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THE TORRINGTON WATER COMPANY

Annual Report 2018

CASH DIVIDENDS PAID EVERY YEAR SINCE 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, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, 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. Change in Accounting Principle As discussed in Note 5 to the financial statements, during the year ended December 31, 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective transition approach. Our opinion is not modified with respect to this matter.

January 28, 2019 Shelton, Connecticut

Dworken, Hillman, LaMorte & Sterczala, P.C. Four Corporate Drive, Suite 488 l 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

l

ANNUAL REPORT

l

DECEMBER 31, 2018

FIVE-YEAR SELECTED DATA

FINANCIAL

2018

2017

2016

2015

2014

Income Statement

Operating Revenues O & M Expenses Utility Operating Income Net Income

$ $ $ $

7,336,287 3,028,320 1,785,766 1,685,858

$ $ $ $

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

Balance Sheet

Stockholders’ Equity $ 21,678,946 $ 21,012,608 $ 20,035,923 $ 18,907,169 $ 17,997,881 Long Term Debt $ 11,280,000 $ 11,640,000 $ 12,000,000 $ 9,205,000 $ 9,460,000 Stockholders’ Equity % 65.8 64.4 62.5 67.3 65.5 Long Term Debt % 34.2 35.6 37.5 32.7 34.5 Net Utility Plant $ 43,861,080 $ 42,956,221 $ 41,859,685 $ 41,236,243 $ 40,382,388

Per Share Amounts Earnings Per Share

Dividend Per Share Book Value Per Share

OPERATIONAL

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

$ $ $

1.95 1.18 25.09

$ $ $

2.23 $ 1.10 $ 24.32 $

2.33 1.02 23.19

2016

$ $ $

1.99 0.94 21.88

$ $ $

1.89 0.83 20.83

2018

2017

2015 2014

169 950 893,764

169 948 877,248

169 948 895,083

169 947 882,838

164 920 908,973

469,575 136,690 8,725 10,057 19

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

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2018

1


THE TORRINGTON WATER COMPANY PRESIDENT’S MESSAGE

To Our Stockholders FINANCIAL RESULTS

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

Operating revenues for 2018 increased by 1.0% to $7,336,287 from $7,261,523 in 2017. This basically flat result was due to a combination of factors: yet another wet, cool summer; a continuing lack of residential and commercial development in the community; and an increase in the number of vacant properties in our service area. We monitored expenses very carefully last year, but despite our best efforts increases did occur, primarily in labor costs, insurance costs and leak detection costs. Consequently, our Operation and Maintenance (O&M) expenses for the year grew significantly, rising by $357,605, or 13.4%. We will continue to diligently manage these expenses to ensure that your company is run as efficiently as possible. Because of the increase in O&M expenses, utility operating income declined by 17.2% to $1,785,766 from $2,157,832 in 2017. Non-utility ventures generated income of $350,214 in 2018, an increase of 60.3% from $218,377 in 2017. The improvement was primarily due to increased timber sales. With the advance of the emerald ash borer, which is destroying ash stands throughout the eastern United States, the Company has stepped up the harvest of ash trees before they are gone. We will again harvest as much ash as possible in 2019, but do not expect to continue doing this in the future. Rather, we will return to our watershed management plan and will harvest timber accordingly. Net income for 2018 declined by 12.5% to $1,685,858 ($1.95 per share) from $1,927,085 ($2.23 per share) in 2017. The last time the Company sought a general rate increase was in 2008. Since then, we have been able to avoid filing a general rate case in several ways. First, the state’s Water Infrastructure and Conservation Adjustment (WICA) program has allowed us to recover, in a timely manner, qualifying infrastructure investments (plus associated property tax, depreciation expense and income tax) via a surcharge on customer bills. Second, another state program, the Revenue Adjustment Mechanism, allows us to add a surcharge to customer bills to ensure that the Company

The Torrington Water Company • Annual Report 2018

realizes the revenue it was allowed in its last rate case. And the third way we have avoided a rate case is that by utilizing a change in IRS rules related to the federal repair deduction we have been able to reduce our current tax expense in recent years. As of year-end 2018, however, we have reached the maximum level of WICA surcharge—10.0%—that we are allowed to apply. (And this is the second time we have hit the cap: The first time it happened, in 2015, we negotiated a settlement agreement with the state’s Office of Consumer Counsel that rolled the WICA surcharge into our base rates and reset the surcharge at zero.) Therefore, the Company has now started to put together a rate application and will either again negotiate a settlement agreement or we will file a general rate case with the Public Utilities Regulatory Authority (PURA) sometime this year. We will look to restore our earnings to a level that will let us continue serving both our stockholders and the community in a responsible manner. Meanwhile, we have applied to PURA to recover the allowed costs for mains replaced in 2018. If approved, the 2019 WICA surcharge will be close to 10.0%. I am pleased to report that our Board of Directors continued its practice of increasing the quarterly cash dividend each year. In 2018, the Board raised the quarterly dividend to $0.31 per share from $0.29. With that increase, 2018 became the 21st consecutive year we have raised our dividend, and the 138th consecutive year we have paid a dividend (payments began in 1880). Book value per share grew 3.1%, to $25.09 at year-end from $24.32 at year-end 2017.

OPERATIONAL HIGHLIGHTS

During 2018, we again devoted considerable effort and money to improving our infrastructure. We replaced 3,460 feet of existing water mains at a total cost of $1,015,000. Replacing small old mains helps reduce main breaks and lowers unaccounted-for water. In this effort, we have made 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.


THE TORRINGTON WATER COMPANY

IN MEMORY

Richard D. Calhoun Director and President TWC 1972-2008

This coordination has enabled us to have one of the lowest costs-per-foot for main replacement in the state, and this has not gone unnoticed at PURA. However, we are nearing the end of being able to take advantage of this coordination with the state, other utilities and the City of Torrington. Therefore, we will see cost increases for future projects.. In 2018, we realized $436,200 in revenues through the WICA surcharge that was based on our 2017 infrastructure investment. If a WICA surcharge for our 2018 investment is approved, we expect the new rate to become effective April 1, 2019, and to generate approximately $577,500 in revenues. Over the past eight years, we have invested more than $8.3 million through the WICA program to replace a little under 10 miles of WICA-eligible main. Other plant activity last year included the repaving of the driveway at our office / filtration plant at a cost of $250,000. In 2018, we launched a Geographic Information System (GIS), a technology for collecting, managing and analyzing data. This system, which gives us the ability to record readings and locations in the field, allows for better coordination between field representatives and the office and thereby cuts down on errors and paperwork. We purchased new radio-read meter reading equipment and now have the ability to read our entire system in one day. One benefit of this is that we can now see in real time how much we are losing in non-revenue water (the difference between water produced and water sold). Last year saw an uptick in non-revenue water. We conducted a systemwide in-depth leak detection survey that enabled us to repair or replace several points where water was being lost. As a result, we should see a drop this year in the percentage of unaccounted-for water.

LOOKING AHEAD

We enter 2019 with some executive and Boardlevel changes. For over 40 years, I have had the privilege of working alongside Steven F. Cerruto, Vice President of Operations for The Torrington Water Company. Steve joined the Company over 45 years ago, in 1973. His dedication, knowledge and commitment have served our company very well. Steve will retire at the end of March, and I will miss his presence. He will continue to be a Director,

however, and I will be sure to reach out to him when needed. We hired Fred W. Rogers in December 2017 as Operations Manager. Fred has years of service in the water industry and has settled in well here. I am very grateful to have served with Steve and look forward to working with Fred. • • • IT IS WITH DEEP SADNESS that I announce the passing of Richard D. Calhoun, a Director of the Company, who died on January 23, 2019. His death marks the end of an era for The Torrington Water Company and the City of Torrington. He worked at the Company from January 1972 to March 2008, serving as President from 1977 to his retirement in 2008. He also served as a Director from 1977 until his death, during which time he was instrumental in guiding our company through the construction of many of our major facilities. As a Director, he provided valuable leadership and advice to our company. Dick was very active in the community and will be missed by all who knew him. In the year that lies ahead, we will continue our tradition of responding to our customers, stockholders and neighbors with resourcefulness, competence and care. Ultimately, our success rests on how well we meet the needs and concerns of those customers, investors and communities. Our unchanging priorities are to provide safe, reliable drinking water, and to increase value for our stockholders. As always, I credit the dedication, focus and resilience of our employees and recognize that we are well positioned for the future because of their efforts. I want to personally thank our Board of Directors for their confidence, guidance and support throughout the year. I especially want to acknowledge Richard D. Calhoun for his wisdom and invaluable guidance. He was truly a legend in the water industry, and the Company has been extremely well served by him. May he rest in peace. Thank you.

The Torrington Water Company • Annual Report 2018

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THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

BALANCE SHEETS

AS OF DECEMBER 31, 2018, 2017 AND 2016

2018

ASSETS

Utility plant, at cost Less: accumulated depreciation Net utility plant Nonutility property, net of accumulated depreciation

2017

$ 66,976,645 $ 23,115,565 43,861,080 372,935

64,970,714 22,014,493 42,956,221 372,935

1,577,560 517,650 824,000

2,410,858 451,119 838,000

2016 $ 62,890,902 21,031,217 41,859,685 372,935

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 $

3,286,891 394,037 819,000

744,544 222,107 116,113 4,001,974

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

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

2,344,134 216,186 5,919,900

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

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

166,363 169,629 2,893,865 2,702,155 11,540,448 10,793,286 59,776,437 $ 58,829,090

125,709 2,540,732 12,987,796 $ 60,491,114

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 Current liabilities: Current portion of long-term debt Accounts payable Accrued taxes Accrued interest Other current liabilities Total current liabilities Deferred income taxes Regulatory liability-excess deferred income taxes Regulatory liability-excess 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 11)

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES

The accompanying notes are an integral component of these financial statements 4

The Torrington Water Company • Annual Report 2018

1,800,000 $ 19,878,946 21,678,946

1,800,000 $ 1,800,000 19,212,608 18,235,923 21,012,608 20,035,923

10,867,939

11,220,589

360,000 176,123 596,584 191,760 127,918 1,452,385

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

7,824,580 1,261,300 26,982 2,893,865 — 439,286 10,908,961 2,422,193

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

25,777,167

25,041,661

$ 59,776,437 $ 58,829,090

11,573,239

27,421,946 $ 60,491,114


THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

2018

2017

2016

Operating revenues $

7,336,287

2,309,743 718,577 1,127,343 1,295,158 99,700 5,550,521

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

1,785,766

2,157,832

2,246,787

119,801 4,555 264,481 10,759 399,596 29,162 370,434

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

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

2,412,139

2,508,836

Operating expenses:

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

$ 7,261,523

$ 7,061,834

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

2,156,200

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

461,448 7,350 1,544 470,342

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

1,685,858

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

1,927,085

2,010,034

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

(1,019,520) 19,212,608 $ 19,878,946

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

Net income, basic

$

1.95

$

2.23

$

2.33

Dividends declared

$

1.18

$

1.10

$

1.02

Book value

$

25.09

$

24.32

$

23.19

The accompanying notes are an integral component of these financial statements The Torrington Water Company • Annual Report 2018

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THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

2018

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

$

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:

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

6

The Torrington Water Company • Annual Report 2018

1,927,085 $

2,010,034

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

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

(59,683) (79,581) (52,223) (204,906) (56,307) (18,112) 35,703 (56,803) (357,755) (464,088) (96,427) 68,921 1,199 13,764 26,982 — — (29,562) 2,571,849 2,590,673

CASH FLOWS FROM INVESTING ACTIVITIES:

The accompanying notes are an integral component of these financial statements

$

1,381,314 66,795 7,152 (10,759)

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 Regulatory liability-excess income taxes Deferred credits Net cash provided by operating activities

CASH AND CASH EQUIVALENTS, ENDING

1,685,858

2017 2016

$

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

(2,021,443) (1,973,635) (1,665,745) — — 57,818 (4,184) ( 182,671) (86,995) (2,025,627) (2,156,306) (1,694,922)

(360,000) — (1,019,520) (1,379,520)

(360,000) — (950,400) (1,310,400)

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

(833,298)

(876,033)

2,725,557

2,410,858

3,286,891

561,334

1,577,560

$

2,410,858

$

3,286,891


THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2018

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 (“FASB”) 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, 2018, 2017 and 2016 consists of the following: 2018

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

2017

2016

$

236,404 2,440,939 2,371,030 11,830,610 47,025,120 2,820,423 9,257 242,862

$

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

$

66,976,645

$

64,970,714

$

62,890,902

Nonutility Plant

he Company owns land, buildings and equipment with an original cost of $559,204 that is not used in utility service. Depreciation in T 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

he Company uses the straight-line method of depreciation over the estimated service lives of depreciable plant ranging from 5 to 75 T 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 reporte within Customers’ Advances for Construction, Contributions in Aid of Construction and Amortized Contributions in Aid of Construction is $10,207,804, $10,199,019, and $10,214,051, as of December 31, 2018, 2017 and 2016, respectively.

Cash and Cash Equivalents

he Company considers all highly liquid investments that have an original maturity of less than three months to be cash equivalents. T 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.

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.

The Torrington Water Company • Annual Report 2018

7


THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

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DECEMBER 31, 2018

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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, 2018, 2017 and 2016:

Original Cost

Cost of Service Study $ 2009 Tank Painting 2010 Tank Painting 2011 Tank Painting 2011 Tank Painting Crystal Lake Dam Repair Litchfield Street Tank Painting Soapstone Hill Tank Painting Prepaid Income Taxes Highland Ave Tank Painting Supply Plan Update III Other Deferred Costs 2013 Customer Survey Docket 13-01-29 W. Pearl Rd Tank Painting-Outside W. Pearl Rd Tank Painting-Inside 2015 Tank Painting Deferred Sales Tax Emergency Action Plan Woodridge Lake Future Tank Paintings Docket 18-01-15

40,462 262,866 318,456 145,227 160,346 263,321 97,903 191,694 Various 291,911 61,240 59,795 20,125 8,352 284,349 338,708 252,213 89,365 18,496 308,543 Various 18,365

2018 — $ $ 64,556 95,094 58,496 64,584 100,678 47,545 93,150 (7,909) 188,525 23,816 20,928 — 8,352 161,921 305,498 185,657 89,365 — 308,543 516,970 18,365

2017 3,035 86,462 121,633 70,598 77,946 125,654 55,695 109,118 (7,158) 212,851 30,620 32,886 1,686 8,352 185,616 336,595 206,675 50,540 — 264,587 259,609 —

Total Other Assets $ 2,344,134 $ 2,233,000

2016 $

Amortization Period Ends

7,081 September 2018 108,367 November 2021 148,171 July 2022 82,700 October 2023 91,308 October 2023 135,287 May 2022 63,844 October 2024 125,087 October 2024 (11,242) Various 237,177 September 2026 37,425 June 2022 44,845 September 2020 5,709 May 2018 8,352 Not yet amortizable 209,312 October 2025 — November 2029 227,693 October 2027 29,684 Not yet amortizable 18,496 Transferred to utility plant 172,533 Not yet amortizable 294,098 Not yet amortizable — Not yet amortizable

$ 2,035,927

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 changed existing United States tax law and included a number of provisions that affected the Company, including reducing the federal corporate tax rate from 34% to 21% effective January 1, 2018, and, specifically for public utility companies, requiring customer advances for construction be included in taxable income and eliminating bonus depreciation. See Note 2. 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. 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. As a result of the Act requiring these advances be included in taxable income, PURA directed the Company to collect additional funds from developers for any additional income taxes incurred by the Company. 8

The Torrington Water Company • Annual Report 2018


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2018

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.

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 On January 23, 2019, PURA issued a final decision concerning Docket No. 18-01-15, PURA Review of Rate Adjustments Related

to the Federal Tax Cuts and Jobs Act (“Docket 18-01-15”), which was undertaken by PURA to address the impact on rates charged to customers due to the reduction in the federal corporate tax rate from 34% to 21%. Specifically, Docket 18-01-15 addressed two areas of corporate income taxes: (1) the income tax expense included in rates charged to customers; and (2) the excess accumulated deferred income tax (“EDIT”) liability. In accordance with the final decision, the Company was ordered to create a regulatory liability of $26,982 annually to account for the decrease in its federal income tax expense and to establish a regulatory liability of $1,261,300 to account for its EDIT. The Company was further ordered to propose a method of returning such amounts to customers in its next rate case or multi-year rate plan authorized by a settlement agreement. The Company’s financial statements as of and for the year ended December 31, 2018 have been adjusted to comply with these orders.

3. LONG-TERM DEBT

The Company has long term debt consisting of Series G First Mortgage Bonds with annual principal payments of $360,000 due on January 26th of each respective year through January 2026. The bonds bear interest at 4.08%, 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. Long-term debt is comprised of the following: December 31,

Series G Bonds

$

Less Due Within One Year Net Long-Term Portion Due Less Unamortized Finance Costs

$

2018

11,280,000 (360,000) 10,920,000 (52,061) 10,867,939

2017

$

$

11,640,000 (360,000) 11,280,000 (59,411) 11,220,589

2016

$

$

12,000,000 (360,000) 11,640,000 (66,761) 11,573,239

4. NOTE PAYABLE, BANK

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% (5.00% at December 31, 2018) and expires in July 2020. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2018, 2017, or 2016.

5. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS:

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which replaced most of the previous guidance related to revenue recognition. ASU 2014-09 requires an entity to recognize revenue as its performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive in exchange for those goods and services. ASU 2014-09, as amended, became effective for public companies for fiscal years beginning after December 15, 2017. Accordingly, the Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective transition approach. The Company has determined that there was no change in either the measurement or the timing of revenues recognized under ASU 2014-09 as compared to the previous guidance. As a result, the adoption of ASU 2014-09 had no impact on the Company’s results of operations or cash flows. Substantially all of the Company’s revenues are generated from regulated tariff-based sales of water. The Company’s performance obligation is comprised of a stand-ready obligation to deliver water as well as the actual delivery of water to residential, commercial, industrial, public authority, and fire protection customers. The Company recognizes revenue through the passage of time at a fixed rate with respect to its stand-ready obligation, and at a price per unit of water delivered based on tariffs established by PURA through the rate-making process. These tariffs include a Water Infrastructure and Conservation Adjustment, which allows for the timely recovery in rates of the cost of approved infrastructure investment, and a Water Revenue Adjustment, which allows the Company to record the amount by which actual revenues from water customers were less than revenues allowed in the Company’s most recent rate decisions. Residential, commercial, industrial, and public authority customers are billed quarterly on a cycle basis. Fire protection customers are billed monthly. The Company accrues revenue and a related contract asset for actual or estimated water delivery services provided but not yet billed to customers based on estimated water usage from the latest meter reading to the end of the year. The Torrington Water Company • Annual Report 2018

9


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2018

5. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS (continued) The following table presents the Company’s operating revenues by customer class: Year Ended December 31,  

Residential Commercial Industrial Public Authority Fire Protection Water Revenue Adjustment Other Total Operating Revenues

2018 2017

$

2016

3,766,989 $ 3,725,811 $ 3,711,568 828,115 845,064 871,965 76,821 74,011 74,718 179,482 169,738 185,151 1,572,468 1,534,525 1,494,273 665,451 678,515 513,587 246,961 233,859 210,572 7,336,287 $ 7,261,523 $ 7,061,834

$

The Company continuously monitors the creditworthiness of customers and establishes, when necessary, an allowancfor 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. Accounts receivable at December 31, 2018, 2017, and 2016 is comprised solely of amounts due from customers related to regulated tariff-based sales of water.

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, 2018, 2017 and 2016 was $137,204,$132,528, and $122,866, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $18,470, $14,536, and $12,543, for the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016 was $63,354, $68,965, and $70,193, 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 $2,893,865, $2,702,155, and $2,540,732 as of December 31, 2018, 2017 and 2016, 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 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, 2018, 2017 and 2016:

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 (Gain) Loss Unfunded Postretirement Benefits at End of the Year

2018 $ $

2,888,017 — 2,888,017

2017 $ 3,213,265 $ — 3,213,265

17,280 (23,128) (5,848) $

2,893,865

2016

19,942 491,168 511,110 $

2,702,155

2,835,776 — 2,835,776

22,605 272,439 295,044

$

2,540,732

The net periodic postretirement benefit cost for 2018, 2017 and 2016 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

$

$

2018

2017

124,304 117,748

$

108,655 119,070

10,350 2,662 255,064

$

— 2,663 230,388

2016 $

$

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

The weighted-average assumed discount rate used to measure the APBO was 4.30% for 2018, 3.70% for 2017, and 4.25% for 2016. 10

The Torrington Water Company • Annual Report 2018


l

THE TORRINGTON WATER COMPANY

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2018

7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (continued) 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 4.75% in 2016 down to 4.50% in 2024 was also used in determing 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, 2018 by $511,530 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $55,714. 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, 2018, 2017 and 2016 are as follows:

2018 2017 2016

Property Taxes

Payroll Taxes

Total Taxes Other than Income Taxes

Less Amounts Capitalized

Net Taxes Other than Income Taxes

$

1,201,923

$

1,152,628

106,506 1,308,429

1,247,534

1,207,614

(18,166)

1,295,158

$

1,116,776 90,838

(13,271) $

$

94,906

1,229,368

(13,955) $

1,193,659

9. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2018, 2017 and 2016 are as follows:

2018

Federal Current Income Taxes

$

124,000

State $

61,071

Total

$ 185,071

2017

Totals

$ 264,723

2016 Totals

$ 258,861

Tax Benefit of Operating Loss Carryforwards Change in Valuation Allowance Deferred Income Taxes (Benefit)

(124,000)

(43,800)

(43,800)

114,300

98,600

(35,600)

996

996

996

114,300

Normalization of Prepaid Income Taxes Normalization of Investment Credits

(124,000)

996

Total Income Taxes (Benefit)

(3,705) $

67,791

$

(225,400)

(200,000) (200,000)

(3,705)

(3,705)

(3,705)

61,071

$ 128,862

$ 135,214

$ (179,448)

Less Attributed to Other Income Net Charged to Utility Operations

$

(29,162) 99,700

(19,914) (21,552) $ 115,300 $ (201,000)

The Company has net operating loss carryforwards of approximately $605,800 to offset federal taxable income through 2034. For financial reporting purposes, a deferred tax asset of $127,200 has been recognized at December 31, 2018. 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 2015 are no longer subject to examination by taxing authorities.

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 2018, 2017 and 2016 the amount of these purchases approximated $197,500, $194,900, and $231,700, respectively.

The Torrington Water Company • Annual Report 2018

11


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2018

11. 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 The Company has a cancellable long-term contract for annual water tank inspection, maintenance and periodic painting. The contract calls for annual payments of approximately $299,100 in 2019, decreasing to $188,400 from 2020 through 2023.

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. The Company was notified in 2018 that their bid was unsuccessful.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2018

Interest Paid Income Taxes Paid

$

2017

467,568

$ 482,256

62,206

37,803

2016 $

430,806 52,961

13. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 28, 2019, the date which the financial statements were available for issue.

The Torrington Water Company • Annual Report 2018

12


THE TORRINGTON WATER COMPANY

l

l

ANNUAL REPORT

DECEMBER 31, 2018

EQUITY 65.8 % VS DEBT 34.2% Millions

EQUITY

22–

DEBT

20–

$21.01

$21.68

$20.03 $18.90 $17.99

18– 16– 14–

$12.00

12–

$11.64

10–

$9.46

$11.28

$9.20

8– 6– 4– 2–

2014

2015

• TORRINGTON CT

$0.83

PRINTING: MINUTEMAN PRESS

2017

$1.18

DIVIDENDS PER SHARE

DESIGN: RHODE VAN GESSEL • ESSEX CT

2016

2014

$0.94

2015

$1.02

2016 $2.33

EARNINGS PER SHARE

$1.89

2014

$1.99

2015

2016

$1.10

2017

$2.23

2017

2018

$1.95

2018 $25.09

BOOK VALUE PER SHARE

$23.19

$20.83

2014

This information is not part of the audited financial statements

$24.32

$21.88

2015

2016

2017

2018

2018


THE TORRINGTON WATER COMPANY torringtonwater.com

277 Norfolk Road

PO Box 867

Torrington, Connecticut 06790

860.489.4149

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