The Torrington Water Company
Annual Report 2014
Ca s h D i v i d e n d s Pa i d E v e r y Y e a r S i n c e 1880
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THE TORRINGTON WATER COMPANY /
Annual Report
INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders
Report on the Financial Statements We have audited the accompanying financial statements of The Torrington Water Company (the Company), which comprise the balance sheets as of December 31, 2014, 2013 and 2012, and the related statements of income and retained earnings, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
January 27, 2015 Shelton, Connecticut
The mission of The TorringtonWater Company is to reliably and cost-effectively provide clean water to its customers while acting in the best interest of its shareholders.
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THE TORRINGTON WATER COMPANY /
Annual Report
/
DECEMBER 31, 2014
Five-Year Selected DATa
FINANCIAL
2014
2013
2012
2011
2010
Income Statement
Operating Revenues $ O & M Expenses $ Utility Operating Income* $ Net Income* $
6,594,940 2,625,492 1,923,453 1,635,805
$ $ $ $
6,515,526 2,449,437 2,058,884 1,685,123
$ $ $ $
5,958,762 2,315,345 1,548,511 1,120,060
$ $ $ $
5,855,145 2,327,360 1,641,147 1,202,854
$ $ $ $
5,995,020 2,267,843 1,560,287 1,165,241
Balance Sheet
Stockholders’ Equity* Long Term Debt Stockholders’ Equity %* Long Term Debt % Net Utility Plant Earnings Per Share* Dividend Per Share* Book Value Per Share*
$ 17,997,881 $ 9,460,000 65.5 34.5 $ 40,382,388 $ 1.89 $ 0.83 $ 20.83
$ 17,079,196 $ 9,715,000 63.7 36.3 $ 38,392,262 $ 1.95 $ 0.77 $ 19.77
$ 16,059,353 $ 9,970,000 61.7 38.3 $ 37,661,252 $ 1.30 $ 0.73 $ 18.59
$ 15,570,013 $ 10,225,000 60.4 39.6 $ 36,207,506 $ 1.39 $ 0.69 $ 18.02
$ 14,963,319 $ 7,480,000 66.7 33.3 $ 35,181,391 $ 1.35 $ 0.61 $ 17.32
* Reflects the 2-for-1 stock split that took place in April 2013 and the change in the Company’s method of accounting for income taxes effective January 1, 2013. All prior periods have been adjusted to reflect these changes. See Notes 2 and 3 to the financial statements.
OPERATIONAL
2014
Miles of Main 164 Number of Hydrants 920 Gallons Produced (Thou.) 908,973 Gallons Sold (Thou.) Residential 513,115 Commercial 134,643 Industrial 9,875 Number of Customers 9,969 Number of Employees 17
2013
2012
2011
163 920 918,367 529,742 531,832 135,894 140,850 11,168 12,894 9,688 9,665 16 16
163 919 938,601
164 920 918,299
2010
162 914 989,924 539,669 559,522 142,146 146,506 14,910 16,781 9,637 9,607 16 16
This information is not part of the audited financial statements
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THE TORRINGTON WATER COMPANY president’s message
To Our Stockholders:
OFFICERS Susan M. Suhanovsky President Steven F. Cerruto Vice President / Operations Catherine C. Roscello Secretary / Treasurer
DIRECTORS Edwin G. Booth, Jr. Richard D. Calhoun Steven F. Cerruto Diane V. Libby James M. Lucas Gregory S. Oneglia Charles W. Roraback Margaret P. Roraback Susan M. Suhanovsky
2
Financial Highlights We ended 2014 with satisfactory results, both financially and operationally. Company operating revenues increased during the year to $6,594,940, rising 1.2%, or $79,414, over 2013. Operating expenses rose by $214,845, or 4.8%, to $4,671,487 despite our best cost control efforts. As a result of the higher operating expenses, utility operating income for 2014 declined by $135,431, or 6.6%, to $1,923,453. Net income also fell, by $49,318, or 2.9%, to $1,635,805. On a per share basis, net income declined by $0.06 to $1.89. In December, the Board of Directors raised our quarterly cash dividend to $0.23 per share from $0.20. With that increase, 2014 became the 17th consecutive year we have raised our dividend, and the 135th consecutive year we have paid a dividend (payments began in 1880). Shareholder value was further increased by a gain in the market price of our common stock. The share price rose 3.4% to $38.00 at year-end from $36.75 at the end of 2013. Book value grew to $20.83 per share from $19.77, a 5.4% increase. Operational Highlights In December 2013, we negotiated an agreement with the City of Torrington to acquire its water system assets at a cost of $350,000. The transaction was finalized on December 17, 2014, following approval by the Public Utilities Regulatory Authority (PURA). With this transaction, we transferred 260 customers to our base whom we had previously served through a Sale for Resale agreement with Torrington. Our total number of customers is now just under 10,000. The process of integrating the Torrington customers went very smoothly and is now complete. We have been operating and maintaining this distribution system for the city since 1967, so we know it well. As part of our distribution improvement program, we have started to change all of the meters in the newly acquired system to radio-wireless-read meters. During 2014, we again devoted considerable effort and money to improving our infrastructure. We replaced 8,500 feet of existing water mains at a total investment of $1,300,000. Replacing small old mains helps reduce main breaks and lowers unaccounted-for water. In this effort, we make a point of working with the City of Torrington, State of Connecticut and other utilities to coordinate water main replacement projects prior to road resurfacing projects. That is one reason we have one of the lowest costs-per-foot for main replacement in the state, and this has not gone unnoticed at PURA. Under the state’s Water Infrastructure and Conservation Adjustment (WICA) program, water utilities regulated by PURA are allowed to add a surcharge to customer bills to earn a return on a given year’s infrastructure investment costs (as well as associated property tax, depreciation expense and income tax). In 2014, the revenue realized through the WICA surcharge was $358,000 based on our 2013 infrastructure investment. We have applied to PURA to recover the allowed costs for mains replaced in 2014. If approved, the 2015 WICA surcharge will be at 10.0%, which is the maximum allowed between rate cases. We expect the new rate to become effective April 1, 2015, and to generate $598,000 in revenues. Over the past four years, we have invested more than $4.2 million through the WICA program to replace 5.65 miles of main which met the criteria for replacement. In February 2014, we entered into a two-year contract to provide operations and maintenance support services for the water system owned by the New Hartford Water Pollution Control Authority (WPCA). We also provide monitoring of water quality compliance, emergency response and other services as needed. The contract has been quite successful, generating over $58,000 in revenue in 2014. The WPCA appears pleased with our performance, and we hope to have the opportunity to extend the contract for another two years. During 2014, we again offered customers coverage for the cost of repairing broken or leaking water or sewer lines on their property. We contract with Homeowner Safety Valve Company for the coverage, with no liability on our part, and we receive 15% of the revenue for each customer who signs up. At year-end, 10.5% of our water customers and 7.1% of the City of Torrington’s sewer customers were taking advantage of this program, which provided us with revenue of $15,000 in 2014.
The Torrington Water Company / Annual Report 2014
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THE TORRINGTON WATER COMPANY
Early in 2014, we installed a generator at the Greenbriar Pumping Station, the final pump station in need of such backup equipment, in order to comply with proposed new regulations. The completion of this project ensures that our customers will have an uninterrupted supply of water even when the electrical power goes out. We continue to manage our watershed in a prudent and sustainable manner. We follow a forest management plan that allows for carefully controlled harvesting of timber. Each year, a new area of timber is marked for harvesting. Our forester looks at many factors in determining a sale of timber. One of the factors looked at in the past few years is the spread of the emerald ash borer, a beetle that destroys ash trees. Therefore, ash was a large part of last year’s harvest. In 2014, we realized $58,000 in non-operating income through our timber sale operations. In March 2014, we submitted an application to the state’s Department of Energy and Environmental Protection (DEEP) to renew our water diversion permit for the sale of water to Aquarion’s Litchfield system. The permit was due to expire in June 2014. If approved, the new permit will allow us to sell to Aquarion up to 400,000 gallons of water per day, an increase of 200,000 gallons per day, and will guarantee revenue to us for 125,000 gallons per day whether Aquarion uses it or not. We have already received the required sale-of-excess-water permit from the Department of Public Health as well as approval from PURA. Once DEEP grants its approval, we will be able to increase our sale of water to Aquarion. Your Board of Directors is committed not only to steering our company in the present but also to looking ahead. In 2014, we purchased an additional 35 acres of watershed land on the Allen Dam watershed which will become part of a future reservoir site. Forward planning such as this ensures that we always have the ability to serve our customers in the future. The Year Ahead We have been able to avoid a rate increase since 2008 (the date of our most recent rate case), for several reasons. First, the WICA program has allowed us to partially recover costs associated with infrastructure investments in a timely manner. Second, another state program—the Water Revenue Adjustment (WRA)—has enabled us to realize the revenues allowed to us in our 2008 rate case. And third, we have been able to lower our federal income tax expense dramatically by taking advantage of a change in IRS rules that enables us to immediately deduct, as ordinary and necessary repair costs, certain qualifying expenditures. Unfortunately, we have now reached the limits of what we can recoup through WICA and WRA.
The maximum allowed WICA surcharge is 10.0%, which we reached at year-end 2014. And the WRA program allows no more than a six-year gap between rate cases. Therefore, we have started to prepare a rate application that we will file with PURA sometime this spring. Our Series F bonds, with an interest rate of 5.58%, come due in January 2016. Our bank loan, with an interest rate of 4.58%, also comes due at that time. We will be exploring the potential sources of borrowing, interest rates and terms that will be available to us, and will look to refinance both types of debt during the latter part of 2015. The agreement that we signed with a wind farm development company was not extended. The firm we were working with decided that the regulatory climate in Connecticut was not favorable enough for it to make the financial investment needed. However, another wind development company has shown an interest in working with us to determine the feasibility of a wind farm project on our non-watershed land. Some Closing Thoughts The future holds many opportunities for our company. We are confident that with our excellent water quality, strong physical plant and dedicated staff, we will be able to capitalize on those opportunities to the benefit of our stockholders. For a company to thrive and improve service to its customers for over 130 years—as our company has done—requires both employees and Board members who are dedicated, loyal and hard working. Our employees have an average of 18.5 years of service, which is indicative of the rewarding environment, challenging work and strong support they find here. During 2014, our Vice President / Operations, Steven F. Cerruto, celebrated 40 years of service. Another employee, Art Mercuri, retired at year-end after 11 years of service. I thank all of our employees for their commitment to making this company the best it can be. I also extend my sincere appreciation to our Board of Directors for their support and able planning, and to our stockholders for their ongoing confidence.
Susan M. Suhanovsky President
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THE TORRINGTON WATER COMPANY /
Annual Report
Balance Sheets AS OF DECEMBER 31, 2014, 2013 AND 2012
2014
ASSETS Utility plant, at cost
Less: accumulated depreciation Net utility plant
$ 59,409,057 19,026,669 40,382,388
Nonutility property, net of accumulated depreciation
2013
2012
$ 56,179,154 17,786,892 38,392,262
$ 54,501,584 16,840,332 37,661,252
372,935
372,935
372,935
377,742 418,988 748,000
1,564,077 444,035 748,000
2,139,907 448,058 734,000
567,794 145,174 10,219 137,016 2,404,933
367,160 120,598 165,000 219,735 3,628,605
— 140,126 180,078 174,422 3,816,591
1,712,421 190,613 6,551,500
1,628,453 184,564 5,537,100
1,526,746 154,858 4,821,700
Current assets: Cash and cash equivalents Accounts receivable Accrued unbilled revenues Regulatory asset-water revenue adjustment, current portion Materials and supplies inventory Prepaid income taxes Prepaid expenses Total current assets
Other assets: Other assets
Preliminary survey and investigation charges Regulatory asset-income taxes recoverable Regulatory asset-water revenue adjustment, net of current portion Unfunded postretirement benefits Total other assets TOTAL ASSETS
141,291 2,212,111 10,807,936 $ 53,968,192
122,387 2,053,701 9,526,205 $ 51,920,007
— 1,862,439 8,365,743 $ 50,216,521
$
$ 1,800,000 15,279,196 17,079,196
$ 1,800,000 14,259,353 16,059,353
STOCKHOLDERS’ EQUITY AND LIABILITIES Stockholders’ equity:
Common stock, no par; 1,000,000 shares authorized; 864,000 issued and outstanding Retained earnings Total stockholders’ equity
Long-term debt , net of current portion Current liabilities: Current portion of long-term debt Accounts payable Accrued taxes Accrued interest Other current liabilities Total current liabilities
Deferred income taxes Unfunded postretirement benefits Other deferred credits Customer advances for construction Contributions in aid of construction Amortized contributions in aid of construction Commitments (Note 11)
TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES
1,800,000 16,197,881 17,997,881
9,205,000
9,460,000
255,000 282,756 425,186 150,195 111,549 1,224,686
255,000 203,648 384,801 156,124 113,862 1,113,435
255,000 318,414 354,351 162,053 106,165 1,195,983
9,808,000 2,212,111 — 3,069,316 8,350,450 2,100,748
8,869,983 2,053,701 105,709 3,370,737 7,940,648 1,926,598
8,081,288 1,862,439 105,709 3,329,504 8,025,577 1,841,668
24,267,376 $ 51,920,007
23,246,185 $ 50,216,521
25,540,625 $ 53,968,192
9,715,000
The accompanying notes are an integral component of these financial statements 4
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THE TORRINGTON WATER COMPANY /
Annual Report
Statements of Income and retained earnings For the years Ended DECEMBER 31, 2014, 2013 AND 2012
2014
Operating revenues Operating expenses:
$
Operation expenses Maintenance expenses Depreciation expense Taxes other than income taxes Income taxes (benefit) Total operating expenses Utility operating income
6,594,940
2013 $
6,515,526
2012 $
5,958,762
1,948,997 676,495 1,150,538 928,457 (33,000) 4,671,487
1,933,411 516,026 1,098,713 839,929 68,563 4,456,642
1,830,589 484,756 1,050,369 780,331 264,206 4,410,251
1,923,453
2,058,884
1,548,511
128,010 1,198 131,675 — 260,883 27,859 233,024
64,797 1,909 96,728 11,193 174,627 7,843 166,784
73,240 4,156 108,834 11,117 197,347 69,818 127,529
2,156,477
2,225,668
1,676,040
500,962 18,342 1,368 520,672
521,774 17,362 1,409 540,545
537,427 17,166 1,387 555,980
Other income and deductions:
Merchandising and jobbing – net Interest income Miscellaneous non-operating income Allowance for funds used during construction Total other income and deductions Taxes applicable to other income Net other income and deductions
Income before interest expense
Interest expense:
Interest on long-term debt Amortization of deferred financing costs Other interest expense Total interest expense
Net income
1,635,805
1,685,123
1,120,060
Dividends declared Retained earnings, beginning of year Retained earnings, end of year Per share amounts:
(717,120) 15,279,196 $ 16,197,881
(665,280) 14,259,353 $ 15,279,196
(630,720) 13,770,013 $ 14,259,353
Net income, basic
$
$
1.95
$
1.30
Dividends declared
$
$
.77
$
.73
Book value $
$
19.77
$
18.59
1.89 .83 20.83
The accompanying notes are an integral component of these financial statements The Torrington Water Company / Annual Report 2014 TWC AR 2014/5 final.indd 7
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THE TORRINGTON WATER COMPANY /
Annual Report
Statements of Cash Flows For the years Ended DECEMBER 31, 2014, 2013 AND 2012
2014
2013
2012
CASH flows from operating activities: Net income
$1,635,805
Adjustments to reconcile net income to net cash provided by operating activites: Depreciation and amortization Deferred income taxes (benefit) Bad debt, nonutility property and project write-offs Allowance for funds used during construction Changes in operating assets and liabilities: Receivables and unbilled revenues Regulatory asset-water revenue adjustment Materials and supplies inventory Prepaid income taxes Prepaid expenses Other assets, net Accounts payable Accrued and other liabilities Deferred credits Net cash provided by operating activities
$
1,685,123
$
1,120,060
1,356,768 (76,383) 8,027 —
1,294,603 73,295 6,980 (11,193)
1,229,727 264,495 5,073 (11,117)
17,020 (219,538) (24,576) 154,781 82,719 (290,198) 69,448 32,143 (105,709)
(16,957) (489,547) 19,528 15,078 (45,313) (297,585) (121,295) 32,218 —
193,621 — (3,922) 479,129 (92,624) (312,873) (74,593) (22,599) (227)
2,640,307
2,144,935
2,774,150
(2,568,675) (350,000) 115,510 (51,357) (2,854,522)
(1,805,190) — 47,763 (43,058) (1,800,485)
(2,453,437) — — (43,673) (2,497,110)
(255,000) (717,120) (972,120)
(255,000) (665,280) (920,280)
(255,000) (630,720) (885,720)
(1,186,335)
(575,830)
(608,680)
Cash flows from investing activities: Additions to utility and nonutility plant Acquisition of the City of Torrington water system Proceeds from developers’ contributions, net of refunds Additions to preliminary survey and investigation charges Net cash used in investing activities
Cash flows from financing activities: Repayment of long-term debt Dividends declared Net cash used in financing activities
Net change in cash and cash equivalents Cash and cash equivalents, beginning
$
1,564,077
$
2,139,907
$
2,748,587
Cash and cash equivalents, ending
$
377,742
$
1,564,077
$
2,139,907
The accompanying notes are an integral component of these financial statements
6
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General
The Torrington Water Company (the “Company”) is a public utility that provides water sources to approximately 10,000 customers in the city of Torrington and the towns of Burlington, Harwinton, Litchfield and New Hartford, Connecticut. As a public utility operating in Connecticut, the Company functions under rules and regulations prescribed by the State of Connecticut Public Utilities Regulatory Authority (“PURA”).
Regulation
The Company maintains its accounts in accordance with the PURA Uniform System of Accounts as prescribed for Water Utilities Class A. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America which include the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 980, Regulated Operations (“ASC 980”). Under ASC 980, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate setting process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in rates charged for service.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Utility Plant
The cost of additions to utility plant and improvements are capitalized. Costs include labor, materials, services and charges for such indirect costs as engineering, supervision, payroll taxes, employee benefits, transportation and certain preliminary survey and investigation charges. The cost of repairs and maintenance is expensed. When depreciable utility plant is retired or disposed of its book cost along with the cost of removal, less salvage value, is charged to accumulated depreciation. Utility plant as of December 31, 2014, 2013 and 2012 consists of the following:
Intangible Plant Source of Supply Pumping Water Treatment Transmission and Distribution General Plant Construction Work in Progress Property Held for Future Use Total Utility Plant
2014 2013 2012 $
$
196,434 2,216,319 2,289,100 10,927,611 41,041,132 2,508,033 18,085 212,343 59,409,057
$
$
196,434 2,062,849 2,214,200 10,801,751 38,298,855 2,227,256 165,466 212,343 56,179,154
$
$
196,434 2,059,985 2,042,990 10,747,894 37,057,642 2,101,761 82,535 212,343 54,501,584
In December 2014, the Company purchased all of the assets of the City of Torrington water system for $350,000.
Nonutility Plant
The Company owns land, buildings and equipment with an original cost of $559,204 that is not used in utility service. Depreciation in the amount of $186,269 was accumulated during the period these items were in service and for financial statement presentation this amount is netted against the original cost. No depreciation for this property is currently being charged against income. Upon retirement or disposal of this plant the book cost, accumulated depreciation and any salvage are netted and any gain or loss is recognized in the statement of net income. Depreciation The Company uses the straight-line method of depreciation over the estimated service lives of depreciable plant ranging from 5 to 75 years as approved by PURA. No depreciation for financial statement purposes is charged to income relating to utility plant constructed with developers’ contributions after 1988 as PURA does not allow the Company to recover this expense through rates. The cost of this plant, offset by an equal corresponding amount reported within Customers’ Advances for Construction, Contributions in Aid of Construction and Amortized Contributions in Aid of Construction is $9,958,488, $9,676,135 and $9,637,946, as of December 31, 2014, 2013 and 2012, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments that have an original maturity of less than three months to be cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk on cash and cash equivalents.
Accounts Receivable
The Company continuously monitors the creditworthiness of customers and establishes, when necessary, an allowance for amounts that may become uncollectible in the future based on current economic trends, historical payment and bad debt write-off experience, and any specific customer related collection issues. The Torrington Water Company / Annual Report 2014
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Materials and Supplies Inventory
Materials and supplies inventory, which is stated at the lower of cost or market using the weighted average cost method, is primarily for the construction and maintenance of utility plant.
Other Assets
Costs of certain administrative projects relating to regulatory processes and costs of items which benefit more than one accounting period are deferred and amortized to income over their respective lives and/or periods allowed by PURA using the straight-line method. Costs which are “not yet amortizable� may be entirely charged to income if and when the Company believes it is probable that PURA will not allow the Company to recover these costs through rates. The following costs have been deferred as of December 31, 2014, 2013 and 2012: Original Cost 2014 2013 2012 Amortization Period Ends Rate Case Costs $ 141,786 $ 21,273 Series F Bond Issue Costs 153,960 $ 15,396 $ 30,792 46,188 Cost of Service Study 40,462 15,174 19,220 23,266 Deferred Finance Costs 11,054 3,192 6,138 5,604 2006 Tank Painting 240,739 35,911 59,852 83,792 2009 Tank Painting 262,866 152,178 174,083 195,989 2010 Tank Painting 318,456 201,246 227,784 254,322 2011 Tank Painting 145,227 106,904 119,006 131,108 2011 Tank Painting 160,346 118,033 131,395 144,757 247,978 185,239 210,216 235,192 Crystal Lake Dam Repair 97,903 80,144 88,293 96,443 Litchfield Street Tank Painting 191,694 157,025 172,994 188,962 Soapstone Hill Tank Painting Various (10,577) (10,600) 1,815 Prepaid Income Taxes 291,911 285,830 4,889 4,889 Highland Ave Tank Painting 61,240 51,034 57,838 52,536 Supply Plan Update III 36,881 36,881 30,024 29,899 Other Deferred Costs 20,125 13,755 17,777 10,711 2013 Customer Survey 8,352 8,352 8,352 Docket 13-01-29 256,704 280,400 West Pearl Road Tank Painting 284,349 $ 1,712,421 $ 1,628,453 $ 1,526,746 Total Other Assets
September, 2013 December, 2015 September, 2018 February, 2016 July, 2016 November, 2021 July, 2022 October, 2023 October, 2023 May, 2022 October, 2024 October, 2024 Various September, 2026 June 2022 Not yet amortizable May 2018 Not yet amortizable October 2025
Preliminary Survey and Investigation Charges
Costs of studies for specific construction projects are deferred until the start of the project at which time the costs are capitalized. If a project is abandoned or if it is determined that any of these costs may not be allowed to be recovered in future rates by PURA, the accumulated costs relating to that project are written off during the year of abandonment or determination.
Income Taxes
Deferred income taxes are provided for the expected future tax consequences of events that have been included in the financial statement or tax returns, on a normalized basis. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Deferred income taxes result principally from the use of accelerated depreciation for income tax purposes, deferring investment tax credits for financial reporting purposes, and the future benefits to be recognized upon the utilization of operating loss carryforwards. Deferred tax assets not expected to be realized are reduced by a valuation allowance. Additionally, the Company provides a regulatory asset for income tax benefits (primarily federal and state income tax reductions due to the adoption of final tangible property regulations issued by the Internal Revenue Service (IRS) in 2013 (see Note 2) and state income tax reductions due to accelerated depreciation) which have been flowed-through to the ratepayers under PURA ratemaking policies and which the Company believes it will recover in rates when these income tax benefits reverse in the future. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets.
Customer Advances for Construction
In certain cases real estate developers and others advance funds to the Company for the construction of water main extension projects. A portion of these funds are potentially refundable, without interest, usually within a ten year period. Advances which have not been refunded within this period are reclassified to Contributions in Aid of Construction. The potential amount refundable on completed projects as of December 31, 2014, 2013 and 2012 is estimated to be $75,200, $76,900, and $100,300, respectively.
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Amortized Contributions in Aid of Construction
Contributions in Aid of Construction that were received prior to 1989 are amortized over the remaining useful life of the related “contributed” utility plant item to Amortized Contributions in Aid of Construction.
Revenue Recognition
Operating revenues include amounts billed to customers on a cycle basis, adjusted for accrued unbilled amounts based on estimated water usage from the latest meter reading to the end of each year. Operating revenues also include a Water Infrastructure and Conservation Adjustment, which allows for the timely recovery in rates of the cost of approved infrastructure investment. Beginning in 2013, as permitted by PURA, operating revenues also include amounts related to the Water Revenue Adjustment (WRA). The WRA allows the Company to record, on an annual basis, the amount by which actual revenues from water customers were less than revenues allowed in the Company’s most recent rate decisions. The goal of the WRA is to remove any disincentive to implement conservation rates and programs, postpone the filing of general rate increase applications, and reduce overall water consumption. The Company recorded $536,701 and $489,547 in operating revenues related to the WRA in 2014 and 2013, respectively, with a corresponding entry to a regulatory asset representing the future collection of the WRA surcharge.
Allowance for Funds Used During Construction (AFUDC)
The Company recognizes AFUDC, which is a non-cash credit to income and a corresponding debit to utility plant, by applying the last allowed rate of return on rate base approved by PURA to costs on large construction projects lasting longer than three months. The inclusion of AFUDC in utility plant enables the Company to earn a fair return on its utility plant, and the recovery of these capitalized costs by their inclusion in rate base and depreciation in the ratemaking process.
2. Change in accounting method Effective January 1, 2013, the Company adopted, for tax purposes, final tangible property regulations issued by the IRS
in September 2013. The final regulations, among other things, allow for the immediate deduction for tax purposes, as an ordinary and necessary repair expense, qualifying expenditures that previously would have been capitalized and depreciated over the estimated useful life of the asset. In connection with this adoption, the Company elected to change, retrospectively, its method of accounting for the timing differences between these book and tax expenditures. In accordance with ASC 980 and previous regulatory decisions, the Company elected to flow-through, rather than normalize, these timing differences. The financial statements as of and for the year ended December 31, 2012 have been adjusted to reflect this change in accounting method as follows: December 31, 2012 As Previously Reported
Regulatory Asset-Income Taxes Recoverable
$
Total Assets Retained Earnings Deferred Income Taxes
Total Stockholders’ Equity and Liabilities
1,285,700
To Reflect Change in Accounting For Income Taxes
$
46,680,521
Total Stockholders’ Equity
3,536,000
As Currently Reported
$
3,536,000
4,821,700 50,216,521
13,334,253
925,100
14,259,353
15,134,253
925,100
16,059,353
5,470,388
8,081,288
2,610,900
$ 46,680,521
$
3,536,000
$
Year Ended December 31, 2012 Income Taxes Total Operating Expenses
Utility Operating Income
Income Before Interest Expense
Net Income
Net Income Per Share, Basic
As Previously Reported
$
441,906 4,587,951
To Reflect Change in Accounting For Income Taxes
$
1,370,811
(177,700) (177,700)
$
177,700 177,700
1,498,340 $
942,360
$
$
1.09
$
177,700 .21
50,216,521
As Currently Reported 264,206 4,410,251
1,548,511
1,676,040 $
1,120,060
$
1.30
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
3. Stock Split
In January 2013, the Company filed an application with PURA for approval to issue 432,000 additional shares of common stock in conjunction with a 2-for-1 stock split. The stock split was affected in the form of a 100% common stock distribution in April 2013. All share and per share values in the financial statements reflect the common stock split.
4. Long-term debt
The Company has long-term debt consisting of Series F First Mortgage Bonds with annual principal payments of $255,000 due January 26th of each respective year through January 2016, with a balloon payment of any remaining principal due at that time. The bonds bear interest at 5.58%, which is paid semi-annually in January and July of each year. These first Mortgage Bonds are secured by substantially all of the Company’s utility plant. The Company also has a $3,000,000 note payable from a financial institution. The note requires monthly payments of interest only at 4.58% through February 2016, at which time all outstanding principal is payable in full. The note payable is secured by substantially all assets of the Company. See Note 5.
Long-term debt is comprised of the following:
Note Payable, Bank Series F Bonds Less Due Within One Year Net Long-term Portion Due
December 31,
2 014 2013 2012 $
$
3,000,000 6,460,000 (255,000) 9,205,000
$
$
3,000,000 6,715,000 (255,000) 9,460,000
$
$
3,000,000 6,970,000 (255,000) 9,715,000
5. Note Payable
The Company has available a $750,000 line of credit (LOC) to be used for short term working capital needs. The LOC requires monthly payments of interest only on outstanding advances at the bank’s prime rate (3.25% at December 31, 2014) and expires in May 2016. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2014. The LOC and the $3,000,000 note payable require that the Company meet certain cash flow and net worth requirements, as defined, on a semi-annual basis. The Company was in compliance with these covenants at December 31, 2014.
6. PENSION EXPENSE
The Company has a defined contribution simplified employee pension plan that covers all full-time employees who have been employed in three of the preceding five years and attained the age of 21. The Company contributes 12% of the participants’ annual payroll to this plan. The pension contribution for the years ended December 31, 2014, 2013 and 2012 was $131,775, $126,010, and $121,918, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $9,782, $9,380, and $9,049 for the years ended December 31, 2014, 2013 and 2012, respectively.
7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company pays the health care premiums for its retirees and their spouses. The amount of these premiums paid on behalf of current retirees during the years ended December 31, 2014, 2013 and 2012 was $49,068, $65,042, and $66,205, respectively. The Company defers and records the future liability relating to current employees who have yet to retire as of the balance sheet date. This estimated liability is $2,212,111, $2,053,701 and $1,862,439 as of December 31, 2014, 2013 and 2012, respectively. The Company believes the deferred liability related to this benefit will be recovered through future ratemaking processes and as such has recorded an offsetting deferred regulatory asset reflecting future revenues expected to be received when such liabilities become payable. Employees hired after July 1, 2013 are no longer eligible for this benefit. The Company has elected to recognize the transition obligation over 20 years. The following table sets forth the postretirement benefit plan’s funded status and unfunded amounts recognized on the Company’s balance sheets as of December 31, 2014, 2013 and 2012:
2014
2013
2012
Accumulated Postretirement Benefit Obligation (APBO) $ 2,552,310 Less Fair Value of Plan Assets — APBO in Excess of Fair Value of Plan Assets 2,552,310 Unrecognized Amounts: Transition Obligation — Prior Service Cost 27,930 Unrecognized (Gain) /Loss 312,269 340,199 Unfunded Postretirement Benefits at End of the Year $ 2,212,111
$
2,169,276 $ 2,444,963 — — 2,169,276 2,444,963 — 30,592 84,983 115,575
$
19,606 33,255 529,663 582,524
2,053,701 $ 1,862,439
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) The net periodic postretirement benefit cost for 2014, 2013 and 2012 includes the following components:
2014
Service Cost-Benefit Attributed to Service During the Year Interest Cost Amortizations of: Unrecognized Gain or Loss Transition Obligation Prior Service Cost Total Cost
$
$
2013
97,226 107,590 — — 2,662 207,478
$
$
115,828 99,856 18,351 19,606 2,663 256,304
2012 $ 115,538 96,604
$
8,498 19,606 2,662 242,908
The weighted-average assumed discount rate used to measure the APBO was 4.05% for 2014, 5.05% for 2013, and 4.15% for 2012. The weighted-average discount rate used to determine the transition obligation at January 1, 1994 was 7.25%. As the plan is unfunded and is void of assets there is no expected long-term after-tax-return of plan assets. A health care cost trend graded from 8.00% in 2012 down to 5.00% in 2017 was also used in determining APBO for each of the three years. This health care trend significantly affects the calculation of the APBO and net period cost. A one-percentage-point increase in the assumed health care cost trend rates would increase the APBO at December 31, 2014 by $504,751 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $43,850. Accordingly, subsequent changes in the assumed rates will increase or decrease the deferred regulatory assets and liabilities mentioned above.
8. TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes for the years ended December 31, 2014, 2013 and 2012 are as follows:
Property Taxes Payroll Taxes Total Taxes Other than Income Taxes Less Amounts Capitalized Net Taxes Other than Income Taxes
2014 $
$
2013
855,412 86,784 942,196 (13,739) 928,457
$
$
773,699 81,465 855,164 (15,235) 839,929
2012 $
$
714,225 79,535 793,760 (13,429) 780,331
9. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012 are as follows:
2014 2013 Federal State Total Totals $ (4,535) $ 74,781 $ 70,246 $ 2,115 $ Income Taxes (Benefit) Accrued Deferred Income Taxes (Benefit) (73,000) 1,222 Normalization of Prepaid Income Taxes Normalization of Investment Credits (3,705) Total Income Taxes (Benefit) $ (80,018) Less Attributed to Other Income
Net Charged to Utility Operations
$
— 96 — 74,877
(73,000) 1,318 (3,705) $ (5,141)
77,000 996 (3,705) $ 76,406
(27,859)
(7,843)
$
(33,000) $
68,563
2012
Totals
68,533 268,200 996 (3,705) $ 334,024 ( 69,818)
$
264,206
The Company has net operating loss carryforwards of approximately $2,600,000 to offset federal and state taxable income through 2033. For financial reporting purposes, a valuation allowance of $1,014,000 has been recognized for the related deferred tax asset. The conclusions of the Company’s management regarding tax positions may be subject to review and adjustment at a later date based on an ongoing analysis of tax laws, regulations, and interpretations. Generally, federal and state authorities may examine the Company’s tax returns three years from date of filing. Consequently, income tax returns for years prior to 2011 are no longer subject to examination by taxing authorities. Uncertain Tax Positions In a prior year, the Company was notified by the Connecticut Department of Revenue Services (DRS) that, in the opinion of DRS, certain fixed capital additions did not qualify for the Connecticut fixed capital investment credit (FCIC).
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THE TORRINGTON WATER COMPANY /
NOTES TO FINANCIAL STATEMENTS
/
DECEMBER 31, 2014
9. INCOME TAXES (continued) The Company believed that DRS’ position was both factually and legally incorrect and, accordingly, filed an appeal of the DRS ruling. In connection with the appeal, the Company posted deposits in the nature of cash bonds totaling $133,000. The cash bonds were included in prepaid expenses on the December 31, 2013 balance sheet. In 2014, the Company and DRS reached a settlement agreement concerning qualifying FCIC additions and the Company received a partial refund of its cash bond of $87,400. The remaining balance of $45,600 is expected to be refunded in early 2015. As a result of the Company’s adoption of the final tangible property regulations issued by the IRS in 2013, utilization of the FCIC is no longer a material component of the Company’s tax provision.
10. Related party transactions
The Company purchases services, materials and supplies from professional firms, contractors and retailers whose principals are also directors and/or shareholders of the Company. During 2014, 2013 and 2012 the amount of these purchases approximated $136,600, $120,000, and $138,300, respectively.
11. Commitments Capital Budget The Company is engaged in a continuous construction program and expects to spend from $1,000,000 to $2,000,000 annually over the next five years for routine new utility plant and/or improvements. A majority of this program is expected to be financed with internally generated funds. Water Tank Maintenance In 2010, the Company entered into a long-term contract for annual water tank inspection, maintenance and periodic painting. The contract calls for annual payments of $299,108 through 2018.
12. Supplemental disclosure of cash flow information
2014
2013
2012
Interest Paid
$
508,259
$
527,704
$
543,355
Income Taxes Paid
$
20,000
$
132,752
$
175,250
13. Subsequent events
Design: Rhode van Gessel • Essex CT Printing: RainBow Printing • Torrington, CT
Management has evaluated subsequent events through January 27, 2015, the date which the financial statements were available for issue.
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THE TORRINGTON WATER COMPANY /
Annual Report
/
DECEMBER 31, 2014
EQUITY VS DEBT EQUITY DEBT Millions 18–
$17.99
17– $16.06
16– $14.96
14–
$13.35 $12.31
12–
$9.97
$10.98
10–
$9.46
$8.50
$8.40
$7.99
8–
$7.48
6– 4– 2– 2004
2006
2008
2010
DIVIDENDS PER SHARE $0.45
Design: Rhode van Gessel • Essex CT Printing: RainBow Printing • Torrington, CT
$0.37
2004
$0.47
$0.51
$0.55
2012
$0.61
2014
$0.69
$0.73
2004
2005
2006
2007 2008
2009
2010
2011
$1.09
2005
$1.30
2006
$1.18
2007
$1.35
$1.35
$1.39
2009
2010
2011
$1.01
2008
Book Value Per Share Based on 864,000 Shares
$12.71 $13.40
2004
$0.83
$0.40
2012
EARNINGS PER SHARE $1.21
$0.77
2005
$14.25 $14.96
2006
$15.46 $16.57
2007 2008
2009
$17.32
2010
2013
2014
$1.95
$1.89
2013
2014
$1.30
2012
$19.77 $18.02 $18.59
2011
2012
2013
$20.83
2014
This information is not part of the Audited Financial Statements
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The Torrington Water Company 277 Norfolk Road PO Box 867 Torrington CT 06790 (860) 489.4149
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