UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No. )

 

Filed by the Registrant þ

 Filed by a Party other than the Registrant  o

Check the appropriate box:

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

CONNECTICUT WATER SERVICE, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Connecticut Water Service, Inc.

93 West Main Street

Clinton, CT 06413

 

April 1, 2011

 

Dear Shareholder:

 

You are cordially invited to the Annual Meeting of Shareholders of Connecticut Water Service, Inc., scheduled to be held on Thursday, May 12, 2011, at the Water’s Edge, 1525 Boston Post Road, Westbrook, Connecticut, beginning at 2:00 P.M.

 

At the meeting, you will be asked to elect three directors, ratify the appointment of our independent auditors, and provide the Board with your advisory votes on the Company’s executive compensation program and the frequency that you would like to have this vote. In addition to the specific matters to be voted on, there will be a report on the progress of the Company and an opportunity for you to ask questions of general interest to shareholders. Important information is contained in the accompanying proxy statement, which you are urged to carefully read.

 

It is important that your shares are represented and voted at the meeting, regardless of the number you own or whether you attend. Accordingly, please vote by mail, telephone, or internet. It is also very helpful to us if you would call and let us know if you plan to attend the Annual Meeting. Please call 1-800-428-3985, Extension 3015, and provide your name, address, and telephone number. Directions to the Annual Meeting are printed on the back of the proxy statement and available on the Company’s Web site. Your Board and executive officers look forward to personally meeting you.

 

Also, I am pleased to report that again this year we will be utilizing U.S. Securities and Exchange Commission rules that permit us to furnish our proxy materials to certain shareholders over the Internet. Accordingly, a Notice of Internet Availability of Proxy Materials will be mailed to some of our shareholders on or about April 1, 2011. These shareholders will have the ability to access the proxy materials on a Web site referred to in the Notice or request that a printed set of the proxy materials be sent to them free of charge, by following the instructions in the notice. For other shareholders, we have elected to mail a full set of printed copies of our proxy materials, as in prior years.

 

We believe that using Internet delivery for some shareholders will expedite the delivery of proxy materials, reduce printing and postage costs, and conserve natural resources.

 

Your interest and participation in the affairs of the Company are appreciated.

 

Sincerely,

 

Eric W. Thornburg

Chairman

 

 

CONNECTICUT WATER SERVICE, INC.

 

NOTICE OF ANNUAL MEETING OF

SHAREHOLDERS AND PROXY STATEMENT

 

May 12, 2011

 

The Annual Meeting of Shareholders of Connecticut Water Service, Inc. will be held on Thursday, May 12, 2011, at the Water’s Edge, 1525 Boston Post Road, Westbrook, Connecticut, for the following purposes:

 

 

Only holders of the Company’s common stock and its Cumulative Preferred Stock — Series A of record at the close of business on March 15, 2011 are entitled to vote at this meeting.

 

Shareholders are cordially invited to attend the meeting in person.

 

By order of the Board of Directors,

 

 

Kristen A. Johnson

Vice President, Human Resources and Corporate Secretary

 

Shareholders can help avoid the necessity and expense of follow-up letters to ensure that a quorum is present at the Annual Meeting by promptly voting their shares.

 

YOU CAN VOTE IN ONE OF THREE WAYS:

 

 

Shareholders are invited to visit the Corporate Governance section of our
Web site at http://www.ctwater.com

 

and the following Web site until 11:59 P.M. on May 11, 2011: www.proxyvote.com.  (Shareholders will need the 12 digit control number from the proxy card or NOIA to view proxy materials at www.proxyvote.com)

 

TABLE OF CONTENTS

 

CONNECTICUT WATER SERVICE, INC.

 

PROXY STATEMENT

2011 ANNUAL MEETING OF SHAREHOLDERS

 

This Proxy Statement is furnished by and on behalf of the Board of Directors (the “Board”) of Connecticut Water Service, Inc. (the “Company”) for use at the Annual Meeting of Shareholders (the “Annual Meeting”) to be held at Water’s Edge, 1525 Boston Post Road, Westbrook, Connecticut, at 2:00 P.M., on May 12, 2011. In that regard, a Notice of Internet Availability or this Proxy Statement, the Company’s 2010 Annual Report to Shareholders and the Company’s Annual Report on Form 10-K are being mailed to shareholders on or about April 1, 2011. In addition to this solicitation by mail and the Internet, officers and regular employees of the Company may make solicitations by telephone, mail, or personal interviews and arrangements may be made with banks, brokerage firms, and others to forward proxy material to their principals. The Company has retained Morrow & Company, Inc. to assist in the solicitation of proxies at an estimated cost of $5,750 plus expenses, which will be paid by the Company.

 

Under rules adopted in 2007 by the U.S. Securities and Exchange Commission (“SEC”), we have chosen to furnish our proxy materials, including this Proxy Statement and the Annual Report to Shareholders, to some of our shareholders over the Internet and to provide a Notice of Internet Availability of Proxy Materials (“NOIA”) by mail, rather than mailing a full set of the printed proxy materials. For other shareholders, we have elected to mail a full set of printed copies of our proxy materials, as in prior years.

 

If you receive a NOIA, you will not receive a printed copy of our proxy materials unless you request them by following the instructions provided in the NOIA. Instead, the NOIA explains how you may access and review all of the important information contained in the proxy materials. The NOIA also explains how you may submit your proxy via telephone or the Internet. If you would like to receive a printed copy of our proxy materials, you should follow the instructions in the NOIA.

 

We are mailing either our NOIA or a full set of our printed proxy materials to shareholders of record on or about April 1, 2011. On this date, all shareholders of record and beneficial owners will have the ability to access all of the proxy materials at www.proxyvote.com, which is the Web site referred to in the NOIA. These proxy materials will be available free of charge.

 

What is the purpose of the Annual Meeting of Shareholders?

 

Shareholders are asked to consider and vote upon:

 

 

How is a quorum determined for the Annual Meeting?

 

Under Connecticut law, holders of our Common Stock and Preferred Stock — Series A may take action on a matter at the Annual Meeting only if a quorum exists with respect to that matter. With respect to each of Proposals No. 1, 2, 3, & 4, a majority of the votes entitled to be cast on each matter by holders of our Common Stock and Preferred Stock — Series A will constitute a quorum for action on that matter. For this purpose, only shares of

our Common Stock and Preferred Stock — Series A held by those persons present at the Annual Meeting or for which proxies are properly provided by telephone, Internet or in writing and returned to the Company as provided herein will be considered to be represented at the Annual Meeting. All shares of our Common Stock and Preferred Stock — Series A represented at the Annual Meeting will be counted for quorum purposes without regard to abstentions or broker non-votes as to any particular item.

 

Who is entitled to vote?

 

Holders of the Company’s Common Stock and its Cumulative Preferred Stock — Series A of record at the close of business on March 15, 2011 are entitled to notice of and to vote at the Annual Meeting. On March 1, 2011, the Company had outstanding 8,703,295 shares of Common Stock, 15,000 shares of Cumulative Preferred Stock — Series A, $20 par value, and 29,499 shares of $.90 Cumulative Preferred Stock, $16 par value. Each share of Common Stock is entitled to three votes and each share of Cumulative Preferred Stock — Series A is entitled to one vote on all matters coming before the Annual Meeting. The holders of shares of $.90 Cumulative Preferred Stock, $16 par value, have no general voting rights.

 

What is the difference between holding shares as a shareholder of record and in “street name”?

 

About four-fifths of Connecticut Water’s shareholders hold their shares in “street name”. “Street name” refers to the predominant form of public company share ownership in the United States, whereby investors indirectly own, through banks, brokers and other intermediaries, the companies’ publicly-traded shares. Under Connecticut law, only the legal owners of stock on the record date are entitled to vote shares or grant proxies in connection with a shareholder meeting. Some of the key differences between these forms of ownership are described below.

 

Shareholder of record — If your shares are registered directly in your name with our transfer agent, the Registrar and Transfer Company, you are considered the shareholder of record, and these proxy materials, or a NOIA, are being sent directly to you by an agent on behalf of Connecticut Water. You have the right to grant your voting proxy to the Company or to vote in person at the Annual Meeting. You may vote by any of the methods described below.

 

Owning shares in “street name” — If your shares are held in a securities brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in “street name”, and these proxy materials, or a NOIA, are being forwarded to you by your broker or nominee who is considered to be the shareholder of record. As the beneficial owner, you have the right to direct your broker or other nominee on how to vote your shares and are invited to attend the Annual Meeting. Your broker or nominee has enclosed a voting instruction card, or their own form of NOIA, for you to use in directing your broker or nominee on how to vote your shares.

 

How do I vote?

 

Shareholders of record and most shareholders holding shares in “street name” can vote in any of the following ways:

 

(1) You can vote through the Internet: Available to shareholders of record and through most brokers or nominees by going to the Web site listed on your NOIA, proxy card or voting instruction card. You will need to follow the instructions on your NOIA, proxy card or voting instruction card and the Web site.

 

(2) You can vote by telephone: Available to shareholders of record and through most brokers or nominees by calling the toll-free number on your NOIA, proxy card, or voting instruction card. You will need to follow the instructions on your NOIA, proxy card, or proxy instruction card and follow the voice prompts.

 

(3) You can vote by mail: Available to shareholders of record and through brokers or nominees who received printed copies of proxy materials by signing, dating and returning your printed proxy card or voting instruction card in the enclosed postage-paid envelope provided. Shareholders receiving a NOIA can receive a printed proxy card by requesting a full printed set of proxy materials following instructions on the notice.

(4) You can vote in person at the Annual Meeting: Shareholders of record may deliver their completed proxy card in person at the Annual Meeting of Shareholders or by completing a ballot available upon request at the meeting. Shareholders owning shares in “street name” must obtain a “legal proxy” from the holder of record in order to vote in person at the meeting.

 

If you vote by telephone or the Internet, your electronic vote authorizes the named proxies in the same manner as if you signed, dated and returned your proxy card. If you vote by telephone or the Internet, you do not need to return your proxy card.

 

Can I change my vote?

 

Yes. You may change your proxy instructions at any time prior to the vote at the Annual Meeting. For shares held directly in your name, you may do this by granting a later-dated proxy, submitting a later vote by telephone or the Internet, or by attending the Annual Meeting and voting in person. Attendance at the Annual Meeting will not cause your previously-granted proxy to be revoked, unless you specifically request it. You may change your proxy instructions for shares in “street name” by submitting new voting instructions to your broker or nominee.

 

How is my vote counted?

 

If you are a registered shareholder and you vote on a director nominee or the ratification of our independent registered public accountants by selecting one of the options available on the proxy card or via Internet and telephone voting methods, the proxy will be voted as you have specified. However, if you do not specify your intentions on a director nominee or the ratification of our independent registered public accountants then your vote will be counted FOR that director nominee or FOR the ratification of our independent registered public accountants.

 

What is a broker non-vote?

 

If your shares are held in “street name,” you must instruct the broker how to vote your shares. If you do not provide voting instructions, your shares will not be voted on any Proposal on which the broker does not have discretionary authority to vote. This is called a “broker non-vote.” In these cases, the broker can register your shares as being present at the Annual Meeting for purposes of establishing a quorum but will not be able to vote on those matters for which specific authorization is required under the rules of the New York Stock Exchange (“NYSE”).

 

If you are a beneficial owner whose shares are held on the record date by a broker, your broker has discretionary voting authority under NYSE rules to vote your shares only on the ratification of the appointment of PricewaterhouseCoopers LLP even if the broker does not receive voting instructions from you. Important Information for 2011: There is an important change this year regarding broker non-votes and votes on executive compensation and certain other matters including new “Say-on-Pay” and “Say When on Pay” votes. This rule change, which was made effective through the new Dodd-Frank legislation, follows similar treatment of broker non-votes for director elections implemented for the 2010 proxy season. These rules do not permit brokers to vote in the advisory votes for executive compensation and the frequency of future advisory votes for executive compensation if the broker has not received instructions from its customer, the beneficial owner. Accordingly, it is particularly important that beneficial owners instruct their brokers how they wish to vote their shares on the election of directors, the new advisory votes on executive compensation, and the new advisory vote on the frequency of the executive compensation advisory vote. We recommend that you contact your broker to assure that your shares will be properly voted.

 

Regardless of how you choose to vote, your interest in the affairs of Connecticut Water Service, Inc. is important and we encourage you to vote promptly.

 

How will abstentions and broker non-votes be counted?

 

Broker non-votes and proxies marked to abstain or withhold from voting with respect to any proposal to be voted upon at the Annual Meeting generally are not considered for purposes of determining the tally of votes cast for or against such proposal and, therefore, will not affect the outcome of the voting with regard to any proposal.

What vote is needed to elect the three directors?

 

Under Connecticut law, the election of directors requires a plurality of the votes cast by the holders of shares present in person or by proxy and voting at the Annual Meeting. Proxies may be voted only for the number of the nominees named by the Board of Directors.

 

What vote is needed to ratify the Audit Committee’s appointment of PricewaterhouseCoopers LLP as our independent registered public accountants for 2011?

 

The ratification of the appointment by the Audit Committee of PricewaterhouseCoopers LLP requires that the votes cast in favor of the ratification exceed the number of votes cast opposing the ratification.

 

What vote is needed to approve the non-binding advisory resolution regarding the compensation of our Named Executive Officers?

 

Under Connecticut law, the approval of the non-binding advisory resolution regarding the compensation of our named executive officers requires that the votes cast in favor of the proposal exceed the number of votes cast against the proposal.

 

What vote is required to approve the non-binding advisory vote on the frequency of the executive compensation vote and how will the Board interpret any other voting result?

 

With respect to Proposal No. 4, the advisory vote on the frequency of the executive compensation vote, you may vote as follows: every one year, every two years, every three years, or you may abstain from voting. If you abstain from voting, the abstention will have no effect on the outcome of the vote on this Proposal.

 

Under Connecticut law, the approval of the advisory vote on the frequency of the executive compensation vote requires that the votes cast in favor of the proposal exceed the votes cast against the Proposal. If, however, none of the frequency choices receives sufficient votes for approval under the state law voting requirement, the frequency choice that receives the most votes will be considered by the Board to be the expression of the Company’s shareholders as to their preference and will be taken into account by the Board in making its determination as to the frequency of future advisory votes on executive compensation.

 

What are the voting recommendations of the Board?

 

For the reasons set forth in more detail later in this Proxy Statement, THE BOARD RECOMMENDS THAT YOU VOTE YOUR SHARES AS FOLLOWS:

 

 

The Board does not know of any matters to be presented for consideration at the Annual Meeting other than the matters described in these proposals and the notice of Annual Meeting of Shareholders. However, if other matters are presented, the persons named in the proxy intend to vote on such matters in accordance with their judgment.

 

Who counts the votes?

 

Representatives of Broadridge Financial Solutions, Inc. will tally the votes and certify the results.

When and how will the voting results be published?

 

We will announce the preliminary voting results at the Annual Meeting of Shareholders and in a press release, and will file a Current Report on Form 8-K containing the final voting results with the SEC within four business days of the Annual Meeting or, if final results are not available at that time, within four business days of the date on which final voting results become available.

 

The Company’s Amended and Restated Certificate of Incorporation provides for a Board of no less than nine or no more than fifteen directors, the exact number of directorships to be determined from time to time by resolution adopted by affirmative vote of a majority of the Board. The directors are divided into three classes, I, II and III, as nearly equal in number as practicable, with members to hold office until their successors are elected and qualified. Each class is to be elected for a three-year term at successive annual meetings. During 2010, the Board consisted of nine persons.

 

The Corporate Governance Committee recommended, and the Board selected, the three nominees listed below for election; Ms. Mary Ann Hanley, Mr. Mark G. Kachur, and Mr. David A. Lentini. All are Class II directors whose current terms expire at the 2011 Annual Meeting. If elected, each nominee will serve a three-year term of office that will expire at the annual meeting of shareholders in 2014. Each of Ms. Hanley and Messrs. Kachur and Lentini have consented to being named in this proxy statement and will serve as directors, if elected. Of the remaining directors, the Class III terms of Directors Thibdaue, Wallace, and Wilbur will expire in 2012. The Class I terms of Directors Hunt, Reeds and Thornburg will expire in 2013. The Board has fixed the number of directorships for the ensuing year at nine. Proxies cannot be voted for a greater number of persons than the number of nominees named.

 

Unless otherwise directed, it is intended that the enclosed proxy will be voted for the election of director nominees Hanley, Kachur, and Lentini. If any nominee is unable or declines to serve, the persons named in the proxy may vote for some other person(s). The biographies of each of the nominees and continuing directors below contains information regarding the person’s service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the specific experiences, qualifications, attributes or skills that caused the Corporate Governance Committee and the Board to determine that the person should serve as a director for the Company in 2011.

 

 

 

 

With the exception of Ms. Hunt, each director listed above has had the same employment for more than the past five years either in the position indicated or in other similar or executive capacities with the same company or a predecessor.

 

 

In 2010, the Company’s Board met five times, including one telephonic meeting, and conducted five regular executive sessions of the independent directors without management present. In addition, the Board maintains a number of standing committees described below under the heading “Board Committees and Responsibilities”. In 2010, each director attended 100% of the aggregate number of meetings of the Board and Committees on which he or she served. All directors attended the 2010 Annual Meeting of Shareholders. Directors are expected, but not required, to attend the 2011 Annual Meeting of Shareholders.

 

One half-day development session was held for directors in 2010. The session was conducted outside of regular meetings and featured experts from both outside and inside the Company. Directors were not required to attend the development session and were not compensated for attending.

 

The Board leadership model consists of a combined Chairman and Chief Executive Officer role, coupled with a strong independent Lead Director. Eric W. Thornburg is the Chairman and Chief Executive Officer, and Donald B. Wilbur is the Lead Director. The Board believes that the Company’s CEO is best suited to serve as Chairman because he is the director most experienced in the Company’s business and industry, and most capable of effectively identifying strategic priorities and leading discussions on and execution of the Company’s strategy.

 

The Lead Director has the following responsibilities:

 

 

Mr. Wilbur will retire, per the age limitation rules in the Company’s Bylaws, at the Annual Meeting in 2012. The Company’s CEO and Corporate Governance Committee are currently in the process of selecting an effective successor for this role.

 

The Company’s independent directors bring experience, oversight and expertise from outside the company and industry.

 

The Board believes the combined role of Chairman and Chief Executive Officer, together with a strong independent Lead Director, is in the best interest of shareholders because it provides the appropriate balance between Company and industry expertise in strategy development and independent oversight of management. The Lead Director is Chair of the Compensation Committee and serves on the Corporate Governance and Corporate Finance and Investments Committees.

 

The Board has an active role, as a whole and also at the Committee level, in overseeing and monitoring management of the Company’s risks. The Board regularly receives reports from members of senior management on areas of material risk to the Company, including operational, financial, legal, regulatory, environmental, and strategic and reputational risks. The full Board or an appropriate Committee receives these reports from the appropriate executive so that it may understand and oversee the strategies to identify, manage and mitigate risks.

When it is a Committee that receives the report, the Chairman of that Committee makes a report on the discussion to the full Board at its next meeting.

 

The Audit Committee is responsible for oversight of risks relating to the Company’s financial statements, financial reporting processes, the evaluation of the effectiveness of internal control over financial reporting, legal and regulatory risk and the Company’s compliance with its financial and ethics policies.

 

The Compensation Committee is responsible for monitoring risks associated with the design and administration of the Company’s compensation programs and equity compensation plans, and performs the annual performance review of the CEO. For 2010, the Compensation Committee reviewed the Company’s compensation policies and practices and did not identify any policies or practices that are reasonably likely to have a material adverse effect on the Company (see page 41 for further information).

 

The Governance Committee oversees risks relating to the Company’s corporate governance processes, independence of the Board, potential conflicts of interest and compliance with state and federal laws and regulations relating to corporate governance.

 

The Corporate Finance and Investments Committee manage risks associated with investments related to the defined benefit, welfare and Supplemental Executive Retirement plans, and merger and acquisition transactions.

 

The Board and its committees have direct and independent access to management. We believe this division of risk management responsibilities is the most effective approach for addressing the risks that the Company faces. The existing Board leadership structure encourages communication between the independent directors and management, including those as a result of discussions between the Lead Director and the Chairman of the Board and CEO. By fostering increased communication, we believe that the current Board leadership structure leads to the identification and implementation of effective risk management strategies.

 

The Company’s common stock is listed on the NASDAQ Global Select Market. NASDAQ listing rules require that a majority of the Company’s directors be “independent directors” as defined by NASDAQ corporate governance standards. Generally, a director does not qualify as an independent director if the director has, or in the past three years has had, certain material relationships or affiliations with the Company, its external or internal auditors, or is an employee of the Company. The Board has determined that Directors Hanley, Hunt, Kachur, Lentini, Reeds, Thibdaue, Wallace, and Wilbur are independent directors under NASDAQ listing standards. Mr. Thornburg, who is an employee of the Company, is not considered an independent director.

 

The Board based these determinations primarily on a review of the responses of the directors and executive officers to questions regarding employment and compensation history, affiliations, family and other relationships, together with an examination of those companies with whom the Company transacts business. In making the determination that Ms. Hunt is independent under NASDAQ rules, the Board considered the payments ($2,361.16 in 2009 and $2,950.20 in 2010) made by the Company to a law firm at which Ms. Hunt’s husband is an equity partner. These payments relate to a 2008 acquisition transaction that occasionally requires legal attention. At a point in the not distant future, these trailing legal matters will cease.

 

The Board has established standing Audit, Compensation, Corporate Governance, and Corporate Finance and Investment Committees. All Committees have adopted written charters. Copies of these charters are available in the Corporate Governance section on the Company’s website at www.ctwater.com, or by contacting the Company at the address appearing on page 56.

 

 

 

 

The Audit Committee

 

In 2010, the Audit Committee met five times, including three telephonic meetings. The Audit Committee appoints, compensates, and oversees the work of the independent registered public accountants of the Company and The Connecticut Water Company, and monitors the Company’s financial reporting process and internal control systems. The Board has determined that each member of the Audit Committee qualifies as an “independent director” for purposes of NASDAQ listing standards and SEC rules and also has determined that Carol P. Wallace is a “financial expert” as defined under SEC regulations. The Audit Committee Charter is available in the Corporate Governance section on the Company’s Web site at www.ctwater.com.

 

The Compensation Committee

 

In 2010, the Compensation Committee met four times, including two telephonic meetings. The Compensation Committee determines officer compensation and the promotion and hiring of officers, reviews Company fringe benefit plans other than retirement plans, and administers the Company’s Performance Stock Programs. The Compensation Committee Charter is available in the Corporate Governance section on the Company’s Web site at www.ctwater.com.

 

The Compensation Committee has the authority to retain any legal counsel, compensation consultant or other consultant to be used to assist in the evaluation of director or executive compensation. The Compensation Committee has engaged a recognized independent compensation consultant every three years to analyze executive compensation competitiveness and provide recommendations regarding the Company’s total pay program, described within the Compensation Discussion and Analysis on page 30.

 

In addition, the Compensation Committee receives an annual report from the President/CEO on each individual executive’s historical compensation information; each executive’s performance review; a progress report on the executive’s results in achieving strategic objectives; and general competitive market information pertaining to salary increase budgets and executive compensation.

 

The Corporate Governance Committee

 

In 2010, the Corporate Governance Committee met two times, including one telephonic meeting. The Corporate Governance Committee reviews the qualifications and independence standards of director nominees and makes recommendations to the Board, and reviews the overall effectiveness of the Board. The Corporate Governance Committee Charter is available in the Corporate Governance section on the Company’s Web site at www.ctwater.com.

 

The Corporate Finance and Investments Committee

 

In 2010, the Corporate Finance and Investments Committee met six times, including three telephonic meetings. The Corporate Finance and Investments Committee reviews the Pension Trust Fund of The Connecticut Water Company Employee Retirement Plan, the employee Savings Plan (401(k)), the VEBA Trust Fund for retiree

medical benefits, and the Supplemental Executive Retirement Program, reviews and determines actuarial policies and investment guidelines, selects the investment managers, and makes recommendations to and advises the Board on financial policy issues and the issuance of securities. The Committee also assists in the evaluation of proposed merger and acquisition transactions. The Corporate Finance and Investments Committee charter is available in the Corporate Governance Section on the Company’s Web site at www.ctwater.com.

 

The Corporate Governance Committee annually identifies director nominees based primarily on recommendations from management, Board members, shareholders, and other sources, such as water industry and state industry associations. All candidates submitted by a shareholder or shareholder group are reviewed and considered in the same manner as all other candidates. The Corporate Governance Committee recommends to the Board nominees that are independent of management and satisfy SEC and NASDAQ requirements and possess qualities such as personal and professional integrity, sound business judgment, and utility, compensation, financial, or political expertise. The Corporate Governance Committee also considers the age and diversity of proposed nominees (broadly construed to mean a variety of opinions, perspectives, personal, and professional experiences and backgrounds, such as gender, race, and ethnicity differences, as well as other differentiating characteristics) in making its recommendations for nominees to the full Board. The Corporate Governance Committee does not have a formal policy with respect to considering diversity; however, the Board and Committee believe that it is essential that diverse viewpoints are represented on the Board. In addition, the Corporate Governance Committee considers whether potential director nominees live in the Company’s service regions in sufficient numbers to satisfy the representation requirements of Connecticut General Statute 16-62a, and also evaluates other factors that it may deem are in the best interests of the Company and its shareholders. The Corporate Governance Committee may, under its charter, retain at the Company’s expense one or more search firms to identify potential board candidates. The Corporate Governance Committee does not currently employ an executive search firm, or pay a fee to any other third party, to locate qualified candidates for director positions.

 

The Corporate Governance Committee met on September 28, 2010 to consider the renomination of Directors Hanley, Kachur and Lentini, whose terms expire at the 2011 Annual Meeting of Shareholders. The Corporate Governance Committee reviewed the attendance, performance, skills and independence of these directors, but determined to withhold the Corporate Governance Committee’s recommendation of these director nominees to the Board until its January 2011 meeting, in order to allow interested shareholders to make either (i) recommendations to the Corporate Governance Committee for director nominees to be considered by the Board for inclusion on the Company’s proxy card, or (ii) formal director nominations, which, pursuant to the Company’s Bylaws procedures (described below), were due by January 12, 2011. The Corporate Governance Committee did not receive any formal director nominations from shareholders prior to the deadline. After consideration of all candidates, the Corporate Governance Committee recommended to the Board, and the Board approved, that the number of Board members should be set at nine and that Ms. Hanley, Mr. Kachur and Mr. Lentini should be submitted to shareholders as the Company’s director nominees.

 

The Company’s Bylaws allow nomination of directors by any shareholder who is entitled to vote for the election of directors at either the Annual Meeting of Shareholders or a special meeting where directors are to be elected. Shareholder nominations must be received no later than January 14, 2012, which is 120 days prior to the first anniversary date of the prior year’s Annual Meeting of Shareholders or within 10 days of the mailing date of a Notice of Special Meeting, and must include the following:

 

 

 

The presiding officer at the meeting will determine if a shareholder nomination was made in accordance with the provisions of the Company’s Bylaws. If the officer determines that a nomination was not compliant with the Bylaws, he shall state so at the meeting and the nomination will be disregarded.

 

Under the Company’s Bylaws, no director shall be eligible for election or re-election as a director of the Company after such director has attained the age of 70.

 

On January 27, 2010, the Board increased minimum stock ownership for each Board member to at least 2,500 shares of the Company’s common stock. Incumbent directors have until the date of the Annual Meeting of Shareholders in 2012 to meet the minimum stock ownership requirement. Newly-elected directors will have a reasonable amount of time, as determined by the Committee, to satisfy the minimum stock ownership requirement. All independent directors received an equity award of $10,000 in restricted common stock on May 14, 2010 under the Company’s Performance Stock Program. The shares become unrestricted on the first anniversary of the grant date (May 14, 2011), and count toward the minimum stock ownership requirements. Similar awards were made in 2009.

 

Any shareholder wishing to communicate with a director may do so by contacting the Company’s Corporate Secretary, at the address and telephone number listed on page 56, who will forward to the director a written, e-mail, or phone communication. The Corporate Secretary has been authorized by the Board to screen frivolous or unlawful communications or commercial advertisements.

 

During 2010, the Company paid $1,380,921 to Connecticut Light & Power (CL&P) for electric utility services at rates authorized by the Connecticut Department of Public Utility Control. Ms. Thibdaue is a vice president at Northeast Utilities Service Company, an affiliate of CL&P. Each year the Company engages in a competitive bid process to procure electricity in areas where that process is allowed and other cost effective service is available. The Company believes that the fees paid to CL&P are standard and are not influenced by the relationship it has with its director, Ms. Thibdaue. CL&P made payments of $7,419 to the Company during 2010 for water services at rates authorized by the DPUC.

 

Our Board has adopted a process for related person transactions which is administered by our Corporate Secretary who will report to the Corporate Governance Committee and Board, if there are any potential conflicts of interest. Our Corporate Governance Committee reviews and approves or ratifies all relationships and related person transactions between us and (i) our directors, director nominees, executive officers or their immediate family members, (ii) any 5% record or beneficial owner of our common stock or (iii) any immediate family member of any person specified in (i) and (ii) above. Our Corporate Secretary is primarily responsible for the development and

implementation of processes and controls to obtain information from our directors and executive officers with respect to related party transactions and for determining, based on the facts and circumstances, whether we or a related person have a direct or indirect material interest in the transaction.

 

Under its charter, the Corporate Governance Committee is responsible for review and approval of related person transactions. In the course of its review and approval or ratification of a related person transaction, the Corporate Governance Committee will consider:

 

 

Any member of the Corporate Governance Committee who is a related person with respect to a transaction under review will not be permitted to participate in the discussions or approval or ratification of the transaction. However, such member of the Corporate Governance Committee will provide all material information concerning the transaction to the Board and appropriate Board committee.

 

Annually, employees are sent the Company’s Code of Conduct. Thereafter, each employee acknowledges their understanding and compliance with the code, including the establishment of a Company hotline for reporting Code of Conduct violations. To date, the Company hotline has received no reports of conduct violations. In addition to the Code of Conduct, the Board has adopted an additional Code of Conduct as a result of the Sarbanes-Oxley Act of 2002.

 

The Board promotes honest and ethical conduct, including the ethical handling of actual and apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company; and compliance with applicable governmental laws and regulations and the Company’s own governing documents.

 

The public can access the Company’s Code of Conduct, updated in November of 2010, on the Company’s Web site (www.ctwater.com) or by contacting the Company at the address appearing on page 56.

 

Since the Boards of Directors of the Company and The Connecticut Water Company are identical, regular meetings of each are generally held on the same day.

 

In late 2009, the Compensation Committee approved an increase in compensation for the Board, ratified by the Board in early 2010, to increase Board member annual retainers from $8,000 to $12,000, which are paid in quarterly installments. As in 2009, each Committee Chairman was paid an additional retainer of $2,000 in quarterly installments, other than the Audit Committee Chair who received $4,000 and the Lead Director who received an additional $15,000 retainer. Board and Committee meeting fees were increased by $300 and $200 respectively to $1,000 for regular meetings; and the special meeting fee was increased by $100, to $1,000; whether the directors participate in person or by phone, other than the Audit Committee which has a $1,200 per meeting fee. There were no special meetings of the Board held in 2010. The Compensation Committee held one special telephonic meeting and the Corporate Finance and Investments Committee held three special telephonic meetings in 2010. Audit Committee members who participate in scheduled committee telephone conference calls were paid $600 per call and other Committees were paid $500 per call. On May 14, 2010, independent members of the Board were awarded

$10,000 in restricted common stock that will become unrestricted on May 14, 2011. It is anticipated that similar restricted awards may be made in future years.

 

The table below summarizes the compensation paid by the Company to its directors during the fiscal year-ended December 31, 2010.

 

 

 

 

Every three years, the Compensation Committee conducts a review of the Board’s compensation. In 2009, the Compensation Committee retained Thomas E. Shea & Associates, an independent compensation consultant, to review current compensation arrangements for Board members and compare them to Board compensation practices of the Company’s peer water companies and certain other utility companies. The review conducted by Thomas E. Shea & Associates generally found that the Company’s total and equity based compensation for directors was below those of its principal competitors and comparable companies, and the Committee determined that an increase in compensation to Board members in 2010 was necessary and appropriate. There have now been two changes since the 2009 study.

 

On December 7, 2010, the Compensation Committee authorized an increase in directors’ compensation, which was reported to the Board on January 27, 2011, and which became effective as of January 1, 2011. These changes were made to reflect market compensation for unscheduled committee conference calls. After that date, the Board and Committee meeting fees (excluding Audit Committee) will be $1,000 for regular and special meetings; whether the directors participate in person or by phone. The Audit Committee meeting fee will be $1,200 for regular meetings; whether the directors participate in person or by phone. Committee members (excluding Audit Committee) who participate in scheduled telephone conference calls will be paid $1,000 per call. Audit Committee members who participate in scheduled telephone conference calls will be paid $1,200 per call. Each Board member will be paid an annual retainer of $12,000 in quarterly installments. Committee Chairmen (excluding the Audit Committee) will be paid an additional annual retainer of $2,000 in quarterly installments. The Chairman of the Audit Committee will be paid an additional annual retainer of $4,000 in quarterly installments. The Lead Director will be paid an additional annual retainer of $15,000 in quarterly installments.

 

Under the Company’s Directors Deferred Compensation Plan, directors may elect to defer receipt of all or a specified portion of the compensation payable to them for services as directors until after retiring as directors. Any amounts so deferred are credited to accounts maintained for each participating director, and earn interest at an annual rate of 7.32% that is currently credited on a monthly basis to all deferred amounts. On January 24, 2008, the Directors Deferred Compensation was amended and restated to comply with Section 409A of the Internal Revenue

Code (IRC). As a result, any director who retires after January 1, 2008 receives a distribution of amounts deferred and accumulated interest in a lump sum within 60 days of their retirement date. One of the Company’s retired directors is currently receiving annual payments under the Plan.

 

None of the members of the Company’s Compensation Committee during 2010 (Directors Hunt, Kachur, Lentini, Wallace, or Wilbur) served as an officer or employee of the Company or any of its subsidiaries during the year. During 2010, no executive officer of the Company served as a director or as a member of the Compensation Committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served as a director of the Company, or who served on the Board’s Compensation Committee.

 

The following table lists, to the Company’s knowledge, the beneficial ownership of the Company’s common stock and the nature of such ownership for each director and nominee for director, for each executive officer named in the Summary Compensation Table, for all executive officers and directors of the Company as a group, and for each person who beneficially owns in excess of five percent of the outstanding shares of any class of the Company’s voting securities. Unless otherwise noted, each holder has sole voting and dispositive power with respect to the shares listed. All information is given as of March 15, 2011 and assumes that shares which the named person has a contractual right to acquire within 60 days have been acquired and are outstanding.

 

 

The above ownership individually and as a group is less than 5% of the outstanding shares of Connecticut Water Service, Inc.

 

 

 

 

Under Section 16 of the Securities Exchange Act of 1934, directors, officers and certain beneficial owners of the Company’s equity securities are required to file beneficial ownership reports of their transactions in the Company’s equity securities with the SEC on specified due dates. In 2010, all reports of transactions by all directors, officers and such beneficial holders were timely filed. In making this statement, the Company has relied on the written representations of its directors, officers, and ten percent shareholders and copies of the reports that they have filed with the SEC.

 

The following table sets forth information as of March 15, 2011 (except as otherwise indicated) as to all persons or groups known to the Company to be beneficial owners of more than five percent of the outstanding common stock or Preferred A Stock of the Company.

 

 

 

 

In connection with the preparation and filing of the Company’s audited financial statements for the fiscal year ended December 31, 2010 (the “audited financial statements”), the Audit Committee performed the following functions:

 

 

Based upon the functions performed, the Audit Committee recommended to the Board, and the Board approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for filing with the U.S. Securities and Exchange Commission.

 

AUDIT COMMITTEE

Carol P. Wallace (Chairman)

David A. Lentini

Lisa J. Thibdaue

Arthur C. Reeds

 

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such statutes.

 

The Audit Committee has appointed PricewaterhouseCoopers LLP to serve as the Company’s independent registered public accounting firm and to audit our financial statements for the fiscal year ending December 31, 2011. Although we are not required to seek shareholder approval of this appointment, it has been our practice for many years to do so. No determination has been made as to what action the Audit Committee and the Board would take if our shareholders fail to ratify the appointment.

 

Even if the appointment is ratified by shareholders, the Audit Committee retains discretion to appoint a new independent registered public accounting firm at any time if the Audit Committee concludes such a change would be in the best interests of the Company.

 

Representatives of PricewaterhouseCoopers LLP will attend the Annual Meeting of Shareholders, will have the opportunity to make a statement, if they desire to do so, and are expected to be available to respond to appropriate questions.

 

During fiscal year 2010, the Company retained its independent registered public accountants, PricewaterhouseCoopers LLP, to provide services in the following categories and amounts.

 

The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K and for the review of the financial statements included in the Company’s Quarterly Reports on Form 10-Q were $350,000 for the fiscal year-ended December 31, 2009 and $365,000 for the fiscal year-ended December 31, 2010.

 

PricewaterhouseCoopers LLP performed audit related professional services as follows:

 

 

In addition to the services and fees stated above, PricewaterhouseCoopers LLP billed the Company for the following:

 

 

 

 

In accordance with its charter, the Audit Committee pre-approved all audit and non-audit fees for 2009 and 2010 as listed above.

 

 

The following table provides information about the Company’s common stock that may be issued upon the exercise of options and vesting of other awards under all of the Company’s existing equity compensation plans as of December 31, 2010. The table also includes information about the Company’s other equity compensation plans previously adopted without shareholder approval.

 

 

 

 

At the Company, honesty is one of our core values. We believe in the power of this value and know the only way to build and strengthen our reputation is through trust. We hold ourselves to the highest standard of integrity and ethical behavior and strive for transparency. We welcome the opportunity to share this Compensation Discussion and Analysis (CD&A) with our shareholders and customers.

 

In this section, we provide an overview and analysis of the Company’s compensation program and policies, the material compensation decisions we have made under those programs and policies, the material factors that we considered in making those decisions and our Company’s peer ranked Total Shareholder Return performance to the NEO’s total compensation. Later in this proxy statement, under the heading “Additional Information Regarding Executive Compensation”, you will find a series of tables containing specific information about the compensation awarded to the following individuals, our Named Executive Officers (NEOs) in 2010, Chairman and Chief Executive Officer (CEO), Mr. Eric W. Thornburg; Vice President, Finance and Chief Financial Officer (CFO),

Mr. David C. Benoit; Mr. Thomas R. Marston who served as our Vice President, Business Development, until September, 2010; Mr. Terrance P. O’Neill, Vice President, Service Delivery; Ms. Maureen P. Westbrook, Vice President, Customer and Regulatory Affairs; and Ms. Kristen A. Johnson our Vice President, Human Resources and Corporate Secretary.

 

The compensation for these individuals is listed in tables found in the CD&A and in the Executive Compensation sections of this Proxy Statement.

 

OUR BUSINESS IN FISCAL 2010

 

Following are highlights of the Company’s financial performance in 2010:

 

 

The following table displays the 2010 TSR of our publicly traded Water Utility Peer Group. For a listing of companies in our utility peer group, Please refer to page 31 of the CD&A.

 

 

 

The following chart documents the Company’s average annual three-year TSR as compared to the Water Utility Peer Group, showing its performance of 9.9%:

 

The following table graphically depicts the cumulative five-year TSR for the publicly traded Water Utility Peer Group for the period ended December 2010:

 

 

Developments in our Executive Compensation Program for Fiscal Year 2010

 

During fiscal year 2008, the Compensation Committee (for purposes of this CD&A, the “Committee”) undertook a strategic review of the Company’s executive compensation practices to ensure that our plans and practices were competitive, supportive of the goals of the organization and in keeping with the best interests of our shareholders. As a result of that review and further discussion in December of 2009, the Committee took the following actions with regard to the executive compensation program for fiscal year 2010:

 

 

The Committee also met in December of 2010 and made the following modifications to executive compensation plans for fiscal year 2011:

 

 

For fiscal year 2011, the Committee also:

 

 

PHILOSOPHY AND GOALS OF OUR EXECUTIVE COMPENSATION PROGRAM

 

The Company’s compensation philosophy is set by the Committee and affirmed by the Board. Our philosophy is described in the following table and is intended to align executive officer’s compensation with the Company’s annual and long-term performance. A significant portion of each NEO’s total compensation opportunity is directly related to the Company’s attaining earnings per share targets as well as to other performance factors measuring our progress toward the goals of our long-term strategic and business plans.

 

We are pleased to share with you that in 2010, the Company’s three-year average annual TSR, the highest among our peer group, was 9.9%, and its cumulative five-year TSR was 37.5% as detailed in the charts on pages 23 and 24, while NEO compensation was at the market median of that same peer group as measured by our 2008 executive compensation benchmarking study, time adjusted.

 

We believe that this exceptional market performance supports the executive compensation plans and programs the Committee has approved for the NEOs. Our goal has been to design compensation plans that drive short and long-term positive results for our shareholders within the framework of our compensation philosophy as detailed further in this CD&A.

 

The Company wants its NEOs and employees to balance the risks and related opportunities inherent in its industry and in the performance of their duties and share the upside opportunity and the downside risks once actual performance is measured. To this point, the Board has completed a risk analysis of all of our compensation policies and programs for its employees and has determined that these policies and programs are not reasonably likely to have a material adverse effect on the Company. For further information please see the Risk Assessment on page 41.

 

A review of our programs will highlight two core concepts of our philosophy, pay for performance and pay at risk.

 

The following table highlights the primary components and rationale of our compensation philosophy and the pay elements that support the philosophy.

 

Elements of Total Compensation

 

Executive Summary

 

We recognize that a sound and risk appropriate executive compensation program is part of what makes a company an employer of choice. Our compensation philosophy is to provide certain pay elements that are directly linked to the Company’s performance results. By doing so, we are able to provide the following:

 

 

Of these four pay elements, we consider the annual and long-term incentive forms of compensation to be the most important because they enable us to attract, retain, motivate and reward talented individuals who have the necessary skills to manage our growing organization on a day-to-day basis as well as for the future.

 

The value of annual incentives is directly linked to specific financial goals such as earnings per share, customer growth and other specific individual objectives, such as customer and employee satisfaction defined and approved by the Committee at the beginning of each fiscal year. The long-term incentive plan helps to mitigate the potential risk that an executive might take short-term actions that are not in the long-term interest of the Company and its shareholders in order to achieve greater payouts through the annual incentive plan.

 

Long-term incentive awards are provided to executive officers in three forms: restricted stock, performance stock and performance cash and each, vest over a three-year period since 2008. This vesting target is reviewed by the Committee at the beginning of each three-year performance period.

 

To assist the Committee in executing its responsibilities, it engages a consultant (see information on Compensation Consultant page 30) every three years, or as needed, to provide the Committee comparative performance and pay data based upon a sample of publicly-traded utilities (page 31). The peer group pay data is derived from proxy statements and helps the Committee establish the salaries and target incentive award opportunities for the NEOs. In addition to the peer utility group compensation data, the Consultant selects certain well known and respected published surveys on executive compensation and includes that data, where appropriate, to provide a well defined review.

 

In general, it is the intent of the Committee to have individual base salaries fall within a plus or minus range of 25% from the market median data established by the independent consultant. Variations within the plus or minus 25% range can occur based on length of service, performance, job grade, etc., and are considered by the Committee annually in the merit increase award process. Annual and long-term incentives are targeted at market median for performance that meets targeted annual objectives. Performance results can be above or below the targets set and the Committee intends to have the incentive compensation award levels mirror the actual performance results up to a cap, currently 120% of target.

 

Discussion of Specific Elements of Compensation

 

Our approach to total compensation is to create a comprehensive compensation package designed to reward individual performance based on the Company’s short-term and long-term performance and how this performance links to our corporate strategy. The elements of our total compensation for executive officers, including the NEOs, are as follows:

 

Rewarding Short-Term Performance

 

 

 

Rewarding Long-Term Performance

 

 

 

Other Elements of Total Compensation

 

 

 

The Role of Management in Compensation Decisions

 

The Committee and the CEO discuss the financial metrics that closely align performance targets of the business with the strategic goals of the Company. The Committee and the CEO also discuss the individual goals and desired initiatives for each executive, to determine which goals should be used, and the extent to which performance targets for the previous year have been achieved.

The Committee reviews information provided by its Compensation Consultant and uses that information as a reference point for the components of compensation. The CEO provides input on and makes recommendations to the Compensation Committee for executives other than himself with respect to annual salary adjustments, annual and long-term incentive adjustments and grants of equity awards under our incentive plans. The Committee approves or modifies the compensation of these executives taking into consideration the CEO’s input and recommendations.

 

From time to time throughout the year, the CEO or the Vice President, Human Resources and Corporate Secretary may provide to the Committee competitive data with regard to annual salary range adjustments, merit increase budgets and other information related to best practice and emerging trends on executive compensation matters.

 

In fiscal 2010, the CEO was present at all of the Committee meetings, and attended the portions of executive sessions as invited by the lead director and as such attended portions of two meetings in 2010. The CEO did provide information to the Committee regarding compensation for his direct reports in executive session but did not participate in meetings or deliberations when his own compensation was discussed.

 

The Role of the Compensation Consultant

 

The Committee retains a compensation consultant every three years, or as needed, to review, gather competitive data and provide advice on executive compensation matters. The most recent executive compensation review was performed in 2008 when the Committee engaged the services of Thomas E. Shea of TES & Associates, hereafter the “Consultant”. In 2008, the Consultant provided advice and information regarding the design and implementation of the Company’s executive compensation programs, and updated the Committee about regulatory and other technical developments that may affect the Company’s executive compensation programs. In addition, the Consultant provided the Committee with competitive market information, analyses and trends on base salary, short-term incentives, long-term incentives, executive benefits and perquisites. The Committee believes that the Consultant provides candid, direct and objective advice to the Committee, to that end:

 

 

In 2011, the Committee again engaged the Consultant to provide an independent review of revised annual and long-term metrics for the 2004 PSP, as selected by the Committee. Additional disclosure on this engagement may be found on pages 34 and 35 in this CD&A.

 

Consultant Independence

 

The Committee is solely responsible for engaging, retaining and terminating compensation consultants and determining their terms and conditions, including the fees. The Committee determines whether the compensation consultant’s advice is objective and free from the influence of management. It also closely examines the safeguards and steps the Consultant takes to ensure that its executive compensation consulting services are independent and objective.

 

Competitive Positioning

 

In 2008, the Committee reaffirmed a total pay compensation philosophy to target the pay of our NEOs in a range of plus or minus 25% of the median of both a peer group of utility comparators and data from selected general

industry published surveys. The competitive total annual compensation is determined by an arithmetical average of the Utility Comparator 25th percentile; multiple regression size adjusted data for the utility peer group and published survey data.

 

The utility peer comparators listed below were independently recommended by the Consultant, and finalized and approved based upon input from the Committee Chairman and the Company’s Chairman, President and CEO. The Committee reviewed proxy statements for the peer group entities which provided philosophy, program design and total direct compensation statistical data for the top five executive officers by rank order of pay. The Committee then approximated the 25th percentile for all three of the criteria. The Committee utilized 25th percentile data as well as multiple regression analysis (with revenue, employees, and number of customers as the independent variables) to adjust the data for size and provide comparisons comparable to the Company’s scope of operations.

 

Utility Peer Group

 

The Committee established a utility peer group of the following companies in 2008 and reviews this list at each compensation study for relevance:

 

 

 

 

Published Surveys

 

The Committee reviewed the following surveys in conjunction with its 2008 executive compensation benchmarking review:

 

 

These published surveys were utilized in the 2008 study because executive and officer jobs are typically viewed as part of a broader labor market.

 

Using the information from this utility peer group and published surveys, the Committee compared each executive officer position to similar positions at other companies. Where there was no similar position, the Committee compared the Company position to a range of positions from the two resources that were the closest matches, and then assigned the Company position to a salary grade.

 

The Committee used these salary grades to determine the preliminary salary recommendation, the preliminary target incentive award opportunity, and the target long-term equity incentive award value for each executive position. Each salary grade is expressed as a range with a minimum, midpoint, and maximum. The Committee seeks to set the midpoint for salaries, target incentive award levels, and target annual long-term incentive award values for our Executive Officer positions to plus or minus 25% of the median for executives in equivalent positions in the utility peer group and published survey data. The minimum level of each salary grade is set close to the bottom quartile of these groups, while the maximum level is set close to the top quartile of each group.

 

This framework provides a guide for the Committee’s deliberations. The actual total compensation and/or amount of each compensation element for an individual executive officer may be more or less than this median figure.

How We Make Compensation Decisions

 

In conjunction with the review and approval of the upcoming year’s financial and strategic plans each fall, the Committee determines the level of potential awards through the Company’s PSP for the upcoming year, and undertakes a risk analysis to identify any adverse material impacts and take steps to mitigate such impacts. The specific performance goals are established and the corresponding maximum and minimum awards are determined by the Committee taking into consideration guidance from the Consultant. At the conclusion of the year’s performance being measured, the Committee determines for each NEO what portion of the awards was actually earned, based upon the achievement of performance goals set in the financial and strategic business plans. The awards are then made to the participants. Long-term awards have a vesting period that must be satisfied, pre-established goals that must be achieved and a continued employment term of three years.

 

In the first quarter of each year, the Committee reviews the total compensation of our leadership team, the executive officers reporting to the CEO, including salaries, target annual and long-term incentive award values, perquisites and other benefits (including retirement, health, and welfare benefits), and change-in-control arrangements. The Committee receives an annual report from the CEO in executive session on each individual executive’s historical compensation information; each executive’s performance reviews; a progress report on the executive’s results in achieving strategic objectives; and general competitive market information pertaining to salary increase budgets and executive compensation. Every three years, or as frequently as the Committee desires, a recognized independent compensation consultant is engaged to analyze executive compensation competitiveness and reasonableness of the Company’s executive officer pay levels and program. Comparisons have regularly been made to a sample of larger and smaller publicly-traded water company competitors for executive talent, including our Utility Peer Group members. The Consultant also provides recommendations regarding executive compensation program strategy, mix and award practices based upon competitive market trends as well as tax and financial efficiencies. Ernst & Young LLP provided an analysis and recommendation to the Committee on July 31, 2002, Pearl Meyer & Partners provided an analysis and recommendation to the Committee on August 30, 2005 and TES & Associates did so most recently on December 3, 2008. The Compensation Committee intends to engage an independent compensation consultant for these purposes again in 2011, as per their past practice.

 

The Committee then sets each executive’s compensation target for the current year. Typically, this involves establishing annual merit opportunities. Merit pay adjustments become effective on a date determined by the Committee, typically in the first or second quarter of the year. The Committee’s decisions are then reported to and reviewed by the Board.

 

Decisions about individual compensation elements and total compensation are ultimately made by the Committee using its best business judgment, focusing primarily on the executive officer’s performance against his or her individual financial and strategic objectives, as well as the Company’s overall performance. The Committee also considers a variety of qualitative factors, including the business environment in which the financial and strategic objectives were achieved. Thus, with the exception of the performance share awards discussed later, the compensation of our executives is not entirely determined by formula.

 

Total Annual Cash Compensation

 

In 2010, the Committee reviewed base pay amounts and approved a two percent increase to the grade range midpoints for each of the NEOs to maintain the competitiveness of ranges and to recalibrate the long and short-term

award opportunities for 2011. The following table illustrates the 2011 grade range midpoints and annual and long-term award opportunities for the NEOs.

 

 

In 2009, the Committee chose not to increase NEO salaries due to the challenging economic environment. In 2010, the Committee conducted a review of the base pay amounts for each NEO and made adjustments in line with the Company’s merit increase budget, an analysis of competitive executive merit pay data, Company financial performance and the report of the CEO on the individual performance of each of the NEOs and other officers for the most recent performance period.

 

Overall, the primary reasons for individual variation of salaries from the market median include length of time in the current position and individual performance. Based on the manner in which the Company manages base salaries, it is expected that actual and market salaries will eventually converge. Since annual cash incentive targets and the annualized value of long-term incentive targets are applied to actual base salaries, total compensation levels may similarly differ from market median total compensation levels.

 

This policy results in a greater percentage of total compensation (excluding benefits) for the NEOs being performance based. The table below shows 2010 total performance-related percentages for the NEOs.

 

 

 

 

Performance Objectives and Annual Incentive Awards Though the PSP

 

We carefully set annual incentives through the PSP to reward our executive officers, including the NEOs, for the Company’s annual performance in achieving pre-established financial and strategic goals set at both the Company level and the individual level. In the Fall of each year, based on the CEO’s recommendations for his direct officer reports, the Committee reviews this information to determine if any material adverse impact may arise as a result of the recommendations and then establishes the target annual incentive award opportunity for each executive

salary grade, approves the performance objectives for the upcoming performance year and reviews those actions with the Board. All references to the CEO’s recommendations relate to executives other than himself. All decisions related to the CEO are made by the Committee and are reviewed with the Board in accordance with the Committee’s Charter.

 

 

Threshold, Target and Maximum Award Opportunities

 

The Committee establishes a threshold, target, and maximum incentive amount for each NEO expressed as a percentage of the salary range midpoint for the annual and long-term awards as detailed in the table below. These amounts were revised for the 2009-2011 plan years based on the advice of the Consultant, the Committee’s evaluation of competitive market data and internal equity and then the salary grade midpoints were adjusted by two percent for 2011 to maintain pace with market compensation growth levels. The PSP is used by the Committee to pay fully competitive annual cash compensation and provide competitive longer-term stock compensation awards when performance against goals matches the target level. The Committee has the authority in determining the amounts of annual and long-term awards, to modify the mathematical results (for example, in a year in that an event beyond management’s control, such as extremely wet conditions, were to decrease revenues and earnings significantly) when the Compensation Committee, exercising its sound business judgment, deems it prudent to do so. In line with this authority, the Committee determined, exercising its sound business judgment, to pay an incentive for the plan participant’s achievement of 88% of the three-year growth target, set in 2007 for years 2008 through 2010, despite the fact that the 2010 year growth did not meet the threshold level of performance. The Committee felt that the three-year growth to the three-year target was positive and improved the Company’s overall standing in a State with negative growth in the same period (see page 39 for more information).

 

 

 

 

 

Performance Objectives

 

Based on the CEO’s recommendations and an analysis of the associated potential risk points, the Committee approves the financial and strategic performance objectives for each executive officer, including the NEOs. In selecting the financial performance objectives, the Committee sought to have the executives focus on the Company’s operating financial performance, including in 2010, target earnings per share of $1.17 at a weight of 60%, customer satisfaction, employee satisfaction and customer growth targets at a combined weight of 20% and individual NEO objectives at a weight of 20%. These individual objectives were set to reward each executive for actions successfully taken that were directly related to his or her own job responsibilities and to reinforce accountability.

 

Consistent with several previous performance metrics enhancements, for plan year 2011 and into the future the Committee, in consultation with the independent consultant, adjusted the metrics of the short-term incentive plan to weight financial targets at 70% of the award calculation and key company metrics at 30%. Individual objectives will no longer be included in the short-term incentive because the Committee has determined that it will be more effective to reward these achievements through the Company’s merit increase and performance management plan.

 

 

2010 Performance Process

 

In executive session, the Committee selected and weighted the CEO’s performance goals, taking into consideration the Company’s current financial and strategic priorities. The Committee recognizes that earnings

per share should be emphasized, but also that performance against this metric may not be reflected in a single 12-month period. For 2010, 60% of the CEO’s annual incentive award opportunity was based on the Committee’s assessment of the Company’s total financial performance. Each of these goals are further defined by identifying the Threshold level of performance (80%), Target or expected performance (100%) and Maximum level of performance (120%). Mr. Thornburg’s financial performance for 2010 was measured by the following metrics:

 

 

The remaining 40% of his award opportunity was based on the Committee’s assessment of the following strategic goals:

 

 

The Committee selected these strategic goals based on its judgment that they represent areas where the CEO should focus his energies to continue to drive the Company’s business forward. The potential risks associated with the CEO’s performance goals were reviewed by the Committee and with the Board and his progress was periodically reviewed by these same entities during the year.

 

For 2010, annual incentives for our other NEOs were based on performance measured against a combination of financial goals and one or more strategic goals, related to the Company’s business for the year, as follows:

 

 

 

 

The Committee set the target levels for the financial and strategic objectives relating to the annual incentive awards and concluded that the relationship between the payments generated at the various levels of achievement for the NEOs other than the CEO and the degree of difficulty of attainment of the performance targets was significant and reasonable.

 

Performance Objectives and Long-Term Incentive Awards Though the PSP

 

We use long-term incentives through the PSP to reward our executive officers, including the NEOs, for the Company’s longer-term performance in achieving pre-established financial and strategic goals set at the Company level. In the last quarter of each year, based on the CEO’s recommendations for his direct officer reports, the Committee establishes the target long-term incentive award opportunity for each executive salary grade and approves the performance objectives for the upcoming performance year. All references to the CEO’s recommendations relate to executives other than himself. All decisions related to the CEO are made by the Committee and are reviewed with the Board in accordance with the Committee’s Charter.

 

Consistent with several previous performance metrics enhancements, for plan year 2011 and into the future, the Committee, in consultation with the independent Consultant, changed the metrics of the long-term incentive plan to TSR achievements relative to peer company performance and/or the achievement of highly significant

growth targets over a three-year period. Total Shareholder Return is a term describing the total of the Company’s stock appreciation and dividends over a specified period of time. The Committee determined to undertake this review and subsequent metric adjustments to better differentiate the short and long-term goals and to provide objectives that continue to strengthen alignment of the participants’ activities with the interests of shareholders.

 

 

Target Award Opportunities

 

Each NEO’s 2010 target incentive award opportunity was set as a percentage of salary grade mid-point. The Committee determined the target incentive levels based on its evaluation of competitive market data and internal equity.

 

For 2010, target incentive opportunities for the NEOs ranged from 20-40% of salary grade midpoints. These target levels are at market median for similar positions. Should an executive have responsibilities increased during the year and/or be promoted, the target incentive opportunity for the year may be adjusted pro rata to reflect the new salary range and target bonus opportunity.

 

 

Performance Objectives

 

Based on the CEO’s recommendation, the Committee approves the financial and strategic performance objectives for each executive officer, including all NEOs. In selecting the financial performance objectives, the Committee sought to have the executives focus on the Company’s 2010 earnings per share at a weight of 60% and customer growth for 40% of the award total.

 

 

2010 Performance Process

 

The Committee selected and weighted the CEO’s goals, taking into consideration the Company’s current financial and strategic priorities and reviewing all associated elements of risk. The Committee recognizes that earnings per share should be emphasized. For 2010, 60% of the CEO’s long-term incentive award opportunity was based on the Committee’s assessment of the Company’s achievement of the 2010 earnings per share target projected in 2007, 2008, and 2009. The CEO’s financial performance for 2010 was measured by the following metrics:

 

 

The Committee selected these strategic goals based on its judgment that they represent areas where the CEO should focus his energies to drive the Company’s business forward. The CEO’s goals were reviewed with the Board and his progress was periodically reviewed by the Committee and the Board during the year.

 

Similarly, for 2010, long-term incentives for our other NEOs were based on performance measured against a combination of financial goals and one strategic goal, related to the Company’s growth in residential equivalents over a period of three years as follows:

 

 

 

 

The Committee set the target levels for the financial and strategic objectives relating to the long-term incentive awards and concluded that the relationship between the payments generated at the various levels of achievement and the degree of difficulty of the targets was significant and reasonable.

 

 

PSP Achievement Process

 

The Company’s 2010 Strategic Plan provided the targets for awards through the 2004 PSP that were then payable in 2011.

The Committee met in late 2007 with the intent of adjusting the components of the long-term incentive to enhance the alignment of the participant’s incentives with that of the Company’s shareholders and customers. To accomplish this, the Committee approved changes to the long-term awards to differentiate the goals between the annual and long-term incentive and modify the vesting period for the long-term awards. In 2008 through 2010, the long-term awards are measured by the attainment of earnings per share and growth of residential equivalents, and vest 33.33% per year ratably over three years beginning on the first anniversary of the earning of the award as long as the participant remains employed by the Company.

 

As previously reported on pages 34 and 35 the Committee, in consultation with the Consultant, made adjustments to the metrics in both the short-term and long-term components of the 2004 PSP to further differentiate the objectives and to better align the actions of the participants with the interests of the shareholders.

 

The Compensation Committee met on March 9, 2010, and finalized amounts payable as annual and long-term incentive awards to the NEOs. The annual results for the 2009 plan year were reported previously in the 2010 Proxy Statement but are reiterated here because the payments of such portions of the annual and long-term awards for 2009 had an impact on the NEO’s compensation in 2010.

 

In 2008, the Board established an earnings per share maximum level of performance for 2009 in 2008 of $1.20 per basic common share and a strategic growth target of increasing our customer base by 1,650 residential equivalents was exceeded; thus the NEOs received 75.39% of their award allocation, based on the Company’s 2009 financial and strategic results in the long-term plan. The short-term plan included the earnings per share target achieved at 100%, defined performance indicators, such as customer satisfaction and customer growth were achieved at threshold or better levels and added 14.0% to the award allocation. Individual initiatives were achieved at various levels (detail disclosed in 2010 Proxy Statement) and added an additional amount to each of the NEO’s awards.

 

Total awards earned through the PSP for the 2009 plan year were as follows (previously disclosed in 2010 Proxy Statement):

 

 

Please see the table on page 39 for a tabular representation of the long-term plan goals and achievement levels for 2008, 2009, and 2010. The awards, when earned, vest ratably at the rate of 33.33% over each of three years. For example, in April 2010, 33.33% of the 2009 long-term award was paid to each NEO. In March of 2011 another 33.33% of the 2009 award and 33.33% of the 2010 was paid and the remaining 33.33% of the 2009 award will be paid on the anniversary date of the earning of the award in March of 2012. Also, in 2010, another 33.33% of the 2010 award will be paid and then the final 33.33% of the 2010 award will be paid in March of 2013, as long as the participant remains employed by the Company.

 

The Committee also met on March 8, 2011, and finalized amounts payable as annual and long-term incentive awards to the NEOs through the PSP for 2010.

 

The short-term plan included the previously detailed earnings per share target of $1.17 for 2010 providing an award equal to 95.7% of target for each NEO, providing 57.4% to the award allocation. The defined performance for customer satisfaction was achieved at 104.8% of target and employee satisfaction was achieved at 84.4% of target. The growth of residential equivalents goal was not achieved and thus did not provide an award increment to the calculation. Customer service and employee satisfaction targets added 11.4% to the award allocation. Individual initiatives were achieved at levels disclosed in the following exhibits and added between 8% and 24% to the

incentive award allocation. Thus, each of the NEOs received between 76.8% and 92.8% of their target award allocations for 2010 as follows:

 

 

 

 

 

 

 

 

Total awards earned through the PSP for the 2010 plan year were as follows:

 

 

 

 

 

As previously reported, the long-term component of the PSP now bases NEO awards on the achievement of financial performance and strategic growth results over three years. In 2008 and 2009, the Company worked to transition to this structure such that the Board defined earnings per share and strategic growth goals for 2008 and 2009, established in 2007 accounting for 66.66% of the 2009 long-term award payout and goals in the same categories for 2009, established in 2008, accounted for 33.33% of the long-term award payout. Our transition to long-term award based on three years of performance against strategic goals was completed at the close of the 2010 PSP year when 33.33% of the Award was based on earnings per share and strategic growth targets for 2010 set in 2007, 2008, and 2009 as illustrated in the chart below.

 

Following is an illustration of the business cycles, goals and achievement levels for the 2010 awards approved for payment beginning in 2011 and vesting ratably over a three-year period, 2011 through 2013, as long as the participant remains employed by the Company.

 

 

 

 

 

 

 

The Impact of Tax Considerations on Executive Compensation Decisions

 

While the Company’s executive compensation program is structured to be sensitive to the deductibility of compensation for federal income tax purposes, the program is principally designed to achieve our objectives as described throughout this Compensation Discussion and Analysis. Section 162(m) of the Internal Revenue (IRC) Code of 1986 generally precludes the deduction for federal income tax purposes of more than $1 million in compensation (including long-term incentives) paid individually to our Chief Executive Officer and the other NEOs in any one year, subject to certain specified exceptions. As noted above, under the amended and restated employment agreement and change-in-control plan descriptions for Messrs. Thornburg, Benoit, O’Neill and Ms. Westbrook on page 46 in the event that any payment or benefit received or to be received by the executive under the agreement would be an “excess parachute payment”, as defined in (IRC) Section 280G, and subject to the federal excise tax imposed by IRC Section 4999, then an additional “gross-up” payment will be made to the named executive in the event that the benefits payable to the named executive under agreement becomes subject to the excise tax on excess parachute payments. The gross-up payment would compensate the named executive for the initial 20% excise tax payable on their excess parachute payments plus the income and excise taxes then becoming payable on the gross-up payment. We included these provisions in these agreements because we did not want the potential excise tax to serve as a disincentive to pursue a change-in-control transaction that might otherwise be in the best interests of our shareholders. We believe that, in light of our NEOs record of performance, this determination is appropriate. Ms. Johnson’s amended and restated employment agreement and change-in-control plan does not provide for a tax gross up in the event that her payment was to incur federal excise tax as explained above.

 

Anti-Hedging

 

The Company does not allow directors, officers, and specified employees to hedge the value of Company equity securities held directly or indirectly by the director or employee. Company policy prohibits the purchase or sale of puts, calls, options, or other derivative securities based on the Company’s securities, as well as hedging or monetization transactions and purchases of Company equity securities on margin.

 

We have reviewed and discussed the Compensation Discussion and Analysis with the Company’s management, and, based on our review and discussions and such other matters deemed relevant and appropriate by the Compensation Committee, we recommend to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

THE COMPENSATION COMMITTEE

Donald B. Wilbur (Chairman)

Heather Hunt

Mark G. Kachur

David A. Lentini

Carol P. Wallace

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such statutes.

 

The Compensation Committee of the Board regularly reviews the compensation policies and practices for all employees, including executive officers and has determined that our compensation policies do not and are not reasonably likely to have a material adverse effect on the Company. The Compensation Committee following its review and approval of executive compensation matters reports to the full Board for their ratification. The Company believes that this is an important step to assure that the decisions made by the Compensation Committee are aligned with the strategy of the entity and transparent to all constituencies, therefore exposing any potential risks for discussion and mitigation. The Compensation Committee makes decisions regarding incentive and other forms of compensation based on analysis and discussion of the following key factors, presented by knowledgeable industry professionals that have the potential to encourage excessive risk-taking:

 

 

The Compensation Committee highlights the following design features of our PSP that operate to mitigate the concern of excessive risk taking for participants:

 

 

The Compensation Committee determined that, for all non-executive employees, the Company’s compensation programs are low risk. The Company maintains a single discretionary annual bonus program for non-executive employees rewarding world class customer service satisfaction scores. This bonus is determined by management and, when paid, is less than a week of wages for participants. In 2011, the Compensation Committee approved a new short-term cash incentive program for non-officers called the Non-Officer Incentive Compensation Plan (“NOICP”). The Compensation Committee designed this plan to encourage a team of senior managers to review the Company’s operations for sustainable, cost-effective efficiencies and to responsibly reduce operations and maintenance expense without negatively impacting safety, water quality, infrastructure improvements, and customer service. Ultimately, the NOICP will benefit shareholders and customers by appropriately reducing

expenses while maintaining exceptional customer service and water quality. The Compensation Committee has determined that this program will not pose a material adverse effect for the Company due to the fact that: