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THE TORRINGTON WATER COMPANY

Annual Report 2017

CASH DIVIDENDS PAID EVERY YEAR SINCE 1880


THE TORRINGTON WATER COMPANY

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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, 2017, 2016 and 2015, 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 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, 2017, 2016 and 2015, 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 30, 2018 Shelton, Connecticut

Dworken, Hillman, LaMorte & Sterczala, P.C. Four Corporate Drive, Suite 488, Shelton, CT 06484

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

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ANNUAL REPORT

l

DECEMBER 31, 2017

FIVE-YEAR SELECTED DATA

FINANCIAL

2017

2016

2015

2014

2013

Income Statement

Operating Revenues O & M Expenses Utility Operating Income Net Income

$ $ $ $

7,261,523 2,670,715 2,157,832 1,927,085

$ 7,061,834 $ 2,689,869 $ 2,246,787 $ 2,010,034

$ $ $ $

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

$ $ $ $

6,594,940 $ 2,625,492 $ 1,923,453 $ 1,635,805 $

6,515,526 2,449,437 2,058,884 1,685,123

Balance Sheet

Stockholders’ Equity $ 21,012,608 $ 20,035,923 $ 18,907,169 $ 17,997,881 $ 17,079,196 Long Term Debt $ 11,640,000 $ 12,000,000 $ 9,205,000 $ 9,460,000 $ 9,715,000 Stockholders’ Equity % 64.4 62.5 67.3 65.5 63.7 Long Term Debt % 35.6 37.5 32.7 34.5 36.3 Net Utility Plant $ 42,956,221 $ 41,859,685 $ 41,236,243 $ 40,382,388 $ 38,392,262 Earnings Per Share $ 2.23 $ 2.33 $ 1.99 $ 1.89 $ 1.95 Dividend Per Share $ 1.10 $ 1.02 $ 0.94 $ 0.83 $ 0.77 Book Value Per Share $ 24.32 $ 23.19 $ 21.88 $ 20.83 $ 19.77

OPERATIONAL

Miles of Main Number of Hydrants Gallons Produced (Thou.) Gallons Sold (Thou.) Residential Commercial Industrial Number of Customers Number of Employees

2017

2016

2015

2014 2013

169 948 877,248

169 948 895,083

169 947 882,838

164 920 908,973

164 920 918,299

501,114 156,831 10,522 10,039 19

519,189 169,092 10,734 10,013 17

512,304 163,491 13,180 9,994 17

513,115 134,643 9,875 9,969 17

529,742 135,894 11,168 9,688 16

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2017

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

2

I am pleased to report that 2017 was a very successful year for The Torrington Water Company. Operating revenues increased during the year by 2.8%, or $199,689, to $7,261,523. Operation and Maintenance expenses declined 0.7% through diligent cost control, falling by $19,154 to $2,670,715. However, total operating expenses grew by 6.0%, or $288,644, to $5,103,691. The primary reason for this increase was that in 2016, operating results had included a one-time income tax benefit of $200,000 related to the recording of a deferred tax asset based on the Company’s expected future usage of federal net operating loss carryforwards. Without this one-time tax benefit, operating expenses in 2016 would have been $5,015,047, so the increase in 2017 would have been only 1.8%. In December 2017, our Board of Directors increased the quarterly cash dividend to $0.29 per share from $0.27. For the year, dividends paid to shareholders totaled $1.10 per share compared with $1.02 per share in 2016, an increase of 7.8%. Book value per share at year-end grew 4.9%, to $24.32 from $23.19.

Infrastructure Improvement and Plant Activity

In 2010 when we started to utilize the state’s Water Infrastructure and Conservation Adjustment (WICA) program to upgrade our infrastructure, little did we realize the impact this program would have. Before WICA, the Company replaced on average 300–600 feet of main a year. Since 2010, the Company replaced on average 6,100 feet of main a year. At the end of 2017, we had replaced over 48,800 feet, or 9.25 miles, of WICA-eligible main in our system at a total investment of $7,507,000. In 2017, we invested $1,064,000 in projects eligible under WICA, replacing 7,266 feet of existing water mains that had reached the end of their useful lives. In this effort, we make a point of working with the City of Torrington, the State of Connecticut and other utilities to coordinate water main replacement projects prior to road resurfacing projects. This coordination enables us to have one of the lowest costs-per-foot for main replacement in the state.

The Torrington Water Company • Annual Report 2017

The WICA program improves water quality and service reliability by covering projects to replace aged or undersized pipes. Another benefit of replacing small old mains is that it helps reduce main breaks and lowers the amount of unaccounted-for water. Partially as a result of the WICA program, our non-revenue water loss (water produced but unaccounted for in customer usage) for six out of the past seven years has been better than the accepted industry standard of 15%. We continue to be very aggressive in our leak-detection program, using electronic recording devices each night to listen for any new leaks that may have developed, so that we can repair them and reduce water loss. We have applied to the state’s Public Utilities Regulatory Authority to add a surcharge to customer bills for the allowed return on our 2017 WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax). We expect a favorable decision. If approved, the surcharge will be 7.8% and will generate $522,857 in revenues. During 2017, we were able to realize revenues of $305,000 via a 5.6% surcharge on customer bills for the prior-year WICA projects. Allen Dam Reservoir is a critical component of our water supply system used during periods of drought or high demand. The concrete dam wall and spillway were starting to deteriorate and were at a point that they needed repair. The Company obtained a general permit from the Department of Energy and Environmental Protection and repaired both the dam wall and the spillway for a capital investment of $175,000. The powdered activated carbon (PAC) system that we installed last year at our Hart Brook treatment facility has been working very well. The system absorbs natural organic compounds that cause taste and odor problems in drinking water and also reduces disinfection by-products by removing dissolved organics from the water. Once the PAC system was installed, it became apparent that our treatment facility needed an upgrade. Over the summer and fall, our employees worked to reconfigure the inside of the treatment facility to better handle the PAC


THE TORRINGTON WATER COMPANY

system. They installed a new chemical feed for potassium permanganate (also used to control odor); installed a backup generator; upgraded the SCADA (Supervisory Control and Data Acquisition) automation control system so alarms could be received at our treatment plant; and upgraded the electrical system. A new driveway was put in along with other improvements in and around the facility. The cost of this capital project was $195,000.

Non-Utility Ventures

The Company continues to conduct non-utility ventures that contribute to our earnings. In 2017, our non-utility segment generated $218,375 in net revenue. This was a 23.9% increase from the $176,300 in net revenue that was generated in 2016. The following ventures make up our non-utility segment: • The Water Line Protection Plan provides residential customers with coverage for the cost of repairing a broken or leaking water service line on their property. The net revenue generated by this program increased slightly in 2017, to $50,225 from $45,000 in 2016. A total of 824, or 9.2%, of our residential customers have signed up for this coverage. • Our contract to provide utility operating services to the New Hartford Water Pollution Control Authority (WPCA) expired in December 2017. The Authority asked us, and we agreed, to continue to manage operating services for WPCA on a month-to-month basis. In November 2017, the town of New Hartford issued a Request for Proposal for the Purchase, Operation and Maintenance of Drinking Water and/or Wastewater Assets of the Town of New Hartford. On December 21, 2017, the Company submitted such a proposal for the water assets only. Connecticut Water Company and Aquarion Water Company each submitted a proposal for both the water assets and the wastewater assets. The members of New Hartford’s asset evaluation team have 120 days to make a recommendation to the Town Council. The systems cannot be sold without a town-wide referendum. We do not expect any change of control to come before the end of 2018 or early 2019. In 2017, we realized $80,000 in net revenue from this contract. • We continue to manage our watershed in a prudent and sustainable manner. We follow an updated forest management plan that allows for carefully controlled harvesting of timber.

With the continuing spread of the emerald ash borer, a beetle that destroys ash trees, we have concentrated on harvesting ash trees before they die. In 2017, we realized $88,150 in net revenue through our timber sales operations.

Woodridge Lake Sewer District

As reported last year, during 2016 we became aware of a project that, if built along the proposed route, could potentially affect the watershed of our Allen Dam Reservoir. The Woodridge Lake Sewer District (WLSD) is proposing to construct a force main sewage transmission pipeline from the town of Goshen to the City of Torrington’s municipal sewer system. We requested that the state’s Department of Public Health (DPH) open an investigation into this matter. The Commissioner of Public Health agreed. After nine months of investigating, DPH issued its ruling on this case. It found that the proposed project could potentially pollute the Allen Dam Reservoir, but DPH would allow the project to move forward if the WLSD complied with several conditions that DPH deemed necessary to protect the Allen Dam Reservoir. The last approval needed by WLSD is for the Torrington’s City Council, acting as the Water Pollution Control Authority (WPCA), to allow WLSD to connect to the city’s municipal sewer system. In early January 2018, WLSD submitted an application to do so. A public hearing was held January 31, 2018. The Company presented its opposition to the proposed route. Torrington’s WPCA will vote on the application sometime this spring.

Closing Thoughts

The future holds many opportunities for our Company. Our excellent water quality, very strong physical plant and dedicated staff will ensure that we are able to capitalize on those opportunities to the benefit of our stockholders. I thank our Board of Directors for their dedication to our company. And, as always, I thank our stockholders for their support and loyalty.

Susan M. Suhanovsky President

The Torrington Water Company • Annual Report 2017

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THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

BALANCE SHEETS

AS OF DECEMBER 31, 2017, 2016 AND 2015

2017

ASSETS

Utility plant, at cost Less: accumulated depreciation Net utility plant

$

Nonutility property, net of accumulated depreciation

2016

2015

64,970,714 22,014,493 42,956,221

$ 62,890,902 21,031,217 41,859,685

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

372,935

372,935

372,935

2,410,858 451,119 838,000

3,286,891 394,037 819,000

689,055 165,800 151,816 4,706,648

528,069 147,688 95,013 5,270,698

625,512 171,243 98,917 2,784,710

2,233,000 212,002 5,476,500

2,035,927 213,428 8,072,000

1,763,632 199,932 7,318,700

Current assets: Cash and cash equivalents Accounts receivable Accrued unbilled revenues Regulatory asset-water revenue adjustment, current portion Materials and supplies inventory 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 $

169,629 2,702,155 10,793,286 58,829,090

$

561,334 483,704 844,000

125,709 153,100 2,540,732 2,377,008 12,987,796 11,812,372 60,491,114 $ 56,206,260

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 and contingency (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 2017

$

1,800,000 19,212,608 21,012,608

$

11,220,589

1,800,000 $ 1,800,000 18,235,923 17,107,169 20,035,923 18,907,169 11,573,239

— 360,000 279,169 573,504 197,880 143,679 1,554,232

— 360,000 198,707 555,881 204,000 141,418 1,460,006

8,575,685 2,702,155 — 1,416,667 10,000,367 2,346,787

11,076,290 2,540,732 29,562 1,801,320 9,704,454 2,269,588

25,041,661

27,421,946 60,491,114

$ 58,829,090

$

9,197,115 350,000 — 292,454 529,058 144,266 123,544 1,439,322 10,562,295 2,377,008 — 1,877,720 9,658,120 2,187,511 26,662,654 $ 56,206,260


THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

2017

Operating revenues

Operating expenses:

$

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

2016

7,261,523 $ 7,061,834

2015 $

7,025,115

2,076,588 594,127 1,088,308 1,229,368 115,300 5,103,691

2,111,346 578,523 1,132,519 1,193,659 (201,000) 4,815,047

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

2,157,832

2,246,787

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

120,037 7,290 138,377 8,517 274,221 19,914 254,307

Income before interest expense

121,757 3,855 141,270 16,719 283,601 21,552 262,049

2,412,139

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

2,508,836

2,235,148

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

476,136 7,350 1,568 485,054

490,540 6,738 1,524 498,802

1,927,085

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

2,010,034

1,721,448

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

(950,400) (881,280) 18,235,923 17,107,169 $ 19,212,608 $ 18,235,923

( 812,160) 16,197,881 $ 17,107,169

Net income, basic

$

2.23

$

2.33

$

1.99

Dividends declared

$

1.10

$

1.02

$

.94

Book value

$

24.32

$

23.19

$

21.88

The accompanying notes are an integral component of these financial statements The Torrington Water Company • Annual Report 2017

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THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015

2017

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 expenses Other assets, net Accounts payable Accrued and other liabilities Deferred credits Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to utility plant 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 Proceeds (repayment) of long-term debt Deferred finance costs Dividends declared Net cash provided by (used in) financing activities

NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents, beginning

CASH AND CASH EQUIVALENTS, ENDING

6

The Torrington Water Company • Annual Report

$

2016 2015

1,927,085 $

2,010,034

1,344,078 94,895 3,499 (8,517)

1,370,100 (239,305) 12,324 (16,719)

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

(79,581) (204,906) (18,112) (56,803) (464,088) 68,921 13,764 (29,562) 2,590,673

102,343 124,834 23,555 3,904 (503,138) (99,552) 104,431 29,562 2,922,373

(167,068) (69,527) (26,069) 48,318 (290,311) 3,155 109,938 — 2,719,743

(1,973,635) — (182,671) (2,156,306)

(1,665,745) 57,818 (86,995) (1,694,922)

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

— (360,000) — (950,400) (1,310,400)

— 2,445,000 (65,614) (881,280) 1,498,106

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

( 876,033)

2,725,557

183,592

3,286,891

561,334

377,742

2,410,858

$

3,286,891

$

$

1,721,448

561,334


THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

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DECEMBER 31, 2017

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General

The Torrington Water Company (the “Company”) is a public utility that provides water service 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 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, 2017, 2016 and 2015 consists of the following: 2017 2016 2015

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 2,412,556 2,373,571 11,554,403 45,373,624 2,741,975 35,319 242,862

$

236,404 2,219,854 2,346,198 11,349,742 43,896,897 2,585,061 13,884 242,862

$

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

$

64,970,714

$

62,890,902

$

61,357,843

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 $10,199,019, $10,214,051, and $10,161,490, as of December 31, 2017, 2016 and 2015, 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 2017

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THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

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DECEMBER 31, 2017

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, 2017, 2016 and 2015:

Original Cost

2017

2016

2015

Cost of Service Study $ 40,462 $ 3,035 $ 7,081 $ 11,127 2006 Tank Painting 240,739 — — 11,970 2009 Tank Painting 262,866 86,462 108,367 130,273 2010 Tank Painting 318,456 121,633 148,171 174,708 2011 Tank Painting 145,227 70,598 82,700 94,802 2011 Tank Painting 160,346 77,946 91,308 104,671 Crystal Lake Dam Repair 263,321 125,654 135,287 160,263 Litchfield Street Tank Painting 97,903 55,695 63,844 71,994 Soapstone Hill Tank Painting 191,694 109,118 125,087 141,056 Prepaid Income Taxes Various (7,158) (11,242) (10,630) Highland Ave Tank Painting 291,911 212,851 237,177 261,504 Supply Plan Update III 61,240 30,620 37,425 44,229 Other Deferred Costs 59,795 32,886 44,845 56,809 2013 Customer Survey 20,125 1,686 5,709 9,732 Docket 13-01-29 8,352 8,352 8,352 8,352 W. Pearl Rd Tank Painting-Outside 284,349 185,616 209,312 233,008 W. Pearl Rd Tank Painting-Inside 338,708 336,595 — — 2015 Tank Painting 252,213 206,675 227,693 248,710 Deferred Sales Tax 50,540 50,540 29,684 11,054 Emergency Action Plan 18,496 — 18,496 — Woodridge Lake 264,587 264,587 172,533 — Future Tank Paintings Various 259,609 294,098 — Total Other Assets $ 2,233,000 $ 2,035,927 $ 1,763,632

Amortization Period Ends 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 November 2029 October 2027 Not yet amortizable Transferred to utility plant 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

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act changes existing United States tax law and includes a number of provisions that will affect the Company, including a reduction of the federal corporate tax rate from 34% to 21% effective January 1, 2018 and an immediate 100% depreciation deduction for eligible capital additions placed in service after September 27, 2017. The Company is currently working with PURA to determine the regulatory impact of the Act on the rate setting process. Deferred income taxes are provided for the expected future tax consequences of events that have been included in the financial statements 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 tangible property regulations 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 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. As of December 31, 2017 the Company has remeasured and reduced its regulatory assets and deferred income taxes by approximately $3,259,900 as a result of the Act. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. 8

The Torrington Water Company • Annual Report 2017


THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2017

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2017, 2016 and 2015 is estimated to be $16,000, $35,500, and $46,500, respectively. .

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. 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 $678,515, $513,587, and $612,525 in operating revenues related to the WRA in 2017, 2016 and 2015, 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) incorporated the April 1, 2015 authorized WICA surcharge of 9.29% into current base rates, (2) set the WICA surcharge to zero and began a new WICA expansion period, (3) allowed for the continuation of the WRA at its present rate, and (4) provided 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

In January 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 in January 2026, and are secured by substantially all of the Company’s utility plant. The proceeds of the Series G First Mortgage Bonds were used to repay the 5.58% $6,205,000 Series F First Mortgage Bonds, the 4.58% $3,000,000 note payable, bank, and the 3.50% $350,000 line of credit.

Long-term debt is comprised of the following:

Series G bonds

2017

2016

2015

$

11,640,000 — — (360,000) 11,280,000 (59,411)

$

12,000,000 — — $ 6,205,000 — 3,000,000 (360,000) — 11,640,000 9,205,000 (66,761) (7,885)

$

11,220,589

$

11,573,239

Series F bonds Note payable, bank Less due within one year Net long-term portion due Less unamortized finance costs

December 31,

$

9,197,115

The Torrington Water Company • Annual Report 2017

9


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2017

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 less 0.50% (4.00% at December 31, 2017) and expires in May 2018. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2017.

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, 2017, 2016 and 2015 was $132,528, $122,866, and $125,097, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $14,536, $12,543, and $11,448, for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015 was $68,965, $70,193, and $68,322, 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 $2,702,155, $2,540,732, and $2,377,008 as of December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015:

2017

Accumulated Postretirement Benefit Obligation (APBO) Less Fair Value of Plan Assets APBO in Excess of Fair Value of Plan Assets Unrecognized Amounts: Prior Service Cost Unrecognized Loss Unfunded Postretirement Benefits at End of the Year

$

3,213,265 — 3,213,265

2016 $

19,942 491,168 511,110 $

2,702,155

2015

2,835,776 $ — 2,835,776 22,605 272,439 295,044

$

2,540,732 $

2,751,593 — 2,751,593

25,267 349,318 374,585 2,377,008

The net periodic postretirement benefit cost for 2017, 2016 and 2015 includes the following components:

Service Cost-Benefit Attributed to

Service During the Year Interest Cost Amortizations of: Unrecognized Gain or Loss Prior Service Cost Total Cost

2017 $

$

108,655 119,070 — 2,663 230,388

2016 $

$

104,748 122,013 4,494 2,662 233,917

2015 $

$

124,986 101,989 3,581 2,663 233,219

The weighted-average assumed discount rate used to measure the APBO was 3.70% for 2017, 4.25% for 2016, and 4.50% for 2015. 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 5.00% in 2015 down to 4.75% in 2023 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, 2017 by $631,329 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $51,693. 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 2017


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2017

7. TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:

2017

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

$

$

1,152,626 94,906 1,247,534 (18,166) 1,229,368

2016 $

$

2015

1,116,776 $ 90,838 1,207,614 (13,955) 1,193,659 $

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

8. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 are as follows:

2017

Federal

State

Current Income Taxes $ 225,400 $ Tax Benefit of Operating Loss Carryforwards (225,400) Change in Valuation Allowance — Deferred Income Taxes (Benefit) 98,600 Normalization of Prepaid Income Taxes 996 Normalization of Investment Credits (3,705) Total Income Taxes (Benefit) $ 95,891 $

39,323 — — — — — 39,323

2016

Total

$

264,723 $ 258,861 (225,400) (200,000) — (200,000) 98,600 (35,600) 996 996 (3,705) (3,705) $ 135,214 $ (179,448)

Less Attributed to Other Income Net Charged to Utility Operations $

(19,914) 115,300

2015

Totals

(21,552) $ (201,000)

Totals

$ 203,636 (146,000) — (9,200) 996 (3,705) $ 45,727 $

(11,727) 34,000

The Company has net operating loss carryforwards of approximately $1,161,000 to offset federal taxable income through 2034. For financial reporting purposes, a deferred tax asset of $200,000 has been recognized at December 31, 2017. 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 2014 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 2017, 2016 and 2015 the amount of these purchases approximated $194,900, $231,700, and $108,500, respectively.

10. COMMITMENTS AND CONTINGENCY

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. Potential Acquisition In December 2017, the Company submitted a proposal to acquire the drinking water assets of the Town of New Hartford. Two public water utilities also submitted bids to acquire these assets. Members of the town’s asset evaluation team have 120 days to make a recommendation to the town council. If successful, the Company expects to finance the acquisition from the issuance of long-term debt.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2017

Interest Paid Income Taxes Paid

$

482,256 37,803

2016 $

430,806 52,961

2015 $

499,650 50,217

12. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 30, 2018, the date which the financial statements were available for issue. The Torrington Water Company • Annual Report 2017

11


l

THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

DECEMBER 31, 2017

EQUITY 64.4 % VS DEBT 35.6% EQUITY DEBT

Millions 22– $21.01

21– 20– $18.91

19– 18– $17.09

17– 16–

$15.58 $14.32

14– $12.96

12–

$11.64 $10.22

10–

$9.72 $8.24

8–

2007

$9.21

$7.74

2009

2011

2013

2015

2017

$1.02

DIVIDENDS PER SHARE $0.47

2007

$0.51

2008

$0.55

2009

$0.61

2010

$0.69

2011

$0.73

$0.77

2012

2013

$0.83

2014

$0.94

2015

2016

$2.33

EARNINGS PER SHARE $1.18

2007

$1.00

2008

$1.35

2009

$1.35 $1.39

2010

2011

$1.95

$1.89

2013

2014

2007

12 The Torrington Water Company • Annual Report 2017

$1.99

2012

2015

2016

$23.19

2008

$16.57 $17.32

2009

2010

$18.02 $18.59

2011

2017

$2.23

$1.30

BOOK VALUE PER SHARE

$14.96 $15.46

$1.10

2012

$19.77

2013

$20.83

2014

2017

$24.32

$21.88

2015

2016

2017

This information is not part of the Audited Financial Statements


DESIGN: RHODE VAN GESSEL • ESSEX CT

PRINTING: MINUTEMAN


THE TORRINGTON WATER COMPANY torringtonwater.com

277 Norfolk Road

PO Box 867

Torrington, Connecticut 06790

860.489.4149

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