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T H E T O R R I N G T O N WAT E R C O M PA N Y

Annual Report 2019

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, 2019, 2018 and 2017, 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, 2019, 2018 and 2017, 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.

February 5, 2020 Shelton, Connecticut

PKF O’CONNOR DAVIES, LLP Four Corporate Drive, Suite 488, Shelton, CT 06484 l Tel 203.929.3635 l Fax 203.929.5470 l www.pkfod.com

PKF O’Connor Davies, LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsiblity or liability for the actions or inactions on the part of any other individual member firms or firms.

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 Shareholderss.


l

THE TORRINGTON WATER COMPANY

ANNUAL REPORT

l

DECEMBER 31, 2019

FIVE-YEAR SELECTED DATA

FINANCIAL

2019

2018

2017

2016

2015

Income Statement Operating Revenues O & M Expenses Utility Operating Income Net Income

$ $ $ $

7,480,222 3,029,122 1,910,491 1,725,338

$ $ $ $

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

Balance Sheet

Stockholders’ Equity $ 22,324,284 $ 21,678,946 $ 21,012,608 $ 20,035,923 $ 18,907,169 Long Term Debt $ 10,920,000 $ 11,280,000 $ 11,640,000 $ 12,000,000 $ 9,205,000 Stockholders’ Equity % 67.2 65.8 64.4 62.5 67.3 Long Term Debt % 32.8 34.2 35.6 37.5 32.7 Net Utility Plant $ 44,918,142 $ 43,861,080 $ 42,956,221 $ 41,859,685 $ 41,236,243

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

$ $ $

2.00 1.25 25.84

$ $ $

2019

1.95 1.18 25.09

$ $ $

2018

2.23 $ 1.10 $ 24.32 $

2017

2.33 1.02 23.19

$ $ $

1.99 0.94 21.88

2016 2015

169 954 861,332

169 950 893,764

169 948 877,247

169 948 895,083

169 947 882,838

494,957 149,366 10,660 10,089 17

502,487 148,241 11,100 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

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2019

1


THE TORRINGTON WATER COMPANY PRESIDENT’S MESSAGE

To Our Stockholders

OFFICERS Susan M. Suhanovsky President Catherine C. Roscello Secretary / Treasurer

DIRECTORS Edwin G. Booth, Jr. Steven F. Cerruto Diane V. Libby James M. Lucas Gregory S. Oneglia Charles W. Roraback Margaret P. Roraback Susan M. Suhanovsky

2

FINANCIAL RESULTS I am pleased to report improved financial results for 2019. Company operating revenues increased during the year to $7.48 million, a gain of 2.0% from $7.34 million in 2018. Total operating expenses, meanwhile, rose by only 0.4%, to $5.57 million from $5.55 million. As a result, utility operating income grew by 7.0%, to $1.91 million from $1.79 million. Net income, earnings per share (EPS) and year-end book value per share grew as well— net income by 2.3%, to $1.73 million; EPS, by 2.6%, to $2.00; and book value, by 3.0%, to $25.84. In December, for the 22nd consecutive year, your Board of Directors increased the quarterly dividend, to $0.32 per share from $0.31 per share. The Company has three non-utility ventures: timber sales, the Torrington Water Line Protection program and a management contract with New Hartford Water Pollution Control Authority. These ventures generated income of $254,260 in 2019, a decrease of 27.4% from 2018. The decline was due to a decrease in 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 for the past several years. We again harvested as much ash as possible in 2019, but since most of the ash is now dying, we were not able to harvest as much as in prior years. Therefore, our timber sales for 2019— $118,957—were down 45.5% from 2018. In addition, the whole timber industry is facing a downturn at this time, which also may negatively impact our timber ventures in the future. Early in 2019, we met with the state’s Office of Consumer Counsel (OCC) to discuss the possibility of entering into a settlement agreement to amend our rate schedule, thereby avoiding a costly rate case process. OCC agreed with our proposal. We filed the settlement agreement with Connecticut’s Public Utilities Regulatory Authority (PURA) on August 8, 2019, and PURA approved the settlement on January 8, 2020. The resulting agreement incorporates a Water Infrastructure and Conservation

The Torrington Water Company • Annual Report 2019

Adjustment (WICA) surcharge of 8.05% into our base rates as of January 1, 2020. This surcharge, which is based on pre-2019 WICA expenditures, added $557,536 to our allowed operating revenues. The agreement also continues our participation in the Water Revenue Adjustment program, which enables our company to realize, also via a surcharge, all the water sales revenue allowed to us in our last rate case. We have agreed not to file a rate case until at least mid-2021, with new rates not going into effect until January 1, 2022. We should see further improvement in our financial results for 2020 because of the increased revenues allowed from this settlement agreement. INFRASTRUCTURE INVESTMENTS We again used the state’s WICA program to upgrade our infrastructure last year. The program improves water quality and service by covering projects to replace aged or undersized pipes. In 2019, we invested $1.4 million in projects eligible under WICA, replacing 5,275 feet of existing water mains that had reached the end of their useful lives. Since joining the WICA program in 2010, we have replaced over 57,800 feet of WICA-eligible main in our system at a total investment of $9.7 million. Besides improving service reliability and water quality, the upgrades we make reduce the amount of water lost to leaks. Being underground, our pipes are of course unseen, which means that pinpointing the spots where water is leaking can be quite challenging. That is one reason we proactively maintain and upgrade our infrastructure and follow a systematic main replacement schedule—to ensure that our water system loses as little as possible of this precious resource to leaks. We use electronic recording devices each night to listen for leaks so that we can repair them quickly and reduce water loss. Non-revenue water (water produced but unaccounted for in customer usage) is a challenge facing water utilities across the country, and keeping water loss below 15.0% is the accepted standard in the industry. We are currently experiencing only a 13.2% water loss


THE TORRINGTON WATER COMPANY

companywide, and we will continue to look for ways to further reduce that percentage. We have applied for the allowed return on our 2019 WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax) and expect a favorable decision. If approved, a surcharge of 3.56% will be applied to customers’ bills starting April 1, 2020, resulting in revenues of $258,000. By prudently investing in our infrastructure, we make sure that our customers will always get clean, safe water when they turn on the tap. The Company will have a systemwide hydraulic model prepared in 2020. This model will be used to identify if there are any mains with hydraulic capacity issues, which is one of the WICA-specified prioritization factors that water utilities are to consider in deciding on future WICA projects. INCREASING EFFICIENCY WHILE MAINTAINING PERSONAL CONTACT As a 147-year-old company, we want to make sure we still provide that personal touch even as we look for ways to utilize advanced technology. When you call our office, one of our friendly customer service representatives will answer the phone and assist you. And our office remains open for walk-in customer support. We continue to expand our initiatives in paperless billing and electronic bill payment. We also continue to deploy a state-of-the-art, drive-by system for reading water meters via radio frequency. We are looking at changing our billing from quarterly to monthly. With today’s concern for conservation, it is important that we can read meters and bill our customers monthly so they can monitor their usage better. We have switched over a small portion of our customers, and they seem to appreciate getting a monthly bill. In our next general rate case, which should occur in the latter part of 2021, we will request additional revenue to cover the cost of switching our system to monthly billing. THE YEAR AHEAD In 2019, the Company hired an engineering firm to assess its filtration plant and come up with a capital improvement plan. As the treatment plant is approaching its 25th year in operation, we felt it was important to look at the entire plant and identify those systems and portions of infrastructure that may need to be upgraded or replaced to improve reliability and efficiency. The plan identifies upgrades

and replacements that should be done immediately and in the next five years. Over the next two years, the Company expects to invest $1.9 million in these needed upgrades. The Company has traditionally used internally generated funds for all of its capital expenditures. Currently, shareholders’ equity ($22.3 million) constitutes 67.2% of the Company’s capital, while debt ($10.9 million) constitutes 32.8%. PURA is critical of the Company’s strong equity position and does not allow the Company to earn a full return on that portion of the Company’s equity that exceeds 60%. The Company is borrowing $2.5 million to finance the cost of the Treatment Plant Capital Improvement Plan and to continue its water main replacement program. This new debt—which will be a term loan due in January 2026, the same time that the Company’s bonds come due—will bring the Company’s equity position down to approximately 62%. IN CLOSING Our company has thrived and grown and improved its service to customers for nearly 150 years. This long record of success has been due to the dedication, loyalty and hard work of its employees. Our employees regard what they do as much more than just a job—they see themselves as responsible for providing a high level of trust and security to our customers. Our customers know that when they turn on the tap in their home or at work, the water they receive will meet all federal and state standards. They know that when they call for assistance, they will be treated with courtesy and respect no matter their situation. They know that our employees work hard to secure the safety of our water supply while maintaining the infrastructure to deliver that water. The Torrington Water Company has always recognized the importance of its employees to its success, and appreciates and thanks them for their dedication. Lastly, I take this opportunity to thank our Board of Directors for their strong support, direction and guidance throughout 2019, and I look forward to working closely with them in the year ahead. Thank you.

The Torrington Water Company • Annual Report 2019

3


THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

BALANCE SHEETS

AS OF DECEMBER 31, 2019, 2018 AND 2017

2019

ASSETS

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

$

2018

2017

69,057,611 $ 66,976,645 $ 64,970,714 24,139,469 23,115,565 22,014,493 44,918,142 43,861,080 42,956,221 372,935 372,935 372,935

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

1,064,441 518,129 821,000

1,577,560 517,650 824,000

707,560 300,436 132,139 3,543,705

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

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

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

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

Other assets: Other assets

2,306,894 Preliminary survey and investigation charges 230,862 Regulatory asset-income taxes recoverable 6,476,000 Regulatory asset-water revenue adjustment, net of current portion 154,160 Regulatory asset-unfunded postretirement benefits 3,038,255 Total other assets 12,206,171 TOTAL ASSETS $ 61,040,953 $

2,410,858 451,119 838,000

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

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 Customer advances for construction Contributions in aid of construction Amortized contributions in aid of construction Commitments (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 2019

$

1,800,000 20,524,284 22,324,284

$

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

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

10,515,289

10,867,939

11,220,589

360,000 329,619 611,538 185,640 133,408 1,620,205

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

8,416,575 1,261,300 — 3,038,255 515,481 10,850,172 2,499,392

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

26,581,175 $ 61,040,953

25,777,167 $ 59,776,437

360,000 279,169 573,504 197,880 143,679 1,554,232 8,575,685 — — 2,702,155 1,416,667 10,000,367 2,346,787 25,041,661 $ 58,829,090


THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017

2019

2018

2017

Operating revenues $

7,480,222

2,381,493 647,629 1,146,922 1,319,487 74,200 5,569,731

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

1,910,491

1,785,766

2,157,832

116,208 4,025 160,412 10,905 291,550 21,055 270,495

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

2,180,986

2,156,200

Operating expenses:

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

$ 7,336,287

$ 7,261,523

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

2,412,139

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

446,760 7,350 1,538 455,648

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

1,725,338

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

1,685,858

1,927,085

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

(1,080,000) 19,878,946 $ 20,524,284

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

(950,400) 18,235,923 $ 19,212,608

Net income, basic

$

2.00

$

1.95

$

2.23

Dividends declared

$

1.25

$

1.18

$

1.10

Book value

$

25.84

$

25.09

$

24.32

The accompanying notes are an integral component of these financial statements The Torrington Water Company • Annual Report 2019

5


THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income Adjustments to reconcile net income to net cash provided by operating activites: Depreciation and amortization Amortization of deferred financing costs Deferred income taxes 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 Accounts payable Accrued and other liabilities Regulatory liability-excess income taxes Deferred credits Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to utility plant Cash from disposition of assets Proceeds from developers’ contributions, net of refunds Additions to preliminary survey and investigation charges Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of long-term debt Dividends declared Net cash used in financing activities

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

CASH AND CASH EQUIVALENTS, ENDING

The accompanying notes are an integral component of these financial statements

6

The Torrington Water Company • Annual Report 2019

$

1,725,338

2018 2017 $

1,685,858

$

1,927,085

1,434,200 7,350 35,895 16,396 (10,905)

1,373,964 7,350 66,795 7,152 (10,759)

1,336,728 7,350 94,895 3,499 (8,517)

(13,875) 49,187 (78,329) (16,026) (206,130) 152,046 14,324 (26,982) — 3,082,489

(59,683) (52,223) (56,307) 35,703 (357,755) (96,427) 1,199 26,982 — 2,571,849

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

(2,207,072) 14,000 96,048 (58,584) ( 2,155,608)

(2,021,443) — — (4,184) (2,025,627)

(1,973,635) — — ( 182,671) (2,156,306)

(360,000) (1,080,000) (1,440,000)

(360,000) (1,019,520) (1,379,520)

(360,000) (950,400) (1,310,400)

(513,119)

(833,298)

(876,033)

1,577,560

2,410,858

3,286,891

1,064,441 $

1,577,560

$

2,410,858


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

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 requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Accordingly, 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, 2019, 2018 and 2017 consists of the following: 2019

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

$

$

2018

2017

236,404 2,462,247 2,420,808 11,863,155 48,960,064 2,846,387 25,684 242,862

$

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

69,057,611

$

66,976,645

$

64,970,714

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 $10,289,580, $10,207,804, and $10,199,019, as of December 31, 2019, 2018 and 2017, 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.

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 2019

7


THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

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. Amortization expense charged to operations in 2019, 2018, and 2017 was $243,370, $246,621, and $220,987, respectively. The following costs have been deferred as of December 31, 2019, 2018 and 2017:

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 Woodridge Lake Future Tank Paintings Docket 18-01-15 Highland Ave Tank Painting 2019 Settlement Agreement Total Other Assets

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 8,352 284,349 338,708 252,213 121,943 308,543 Various 22,135 179,201 7,756

2019 $

2018

2017

Amortization Period Ends

— — $ 3,035 September 2018 42,651 $ 64,556 86,462 November 2021 68,556 95,094 121,633 July 2022 46,394 58,496 70,598 October 2023 51,222 64,584 77,946 October 2023 75,702 100,678 125,654 May 2022 39,395 47,545 55,695 October 2024 77,181 93,150 109,118 October 2024 (25,084) (7,909) (7,158) Various 164,199 188,525 212,851 September 2026 17,011 23,816 30,620 June 2022 8,970 20,928 32,886 September 2020 — — 1,686 May 2018 8,352 8,352 8,352 Not yet amortizable 138,225 161,921 185,616 October 2025 274,402 305,498 336,595 November 2029 164,639 185,657 206,675 October 2027 121,943 89,365 50,540 Not yet amortizable 308,543 308,543 264,587 Not yet amortizable 516,970 516,970 259,609 Not yet amortizable 22,135 18,365 — Not yet amortizable 177,732 — — January 2031 7,756 — — Not yet amortizable

$ 2,306,894

$

2,344,134

$ 2,233,000

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. Amortization expense charged to operations in 2019, 2018, and 2017 was $43,908, $0, and $27,433, respectively.

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. 8

The Torrington Water Company • Annual Report 2019


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

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. 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.

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. On August 7, 2019, the Company entered into a Settlement Agreement (“Agreement”) with the Office of Consumer Counsel. The Agreement, as amended, (1) incorporated the April 1, 2019 authorized Water Infrastructure and Conservation Adjustment (“WICA”) into current base rates, (2) set the WICA surcharge to zero and began a new WICA expansion period, (3) reduced the 2019 Water Revenue Adjustment (“WRA”) by $53,964 to reflect the decrease in the Company’s federal income tax expense in 2019 and 2018 as a result of the Act, (4) required the EDIT to be returned to customers over the weighted average remaining life of the associated assets, or $60,691 annually, and (5) provided that the Company would not submit a general rate case application that would have new rates in effect before January 1, 2022. PURA issued a proposed final decision approving the Agreement on December 9, 2019, and the new rates will become effective on January 1, 2020.

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,

2019

Series G Bonds

$

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

$

10,920,000 (360,000) 10,560,000 (44,711) 10,515,289

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

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% (4.25% at December 31, 2019) 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, 2019, 2018, or 2017.

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 The Torrington Water Company • Annual Report 2019

9


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

5. REVENUE RECOGNITION FROM CONTRACTS WITH CUSTOMERS (continued)

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 WICA, which allows for the timely recovery in rates of the cost of approved infrastructure investment, and a WRA, 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 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

2019 2018

$

$

3,815,267 $ 864,419 76,781 195,625 1,608,889 670,610 248,631 $7,480,222 $

2017

3,766,989 828,115 76,821 179,482 1,572,468 665,451 246,961 7,336,287

$

$

3,725,811 845,064 74,011 169,738 1,534,525 678,515 233,859 7,261,523

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. Past due accounts are written off by management when collection efforts have been exhausted on a case-by-case basis. Accounts receivable at December 31, 2019, 2018, and 2017 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, 2019, 2018 and 2017 was $131,590, $137,204, and $132,528, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $17,381, $18,470, and $14,536, for the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017 was $74,647, $63,354, and $68,965, 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 $3,038,255, $2,893,865, and $2,702,155 as of December 31, 2019, 2018 and 2017, respectively. The Company believes the unfunded postretirement benefits liability will be recovered through future ratemaking processes and as such has deferred recognizing the related costs and has recorded a deferred regulatory asset reflecting future revenues expected to be received when such liabilities are 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, 2019, 2018 and 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 (Gain) Loss Unfunded Postretirement Benefits at End of the Year

10

The Torrington Water Company • Annual Report 2019

2019

$ $

3,516,112 — 3,516,112 14,617 463,240 477,857

$

2018

3,038,255

$ $

2017

2,888,017 $ — 2,888,017 $ 17,280 (23,128) (5,848)

$

2,893,865

$

3,213,265 — 3,213,265 19,942 491,168 511,110 2,702,155


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

7. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued) The net periodic postretirement benefit cost for 2019, 2018 and 2017 includes the following components: 2019 2018 2017 Service Cost-Benefit Attributed to:

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

$

$

93,759 122,607

$

— 2,663 219,029

124,304 117,748

$

10,350 2,662 255,064

$

108,655 119,070

— 2,663 230,388

$

The weighted-average assumed discount rate used to measure the APBO was 3.35% for 2019, 4.30% for 2018, and 3.70% for 2017. As the plan is unfunded and is void of assets there is no expected long-term after-tax-return on plan assets. A health care cost trend graded from 4.75% in 2017 down to 4.50% in 2024 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 (decrease) in the assumed health care cost trend rates would increase (decrease) the APBO at December 31, 2019 by $649,474 ($512,747) and would increase (decrease) the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $44,828 ($34,760). 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, 2019, 2018 and 2017 are as follows:

2019 2018 2017

Property Taxes

Payroll Taxes

Total Taxes Other than Income Taxes

Less Amounts Capitalized

Net Taxes Other than Income Taxes

$

1,232,310

1,201,923

$

1,152,628

100,411

106,506

94,906

1,332,721

1,308,429

1,247,534

(13,234) $

$

1,319,487

(13,271) $

(18,166)

1,295,158

$

1,229,368

9. INCOME TAXES

Income tax expense for the years ended December 31, 2019, 2018 and 2017 are as follows:

2019

Federal State

Current Income Taxes

$

46,200

$

58,364

2018

Total

$ 104,564

Totals

$ 185,071

2017 Totals

$ 264,723

Tax Benefit of Operating Loss Carryforwards Change in Valuation Allowance Deferred Income Taxes Normalization of Prepaid Income Taxes Normalization of Investment Credits Total Income Taxes

$

(46,200)

(46,200)

(124,000)

(43,800)

39,600

39,600

114,300

(225,400) — 98,600

996

996

996

996

(3,705)

(3,705)

(3,705)

(3,705)

$

95,255

$ 128,862

$ 135,124

$

(21,055) 74,200

$

36,891 $

58,364

Less Attributed to Other Income Net Charged to Utility Operations

(29,162) (19,914) 99,700 $ 115,300

A reconciliation of income tax expense at the federal statutory income tax rate to the effective income tax rate follows:

2019

2018 2017

21.0% 3.2 (19.9) 2.1 (2.5) 1.3

21.0% 3.3 (16.2) 6.2 (9.2) 2.0

34.0% 1.9 (20.3) 4.7 (10.9) (2.9)

5.2%

7.1%

6.5%

U.S. Statutory Rate State Income Taxes, Net of Federal Benefit Tangible Property Regulations Deduction Utility Plant Related Operating Loss Carryforwards Other, Net Effective Rate

The Torrington Water Company • Annual Report 2019

11


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2019

9. INCOME TAXES (continued) The components of the Company’s deferred tax liability are as follows: December 31,

Deferred Tax Assets (Liabilities): Operating Loss Carryforwards $ Basis Difference Resulting from Tangible Property Regulations Accelerated Depreciation on Utility Plant Accelerated Depreciation on Non-Utility Plant Other Less: Valuation Allowance

Net Deferred Tax Liability

2019 81,000

2018 2017

$

127,200

243,800

(5,455,300) (4,900,700) (4,457,300) (2,940,400) (2,936,000) (4,208,200) (92,900) (92,900) (92,900) (8,975) (22,180) (17,285) (8,416,575) (7,824,580) (8,531,885) —

$

$

(8,416,575)

$

(43,800)

(7,824,580)

$ (8,575,685)

The Company has net operating loss carryforwards of approximately $386,000 to offset federal taxable income through 2034. For financial reporting purposes, a deferred tax asset of $81,000 has been recognized at December 31, 2019. 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 2016 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 2019, 2018 and 2017 the amount of these purchases approximated $264,300, $197,500, and $194,900, respectively.

11. COMMITMENTS

Capital Budget The Company is engaged in a continuous construction program and expects to spend from $1,000,000 to $2,000,000 annually over the next five years for routine new utility plant and/or improvements. In addition, the Company expects to spend approximately $1,900,000 in 2020 and 2021 for capital improvements to its filtration plant. These programs are 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 $188,400 from 2020 through 2023.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2019

Interest Paid Income Taxes Paid

$

452,880 62,564

2018 $

467,568 62,206

2017 $

482,256 37,803

13. SUBSEQUENT EVENTS

Management has evaluated subsequent events for disclosure and/or recognition in the financial statements through February 5, 2020, the date which the financial statements were available for issue.

The Torrington Water Company • Annual Report 2019

12


l

THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

DECEMBER 31, 2019

EQUITY 67.2 % VS DEBT 32.8% Millions

EQUITY

22–

DEBT

20–

$22.32 $21.01

$21.68

$20.03 $18.90

18– 16– 14– $12.00

12–

$11.64

$11.28

10–

$10.92 $9.20

8– 6– 4– 2–

2015

2016

DIVIDENDS PER SHARE

$1.18

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

2018

$1.25

$1.10 $0.94

2015

$1.02

2016 $2.33

EARNINGS PER SHARE

2017

$1.99

2015

2016

2017

2018

2019

$1.95

$2.00

2018

2019

$2.23

2017

$25.84 $25.09

BOOK VALUE PER SHARE

$23.19

$24.32

$21.88

2015

This information is not part of the audited financial statements

2016

2017

2018

2019

2019


Faces and facets of the Torrington Water Company from top left: Cathy, Mike and Jim Second Row: Eric - Linda, Heather, Kelly and Jessica. Line photo left to right: Heinz, Steven, Jim, Jon, Scott, Joe, Andy, Mike, Jim, Mike, Eric Bottom Left: Steven

THE TORRINGTON WATER COMPANY torringtonwater.com

277 Norfolk Road

PO Box 867

Torrington, Connecticut

06790

860.489.4149

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