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, 2010

 

Dear Shareholder:

 

You are cordially invited to the Annual Meeting of Shareholders of Connecticut Water Service, Inc., scheduled to be held on Friday, May 14, 2010, at the Mystic Marriott, 625 North Road (Route 117), Groton, Connecticut, beginning at 2:00 P.M.

 

At the meeting, you will be asked to elect three directors and ratify the appointment of our independent auditors for the fiscal year ending December 31, 2010. 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 of Directors 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, 2010. 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 14, 2010

 

The Annual Meeting of Shareholders of Connecticut Water Service, Inc. will be held on Friday, May 14, 2010, at the Mystic Marriott, 625 North Road (Route 117), Groton, Connecticut, for the following purposes:

 

1. to elect three (3) directors;

 

 

3. to transact such other business as may properly come before the meeting.

 

Only holders of the Company’s common stock and its Cumulative Preferred Stock — Series A of record at the close of business on March 17, 2010 are entitled to vote at this meeting.

 

Shareholders are cordially invited to attend the meeting.

 

By order of the Board of Directors,

 

 

Daniel J. Meaney

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/corporategovernance.htm

 

and the following Web site until 11:59 P.M. on May 13, 2010: 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

2010 ANNUAL MEETING OF SHAREHOLDERS

 

This Proxy Statement is furnished by and on behalf of the Board of Directors of Connecticut Water Service, Inc. (the “Company”) for use at the Annual Meeting of Shareholders to be held at Mystic Marriott, 625 North Road, Groton, Connecticut, at 2:00 P.M., on May 14, 2010. In that regard, a Notice of Internet Availability or this Proxy Statement, the Company’s 2009 Annual Report and Form 10-K are being mailed to shareholders on or about April 1, 2010. 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 $5,000 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, 2010. 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:

 

1. election of three (3) Directors;

 

2. ratification of the appointment of our independent registered public accountants; and

 

3. transaction of such other business to properly come before shareholders.

 

In addition, following the meeting, management will report on the performance of the Company and respond to questions from shareholders.

 

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 exits with respect to that matter. With respect to each of Proposals No. 1 and 2, a majority of the votes entitled to be cast on each matter by holders 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 17, 2010 are entitled to notice of and to vote at the Annual Meeting. On March 1, 2010, the Company had outstanding 8,500,881 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 on the ratification of the appointment of PricewaterhouseCoopers LLP even if the broker does not receive voting instructions from you. Important Change: There is an important change this year regarding broker non-votes and Director Elections. An NYSE rule change that is effective for the 2010 Annual Meeting of Shareholders no longer permits brokers to vote in the election of Directors if the broker has not received instructions from its customer, the beneficial owner. This represents a significant change from prior years, when brokers had discretionary voting authority in the election of Directors. Accordingly, it is particularly important that beneficial owners instruct their brokers how they wish to vote their shares on the election of Directors.

 

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.

 

How many votes are needed to elect 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 nominees named by the Board of Directors.

How many votes are needed to ratify PricewaterhouseCoopers LLP as independent registered public accountants for 2010?

 

Ratification of the appointment of the Company’s independent registered public accountants requires that there be more votes cast for the Proposal than against the Proposal.

 

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 publish the final voting results in a Form 8-K to be filed with the Securities and Exchange Commission on or about May 18, 2010.

 

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 2009, the Board of Directors consisted of nine persons.

 

The Corporate Governance Committee recommended, and the Board of Directors selected, the three nominees listed below for election; Ms. Heather Hunt, Mr. Arthur C. Reeds, and Mr. Eric W. Thornburg. All are Class I Directors whose current terms expire at the 2010 Annual Meeting. Of the remaining Directors, the Class II terms of Directors Hanley, Kachur, and Lentini will expire in 2011. The Class III terms of Directors Thibdaue, Wallace, and Wilbur will expire in 2012. The Board of Directors has determined to fix 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 Hunt, Reeds, and Thornburg.  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 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 2010.

 

 

 

 

With the exception of Ms. Hunt and Mr. Thornburg, 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 2009, the Company’s Board of Directors met six times, including one teleconference, and conducted five regular executive sessions of the independent directors without management present. In addition, the Company’s Board of Directors maintains a number of standing committees described below under heading “Board Committees and Responsibilities”. In 2009, each director attended at least 94% of the aggregate number of meetings of the Board and Committees on which he or she served. All directors attended the 2009 Annual Meeting of Shareholders. Directors are expected, but not required, to attend the 2010 Annual Meeting of Shareholders.

 

Two half-day development sessions were held for directors in 2009. The sessions were conducted outside of regular meetings and featured experts from both outside and inside the Company and covered matters related to executive compensation and utility accounting and ratemaking. Directors were not required to attend the development sessions 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 Chief Executive Officer 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:

 

 

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 stockholders 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 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 of Directors at its next meeting. The Company’s Compensation Committee is responsible for overseeing the management of risks relating to the Company’s executive compensation plans and arrangements. The Audit Committee oversees management of financial, legal and regulatory risks. The Corporate Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. The Corporate Finance and Investments Committee manages risks associated with investments related to the defined benefit, welfare and Supplemental Executive Retirement plans, and merger and acquisition transactions.

 

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 (which were minimal in amount in 2009) made by the Company to a law firm at which Ms. Hunt’s husband is an equity partner.

 

The Board of Directors 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 at the Company’s website at www.ctwater.com/corporategovernance.htm, or by contacting the Company at the address appearing on page 44.

 

 

 

 

The Audit Committee

 

In 2009, 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 also has determined that Carol P. Wallace is a “financial expert” as defined under rules of the Securities and Exchange Commission. The Audit Committee Charter is available on our Web site at www.ctwater.com/corporategovernance.htm

 

The Compensation Committee

 

In 2009, the Compensation Committee met three times, including one telephonic meeting. 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 on our Web site at www.ctwater.com/corporategovernance.htm.

 

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 18.

 

In addition, the Compensation Committee receives an annual report from the President/Chief Executive Officer 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 2009, the Corporate Governance Committee met two times. 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 on our Web site at www.ctwater.com/corporategovernance.htm.

 

The Corporate Finance and Investments Committee

 

In 2009, the Corporate Finance and Investments Committee met seven times, including three telephonic meetings. On May 13, 2009, the Pension Trust and Finance Committee was renamed the Corporate Finance and Investments Committee. The Corporate Finance and Investments Committee reviews the Pension Trust Fund of The Connecticut Water Company Employee Retirement Fund, 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 of Directors on financial policy issues and the issuance of securities. The Committee also assists in the evaluation of proposed merger and acquisition transactions. On March 9, 2010, the Board of Directors adopted a charter for the Corporate Finance and Investments Committee. The charter is available on our Web site at www.ctwater.com/corporategovernance.htm.

 

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 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, financial, or political expertise. The 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 Committee does not have a formal policy with respect to considering diversity; however, the Board and Corporate Governance Committee believe that it is essential that diverse viewpoints are represented on the Board.

In addition, the Committee considers whether potential director nominees live in The Connecticut Water 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 Committee may, under its charter, retain at the Company’s expense one or more search firms to identify potential board candidates. The 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 29, 2009 to consider the renomination of Directors Hunt, Reeds, and Thornburg, whose terms expire at the 2010 Annual Meeting of Shareholders. The Corporate Governance Committee reviewed the attendance, performance, skills and independence of these Directors, but determined to withhold the Committee’s recommendation of these Director nominees to the Board until its January 2010 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 13, 2010. 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. Hunt, Mr. Reeds and Mr. Thornburg 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, 2011, 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 of Directors increased minimum stock ownership for each Board member to at least 2,500 shares of Connecticut Water Service, Inc. 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 13, 2009 under the Company’s Performance Stock Program. The shares become unrestricted on the first anniversary of the grant date (May 13, 2010), and count toward the minimum stock ownership requirements.

 

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 44, 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 2009, the Company paid $1,416,942 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. CL&P made payments of $7,936 to the Company during 2009 for water services at rates authorized by the DPUC.

 

The Company recognizes that transactions between the Company and any of its directors or executives can present potential or actual conflicts of interest. Therefore, as a general matter and in accordance with the Company’s Code of Conduct and the Board of Directors’ Code of Ethics, it is the Company’s preference to avoid such transactions.

 

In order to screen any potential conflicts of interest, the Board has designated the Corporate Secretary to review the proxy questionnaires completed by executive officers and directors and report to the Corporate Governance Committee, Audit Committee, and Board, if there are any such potential conflicts. The Audit Committee reviews any matter related to audit misconduct and the Corporate Governance Committee reviews any matter related to a conflict of interest of current board members or those considered for Board membership. Both committees report to the Board on matters that may rise to the level of an actual or potential conflict.

 

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 on the Company’s Web site (www.ctwater.com) or by contacting the Company at the address appearing on page 44.

 

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 2009, the Board and Committee meeting fee was $800 for regular meetings; $900 for special meetings; whether the directors participate in person or by phone. There were no special meetings of the Board or any Committee held in 2009. Committee members who participate in scheduled committee telephone conference calls were paid $400 per call. Each Board member was paid an annual retainer of $8,000 in quarterly installments. Each Committee Chairman was paid an additional retainer of $2,000 in quarterly installments. On May 13, 2009, independent members of the Board of Directors were awarded $10,000 in restricted common stock that will become unrestricted on May 13, 2010. It is anticipated that similar restricted awards will be made in future years.

 

The table below summarizes the compensation paid by us to our directors during the fiscal year ended December 31, 2009.

 

 

 

 

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 was necessary and appropriate.

 

On December 8, 2009, the Compensation Committee authorized an increase in directors’ compensation, which was reported to the Board on January 27, 2010, and which became effective on April 1, 2010. 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 $500 per call. Audit Committee members who participate in telephone conference calls will be paid $600 per call. Each Board member will be paid an annual retainer of $12,000 in quarterly installments. Committee Chairmen (excluding 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 8.07% 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 2009 (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 2009, 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) or 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 16, 2010 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 reports of their transactions in the Company’s equity securities with the Securities and Exchange Commission on specified due dates. In 2009, 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 Securities and Exchange Commission.

 

The following table sets forth information as of March 16, 2010 (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, 2009 (the “audited financial statements”), the Audit Committee performed the following functions:

 

 

Based upon the functions performed, the Audit Committee recommended to the Board of Directors, 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, 2009 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, 2010. 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 of Directors 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 2009, 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 reviews 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, 2008 and $350,000 for the fiscal year-ended December 31, 2009.

 

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 2008 and 2009 listed above.

 

THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” PROPOSAL (2).

 

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, 2009. 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 rate payers.

 

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, and the material factors that we considered in making those decisions. 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 2009, Chairman and Chief Executive Officer (CEO), Mr. Eric W. Thornburg; Vice President, Finance and Chief Financial Officer (CFO), Mr. David C. Benoit; Vice President, Business Development, Mr. Thomas R. Marston; Vice President, Service

Delivery, Mr. Terrance P. O’Neill; and Ms. Maureen P. Westbrook, Vice President, Customer and Regulatory Affairs.

 

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

 

PHILOSOPHY AND GOALS OF OUR EXECUTIVE COMPENSATION PROGRAM

 

The Company’s compensation philosophy is set by the Compensation Committee (for purposes of this CD&A, the “Committee”) and affirmed by the Board of Directors. 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 NEOs’ total compensation opportunity is directly related to the Company’s earnings per share as well as to other performance factors measuring our progress toward the goals of our long-term strategic and business plans. The Board of Directors has completed a risk analysis of all Connecticut Water Company 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 32 of this document.

 

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 management 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: reasonable salaries that reflect each executive’s responsibility level, qualifications and contribution over time; benefits that adequately meet the needs of our employees and their families at a reasonable shared cost; meaningful, performance-based annual incentives; and long-term equity incentives that reflect the creation of shareholder value and drive other company objectives.

 

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 to achieve payouts through the annual incentive plan.

 

Long-term incentives are provided to executive officers in three forms: restricted stock, performance stock, and performance cash and vest over a three year period as of 2009. This vesting target is reviewed and established by the Committee for the ensuing three year performance period.

 

To assist the Committee in executing its responsibilities, it engages a consultant (see information on Compensation Consultant page 23) every three years, or as needed, to provide the Committee comparative

performance and pay data based upon a sample of 11 publicly-traded utilities (page 24). The peer group pay data is derived from their 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.

 

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

 

 

 

Compensation Consultant

 

The Compensation Committee retains a compensation consultant every three years, or as needed, to review, benchmark 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 know as 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:

 

 

 

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, as discussed in the Executive Summary (page 20), to target the pay of our executives 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 5 Executive Officers by rank order of pay. The Committee then approximated the 25th percentile for all three of the criterion. 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 with input 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 or four years, as dictated by the individual plan year.

 

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 Total Pay 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 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 below, the compensation of our executives is not entirely determined by formula.

Total Annual Cash Compensation

 

The Company’s executives recommended to the Compensation Committee that they not be granted increases to base pay in 2009 based on several factors: the challenging business environment in Connecticut, their view of the critical importance of maintaining staffing levels without layoffs, and in response to the continuing recessionary environment in the United States. The Committee accepted this recommendation and made no base salary increases for any of the NEOs in 2009. The Committee then reviewed 2009 market data on executive grade range adjustments and concluded that a modest two percent increase to the grade range midpoints for each of the NEOs was appropriate to maintain the competitiveness of ranges and to recalibrate the long and short-term award opportunities for 2010. This grade range increase, however, did not result in any base salary changes for the NEOs in 2009. The following table illustrates the 2010 grade range midpoints and annual and long-term award opportunities for the NEOs.

 

 

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 2009 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 Mr. Thornburg’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 Mr. Thornburg’s recommendations relate to executives other than himself. All decisions related to Mr. Thornburg 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 plan year based on the advice of the Consultant, the Committee’s evaluation of competitive market data and internal equitability and then the salary grade midpoints were adjusted by two percent for 2010 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. Performance against any objective that is below threshold will result in no award being paid for such objective. However, 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. No such discretion was used in determining the 2009 awards.

 

 

Performance Objectives

 

Based on Mr. Thornburg’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 2009, target earnings per share of $1.20 at a weight of 60%, customer satisfaction, employee satisfaction and customer growth targets at a combined weight of 20% and individual NEO objectives also set 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.

 

2009 Performance Process

 

In executive session, the Committee selected and weighted Mr. Thornburg’s 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 2009, 60% of Mr. Thornburg’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 2009 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 Mr. Thornburg should focus his energies to continue to drive the Company’s business forward. The potential risks associated with Mr. Thornburg’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 2009, 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:

 

Weightings Assigned to Each Performance Objective for the Other NEOs

 

 

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 Mr. Thornburg and the degree of difficulty of attainment of the performance targets was significant and reasonable given the ongoing weak business environment and related factors.

 

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 both the Company and individual level. In the last quarter of each year, based on Mr. Thornburg’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 Mr. Thornburg’s recommendations relate to executives other than himself. All decisions related to Mr. Thornburg are made by the Committee and are reviewed with the Board in accordance with our Committee’s Charter.

 

Target Award Opportunities

 

Each NEO’s 2009 target incentive award opportunity was set as a percentage of salary grade midpoint. The Committee determined the target incentive levels based on its evaluation of competitive market data and internal equity.

 

For 2009, 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 Mr. Thornburg’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 2009 earnings per share at a weight of 60% and customer growth for 40% of the award total.

2009 Performance Process

 

The Committee selected and weighted Mr. Thornburg’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 2009, 60% of Mr. Thornburg’s long-term incentive award opportunity was based on the Committee’s assessment of the Company’s achievement of the 2009 earnings per share target defined in 2008. Mr. Thornburg’s financial performance for 2009 was measured by the following metrics:

 

 

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

 

For 2009, 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:

 

Weightings Assigned to Each Performance Objective for the Other NEOs

 

 

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 given the ongoing weak business environment and related factors.

 

PSP Achievement Process

 

The Company’s 2009 Strategic Plan provided the targets for awards through the 2004 PSP that were then payable in 2010.

 

As reported previously, 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 rate payers. 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, 2009 and succeeding plan years, the long-term awards will be measured by attainment of earnings per share and Company metrics (such as customer satisfaction, employee satisfaction and customer growth), 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.

 

The Compensation Committee met on March 10, 2009, and finalized amounts payable as annual and long-term incentive awards to the NEOs. For the long-term awards, the Board’s previously established earnings per share target for 2008 of $1.12 per common share was achieved; thus the NEOs received 100% of their award allocation based on the Company’s financial results. The performance goal of adding 1,600 residential equivalent customers, a two percent increase over 2007, was exceeded in the 2008 plan year resulting in a payout over target of 105% for a total combined payout of 102% through the Long-Term Plan. The Short-Term Plan included the previously detailed earnings per share target of $1.12 providing an award equal to 100% of target for each NEO, providing 60% to the award allocation. Achievement of the defined performance indicators, such as customer satisfaction, employee satisfaction and growth of residential equivalents were achieved at amounts between threshold and maximum levels

and added 20.1% to the award allocation. Individual initiatives were achieved at threshold/target/maximum levels and added between 17% and 24% to the incentive award allocation. Thus, each of the NEOs received between 96.5 and 104.1% of their target award allocations for 2008 as follows:

 

 

In April 2009, 33.33% of the long-term award was paid to each NEO with the remaining 66.66% to be paid ratably on the anniversary date of the earning of the award in April of 2010 and 2011, as long as the participant remains employed by the Company.

 

The Committee also met on March 9, 2010, and finalized amounts payable as annual and long-term incentive awards to the NEOs through the PSP for 2009.

 

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 will be complete at the close of the 2010 PSP year when 33.33% of the Award will be based on earnings per share and strategic growth targets for 2010 set in 2007, 2008 and 2009.

 

Following is an illustration of the business cycles, goals and achievement levels for the 2009 awards approved for payment beginning in 2010 and vesting ratably over a three-year period, 2010 through 2012, as long as the participant remains employed by the Company.

 

Business plan cycle 2008, established late in 2007 accounting for 66.66% of the 2009 Long-Term Award

 

 

Business plan cycle 2009, established in 2008 accounting for 33.33% of the 2009 Long-Term Award

 

 

In 2008, the Boards established an earnings per share maximum level of performance for 2009 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 will receive 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 per the following table and added an additional amount to each of the NEO’s awards as indicated in the tables below.

 

2009 Annual Plan Individual Goals

 

 

 

 

Total awards earned through the PSP for the 2009 plan year were as follows:

 

 

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 on page 37, 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.

 

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 of Directors regularly reviews the compensation policies and practices for all employees, including executive officers and believes that our compensation policies do not and are not reasonably likely to create a material adverse effect on the Company. The Committee makes this decision 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 Committee highlights the following design features of our PSP that operate to mitigate the concern of excessive risk taking for participants:

 

 

The 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, when paid is less than a week of wages for participants.

 

 

 

 

 

 

 

 

 

 

 

As described previously in the Compensation Discussion and Analysis on page 18, the Committee allocates a threshold, target, and maximum award for each participant annually in December of the year proceeding the measurement period. Specific targets disclosed on page 30 herein, covering a range of shareholder, customer, and employee driven strategic goals are established before the year begins. At the conclusion of the fiscal year, the Committee reviews a management report, comparing the actual performance against the pre-established goals to determine the level of earned award. The award is paid in accordance with the allocation choices made by the participant between restricted stock, performance shares and cash units, made prior to the fiscal year being measured.