutory composite income tax rate of 41%. See also Note 5(g).

(m) Shares Outstanding. The pro forma shares outstanding reflect the elimination of CTWS’s common stock, including outstanding CTWS common stock equivalents and restricted shares reported as outstanding at September 30, 2018, and the assumed issuance of approximately 6.75 million common shares of SJW to be used as part of the CTWS Acquisition consideration. The share issuance does not consider payment for fractional shares, if any, which may exist at the time the CTWS Acquisition closes.

The pro forma weighted average number of basic shares outstanding for the nine months ended September 30, 2018 and the year ended December 31, 2017 are calculated by adding SJW’s weighted average number of basic shares outstanding during each period to the number of SJW shares assumed to be issued to partially finance the CTWS Acquisition. The pro forma weighted average number of diluted shares outstanding is calculated by adding SJW’s weighted average number of diluted shares outstanding for the nine months ended September 30, 2018 and the year ended December 31, 2017 to the number of SJW shares assumed to be issued to partially finance the CTWS Acquisition.

The pro forma weighted average number of basic and diluted shares is calculated as follows (in thousands):

	September 30, 2018		December 31, 2017
Pro Forma Basic Earnings Per Share (in thousands):
SJW weighted average shares outstanding		20,593		20,507
Issuance of new shares (transaction financing)		6,750		6,750
Pro forma basic weighted average shares outstanding		27,343		27,257
Pro Forma Diluted Earnings Per Share (in thousands):
SJW weighted average shares outstanding		20,722		20,685
Equivalent CTWS common shares after exchange		6,750		6,750
Diluted weighted average shares outstanding		27,472		27,435