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THE TORRINGTON WATER COMPANY

Annual Report 2015 C A 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


THE TORRINGTON WATER COMPANY

l 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, 2015, 2014 and 2013, 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 Company’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 Company’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 wellas 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, 2015, 2014 and 2013, 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, 2016 Shelton, Connecticut

The mission of The Torrington Water Company is to reliably and cost-effectively provide clean water to its customers while acting in the best interest of its shareholders.


THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

l

DECEMBER 31, 2015

FIVE-YEAR SELECTED DATA

FINANCIAL

2015

2014

2013

2012

2011

Income Statement

Operating Revenues O & M Expenses Utility Operating Income Net Income

$ $ $ $

7,025,115 2,657,355 2,013,450 1,721,448

$ $ $ $

6,594,940 $ 6,515,526 2,625,492 $ 2,449,437 1,923,453 $ 2,058,884 1,635,805 $ 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

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

$ 18,907,169 $ 9,205,000 67.3 32.7 $ 41,236,243 $ 1.99 $ 0.94 $ 21.88

$ 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

2013

2012

164 920 918,299 529,742 135,894 11,168 9,688 16

163 920 918,367

$ 15,570,013 $ 10,225,000 60.4 39.6 $ 36,207,506 $ 1.39 $ 0.69 $ 18.02

OPERATIONAL

2015

Miles of Main 169 Number of Hydrants 947 Gallons Produced (Thou.) 882,838 Gallons Sold (Thou.) Residential 512,304 Commercial 163,491 Industrial 13,180 Number of Customers 9,994 Number of Employees 17

2014 164 920 908,973 513,115 134,643 9,875 9,969 17

2011

163 919 938,601 531,832 539,669 140,850 142,146 12,894 14,910 9,665 9,637 16 16

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2015

1


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

FINANCIAL HIGHLIGHTS I am pleased to report solid financial results for our company in 2015. Operating revenues increased to $7,025,115 from 2014, a gain of $430,175, or 6.5%, while net income grew to $1,721,448 ($1.99 per share), a gain of $85,643, or 5.2%. Two factors were primarily responsible for the growth in revenues: • We began 2015 with a larger customer base as a result of acquiring the City of Torrington’s water system assets in 2014. The 260 customers added by the acquisition expanded our base to just under 10,000. The operating revenue realized from this acquisition was approximately $100,000. • Early in 2015, we met with the Office of Consumer Counsel (OCC) to discuss the possibility of a settlement agreement to amend our rate schedule and thereby avoid a costly rate case process. OCC agreed with our proposal. The resulting agreement incorporated a Water Infrastructure Conservation Adjustment (WICA) surcharge of 9.29% into our current base rates as of October 1, 2015. The agreement also continued our participation in the Water Revenue Adjustment (WRA) program. We agreed not to file a rate case until at least mid-2017. The state’s Public Utilities Regulatory Authority (PURA) approved the settlement agreement on September 2, 2015. The provisions of the agreement produced an increase of $275,000 in our 2015 operating revenues. As for costs during 2015, Operation and Maintenance expenses grew to $2,657,355, but through diligent cost control, we were able to limit their rate of growth to $31,863, or 1.2%, over 2014. This was substantially lower than the 7.2% increase in expenses we had absorbed in 2014. We also saw a significant increase in property taxes in 2015, which increased $208,540, or 24.4%, to $1,063,952. These combined cost increases, however, were more than offset by the overall gain in revenues. In December, the Board of Directors raised our quarterly cash dividend by 8.7%, to $0.25 per share, making 2015 our 18th consecutive year of dividend increases. (Our history of annual cash dividends dates back to 1880.) Book value per share grew to $21.88 at year-end from $20.83 at year-end 2014.

Charles W. Roraback Margaret P. Roraback Susan M. Suhanovsky

2

OTHER HIGHLIGHTS Our Series F bonds, originally sold in 2006, were due to mature in January 2016. During the second quarter of 2015, we explored the potential sources of borrowing, interest rates and terms that would be available to us. On September 18, 2015, we accepted an offer from Modern Woodmen of America to lend us $12,000,000 for 10 years at an interest rate of 4.08%. The sale of those bonds (called Series G) closed on January 26, 2016. We used the proceeds from this financing to repay the 5.58% Series F bonds, repay our 4.58% bank term loan and pay down our outstanding line of credit. We will use the $2,300,000 remaining to finance future WICA-eligible capital infrastructure investments over the next two construction seasons. During the 2015 construction season, we invested $1.5 million in WICA-eligible projects. We replaced 8,700 feet of existing water mains that had reached the end of their useful lives. We again concentrated on replacing our old 4-inch mains; to date, we have replaced 38% of the 4-inch main in our system. We can apply for the allowed return on our WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax) once we complete our WICA projects for the year. If our application for last year’s projects is approved, a surcharge of 3.42% will become effective April 1, 2016, and we expect it to generate $220,000 in revenues. Our investments in infrastructure enable us to ensure that both existing and future customers will have a reliable supply of high-quality water at reasonable cost. Moreover, the upgrades we have done have led to a steady decrease in lost water in our system. For 2015, lost water totaled 13%, below the PURA-mandated maximum of 15%. Even so, we continue to conduct leak surveys and use leak-detection equipment every day to ensure that we find any water main breaks or service line leaks as soon as possible.

The Torrington Water Company • Annual Report 2015


THE TORRINGTON WATER COMPANY

In July 2015, the Department of Energy and Environmental Protection approved our 2014 application to renew our water diversion permit for the sale of water to Aquarion’s Litchfield system. This new permit allows us to sell up to 400,000 gallons of water per day to Aquarion, an increase of 200,000 gallons, and guarantees us revenue for 125,000 gallons per day whether Aquarion uses that quantity or not. In addition to operating income produced by our core business—treating and distributing water—we generate income from non-utility ventures. We focus on ventures that are low risk and are related to our core business. In December 2015, we extended for another two years our contract to provide operations and maintenance support for the water system owned by the New Hartford Water Pollution Control Authority (WPCA). Our experience and expertise are clearly valued by the WPCA and its customers. Our employees treat both the system and its customers as if they were their own. The qualifications of our management team and the system’s close proximity to our Torrington operations make us uniquely positioned to serve New Hartford. This partnership generated over $77,000 in income in 2015. For the past three years, we have contracted with Homeowner Safety Valve Company to provide coverage, with no liability on our part, for the cost of repairing broken or leaking water or sewer lines on our customers’ property. Under the contract, we receive 15% of the revenue realized when a customer signs up. After analyzing the risks and benefits, we decided to take over the water line portion of this program, starting in January 2016. We will now realize 100% of the revenue generated and will take on the liability for any water line repairs. Our customers like that the same company that delivers their water will now cover their water service line. Over 225 customers have signed up for the Torrington Water Company service line protection program, and we anticipate that by year end we will have over 600 customers. Last year, the Safety Valve contract provided us with revenue of $12,000. As part of our forest management plan, in 2015 we conducted a sale of timber from our woodlands. The sale brought us $92,500 in non-operating income. Timely sales of carefully selected timber are an important tool in managing and sustaining our 5,000 acres of property. In September 2015, we signed a letter of intent with a wind turbine company to negotiate a long-term agreement for a wind farm on our off-watershed property. This is the second company to express interest in developing a wind farm, and we hope that this time the project will come to fruition. It will most likely take

several years, as we have to get many regulatory approvals. If approved, this project will generate income which will benefit both our ratepayers and our shareholders. This year marks the 20th anniversary of our filtration plant. When it was first built, our water treatment plant was considered to be state-of-the-art. Designed to provide high-quality, low-cost service to our customers over the long term, the plant has met all expectations. These are a few of the design highlights: • The main process flow through the plant is by gravity, so we avoid the substantial cost of providing and operating large pumps. • The entire structure sits on rock, which eliminates future leakage and maintenance problems resulting from settlement. • All process vessels are constructed of concrete, so we avoid the continuing maintenance and operating costs associated with steel vessels. Now, 20 years later, the plant continues to serve our system and community with no significant problems. Nor do we foresee the need to make any major capital improvements for several years. CLOSING THOUGHTS All that we do – in our office and in the field – centers on one person: our customer. Our customer representatives both in the office and in the field never forget that at the end of every water line, there’s a person depending on us to provide clean, safe water. Our customers trust us, and we don’t take that trust lightly. Our employees have to be ready to respond at any time and in any kind of weather. The winter of 2014–2015 was particularly severe, and our employees worked diligently to keep water flowing to our customers. I am fortunate to serve with a team of highly motivated and skillful people, since ours is a business that challenges us to perform at the highest level to protect public health and provide value to our customers and stockholders. Once again, I thank our Board of Directors for their hard work and dedication, and our stockholders for their continued loyalty and support. And to everyone else who has worked to produce another successful year for our company, I extend my deep appreciation as well.

Susan M. Suhanovsky President

The Torrington Water Company • Annual Report 2015

3


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

BALANCE SHEETS AS OF DECEMBER 31, 2015, 2014 AND 2013

2015

ASSETS Utility plant, at cost

Less: accumulated depreciation Net utility plant

2014

2013

$ 61,357,843 20,121,600 41,236,243

$ 59,409,057 19,026,669 40,382,388

$ 56,179,154 17,786,892 38,392,262

372,935

372,935

372,935

561,334 483,704 844,000

377,742 418,988 748,000

1,564,077 444,035 748,000

625,512 171,243 2,800 96,117 2,784,710

567,794 145,174 10,219 137,016 2,404,933

367,160 120,598 165,000 219,735 3,628,605

1,771,517 199,932 7,318,700

1,712,421 190,613 6,551,500

1,628,453 184,564 5,537,100

Nonutility property, net of accumulated depreciation

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

153,100 2,377,008 11,820,257 $ 56,214,145

141,291 2,212,111 10,807,936 $ 53,968,192

122,387 2,053,701 9,526,205 $ 51,920,007

$

$ 1,800,000 16,197,881 17,997,881

$ 1,800,000 15,279,196 17,079,196

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: Note payable, bank 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 10)

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES The accompanying notes are an integral component of these financial statements 4

The Torrington Water Company • Annual Report 2015

1,800,000 17,107,169 18,907,169 9,205,000

9,205,000

350,000 — 292,454 529,058 144,266 123,544 1,439,322

— — 255,000 255,000 ­ 282,756 203,648 425,186 384,801 150,195 156,124 111,549 113,862 1,224,686 1,113,435

10,562,295 2,377,008 — 1,877,720 9,658,120 2,187,511 26,662,654 $ 56,214,145

9,808,000 2,212,111 — 3,069,316 8,350,450 2,100,748 25,540,625 $ 53,968,192

9,460,000

8,869,983 2,053,701 105,709 3,370,737 7,940,648 1,926,598 24,267,376 $ 51,920,007


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

2015

Operating revenues Operating expenses:

$

Operation expenses Maintenance expenses Depreciation expense Taxes other than income taxes Income taxes (benefit) Total operating expenses Utility operating income

2014

7,025,115

$

2,019,042 638,313 1,181,293 1,139,017 34,000 5,011,665

6,594,940

2013 $

6,515,526

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

1,923,453

2,058,884

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

2,156,477

2,225,668

493,721 18,588 1,391 513,700

500,962 18,342 1,368 520,672

521,774 17,362 1,409 540,545

1,635,805

1,685,123

2,013,450

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

111,058 237 106,032 16,098 233,425 11,727 221,698

Income before interest expense

2,235,148

Interest expense:

Interest on long-term debt Amortization of deferred financing costs Other interest expense Total interest expense

Net income

1,721,448

Dividends declared Retained earnings, beginning of year Retained earnings, end of year Per share amounts:

$

Net income, basic

$

Dividends declared

$

Book value $

(812,160) (717,120) 16,197,881 15,279,196 17,107,169 $ 16,197,881

1.99 .94 21.88

(665,280) 14,259,353 $ 15,279,196

$

1.89

$

1.95

$

.83

$

.77

$

20.83

$

19.77

The accompanying notes are an integral component of these financial statements

The Torrington Water Company • Annual Report 2015

5


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013

2015

2014

2013

CASH FLOWS FROM OPERATING ACTIVITIES: Net income 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

1,721,448

$

1,635,805

$

1,685,123

1,412,510 (12,905) 6,352 (16,098)

1,356,768 (76,383) 8,027 —

1,294,603 73,295 6,980 (11,193)

(167,068) (69,527) (26,069) 7,419 40,899 (290,311) 3,155 109,938 — 2,719,743

17,020 (219,538) (24,576) 154,781 82,719 (290,198) 69,448 32,143 (105,709) 2,640,307

(16,957) (489,547) 19,528 15,078 (45,313) (297,585) (121,295) 32,218 — 2,144,935

(1,970,257) — 209,379 (58,113) (1,818,991)

(2,568,675) (350,000) 115,510 (51,357) (2,854,522)

(1,805,190) — 47,763 (43,058) (1,800,485)

350,000 (255,000) ( 812,160) ( 717,160)

— (255,000) (717,120) (972,120)

— (255,000) (665,280) (920,280)

183,592

(1,186,335)

(575,830)

CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility 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: Borrowings from note payable, bank 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

$

377,742

$

1,564,077

$

2,139,907

CASH AND CASH EQUIVALENTS, ENDING

$

561,334

$

377,742

$

1,564,077

The accompanying notes are an integral component of these financial statements

6

The Torrington Water Company • Annual Report 2015


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2015

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, 2015, 2014 and 2013 consists of the following: 2015 2014 2013

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

$

$

236,404 2,216,319 2,292,736 11,145,417 42,733,144 2,517,727 3,753 212,343 61,357,843

$

$

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

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 $10,161,490, $9,958,488 and $9,676,135, as of December 31, 2015, 2014 and 2013, 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 2015

7


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l DECEMBER 31, 2015

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, 2015, 2014 and 2013: Original Cost 2015 2014 2013 Amortization Period Ends Series F Bond Issue Costs $ 153,960 $ — $ 15,396 $ 30,792 Deferred Finance Costs 11,054 — 3,192 6,138 Cost of Service Study 40,462 11,127 15,174 19,220 2006 Tank Painting 240,739 11,970 35,911 59,852 2009 Tank Painting 262,866 130,273 152,178 174,083 2010 Tank Painting 318,456 174,708 201,246 227,784 2011 Tank Painting 145,227 94,802 106,904 119,006 2011 Tank Painting 160,346 104,671 118,033 131,395 Crystal Lake Dam Repair 247,978 160,263 185,239 210,216 Litchfield Street Tank Painting 97,903 71,994 80,144 88,293 Soapstone Hill Tank Painting 191,694 141,056 157,025 172,994 Prepaid Income Taxes Various (10,630) (10,577) (10,600) Highland Ave Tank Painting 291,911 261,504 285,830 4,889 Supply Plan Update III 61,240 44,229 51,034 57,838 Other Deferred Costs 59,795 56,809 36,881 30,024 2013 Customer Survey 20,125 9,732 13,755 17,777 Docket 13-01-29 8,352 8,352 8,352 8,352 West Pearl Road Tank Painting 284,349 233,008 256,704 280,400 2015 Tank Painting 252,213 248,710 — — Series G Bond Issue Costs 7,885 7,885 — — Deferred Sales Tax 11,054 11,054 — — Total Other Assets $ 1,771,517 $ 1,712,421 $ 1,628,453

December 2015 December 2015 September 2018 July 2016 November 2021 July 2022 October 2023 October 2023 May 2022 October 2024 October 2024 Various September 2026 June 2022 September 2020 May 2018 Not yet amortizable October 2025 October 2027 Not yet amortizable Not yet amortizable

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 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. The final tangible property 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. 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 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, 2015, 2014 and 2013 is estimated to be $46,500, $75,200 and $76,900, respectively. 8 The Torrington Water Company • Annual Report 2015


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l DECEMBER 31, 2015

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 (WICA), 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 $612,525, $536,701 and $489,547 in operating revenues related to the WRA in 2015, 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. REGULATORY MATTERS During 2015, the Company reached the allowed 10% cap for the WICA surcharge and was at the end of the WRA period. To avoid the potential filing of a costly general rate case application, the Company entered into a rate settlement agreement (Agreement) with the Office of Consumer Counsel. The Agreement, among other things, (1) incorporates the April 1, 2015 authorized WICA surcharge of 9.29% into current base rates, (2) sets the WICA surcharge to zero and begins a new WICA expansion period, (3) allows for the continuation of the WRA at its present rate, and (4) provides that the Company will not submit a rate case application that would become effective prior to July 1, 2017. The Agreement was approved by PURA in September 2015, and the new rates became effective on October 1, 2015.

3. LONG-TERM DEBT

The Company has long-term debt consisting of Series F First Mortgage Bonds with annual principal payments of $255,000 due on 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. (A) 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 4. (A) (A) On January 26, 2016, the Company issued $12,000,000 Series G First Mortgage Bonds. The Series G bonds bear interest at 4.08%, require annual principal payments of $360,000, mature on January 26, 2026, and are secured by substantially all of the Company’s utility plant. The proceeds of the Series G First Mortgage Bonds were used, in part, to repay the 5.58% $6,205,000 Series F First Mortgage Bonds and the 4.58% $3,000,000 note payable, bank. Accordingly, these obligations have been classified as long-term debt at December 31, 2015.

Long-term debt is comprised of the following:

2015

Note Payable, Bank Series F Bonds Less Due Within One Year Net Long-term Portion Due

December 31,

$

$

3,000,000 6,205,000 — 9,205,000

2014 $

$

3,000,000 6,460,000 (255,000) 9,205,000

2013 $

$

3,000,000 6,715,000 (255,000) 9,460,000

The Torrington Water Company • Annual Report 2015

9


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l

DECEMBER 31, 2015

4. 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 (3.50% at December 31, 2015) and expires in May 2016. Any advances on the LOC are secured by substantially all assets of the Company. The Company had $350,000 of outstanding advances on the LOC at December 31, 2015. There were no outstanding advances at December 31, 2014 and 2013. 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, 2015.

5. 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, 2015, 2014 and 2013 was $125,097, $131,775 and $126,010, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $11,448, $9,782 and $9,380 for the years ended December 31, 2015, 2014 and 2013, respectively.

6. 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, 2015, 2014 and 2013 was $68,322, $49,068 and $65,042, 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 $2,377,008, $2,212,111 and $2,053,701 as of December 31, 2015, 2014 and 2013, 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, 2015, 2014 and 2013:

2015

Accumulated Postretirement Benefit Obligation (APBO) $ 2,751,593 Less Fair Value of Plan Assets — APBO in Excess of Fair Value of Plan Assets 2,751,593 Unrecognized Amounts: Prior Service Cost 25,267 Unrecognized Loss 349,318 374,585 Unfunded Postretirement Benefits at End of the Year $ 2,377,008

2014

$

2013

2,552,310 $ — 2,552,310 27,930 312,269 340,199

$

2,212,111

$

2,169,276 — 2,169,276

30,592 84,983 115,575 2,053,701

The net periodic postretirement benefit cost for 2015, 2014 and 2013 includes the following components:

2015

Service Cost-Benefit Attributed to Service During the Year Interest Cost Amortizations of: Unrecognized Gain or Loss Transition Obligation Prior Service Cost Total Cost

$

$

124,986 101,989 3,581 — 2,663 233,219

2014 $

$

97,226 107,590 — — 2,662 207,478

2013 $

$

115,828 99,856 18,351 19,606 2,663 256,304

The weighted-average assumed discount rate used to measure the APBO was 4.50% for 2015, 4.05% for 2014, and 5.05% for 2013. 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 7.00% in 2013 down to 5.00% in 2020 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, 2015 by $542,965 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $54,599. Accordingly, subsequent changes in the assumed rates will increase or decrease the deferred regulatory assets and liabilities mentioned above.

10 The Torrington Water Company • Annual Report 2015


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l

DECEMBER 31, 2015

7. TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes for the years ended December 31, 2015, 2014 and 2013 are as follows:

Property Taxes Payroll Taxes Total Taxes Other than Income Taxes Less Amounts Capitalized Net Taxes Other than Income Taxes

2015 $

$

1,063,952 86,927 1,150,879 (11,862) 1,139,017

2014 $

2013

855,412 86,784 942,196 (13,739) 928,457

$

$

773,699 81,465 855,164 (15,235) 839,929

$

8. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as follows:

2015 2014

Federal Current Income Taxes

$

Tax Benefit of Operating Loss Carryforwards Deferred Income Taxes (Benefit) Normalization of Prepaid Income Taxes Normalization of Investment Credits Total Income Taxes (Benefit) $

State

111,000 $ 92,636 (111,000) (35,000) (9,200) — 900 96 (3,705) — (12,005) $ 57,732

Less Attributed to Other Income

Net Charged to Utility Operations

Total

Totals

2013

$

Totals

203,636 $ 70,246 $ (146,000) — (9,200) (73,000) 996 1,318 (3,705) (3,705) $ 45,727 $ (5,141) $

2,115 — 77,000 996 (3,705) 76,406

$

(7,843) 68,563

(11,727) ( 27,859) 34,000 $ (33,000)

$

The Company has net operating loss carryforwards of approximately $2,400,000 to offset federal and state taxable income through 2034. For financial reporting purposes, a valuation allowance of $936,000 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 2012 are no longer subject to examination by taxing authorities.

9. 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 2015, 2014 and 2013 the amount of these purchases approximated $108,500, $136,600 and $120,000, respectively.

1o. 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. This program is expected to be financed with internally generated funds and proceeds from long-term debt. 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.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2015

2014

2013

Interest Paid

$

499,650

$

508,259

$

527,704

Income Taxes Paid

$

50,217

$

20,000

$

132,752

12. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 27, 2016, the date which the financial statements were available for issue.

The Torrington Water Company • Annual Report 2015

11


THE TORRINGTON WATER COMPANY

EQUITY VS DEBT

l ANNUAL REPORT l DECEMBER 31, 2015

EQUITY DEBT Millions 19–

$18.91

18– $17.08

17– 16–

$15.57 $14.32

14– $12.93

12– 10–

$11.58 $10.23

$10.26

$9.72 $8.74

$8.05

8–

$9.21

$8.25 $7.74

6– 4– 2– 2003

2005

2007

2009

DIVIDENDS PER SHARE $0.45

$0.47

2006

2007

$0.51

$0.55

$0.61

2011

$0.69

2013

2015

$0.83

$0.73

$0.77

2012

2013

2014

$1.95

$1.89

2013

2014

$0.94

$0.40

2005

2008

EARNINGS PER SHARE $1.09

2005

BOOK VALUE PER SHARE BASED ON 864,000

2006

$1.18

$1.01

2007

2008

2006

2007

2008

2010

$1.35

$1.35

2009

2010

$16.57 $14.96 $15.46 $13.40 $14.25

2005

12 The Torrington Water Company • Annual Report 2015

$1.30

2009

2009

$17.32

2010

2011

$1.39

2011

$1.99

$1.30

2012

$18.02 $18.59

2011

2015

2012

$19.77

2013

$20.83

2014

2015

$21.88

2015

This information is not part of the Audited Financial Statements


DESIGN: RHODE VAN GESSEL • ESSEX CT PRINTING: MINUTEMAN PRESS • TORRINGTON, CT

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THE TORRINGTON WATER COMPANY 277 Norfolk Road PO Box 867 Torrington CT 06790 (860) 489.4149

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