UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

þ		Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2005

o		Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

Connecticut Water Service, Inc.

(Exact name of registrant as specified in its charter)

Connecticut		06-0739839
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
93 West Main Street, Clinton, CT		06413
(Address of principal executive office)		(Zip Code)

Registrant’s telephone number, including area code (860) 669-8636
Registrant’s website: www.ctwater.com

Securities registered pursuant to Section 12 (b) of the Act:

Title of each Class		Name of each exchange on which registered
None		Not applicable

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, without par value
(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K, (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

     As of June 30, 2005, the aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was $200,641,536 based on the closing sale price as reported on the NASDAQ.

     Number of shares of Common Stock, no par value, outstanding as of March 1, 2006 was 8,127,276, excluding 55,536 common stock equivalent shares.

DOCUMENTS INCORPORATED BY REFERENCE

		Part of Form 10-K Into Which
Document		Document is Incorporated
Definitive Proxy Statement, dated on or about April 7, 2006, for Annual Meeting of Shareholders to be held on May 11, 2006.		Part III

 

 

INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2005

						Page
						Number
Part I
Item 1.				Business			3
Item 1A.				Risk Factors			8
Item 1B.				Unresolved Staff Comments			11
Item 2.				Properties			11
Item 3.				Legal Proceedings			13
Item 4.				Submission of Matters to a Vote of Security Holders			13
Part II
Item 5.				Market for the Company’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities			14
Item 6.				Selected Financial Data			15
Item 7.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 7A.				Quantitative and Qualitative Disclosure About Market Risk			30
Item 8.				Financial Statements and Supplementary Data			30
Item 9.				Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			30
Item 9A.				Controls and Procedures			31
Item 9B.				Other Information			32
Part III
Item 10.				Directors and Executive Officers of the Company			33
Item 11.				Executive Compensation			34
Item 12.				Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			34
Item 13.				Certain Relationships and Related Transactions			34
Item 14.				Principal Accountant Fees and Services			34
Part IV
Item 15.				Exhibits, Financial Statement Schedules			35
				Signatures			37
EX-4.24: BOND PURCHASE AGREEMENT
EX-4.25: LOAN AGREEMENT
EX-4.26: INDENTURE OF TRUST
EX-4.27: INSURANCE AGREEMENT
EX-4.28: BOND PURCHASE AGREEMENT
EX-4.29: GUARANTY
EX-4.30: LOAN AGREEMENT
EX-4.31: INDENTURE OF TRUST
EX-4.32: INSURANCE AGREEMENT
EX-10.22.A: FIRST AMENDMENT TO PERFORMANCE STOCK PROGRAM
EX-10.23.F: FIRST AMENDMENT TO 2004 PERFORMANCE STOCK PROGRAM
EX-10.26: LETTER AGREEMENT
EX-10.27: EMPLOYMENT AGREEMENT
EX-10.28: EMPLOYMENT AGREEMENT
EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

This Form 10-K contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements should be read in conjunction with the risk factors described in Item 1A below and the cautionary statements included in this Form 10-K in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Forward Looking Information”.

PART I

ITEM 1. BUSINESS

The Company

The Registrant, Connecticut Water Service, Inc. (referred to as “the Company”, “we” or “our”) was organized in 1956. Connecticut Water Service, Inc. is a non-operating holding company, whose income is derived from the earnings of its ten wholly-owned subsidiary companies. In 2005, approximately 88% of the Company’s earnings from continuing operations were attributable to water activities carried out within its three Connecticut regulated water companies: The Connecticut Water Company (Connecticut Water), The Crystal Water Company of Danielson (Crystal), and The Unionville Water Company (Unionville). These three companies supply water to 81,763 customers in 41 towns throughout Connecticut. Each of these companies is subject to state regulation regarding financial issues, rates, and operating issues, and to various other state and federal regulatory agencies concerning water quality and environmental standards. In addition to its regulated utilities, the Company owns seven unregulated companies: Chester Realty, Inc., a real estate company in Connecticut; New England Water Utility Services, Inc., which provides contract water and sewer operations and other water related services; Connecticut Water Emergency Services, Inc., a provider of drinking water by tanker truck; Crystal Water Utilities Corporation, a holding company which owns Crystal Water and three small rental properties; BARLACO Inc. (BARLACO), a real estate company in Massachusetts; The Barnstable Holding Company, a holding company which owns Barnstable Water and BARLACO and The Barnstable Water Company (Barnstable Water), a company that was a public service company until its assets were sold to the Town of Barnstable in 2005. As a result of the sale of the assets of Barnstable Water, results of its operations have been classified as discontinued operations. In 2005, these unregulated companies, in conjunction with the regulated water companies, contributed the remaining 12% of the Company’s earnings from continuing operations through real estate transactions as well as services and rentals.

Our mission is to provide high quality water service to our customers at a fair return to our stockholders while maintaining a work environment that attracts, retains and motivates our employees to achieve a high level of performance.

Our corporate headquarters are located at 93 West Main Street, Clinton, Connecticut 06413. Our telephone number is 860.669.8636, and our Internet address is www.ctwater.com.

At this time, the Company has applied in February 2006 (Docket 06-02-02) to the Connecticut Department of Public Utility Control (“DPUC”), to merge all of its Connecticut-based, regulated utilities with and into Connecticut Water. On March 20, 2006, the DPUC issued a Draft Decision which would approve this merger. If, and when, these combinations are completed, the resulting entity, Connecticut Water, would consist of the current subsidiaries Crystal, Unionville, and Connecticut Water. It is expected that future rate relief applications would propose rate

equalization steps, which, if approved would result, over time, in equalized rates for the Company’s customers in Connecticut. The Company believes it is likely that it will apply for a rate increase for Connecticut Water, after the completion of the merger, during the summer of 2006.

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to these documents will be made available free of charge through the “INVESTOR INFO (SEC Filings)” section of the Company’s Internet website (http://www.ctwater.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the SEC). The following documents are also available through the “CORPORATE GOVERNANCE” section of our website:

	•		Code of Conduct — Board of Directors
	•		Code of Conduct — Employees
	•		Audit Committee Charter
	•		Compensation Committee Charter
	•		Corporate Governance Committee Charter

Copies of each of the Company’s SEC filings (without exhibits) and corporate governance documents mentioned above will also be mailed to investors, upon request by contacting the Company’s Corporate Secretary at Connecticut Water, 93 West Main Street, Clinton, CT 06413.

Our Regulated Business

Our business is subject to seasonal fluctuations and weather variations. The demand for water is generally greater during the warmer months than the cooler months due to customers’ high water consumption related to cooling systems and various outdoor uses such as private and public swimming pools and lawn sprinklers. Demand will vary with rainfall and temperature levels from year to year and season to season, particularly during the warmer months.

In general, the profitability of the water utility industry is largely dependent on the timeliness and adequacy of rates allowed by utility regulatory commissions. In addition, profitability is affected by numerous factors over which we have little or no control, such as costs to comply with security, environmental, and water quality regulations. Inflation and other factors also impact costs for construction, materials and personnel related expenses.

Costs to comply with environmental and water quality regulations are substantial. Since the 1974 enactment of the Safe Drinking Water Act, we have spent approximately $55,823,000 in constructing facilities and conducting aquifer mapping necessary to comply with the requirements of the Safe Drinking Water Act, and other federal and state regulations, of which $6,109,000 was expended in the last five years. We are presently in compliance with current regulations, but the regulations are subject to change at any time. The costs to comply with future changes in state or federal regulations, which could require us to modify existing filtration facilities and/or construct new ones, or to replace any reduction of the safe yield from any of our current sources of supply, could be substantial.

Our water companies derive their rights and franchises to operate from special state acts that are subject to alteration, amendment or repeal and do not grant us exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all the towns we now serve. There is the possibility that the State of Connecticut could attempt to revoke our franchises and allow a governmental entity to take over some or all of our systems. While we would vigorously oppose any such attempts, from time to time such legislation is contemplated.

The rates we charge our water customers are established under the jurisdiction of and are approved by a state regulatory agency. It is our policy to seek rate relief as necessary to enable us to achieve an adequate rate of return. The following table shows information related to each of our water companies’ most recent general rate filing.

		Year of Last				Allowed				Allowed
		Rate				Return on				Return on
		Decision				Equity				Rate Base
Connecticut Water			1991				12.7	%			10.74	%
Crystal			2005				10.0	%			7.55	%
Unionville			1999	**			12.35	%			N/A	*

Our Water Systems

Our water infrastructure consists of 28 noncontiguous water systems in the State of Connecticut. Our system, in total, consists of approximately 1,300 miles of water main and reservoir storage capacity of 7.0 billion gallons. The safe, dependable yield from our 119 active wells and 18 reservoirs is approximately 49 million gallons per day. Water sources vary among the individual systems, but overall approximately 35% of the total dependable yield comes from reservoirs and 65% from wells.

We supply water, and in most cases, fire protection to all or portions of 41 towns in Connecticut. The following table lists the customer count, operating revenues and customer water consumption for each of our water companies as of December 31, 2005.

		Number				Water				Customer Water
		of				Revenues				Consumption
Water Company		customers				($000’s)				(millions of gallons)
Connecticut Water			70,714			$	41,537				6,042
Crystal			5,050				2,778				542
Unionville			5,999				3,138				692
Total			81,763			$	47,453				7,276

The following table breaks down the above total figures by customer class:

						Water				Customer Water
		Number of				Revenues				Consumption
Customer Class		customers				($000’s)				(millions of gallons)
Residential			72,968			$	29,980				5,260
Commercial			5,333				5,619				1,188
Industrial			428				1,538				423
Public Authority			580				1,625				405
Fire Protection			1,526				8,267				0
Other (including non-metered accounts)			928				424				0
Total			81,763			$	47,453				7,276

Our water companies own various small, discrete parcels of land that are no longer required for water supply purposes. At December 31, 2005, this land totaled approximately 370 acres. Over the past years we have been slowly disposing of such excess land. The largest transaction to date has been the donation of land by Crystal to the Town of Killingly, CT for protected open space purposes over a three-year period, 2002 — 2004. In January 2004, the final parcel of land was transferred to the Town. Over the three-year period the following acreage was donated to the Town under this agreement:

Year		Acres				After-tax Profit
2002			54			$	293,000
2003			178			$	942,000
2004			133			$	707,000

During 2005, the Company lowered the after-tax profit shown above by $353,000. This was due to an ongoing audit by the Internal Revenue Service, which is examining the fair market value of the property reflected on the Company’s 2002, 2003 and 2004 tax returns. The Company continues to believe the valuations used in those tax years’ filings are correct.

During 2005, the Company had one significant land transaction. Connecticut Water sold 74 acres of land in Bristol, Connecticut for $475,000 resulting in a net profit of $256,000.

In December 2004, Connecticut Water made a donation of approximately 60 acres of land to the Town of Plymouth, CT for a new school. As a result of legislation passed in 2004, this donation was eligible for the Connecticut corporate tax credit in the same manner as a donation for open space purposes. The after tax profit from this transaction was $498,000. In 2005, this amount was increased by $37,000 primarily due to a higher valuation reflected on the Company’s tax return as a result of an updated appraisal.

We also have a limited amount of land held by our unregulated companies. Included in this category at December 31, 2005 was approximately 109 acres of land held by BARLACO, which we acquired in February 2001 in conjunction with the Company’s acquisition of The Barnstable Holding Company. In February 2006, this land was sold to the Town of Barnstable for $1.0 million.

Additional information on Land Dispositions can be found in Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operation – Commitments and Contingencies.

Competition

Our water companies face competition, presently not material, from a few private water systems operating within, or adjacent to, their franchise areas and from municipal and public authority systems whose service areas in some cases overlap portions of our water companies’ franchise areas.

Employees

As of December 31, 2005, we employed a total of 191 persons. Our employees are not covered by collective bargaining agreements.

On April 8, 2005, the Company was notified by the National Labor Relations Board, (“NLRB”) that the International Union of Operating Engineers, Local 478 (“Union”) had petitioned the NLRB to organize a vote by the Company’s employees to authorize the Union to represent a portion of the Company’s employees for purposes of collective bargaining with the Company. A representation hearing was conducted before the NLRB on April 18, 2005 in Hartford, CT. A vote concerning representation by the Union of the Company’s 99 employees eligible to be in the proposed bargaining unit was held on May 19, 2005. A majority of the ballots cast were against the labor organization; therefore no collective bargaining representative was selected.

Segments of Our Business

For management and financial reporting purposes we divide our business into three Business segments: Water Activities, Real Estate Transactions, and Services and Rentals.

The Water Activities segment is comprised of our core regulated water activities to supply public drinking water to our customers. This segment encompasses all transactions of all our regulated companies with the exception of real estate transactions and services and rental activities.

Our Real Estate Transactions segment involves the sale or donation for income tax benefits of our limited excess real estate holdings. These transactions can be effected by either our regulated or unregulated companies. A breakdown of the net income of this segment between our regulated and unregulated companies for the past three years is as follows:

		Gain (Loss) from Real Estate Transactions
		Net of Taxes from Continuing Operations
		Regulated				Unregulated				Total
2003		$	942,000			$	87,000			$	1,029,000
2004		$	1,206,000			$	—			$	1,206,000
2005		$	(69,000	)		$	8,000			$	(61,000	)

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

Some of the services listed above, including the service line protection plan and antenna leases, have little or no competition. But there can be considerable competition for contract operations of large water and wastewater facilities and systems. However, we have sought to develop a niche market by seeking to serve smaller facilities and systems in our service areas where there is less competition. The services and rentals segment, while relatively new and a small portion of our overall business, has grown significantly over the past five years and now provides nearly 10 percent of our overall net income. The table below describes the net income generated by this segment of our business from our regulated and unregulated companies for the past three years:

		Income from Services and Rentals from
		Continuing Operations
		Regulated				Unregulated				Total
2003		$	370,000			$	322,000			$	692,000
2004		$	436,000			$	393,000			$	829,000
2005		$	490,000			$	455,000			$	945,000

ITEM 1A. RISK FACTORS

Because we incur annually significant capital expenditures, we depend on the rates we charge our customers.

The water utility business is capital intensive. On an annual basis, we spend significant sums for additions to or replacement of property, plant and equipment. Our ability to maintain and meet our financial objectives is dependent upon the rates we charge our customers. These rates are subject to approval by the Connecticut Department of Public Utility Control (DPUC). The Company is entitled to file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with the DPUC, the ensuing administrative and hearing process may be lengthy and costly. The timing of our rate increase requests are therefore partially dependent upon the estimated cost of the administrative process

in relation to the investments and expenses that we hope to recover through the rate increase to the extent approved. We can provide no assurances that any future rate increase request will be approved by the DPUC; and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase. Additionally, the DPUC may rule that a company must reduce its rates.

Our operating costs could be significantly increased because of state and federal environmental and health and safety laws and regulations.

Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws, and federal and state regulations issued under these laws by the U.S. Environmental Protection Agency and state environmental regulatory agencies. These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the United States and/or Connecticut. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations. We cannot assure that we have been or will be at all times in total compliance with these laws, regulations and permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. Environmental laws and regulations are complex and change frequently. These laws, and the enforcement thereof, have tended to become more stringent over time. While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards could be imposed that will raise our operating costs. Although these costs may be recovered in the form of higher rates, there can be no assurance that the DPUC would approve rate increases to enable us to recover such costs. In summary, we cannot be assured that our costs of complying with, or discharging liabilities under, current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Our business is subject to seasonal fluctuations which could affect demand for our water services and our revenues.

Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with irrigation systems, swimming pools, cooling systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the demand for our water may decrease and adversely affect our revenues.

Potential drought conditions may impact our ability to serve our current and future customers’ uses of water and our financial results.

We depend on an adequate water supply to meet the present and future demands of our customers. Drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. An interruption in our water supply could have a material adverse effect on our financial condition and results of operations. Moreover, governmental restrictions on water usage

during drought conditions may result in a decreased demand for our water, even if our water reserves are sufficient to serve our customers during these drought conditions, which may adversely affect our revenues and earnings.

Any future acquisitions we may undertake may involve risks and uncertainties.

An important element of our growth strategy is the acquisition and integration of water systems in order to move into new service areas and to broaden our current service areas. We will not be able to acquire other businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources. Future acquisitions by us could result in:

	•		dilutive issuances of our equity securities;
	•		incurrence of debt and contingent liabilities;
	•		failure to have effective internal control over financial reporting;
	•		fluctuations in quarterly results; and
	•		other acquisition-related expenses.

Some or all of these items could have a material adverse effect on our business as well as our ability to finance our business and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment and any difficulties we encounter in the integration process, including in the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. In addition, as consolidation becomes more prevalent in the water and wastewater industries, the prices for suitable acquisition candidates may increase to unacceptable levels and limit our ability to grow through acquisitions.

Water supply contamination may adversely affect our business.

Our water supplies are subject to contamination, including contamination from the development of naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as MTBE, and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source or provide additional treatment. We may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods. If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates. We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage. For example, private plaintiffs have the right to bring personal injury or other toxic tort claims arising from the presence of hazardous

substances in our drinking water supplies. Our insurance policies may not be sufficient to cover the costs of these claims.

The need to increase security may continue to increase our operating costs.

In addition to the potential pollution of our water supply as described above, in the wake of the September 11, 2001 terrorist attacks and the ensuing threats to the nation’s health and security, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have also tightened our security measures regarding the delivery and handling of certain chemicals used in our business. We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant. We are currently not aware of any specific threats to our facilities, operations or supplies; however, it is possible that we would not be in a position to control the outcome of terrorist events should they occur.

Key employee turnover may adversely affect our operating results.

Our success depends significantly on the continued individual and collective contributions of our management team. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The properties of our water companies consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, treatment plants, pumping plants, transmission and distribution mains and conduits, mains and other facilities and equipment used for the collection, purification, storage and distribution of water. Although our regulated water companies own their principal properties in fee, substantially all of the properties owned by our Unionville subsidiary is subject to liens as security for outstanding debt. In addition, in certain cases, our water companies are parties to limited contractual arrangements for the provision of water supply from neighboring utilities. We believe that our properties are in good operating condition. Water mains are located, for the most part, in public streets and, in a few instances, are located on land that we own in fee simple and/or land utilized pursuant to easement right, most of which are perpetual and adequate for the purpose for which they are held.

The net utility plant balances of the water companies at December 31, 2005 were as follows:

		Net Utility Plant
Connecticut Water		$	209,670,000
Crystal			19,078,000
Unionville			18,955,000
Total		$	247,703,000

Sources of water supply owned, maintained, and operated by our regulated water companies include eighteen reservoirs and fifty-one well fields. In addition, Connecticut Water has an agreement with the Metropolitan District Commission (MDC) (a public water and sewer authority presently serving the City of Hartford and portions of surrounding towns), which provides, among other things, for the operation and maintenance by MDC of a filtration plant to supply up to 650,000 gallons of treated water per day for Connecticut Water’s Collinsville System. Collectively, these sources have the capacity to deliver approximately forty-seven million gallons of potable water daily to the fifteen major operating systems in the following table. In addition to the principal systems identified, our regulated water companies own, maintain, and operate thirteen small, non-interconnected satellite and consecutive water systems that, combined have the ability to deliver about one million gallons of additional water per day to their respective systems. For some small consecutive water systems, purchased water may comprise substantially all of the total available supply of the system.

Our regulated water companies own and operate fifteen water filtration facilities, having a combined treatment capacity of approximately 26.33 million gallons per day. Of these facilities, twelve are owned by Connecticut Water, two by Unionville, and one by Crystal.

The companies’ estimated available water supply, not including water purchases or non-principal systems, is as follows:

		ESTIMATED
		AVAILABLE SUPPLY
		(MILLION GALLONS PER
		DAY)
Connecticut Water
Guilford System			9.31
Chester System			1.69
Naugatuck System			6.91
Terryville System			0.94
Thomaston System			0.73
Collinsville System			0.65
Northern Western System			15.99
Somers System			0.28
Stafford System			1.00
Crystal
Danielson System			3.69
Plainfield System			1.01
Thompson System			0.29
KIP System			0.50
Gallup System			0.60
Unionville			3.88
Total			47.47

As of December 31, 2005, the transmission and distribution systems of our three water companies consisted of approximately 1,300 miles of main. On that date, approximately 75 percent of our mains were eight-inch diameter or larger. Substantially all new main installations are cement-lined ductile iron pipe of eight-inch diameter or larger.

The size of each company’s system(s) in terms of miles of mains is as follows:

		Miles of
		Transmission and
		Distribution Water
		Mains
Connecticut Water			1,100
Crystal			90
Unionville			110
Total			1,300

We believe that our properties are maintained in good condition and in accordance with current regulations and standards of good waterworks industry practice.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings from time to time. Although the results of legal proceedings cannot be predicted with certainty, there are no pending legal proceedings to which we, or any of our subsidiaries are a party, or to which any of our properties is subject, that presents a reasonable likelihood of a material adverse impact on the Company’s financial condition, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

     Our Common Stock is traded on the NASDAQ exchange under the symbol “CTWS”. Our quarterly high and low stock prices as reported by NASDAQ and the cash dividends we paid during 2005 and 2004 are listed as follows:

		Price								Dividends
Period		High				Low				Paid
2005
First Quarter		$	27.53			$	24.75			$	.2100
Second Quarter			25.87				21.91			$	.2100
Third Quarter			28.17				24.27			$	.2125
Fourth Quarter			26.32				22.69			$	.2125
2004
First Quarter		$	29.76			$	27.57			$	.2075
Second Quarter			29.00				24.29			$	.2075
Third Quarter			27.55				23.83			$	.2100
Fourth Quarter			28.98				24.17			$	.2100

As of March 1, 2006, there were approximately 4,500 holders of record of our common stock.

We presently have paid or intend to pay quarterly cash dividends in 2006 on March 15, June 15, September 15 and December 15 subject to our earnings and financial condition, regulatory requirements and other factors our Board of Directors may deem relevant.

Purchases of Equity Securities by the Company – 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, or approximately 812,000 shares, at a price or prices that are deemed appropriate. As of December 31, 2005, no shares have been repurchased.

ITEM 6. SELECTED FINANCIAL DATA

SUPPLEMENTAL INFORMATION (Unaudited)

SELECTED FINANCIAL DATA

Years Ended December 31, (thousands of dollars except per share
amounts and where otherwise indicated)		2005				2004				2003				2002				2001
CONSOLIDATED STATEMENTS OF INCOME
Continuing Operations
Operating Revenues		$	47,453			$	46,008			$	44,598			$	43,278			$	42,885
Operating Expenses		$	37,961			$	35,679			$	33,503			$	32,011			$	31,737
Operating Income		$	9,492			$	10,329			$	11,095			$	11,267			$	11,148
Interest and Debt Expense		$	4,017			$	3,742			$	4,482			$	4,348			$	4,422
Income from Continuing Operations		$	7,166			$	9,163			$	8,890			$	8,318			$	8,637
Cash Common Stock Dividends Paid		$	6,773			$	6,641			$	6,529			$	6,277			$	6,105
Dividend Payout Ratio from Continuing Operations			95	%			72	%			73	%			75	%			71	%
Weighted Average Common Shares Outstanding			8,094,346				7,999,318				7,956,426				7,717,608				7,619,031
Basic Earnings Per Common Share from Continuing Operations		$	0.89			$	1.15			$	1.11			$	1.08			$	1.13
Number of Shares Outstanding at Year End			8,169,627				8,035,199				7,967,379				7,939,713				7,649,362
ROE on Year End Common Equity			7.6	%			10.4	%			10.7	%			10.4	%			12.2	%
Declared Common Dividends Per Share		$	0.845			$	0.835			$	0.825			$	0.814			$	0.804
CONSOLIDATED BALANCE SHEET
Common Stockholders’ Equity		$	94,076			$	87,865			$	83,315			$	79,975			$	70,783
Long-Term Debt		$	77,404			$	66,399			$	64,754			$	64,734			$	63,953
Preferred Stock (Consolidated, Excluding Current Maturities)		$	847			$	847			$	847			$	847			$	847
Total Capitalization		$	172,327			$	155,111			$	148,916			$	145,556			$	135,583
Stockholders’ Equity (Includes Preferred Stock)			55	%			57	%			57	%			56	%			53	%
Long-Term Debt			45	%			43	%			43	%			44	%			47	%
Net Utility Plant		$	247,703			$	241,776			$	235,098			$	229,097			$	202,330
Total Assets		$	306,035			$	290,940			$	281,345			$	264,799			$	231,714
Book Value — Per Common Share		$	11.52			$	10.94			$	10.46			$	10.07			$	9.25
OPERATING REVENUES BY REVENUE CLASS
Residential		$	29,980			$	28,951			$	27,831			$	27,310			$	27,318
Commercial			5,619				5,444				5,327				5,141				5,024
Industrial			1,538				1,633				1,616				1,709				1,687
Public Authority			1,625				1,236				1,302				1,245				1,272
Fire Protection			8,267				8,231				8,026				7,355				7,110
Other (including non-metered accounts)			424				513				496				518				474
Total Operating Revenues		$	47,453			$	46,008			$	44,598			$	43,278			$	42,885
Number of Customers (Average)			81,763				87,259				86,145				82,119				78,156
Billed Consumption (Millions of Gallons)			7,276				7,801				7,640				7,418				7,259
Number of Employees			191				193				195				191				181

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Overview

The Company is a non-operating holding company, whose income is derived from the earnings of its ten wholly-owned subsidiary companies. In 2005, approximately 88% of the Company’s earnings from continuing operations were attributable to water activities carried out within its three regulated water companies: Connecticut Water, Crystal, and Unionville. The rates charged for service by these regulated water companies are subject to regulation by the Connecticut DPUC. In 2005, virtually all water activity income came from Connecticut Water, our largest subsidiary and water company. Connecticut Water has not had an increase in its rates since 1991. Primarily due to the construction of six major water treatment plants during the late 1970s and throughout the 1980s, our overall investment in gross utility plant increased by $122,881,000, or 270%, from 1978 to 1991, which resulted in our water rates being amongst the highest in Connecticut. In 1991, we began developing opportunities to increase revenues and earnings without raising regulated water rates. Through these efforts we have successfully:

	-		until 2005, increased our consolidated earnings each year since 1991 without increasing water rates, and;
	-		continued increasing our common dividend payments per share during this period.

For the first time since 1991, a regulated subsidiary of the Company increased its rates, effective December 28, 2005. During the year, Gallup Water Service, Inc. (Gallup) was merged with and into Crystal prior to the filing of an application for rate increase for the newly merged company. In December 2005, Crystal was granted an across the board rate increase of 21.35%. We expect to seek regulatory approval to increase rates charged in all of our Connecticut regulated water companies in the summer of 2006. The material factors that have driven our decision to file for a rate increase in 2006 are:

	-		Increases in infrastructure investment necessary to insure a safe, reliable water system remains in place,
	-		Modest historical and projected annual growth in regulated water sales of approximately 1.5%, and;
	-		Increases in operating costs such as utilities, wage, pension, medical, audit and insurance costs.

On a year-to-year basis our earnings are primarily influenced by weather patterns that affect our customers’ water usage and thereby our revenues. Our revenues may fluctuate by as much as $1.5 million (or 3.0%) above or below a normal year because customers use more water in hot, dry years and less water in cool, rainy years.

Regulatory Matters and Inflation

The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs required to maintain, improve, and expand its service capabilities. The cumulative effect of inflation over time results in significantly higher operating costs and facility replacement costs, which must be recovered from future cash flows.

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

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

The Company currently plans to merge all of its Connecticut subsidiaries into one company, Connecticut Water. Further, the Company expects to apply for a rate increase in the summer of 2006.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in conformity with Generally Accepted Accounting Principles in the United States of America (GAAP) and as directed by the regulatory commissions to which the Company’s subsidiaries are subject. (See Note 1 to the Consolidated Financial Statements for a discussion of our significant accounting policies.) The Company believes the following policies and estimates are critical to the presentation of its consolidated financial statements.

Public Utility Regulation - Statement of Financial Accounting Standards – Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation” (FAS 71), requires cost based, rate-regulated enterprises such as the Company’s water companies to reflect the impact of regulatory decisions in their financial statements. The state regulators, through the rate regulation process, can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the period in which costs would be charged to expense by an unregulated enterprise. The balance sheet includes regulatory assets and liabilities as appropriate, primarily related to income taxes and post-retirement benefit costs. The Company believes, based on current regulatory circumstances, that the regulatory assets recorded are likely to be recovered and that its use of regulatory accounting is appropriate and in accordance with the provisions of FAS 71. Material regulatory assets are earning a return.

Revenue Recognition – Revenue from metered customers includes billings to customers based on quarterly or monthly meter readings plus an estimate of water used between the customer’s last meter reading and the end of the accounting period. The unbilled revenue amount is listed as a current asset on the balance sheet. The amount recorded as unbilled revenue is generally higher during the summer months when water sales are higher. Based upon historical experience, management believes the Company’s estimate of unbilled revenues is reasonable.

Pension Plan Accounting – Management evaluates the appropriateness of the discount rate through the modeling of a bond portfolio which approximates the 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 Plans.

The discount rate assumption we use to value our pension benefit obligations has a material impact on the amount of pension expense we record in a given period. Our 2005 and 2004 pension expense was calculated using assumed discount rates of 5.75% and 6.25%, respectively. In 2006, our pension expense will be calculated with an assumed discount rate of 5.50%. The following table shows how much a one percent change in our assumed discount rate would have changed our reported 2005 pension expense:

		Increase
		(Decrease)
		in expense
A 1% increase in the discount rate			($316,000	)
A 1% decrease in the discount rate			$ 328,000

Outlook

The Company’s earnings and profitability are primarily dependent upon the sale and distribution of water, the amount of which is dependent on seasonal weather fluctuations, particularly during the summer months when water demand will vary with rainfall and temperature levels. The Company’s earnings and profitability in future years will also depend upon a number of other factors, such as the ability to maintain our operating costs at lower levels, customer growth in the Company’s core regulated water utility business, growth in revenues attributable to non-water sales operations, and the timing and adequacy of rate relief if and when requested, from time to time, by our regulated water companies.

The Company believes that the factors described above and those described in detail below under the heading “Commitments and Contingencies” may have significant impact, either alone or in the aggregate, on the Company’s earnings and profitability in fiscal years 2006 and beyond. Please also review carefully the risks and uncertainties described in Item 1A – Risk Factors and described below under the heading “Forward Looking Information”.

Based on the Company’s current projections, the Company believes that its Net Income from Continuing Operations for the year 2006, excluding the gain from the sale of BARLACO assets in February 2006, will be materially reduced from the levels reported for the years 2003, 2004 and 2005. Any such reductions would likely be primarily attributable to lower net income (in the form of reduced tax benefits) related to the Company’s land disposition program, excluding the BARLACO land sale. Since the sale of the assets of Barnstable, the results of operations for

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Barnstable are included in discontinued operations, including any income earned under the management contract. In addition, the regulated water company subsidiaries increased operating costs, including depreciation on their investments in utility plant, will require the Company’s primary subsidiary, The Connecticut Water Company, to seek rate relief in 2006. Based upon appropriate recovery of these costs in a timely manner based upon a rate increase application expected to be filed in the summer of 2006, and taking into account the other factors discussed impacting profitability and earnings, the Company believes that its net income should return to levels achieved in recent years. However, there can be no assurance that the Company will be able to recover costs in an appropriate and timely manner in 2006. During 2006 and subsequent years, the ability of the Company to maintain and increase its net income comparable to historical levels will principally depend upon the effect on the Company of the factors described above in this “Outlook” section, those factors described in the section entitled “Commitments and Contingencies” and the risks and uncertainties described in “Forward Looking Information,” including the Company’s plan to file for rate relief during 2006.

FINANCIAL CONDITION
Liquidity and Capital Resources

In recent years, we have financed the majority of investment in Utility Plant through internally generated funds. In November 2005 two of our regulated subsidiaries, Connecticut Water and Crystal issued $10 million and $5 million respectively of 35-year long-term debt. 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 2006.

						Construction
		Gross				Funded by				Construction
		Construction				Developers &				Funded by
		Expenditures				Others				Company
2003		$	9,747,000			$	1,261,000			$	8,486,000
2004		$	11,045,000			$	2,665,000			$	8,380,000
2005		$	16,957,000			$	2,869,000			$	14,088,000
2006 (Projected)		$	18,387,000			$	3,000,000			$	15,387,000

We currently fund our working capital requirements through our lines of credit with four banks, which provide liquidity to satisfy ongoing cash needs. We consider the current aggregate $15,500,000 lines of credit to be adequate to finance any expected short-term borrowing requirements that may arise in 2006. All the lines have one-year lives and will expire on different dates in 2006. We expect to renew the lines in 2006. The interest rates payable are variable and fluctuate over time based on financial conditions. The weighted average interest rate on the $4,750,000 aggregate balance outstanding at December 31, 2005 was 4.62%.

During 2003, interest rates fell to historically low levels. We took advantage of the low rates and refinanced a portion of our long-term debt in the fourth quarter of 2003. In October 2003, Connecticut Water borrowed $22.93 million from the issuance of Water Facilities Refunding Revenue Bonds by the Connecticut Development Authority (the Authority). The bonds were sold in two series with the following terms:

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		2003 A Series: $8,000,000 (Non-AMT)		4.40% Maturing 12/15/2020
		2003 C Series: $14,930,000 (AMT)		5.00% Maturing 9/1/2022

The proceeds of the transaction were used to redeem the Series R and S first mortgage bonds of Connecticut Water and paid for a portion of the expenses associated with the issuance.

During the first quarter of 2004, Connecticut Water refinanced an additional portion of its long-term debt through the issuance of $12,500,000 of variable rate, taxable debenture bonds Series 2004 with a maturity date of January 4, 2029. The bonds were secured by an irrevocable direct pay letter of credit issued by a financial institution, with a five-year term expiring in March 2009. The proceeds of the sale of the bonds, which are general debt obligations of Connecticut Water, were used to redeem the $12,050,000 aggregate principal amount of Connecticut Water’s First Mortgage Bonds (Series V) and to pay a portion of the expenses associated with the bonds’ refunding.

In connection with the issuance of the bonds, Connecticut Water entered into an interest rate swap transaction with a counterparty in the notional principal amount of $12,500,000. The interest rate swap agreement provides that, beginning in April 2004 and thereafter on a monthly basis, Connecticut Water will pay the counterparty a fixed interest rate of 3.73% on the notional amount for a period of five years. In exchange, the counterparty began in April 2004 and thereafter on a monthly basis, paying Connecticut Water a floating interest rate (based on 105% of the U.S. Dollar one-month LIBOR rate) on the notional amount for a period of five years. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates.

In June 2004, Unionville secured $1.6 million through the Drinking Water State Revolving Fund for costs incurred in developing a water interconnection with a neighboring water supplier. The funds were used to pay off a portion of the balances outstanding under bank lines of credit. As of December 31, 2005 the Company intends to prepay this debt in 2006.

On September 1, 2004, Connecticut Water refinanced a portion of its existing bond indebtedness. Connecticut Water borrowed $9.55 million in sale proceeds from the issuance of Water Facilities Refunding Revenue Bonds by the Authority. The bonds were sold in two series with the following terms:

		2004 A Series: $5,000,000 Variable Interest Maturing 7/1/2028 2004 B Series: $4,550,000 Variable Interest Maturing 9/1/2028

The proceeds of the transaction were used to redeem prior obligations to the Authority that were secured by the Series T and Series U first mortgage bonds of Connecticut Water.

In November 2005, Connecticut Water borrowed $10 million through the issuance of Water Facilities Revenue Bonds by the Connecticut Development Authority sold in one series with an interest rate of five percent maturing on October 1, 2040. The proceeds from the sale of the bonds were used to finance construction and installation of various capital improvements to the Company’s existing water systems.

In November 2005, Crystal borrowed $5 million through the issuance of Water Facilities Revenue Bonds by the Connecticut Development Authority sold in a single series with an

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interest rate of five percent maturing on October 1, 2040. The proceeds from the sale of the bonds are being used to finance the construction of a water treatment plant in the Town of Killingly, CT and to facilitate the interconnection of two systems in the Town of Killingly.

Barnstable Water Company’s note payable was paid off in 2005 in connection with the sale of Barnstable Water’s assets. As a result of the prepayment, the Company paid the lender a prepayment fee of $322,000.

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 (other than the interest rate swap agreement discussed above) and does not have material transactions involving related parties.

The following table summarizes the Company’s future contractual cash obligations as of December 31, 2005:

		Payments due by Periods
		(in thousands of dollars)
						Less												More
						than 1				Years				Years				than 5
Contractual Obligations		Total				year				2 and 3				4 and 5				years
Long-Term Debt (LTD)		$	79,735			$	2,331			$	14			$	16			$	77,374
Interest on LTD			83,513				3,474				6,886				6,886				66,267
Operating Lease Obligations			498				269				226				2				—
Purchase Obligations (2)(3)			30,396				876				1,464				1,416				26,641
Long-Term Compensation Agreement (1)			33,061				2,204				4,408				4,408				22,041
Total (4)(5)(6)		$	227,203			$	9,154			$	12,998			$	12,728			$	192,323

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Interim Bank Loans Payable at year-end 2005 was $4,750,000, which is $900,000 lower than at the end of 2004.

During 2005, the Company incurred approximately $16.9 million of construction expenditures. The Company financed such expenditures through internally generated funds, long-term debt issuances, customers’ advances, contributions in aid of construction and short-term borrowings.

The Board of Directors has approved a $15.4 million construction budget for 2006, net of amounts to be financed by customer advances and contributions in aid of construction. Funds primarily provided by operating activities, short-term borrowings, and funds remaining in escrow from the $5 million Crystal debt issuance in November 2005, are expected to finance this entire construction program given normal weather patterns and related operating revenue billings.

RESULTS OF OPERATIONS

On May 20, 2005, the Company completed the sale of the assets of the Barnstable Water Company to the Town of Barnstable, Massachusetts. The sale of Barnstable Water’s assets has been classified as “Discontinued Operations” in the Consolidated Statements of Income due to the loss of a management contract with the Town of Barnstable in January 2006. All of the results of Barnstable Water, including current and prior years and the gain on the sale of the utility’s assets, have been reclassified and are included as “Discontinued Operations”.

Overview of 2005 Results from Continuing Operations

Net Income from Continuing Operations for 2005 were $7,166,000, or $0.89 per basic share, a decrease of $1,997,000, or $0.26 per basic share when compared to 2004. The decrease in earnings was due to lower net income in our ‘Water Activities’ and ‘Real Estate’ business segments partially offset by an increase in net income in our ‘Services and Rentals’ segment.

		Increase
		(Decrease)
Business segment		In Net Income
Water Activities		$	(846,000	)
Real Estate			(1,267,000	)
Services and Rentals			116,000
Net Decrease		$	(1,997,000	)

Water Activities

The decrease in net income from water activities in 2005 was $846,000, or $ 0.10 per share, lower than it was in 2004. A breakdown of the components of this decrease is as follows:

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		Increase
		(Decrease)
		Increase
Operating Revenues		$	1,445,000
Operation and Maintenance expense			2,178,000
Depreciation expense			154,000
Income Taxes			(256,000	)
Taxes Other than Income Taxes			206,000
Other Income			49,000
Interest and Debt Expense (net of AFUDC)			58,000
Net (Decrease)			($846,000	)

The 3.1% increase in Operating Revenues is primarily due to the following:

–		a $1,220,000, or 3.3%, increase in metered revenues in 2005 which was due to increased customer water consumption attributable to a hotter summer and a 1.5% increase in the number of customers served; and
–		a $225,000, or 2.5%, increase in non-metered revenues which was primarily due to increased fire protection charges related to the expansion of our water system which increased the number of fire hydrants and revenue generating mains upon which these charges are based.

The $2,178,000 or 9.8% increase in Operation and Maintenance expense is primarily due to the following expense increases:

		Increase
Utility Costs		$	491,000
Pension expense			317,000
Other employee benefit costs			468,000
Legal services			260,000
Other outside services			133,000
Maintenance			185,000
Labor			148,000
Other			176,000
Total		$	2,178,000

The increase in Depreciation expense is due to the Company’s investment in new utility plant.

The decrease in Income Tax expense is due primarily to lower pre-tax net income in 2005, partially offset by flow through accounting related to book/tax timing differences.

The increase in Taxes Other Than Income Taxes is primarily due to increased municipal taxes related to our increased investment in utility plant.

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The increase in Interest and Debt Expense is due to the following:

	–		Higher interest expense on long-term debt primarily due to the issuance of $15.0 million in new bonds in 2005;
	–		Higher other interest charges due primarily to increased commitment fees on the letters of credit associated with bonds issued in 2004 plus higher interest expense on interim bank loans with higher interest rates; and
	–		Amortization of the debt issuance costs of the bonds issued in 2004 and 2005.

Real Estate

The net income generated by the Real Estate segment decreased $1,267,000, or $0.16 per share, in 2005 because there were no large sales or donations of land compared with the two donations of land we made in 2004 and in 2005 the Company increased its tax reserves related to prior year land donations.

Income from this business segment is largely dependent on the tax deductions received on donations/sales of available land. This typically occurs when utility-owned land is deemed to be not necessary to protect water sources. The Company currently does not project completing any material land transactions in 2006 other than the sale of the BARLACO land, completed in February 2006.

Services and Rentals

Net income generated from the services and rental segment in 2005 increased $116,000, or $0.02 per share, over 2004 levels. The increased net income is primarily due to a 15% increase in customer enrollment in our service line maintenance program plus an increased number of leases and higher lease rates charged to the telecommunications companies that lease space on our water storage tanks for their antenna sites. The table below summarizes the income from these two lines of business in this business segment for 2005 and 2004.

		2005				2004				Increase
Service line contracts		$	377,000			$	328,000			$49,000 or 15%
Antenna leases		$	462,000			$	401,000			$61,000 or 15%

Overview of 2004 Results from Continuing Operations

Net Income from Continuing Operations for 2004 were $273,000, or $0.04 per basic share higher than in 2003. This increase in earnings from continuing operations was due to higher net income in our Real Estate and Services and Rentals business segments, which more than offset a reduction in net income from our Water Activities segment. The table below details the changes in net income by business segment for Continuing Operations:

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		Increase
		(Decrease)
Business segment		In Net Income
Water Activities		$	(41,000	)
Real Estate			177,000
Services and Rentals			137,000
Net Increase		$	273,000

Water Activities

The net income from water activities in 2004 was $41,000 lower than it was in 2003. A breakdown of the components of this decrease is as follows:

		Increase
Business segment		(Decrease)
Operating Revenues		$	1,410,000
Operation and Maintenance expense			1,250,000
Depreciation expense			87,000
Income Taxes			682,000
Taxes Other than Income Taxes			157,000
Other Income			40,000
Interest and Debt Expense (net of AFUDC)			(685,000	)
Net (Decrease)		$	(41,000	)

The 3.2% increase in Operating Revenues was primarily due to:

–		a 1.9% increase in metered consumption in 2004 due to a hotter and drier summer and a 1.2% increase in the number of customers served;
–		a $288,000 increase in revenues from Unionville’s 30% rate surcharge that went into effect mid-2003; and
–		a $205,000 increase in fire protection revenues due to system expansion which increased the number of fire hydrants and revenue generating mains upon which these charges are based.

The $1,250,000 or 5.9% increase in Operation and Maintenance expense was primarily due to the following expense increases:

		Increase
Sarbanes-Oxley Act Section 404 compliance		$	738,000
Purchased Water			261,000
Property and Liability Insurance			223,000
Total		$	1,222,000

The increase in Depreciation expense was due to the Company’s investment in new utility plant.

Income tax expense increased in 2004 due to the $641,000 increase in book pre-tax income plus a higher 2004 effective income tax rate due to flow through accounting related to book/tax timing differences and a 2003 reduction in estimated tax liabilities associated with non-current periods.

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The increase in Taxes Other Than Income taxes was primarily due to increased municipal taxes related to our increased investment in utility plant.

The 16.5% decrease in Interest and Debt Expense was primarily due to the lowering of our interest rates through the long-term debt refinancings that were completed in 2003 and 2004.

Real Estate

The net income generated by the Real Estate segment increased from 2003 primarily due to the tax benefits of a 2004 donation of approximately 60 acres of land to the Town of Plymouth, CT in addition to the donation of the final parcel of land to the Town of Killingly, CT under our 3-year agreement with the Town. The 2004 and 2003 net income in this business segment were generated from the following:

		2004				2003
Donation of land to Town of Killingly, CT		$	707,000			$	942,000
Donation of land to Town of Plymouth, CT			498,000				—
Miscellaneous sales of real estate			1,000				87,000
Net Income		$	1,206,000			$	1,029,000

Services and Rentals

Net income generated from the Services and Rental segment in 2004 increased $137,000, or 20%, over 2003 levels. The increased net income was primarily due to a 19% increase in customer enrollment in our service line maintenance program plus an increased number of leases and higher lease rates charged to the telecommunications companies that lease space on our water storage tanks for their antenna sites. The table below summarizes the major components of the increase in net income from these two lines of business in this business segment for 2004 and 2003.

		2004				2003				Increase
Service line contracts		$	328,000			$	240,000			$88,000 or 37%
Antenna leases		$	401,000			$	330,000			$71,000 or 22%

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COMMITMENTS AND CONTINGENCIES

Security – The Bioterrorism Response Act of 2001 required every public water system serving over 3,300 people to prepare Vulnerability Assessments (VA) of their critical utility assets. The last of these assessments required to be filed by our companies were submitted to the U.S. Environmental Protection Agency in June 2004 and was followed by updated Emergency Response Plans in December 2004, per statutory requirements. The information within the VA is not subject to release to the public and is protected from Freedom of Information Act inquiries.

Investment in security-related improvements is a continuing process and management believes that the costs associated with any such improvements would be eligible for recovery in future rate proceedings.

Reverse Privatization – Our water companies derive their rights and franchises to operate from state laws that are subject to alteration, amendment or repeal, and do not grant permanent exclusive rights to our service areas. Our franchises are free from burdensome restrictions, are unlimited as to time, and authorize us to sell potable water in all towns we now serve. There is the possibility that states could revoke our franchises and allow a governmental entity to take over some or all of our systems. From time to time such legislation is contemplated.

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.

28

Rate Relief – Our three Connecticut operating subsidiaries, Connecticut Water, Crystal, and Unionville, are regulated public utilities, which provide water services to their customers. The rates that these companies charge their water customers are subject to the jurisdiction of the regulatory authority of the Connecticut DPUC, which sets water rates for each company independently because the systems are not interconnected.

The DPUC may authorize the Company’s operating subsidiaries to charge rates which the DPUC consider to be sufficient to recover the normal operating expenses of our operating subsidiaries, to provide funds for adding new or replacing water infrastructure, and to allow our operating subsidiaries to earn what the DPUC considers to be a fair and reasonable return on our invested capital.

The Company has filed with the DPUC to merge all of its Connecticut subsidiaries into Connecticut Water in February 2006. On March 20, 2006, the DPUC issued a Draft Decision which would approve this merger. Further, the Company expects that Connecticut Water will apply for a rate increase during the summer of 2006.

Land Dispositions – In the past, the Company has engaged in a program of land donations to municipalities in Connecticut, which has resulted in net income (tax benefits) to the Company of approximately $3.9 million. As previously disclosed, the land donation program under the Company’s agreement with the Town of Killingly, CT was completed in January 2004 with the donation of the remaining parcel to the Town. The donation of this final parcel resulted in a net profit (tax benefit) to the Company of $707,000 during the first quarter of 2004. The donation of land to the Town of Plymouth, CT in December 2004 resulted in an additional $498,000 of net income. During 2005, the Company lowered the after-tax profit taken in 2002, 2003 and 2004 by $353,000. This was due to an ongoing audit by the Internal Revenue Service, which is examining the fair market value of the property reflected on the Company’s 2002, 2003 and 2004 tax returns. The Company continues to believe the valuations used in those tax years’ filings is correct.

During 2005, the Company has one significant land transaction. Connecticut Water sold 74 acres of land in Bristol, Connecticut for $475,000 resulting in a net profit of $256,000 on the transaction.

The Company and its subsidiaries own additional parcels of land in Connecticut, which may be suitable in the future for disposition, either by sale or by donation to municipalities, other local governments or private charitable entities. These additional parcels would include certain Class I and II parcels previously identified by the Connecticut DEP, which have restrictions on development and resale.

During 2003 and 2004, the Company donated approximately 370 acres of land to municipalities in Connecticut for public and/or open space purposes. These donations contributed approximately $1.0 million and $1.2 million, respectively to net income in those years, as a result of favorable tax treatment under federal and Connecticut tax laws. The Company currently anticipates that it will continue to pursue selected land sales and/or donations during fiscal years 2006, 2007 and 2008, but at a reduced level. The Company currently does not project completing any material land transactions in 2006, other than the BARLACO land sale. The Company is unable to predict if and when any sales or donations of some or all of these

29

parcels may occur in the future and, if so, what amount of net income (tax benefits) may result from any such sales or donations.

Amounts taken as tax benefits in prior years are subject to challenge by the taxing agencies. In 2005, the Company increased its tax reserves by approximately $400,000 for land valuation allowances (See “Taxes” below).

Taxes – On August 18, 2005, the Company was notified by the Internal Revenue Service (IRS) that they would be conducting an audit of the Company’s 2003 Federal Income Tax Return. The field work portion of the audit is complete and the IRS has summarized its proposed adjustments. Other than a proposed change to the value of donated land, none of the other changes are material. The Company continues to believe that the value of donated land included in its 2003 Federal Income Tax Return is correct. Discussions between the Company and the IRS are continuing. The Company does not believe that IRS proposed changes would materially affect financial results.

The Company and its subsidiaries may be subject to a higher tax burden through changes in state legislation. Also, the Company’s future property tax burden may increase if state aid to towns is decreased.

FORWARD LOOKING INFORMATION

This report, including management’s discussion and analysis, contains certain forward-looking statements regarding the Company’s results of operations and financial position. These forward looking statements are based on current information and expectations, and are subject to risks and uncertainties, which could cause the Company’s actual results to differ materially from expected results.

Our water companies are subject to various federal and state regulatory agencies concerning water quality and environmental standards. Generally, the water industry is materially dependent on the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant. The ability to maintain our operating costs at the lowest possible level, while providing good quality water service, is beneficial to customers and stockholders. Profitability is also dependent on the timeliness of rate relief to be sought from, and granted by, the DPUC, when necessary, and numerous factors over which we have little or no control, such as the quantity of rainfall and temperature, industrial demand, financing costs, energy rates, tax rates, and stock market trends which may affect the return earned on pension assets, and compliance with environmental and water quality regulations. The profitability of our other revenue sources is subject to the amount of land we have available for sale and/or donation, the demand for the land, the continuation of the current state tax benefits relating to the donation of land for open space purposes, regulatory approval of land dispositions, the demand for telecommunications antenna site leases and the successful extensions and expansion of our service contract work. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The primary market risk faced by the Company is interest rate risk. As of December 31, 2005, the Company had no exposure to derivative financial instruments or financial instruments with significant credit risk or off-balance-sheet risks. In addition, the Company is not subject in any material respect to any currency or other commodity risk.

     The Company is subject to the risk of fluctuating interest rates in the normal course of business. The Company’s exposure to interest fluctuations is managed at the Company and subsidiary operations levels through the use of a combination of fixed rate long-term debt (and variable rate borrowings) under financing arrangements entered into by the Company and its subsidiaries and the use of the interest rate swap agreement discussed below. The Company has $15,500,000 current lines of credit with four banks, under which interim bank loans payable at December 31, 2005 were $4,750,000.

     During the first quarter of 2004, Connecticut Water entered into a five-year interest rate swap transaction in connection with the refunding of its First Mortgage Bonds (Series V). The swap agreement provides for Connecticut Water’s exchange of floating rate interest payment obligations for fixed rate interest payment obligations on a notional principal amount of $12,500,000. The purpose of the interest rate swap is to manage the Company’s exposure to fluctuations in prevailing interest rates. See “Liquidity and Capital Resources” section of Item 7 – “Management’s Discussion and Analysis and Results of Operations” above for further information. The Company does not enter into derivative financial contracts for trading or speculative purposes and does not use leveraged instruments.

     Management believes that changes in interest rates will not have a material effect on income or cash flow during 2006, although there can be no assurances that interest rates will not significantly change.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Connecticut Water Service, Inc., and the Notes to Consolidated Financial Statements together with the report of PricewaterhouseCoopers LLP are included herein on pages F-7 through F-30.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None

31

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures — As of December 31, 2005, management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and Rule13a-15(e)). Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting – Internal control over financial reporting (as defined in Exchange Act Rules 13a – 15(f) and 15(d) – 15(f)) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. We have used the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in conducting our evaluation of the effectiveness of the internal control over financial reporting. Based on our evaluation, we concluded that the Company’s internal control over financial reporting is effective as of December 31, 2005. Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting – Beginning in 2003, the Company implemented a comprehensive plan to review, document, test the operational effectiveness, and evaluate the processes and systems of internal controls over financial reporting, as required under Section 404 of the Sarbanes Oxley Act of 2002 and Public Accounting Oversight Board Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction With An Audit of Financial Statements” (Standard No. 2), which was adopted in June 2004.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

32

ITEM 9B. OTHER INFORMATION

On January 6, 2006, the Company and Eric W. Thornburg entered into a letter agreement outlining the terms and conditions of Mr. Thornburg’s planned employment as the Company’s next President and Chief Executive Officer, effective March 1, 2006. Under the terms of employment, Mr. Thornburg will receive an annual salary of $294,100, annual and long term incentive compensation as determined by the Compensation Committee, certain other executive and relocation benefits, and customary employee benefits offered to all of the Company’s employees. A copy of the letter agreement was filed by the Company as an exhibit to the Company’s Form 8-K filed on January 11, 2006. On January 11, 2006, the Compensation Committee approved an award of 4,507 restricted shares of the Company’s common stock to Mr. Thornburg under the Company’s 2004 Performance Stock Program.

On January 12, 2006, the Company announced that the Board of Directors at its January 11^th meeting unanimously approved the appointment of Eric W. Thornburg as the Company’s next President and Chief Executive Officer. Mr. Thornburg, 45, was recently President of Missouri-American Water and also led Government and Regulatory Affairs for American Water’s central region, spanning 15 states in the Midwest. He has also held leadership positions in Indiana and Pennsylvania for American Water, a subsidiary of RWE, a German-based conglomerate and a Global 100 company. The Board of Directors also unanimously elected Mr. Thornburg to the Board of Directors, effective January 11, 2006. Mr. Thornburg has been nominated for election as a Class III director to serve a term expiring at the 2009 annual meeting of shareholders.

Mr. Thornburg assumed the President/CEO positions at the Company on March 1, 2006, succeeding Marshall T. Chiaraluce, who had served as the Company’s President and Chief Executive Officer since 1992 until his retirement as President and Chief Executive Officer effective March 1, 2006. Mr. Chiaraluce will continue to serve as the full time Chairman of the Board of Directors and Executive Officer of the Company until his planned retirement from the Company and the Board of Directors in the spring of 2007.

33

PART III

Pursuant to General Instruction G(3), the information called for by Items 10, (except for information concerning the executive officers of the Company) 11, 12, 13 and 14 is hereby incorporated by reference to the Company’s definitive proxy statement to be filed on EDGAR on or about April 7, 2006. Information concerning the executive officers of the Company is included as Item 10 of this report.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following is a list of the executive officers of the Company:

		Age
		in						Period Held or		Term of Office
Name		2006				Office		Prior Position		Expires
M. T. Chiaraluce			63			Chairman of the Board and Executive Officer		Held position of President since January 1992 and position of Chief Executive Officer since July 1992 until his retirement as of March 1, 2006		2006 Annual Meeting
E. W. Thornburg			46			President, Chief Executive Officer		Held position since March 1, 2006		2006 Annual Meeting
D. C. Benoit			48			Vice President – Finance, Chief Financial Officer and Treasurer		Held current position or other executive position with the company since April 1996		2006 Annual Meeting
T. P. O’Neill			52			Vice President — Operations & Engineering		Held current position or other engineering position with the Company since February 1980		2006 Annual Meeting
M. P. Westbrook			46			Vice President — Administration and Government Affairs		Held current position or other management position with the Company since September 1988		2006 Annual Meeting

34

		Age
		in						Period Held or		Term of Office
Name		2006				Office		Prior Position		Expires
T. R. Marston			53			Vice President — Planning & Treatment		Held current position or other management position with the Company since June 1974.		2006 Annual Meeting
P. J. Bancroft			56			Assistant Treasurer and Controller		Held current position or other accounting position with the Company since October 1979		2006 Annual Meeting
M. G. DiAcri			60			Corporate Secretary		Held administrative position with the Company since February 1990		2006 Annual Meeting

For further information regarding the executive officers see the Company’s Proxy Statement dated on or about April 7, 2006.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

35

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

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

		Page
Index to Consolidated Financial Statements and Schedule			F-1
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Statements of Income for the years Ended December 31, 2005, 2004, and 2003			F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004, and 2003			F-4
Consolidated Balance Sheets at December 31, 2005 and 2004			F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003			F-6
Notes to Consolidated Financial Statements			F-7

			2.			Financial Statement Schedule:
						The following schedule of the Company is included on the attached page as indicated:

Schedule II-Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2005, 2004, and 2003		S-1

				All other schedules provided for in the applicable regulations of the Securities and Exchange Commission have been omitted because of the absence of conditions under which they are required or because the required information is set forth in the financial statements or notes thereto.

36

(b)		Exhibits:

Exhibits for Connecticut Water Service, Inc. are in the Index to Exhibits		E-1

				Exhibits heretofore filed with the Securities and Exchange Commission as indicated below are incorporated herein by reference and made a part hereof as if filed herewith. Exhibits marked by asterisk (*) are being filed herewith.

F-1

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

		Page
Index to Consolidated Financial Statements and Schedule			F-1
Reports of Independent Registered Public Accounting Firm			F-2
Consolidated Statements of Income for the years ended December 31, 2005, 2004, and 2003			F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004, and 2003			F-4
Consolidated Balance Sheets at December 31, 2005 and 2004			F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003			F-6
Notes to Consolidated Financial Statements			F-7
Schedule II — Valuation and Qualifying Accounts			S-1

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have completed integrated audits of Connecticut Water Service, Inc.’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Connecticut Water Service, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control

F-3

over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2006

F-4

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended December 31, (in thousands, except per share data)		2005				2004				2003
Operating Revenues		$	47,453			$	46,008			$	44,598
Operating Expenses
Operation and Maintenance			24,514				22,336				21,086
Depreciation			5,724				5,570				5,483
Income Taxes			2,338				2,594				1,912
Taxes Other Than Income Taxes			5,385				5,179				5,022
Total Operating Expenses			37,961				35,679				33,503
Utility Operating Income			9,492				10,329				11,095
Other Income (Deductions), Net of Taxes
Gain (Loss) on Property Transactions			(61	)			1,206				1,029
Non-Water Sales Earnings			945				829				692
Allowance for Funds Used During Construction			638				421				476
Other			169				120				80
Total Other Income (Deductions), Net of Taxes			1,691				2,576				2,277
Interest and Debt Expenses
Interest on Long-Term Debt			2,937				2,918				3,878
Other Interest Charges			720				486				373
Amortization of Debt Expense			360				338				231
Total Interest and Debt Expenses			4,017				3,742				4,482
Income from Continuing Operations			7,166				9,163				8,890
Discontinued Operations, Net of Tax of $1,720, $238 and $123 in 2005, 2004 and 2003, respectively			3,158				231				320
Net Income			10,324				9,394				9,210
Preferred Stock Dividend Requirement			38				38				38
Total Net Income Applicable to Common Stock		$	10,286			$	9,356			$	9,172
Weighted Average Common Shares Outstanding:
Basic			8,094				7,999				7,956
Diluted			8,143				8,039				8,002
Earnings Per Common Share:
Basic — Continuing Operations		$	0.89			$	1.15			$	1.11
Basic — Discontinued Operations			0.38				0.02				0.04
Basic		$	1.27			$	1.17			$	1.15
Diluted — Continuing Operations		$	0.88			$	1.14			$	1.11
Diluted — Discontinued Operations			0.38			$	0.02			$	0.04
Diluted		$	1.26			$	1.16			$	1.15

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, (in thousands)		2005				2004				2003
Net Income		$	10,286			$	9,356			$	9,172
Other Comprehensive Income, net of tax
Qualified cash flow hedging instrument net of tax of $188 and $58 in 2005 and 2004, respectively			294				87				—
Comprehensive Income		$	10,580			$	9,443			$	9,172

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

F-5

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31, (in thousands, except share amounts)		2005				2004
ASSETS
Utility Plant		$	340,755			$	333,985
Construction Work in Progress			5,505				7,463
Utility Plant Acquisition Adjustments			(1,273	)			(1,273	)
			344,987				340,175
Accumulated Provision for Depreciation			(97,284	)			(98,399	)
Net Utility Plant			247,703				241,776
Other Property and Investments			4,542				4,298
Cash and Cash Equivalents			4,439				707
Restricted Cash			2,628				—
Accounts Receivable (Less Allowance, 2005 - $256; 2004 - $212)			5,888				5,702
Accrued Unbilled Revenues			3,918				4,064
Materials and Supplies, at Average Cost			860				869
Prepayments and Other Current Assets			1,274				3,923
Short-Term Investment			6,815				—
Barlaco Assets Held for Sale			324				—
Total Current Assets			26,146				15,265
Unamortized Debt Issuance Expense			7,823				7,169
Unrecovered Income Taxes			12,986				16,173
Post-Retirement Benefits Other Than Pension			1,595				1,088
Goodwill			3,608				3,608
Deferred Charges and Other Costs			1,632				1,563
Total Regulatory and Other Long-Term Assets			27,644				29,601
Total Assets		$	306,035			$	290,940
CAPITALIZATION AND LIABILITIES
Common Stockholders’ Equity:
Common Stock Without Par Value:
Authorized - 15,000,000 Shares — Issued and Outstanding:
2005 - 8,169,627; 2004 - 8,035,199		$	58,005			$	55,514
Retained Earnings			35,777				32,264
Accumulated Other Comprehensive Income			294				87
Common Stockholders’ Equity			94,076				87,865
Preferred Stock			847				847
Long-Term Debt			77,404				66,399
Total Capitalization			172,327				155,111
Interim Bank Loans Payable			4,750				5,650
Current Portion of Long-Term Debt			2,331				326
Accounts Payable and Accrued Expenses			4,776				5,512
Accrued Taxes			154				3,300
Accrued Interest			699				601
Other Current Liabilities			519				559
Total Current Liabilities			13,229				15,948
Advances for Construction			29,355				27,157
Contributions in Aid of Construction			45,709				46,111
Deferred Federal and State Income Taxes			24,915				24,249
Unfunded Future Income Taxes			11,273				13,096
Long-Term Compensation Arrangements			7,541				7,445
Unamortized Investment Tax Credits			1,686				1,823
Commitments and Contingencies
Total Capitalization and Liabilities		$	306,035			$	290,940

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

F-6

Connecticut Water Service, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, (in thousands)		2005				2004				2003
Operating Activities:
Net Income		$	10,324			$	9,394			$	9,210
Discontinued Operations			3,158				235				324
Income from Continuing Operations			7,166				9,159				8,886
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Allowance for Funds Used During Construction			(743	)			(436	)			(476	)
Depreciation (including $188 in 2005 and $253 in 2004, and $165 in 2003 charged to other accounts)			5,912				5,763				5,648
Change in Assets and Liabilities:
(Increase) in Accounts Receivable and Accrued Unbilled Revenues			(342	)			(769	)			(49	)
(Increase) Decrease in Other Current Assets			2,600				288				(51	)
(Increase) in Other Non-Current Items			(556	)			(469	)			(690	)
Increase (Decrease) in Accounts Payable, Accrued Expenses and Other Current Liabilities			(3,603	)			1,678				(2,069	)
Increase in Deferred Income Taxes and Investment Tax Credits, Net			2,332				996				2,400
Total Adjustments			5,600				7,051				4,713
Net Cash and Cash Equivalents Provided by (Used In) Continuing Operations			12,766				16,210				13,599
Net Cash and Cash Equivalents Provided by (Used In) Discontinued Operations			(185	)			497				184
Net Cash and Cash Equivalents Provided by (Used In) Operating Activities			12,581				16,707				13,783
Investing Activities:
Company Financed Additions to Utility Plant			(14,088	)			(8,380	)			(8,486	)
Advances from Others for Construction			(1,955	)			(2,057	)			(592	)
Net Additions to Utility Plant Used in Continuing Operations			(16,043	)			(10,437	)			(9,078	)
Net Additions to Utility Plant Used in Discontinued Operations			(171	)			(172	)			(193	)
Proceeds from Sale of Barnstable Water Company Assets (Net of $114 in Transaction Costs)		9,885					—				—
Purchase of Short Term Investments			(6,713	)			—				—
Net Cash and Cash Equivalents Used in
Investing Activities in Continuing Operations			(12,871	)			(10,437	)			(9,078	)
Net Cash and Cash Equivalents Used in
Investing Activities in Discontinued Operations			(171	)			(172	)			(193	)
Net Cash Used in Investing Activities			(13,042	)			(10,609	)			(9,271	)
Financing Activities:
Net Proceeds from Interim Bank Loans			4,750				5,650				9,700
Net Repayment of Interim Bank Loans			(5,650	)			(9,700	)			(6,950	)
Proceeds from Issuance of Common Stock			2,038				1,751				699
Proceeds from Issuance of Long-Term Debt			12,282				23,581				22,930
Repayment of Long-Term Debt Including Current Portion			(665	)			(21,764	)			(22,798	)
Costs Incurred to Issue Long-Term Debt and Common Stock			(934	)			(1,309	)			(1,359	)
Advances from Others for Construction			1,955				2,057				592
Proceeds from Exercise of Stock Options			455				—				—
Cash Dividends Paid			(6,838	)			(6,525	)			(6,393	)
Net Cash and Cash Equivalents Provided by (Used in)
Financing Activities in Continuing Operations			7,393				(6,259	)			(3,579	)
Net Cash and Cash Equivalents Provided by (Used in)
Financing Activities in Discontinued Operations			(3,200	)			(254	)			(275	)
Net Cash and Cash Equivalents Provided by (Used in) Financing Activites			4,193				(6,513	)			(3,854	)
Net Increase (Decrease) in Cash and Cash Equivalents			3,732				(415	)			658
Cash and Cash Equivalents at Beginning of Year			707				1,122				464
Cash and Cash Equivalents at End of Year		$	4,439			$	707			$	1,122
Non-Cash Investing and Financing Activities:
Non-Cash Contributed Utility Plant (see Note 1 for details)		$	1,231			$	2,337			$	2,930
Short-term Investment of Bond Proceeds Held in Restricted Cash		$	2,628				—				—
Supplemental Disclosures of Cash Flow Information:
Cash Paid for Continuing Operations During the Year for:
Interest		$	3,511			$	3,440			$	4,372
State and Federal Income Taxes		$	3,515			$	1,383			$	2,355
Cash Paid for Discontinued Operations During the Year for:
Interest		$	106			$	141			$	150
State and Federal Income Taxes		$	410			$	31			$	52