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THE TORRINGTON WATER COMPANY

Annual Report 2016 C A S H D I V I D E N D S PA I D E V E R Y Y E A R S I N C E 1880


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders

Report on the Financial Statements We have audited the accompanying financial statements of The Torrington Water Company (the Company), which comprise the balance sheets as of December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014, 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 3 to the financial statements, during the year ended December 31, 2016 the Company adopted Accounting Standards Update no. 2015-3, Simplifying the Presentation of Debt Issuance Costs. The new standard has been applied retrospectively to each prior period presented.

January 27, 2017 Shelton, Connecticut

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


THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

l

DECEMBER 31, 2016

FIVE-YEAR SELECTED DATA

FINANCIAL

2016

2015

2014

2013

2012

Income Statement

Operating Revenues O & M Expenses Utility Operating Income Net Income

$ $ $ $

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 $ 6,515,526 2,625,492 $ 2,449,437 1,923,453 $ 2,058,884 1,635,805 $ 1,685,123

$ $ $ $

5,958,762 2,315,345 1,548,511 1,120,060

Balance Sheet

Stockholders’ Equity $ 20,035,923 Long Term Debt $ 12,000,000 Stockholders’ Equity % 62.5 Long Term Debt % 37.5 Net Utility Plant $ 41,859,685 Earnings Per Share $ 2.33 Dividend Per Share $ 1.02 Book Value Per Share $ 23.19

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

$ 17,997,881 $ 9,460,000 65.5 34.5 $ 40,382,388 $ 1.89 $ 0.83 $ 20.83

$ 17,079,196 $ 9,715,000 63.7 36.3 $ 38,392,262 $ 1.95 $ 0.77 $ 19.77

$ 16,059,353 $ 9,970,000 61.7 38.3 $ 37,661,252 $ 1.30 $ 0.73 $ 18.59

OPERATIONAL

2016 2015 2014 2013 2012

Miles of Main 169 Number of Hydrants 948 Gallons Produced (Thou.) 895,083 Gallons Sold (Thou.) Residential 519,189 Commercial 169,092 Industrial 10,734 Number of Customers 10,013 Number of Employees 17

169 947 882,838

164 920 908,973 512,304 513,115 163,491 134,643 13,180 9,875 9,994 9,969 17 17

164 920 918,299

163 920 918,367 529,742 531,832 135,894 140,850 11,168 12,894 9,688 9,665 16 16

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2016

1


THE TORRINGTON WATER COMPANY PRESIDENT’S MESSAGE

To Our Stockholders

OFFICERS Susan M. Suhanovsky President Steven F. Cerruto Vice President / Operations Catherine C. Roscello Secretary / Treasurer

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

Our company achieved very strong financial results for 2016. We increased both net income and earnings per share by more than 16%, and raised our quarterly common stock dividend by 8%. Net Income reached its highest level ever, growing to $2,010,034 from $1,721,448 in 2015, while earnings per share grew to $2.33 from $1.99 in 2015. We ended the year with operating revenues of $7,061,834, an increase of $36,719 from $7,025,115 in 2015. In December, the Board of Directors raised our quarterly cash dividend to $0.27 per share from $0.25, making 2016 our 19th consecutive year of dividend increases. (Our history of annual cash dividends dates back to 1880.) Book value per share grew 6%, to $23.19 at year-end from $21.88 at year-end 2015. These solid results, like those for the preceding year, were due to our efforts to improve shareholder value by rigorously controlling costs; investing in infrastructure to enhance service reliability and water quality for our customers; and continuing to build strong non-utility ventures.

our infrastructure and follow a systematic main replacement schedule – to ensure that our water system remains reliable and that as little as possible of this precious resource is lost due to leaks. We use electronic recording devices each night to listen for any unknown leaks that may exist, so that we can repair those leaks 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 at less than 15% is the accepted standard in the industry. We are currently experiencing only 12% water loss company-wide and will continue to look for ways to further reduce that percentage. We have applied for the allowed return on our 2016 WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax) and expect a favorable decision. During 2016, we were able to realize revenues of $175,000 via a surcharge on customer bills for the prior-year WICA projects. By prudently investing in our infrastructure, we make sure that our customers will always get clean, safe water when they turn on the tap.

SUCCESSFUL COST CONTROL Operation and Maintenance expenses rose a modest 1% for the second year in a row, to $2,689,869 from $2,657,355, an increase of $32,514. All of us are committed to tightly controlling our costs and getting the best value for every dollar we spend.

POWDERED ACTIVATED CARBON SYSTEM Controlling taste and odor is one of the most common treatment challenges for drinking water systems that use surface sources of water. Oftentimes, taste and odor problems in drinking water supplies are seasonal; episodes are more likely to occur in warm weather months, with mid- to late summer being the peak risk time for many locations. We encounter this issue occasionally. In the fall of 2015, we experienced an episode of taste and odor complaints. Among the methods used to address the problem, one of the more common is powdered activated carbon (PAC). Though taste and odor issues are aesthetic rather than health-based, we decided to install a PAC system at our treatment facility, at an investment of $172,000, to deal with those issues. The PAC system will better absorb natural organic compounds that cause taste and odor problems in the drinking water, and will also result in the removal of dissolved organics, thereby reducing disinfection by-products. During 2016, our plant operators took on the task of bringing the PAC system online, and they did an excellent job of installing and testing it to ensure that it runs optimally.

INFRASTRUCTURE INVESTMENT We continued to use the state’s Water Infrastructure and Conservation Adjustment (WICA) program to upgrade our infrastructure. The program improves water quality and service by covering projects to replace aged or undersized pipes. In 2016, we invested $834,000 in projects eligible under WICA, replacing 6,550 feet of existing water mains that had reached the end of their useful lives. To date, we have replaced over 41,600 feet of WICA-eligible main in our system at a total investment of $6,443,000. 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 2

The Torrington Water Company • Annual Report 2016


THE TORRINGTON WATER COMPANY

STRONG NON-UTILITY VENTURES Along with our core utility operations, we have several non-utility ventures that contribute to our earnings growth. We focus on ventures that are low in risk and are a good strategic fit with our core business. In 2016, our non-utility segment generated $176,300 in net income, or 9% of our total net income. We concentrate on three ventures: The Torrington Water Company Water Line Protection Plan; our contract management agreement with the New Hartford Water Pollution Control Authority; and the sale of timber from our large tract of woodlands. The Water Line Protection Plan provides residential customers with coverage for the cost of repairing a broken or leaking water service line on their property. In January 2016, we took over the water line protection program from Homeowner Safety Valve Company, which had previously run it for us under contract. (Homeowner separately continues to offer coverage of customers’ sewer lines.) Under that contract, we had received 15% of the revenue realized when a customer signed up, and we had had no liability for any repairs. We now realize 100% of the revenue generated and have full liability for any water line repairs. I am pleased that 813, or 9%, of our residential customers have signed up for this coverage. The Water Line Protection Plan generated net income of $45,000 in 2016. Our contract to provide utility operating services to the New Hartford Water Pollution Control Authority (WPCA) was extended in December 2015 for another two years. WPCA continues to value our operational and maintenance know-how and our experience and expertise in delivering the highest level of customer care for the 250 customers served. Our employees make it a point to treat both the system and its customers as if they were part of The Torrington Water Company. In 2016, we realized $60,200 in net income from this contract. The third area that we generate non-utility income from is timber sales. Our forester carefully selects areas where a timber sale will benefit the woodlands. Timber sales are an important tool in managing and sustaining the forested areas within our more than 5,000 acres of property. Last year, we conducted a sale of timber which generated $71,100 in net income. WIND FARM DEVELOPMENT PROJECT In May 2016, after months of negotiating a long-term lease, we signed an agreement which will allow development of a wind farm on our off-watershed property. Off-watershed land is land that we own but that is not necessarily needed for water utility operations. We own over 1,800 acres of land that is neither used in our operations nor needed as a protection for our water sources. As a result, we are not able to earn on our investment in this land nor can any expenses associated with it be paid for by our ratepayers. A project such as this wind farm not only will support Connecticut’s sustainable energy program but also will benefit both our ratepayers and shareholders. The project is now winding its way through regulatory and town approvals. The wind development company has five years to acquire the necessary approvals and build the turbines.

WOODRIDGE LAKE SEWER DISTRICT During 2016, we became aware of a project that, if built along the proposed route, could potentially affect the watershed of our Allen Dam Reservoir. The Woodridge Lake Sewer District (WLSD) is proposing to construct a force main sewage transmission pipeline from the town of Goshen to the city of Torrington’s municipal sewer system. (Force mains are pipelines that move raw sewage under pressure.) If built, the pipeline would pass through our Allen Dam watershed area. The state’s Department of Energy and Environmental Protection and the Torrington and Goshen Inland Wetlands commissions have given their approval to this route. However, we believe that a failure of the pipeline would result in the discharge of raw sewage into the watershed area, which could impact the quality of water in our Allen Dam Reservoir. After attempts to get WLSD to change the route failed, we requested that the Department of Public Health (DPH) open an investigation into this matter. The Commissioner of Public Health agreed. DPH is gathering testimony and will rule on whether the pipeline will be a threat to our drinking water supply. If DPH finds in our favor, it will issue orders designed to protect our water supply. We are hopeful that it will, though WLSD will then have the opportunity to appeal that decision. We have let our customers know what is happening, and I send my heartfelt thanks to all who have responded with letters to the city of Torrington and the Department of Public Health stating that our drinking water supply should not be jeopardized now or in the future. CLOSING THOUGHTS I am proud to be part of The Torrington Water Company with its rich history and outstanding team of employees. Indeed, our employees are our most valuable resource, bringing expertise, creativity, drive and loyalty to the work place each and every day. All of us are committed to providing our customers with best-in-class services and performance. In September 2016, we held a Business After Hours get-together to celebrate the 20th anniversary of our filtration plant. Over 50 people came to tour the plant, learn about what we do and meet our employees. The interest shown by our guests and the enthusiasm of our employees to share what we do were gratifying to see. Once again, I’d like to express my deep gratitude to our Board members for their continued support and guidance, and to the dedicated employees who safely deliver on our customers’ expectations every day.

Susan M. Suhanovsky President

The Torrington Water Company • Annual Report 2016

3


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

BALANCE SHEETS AS OF DECEMBER 31, 2016, 2015 AND 2014

2016

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

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

Nonutility property, net of accumulated depreciation

2015 $

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

2014 $ 59,409,057 19,026,669 40,382,388

372,935

372,935

372,935

3,286,891 394,037 819,000

561,334 483,704 844,000

377,742 418,988 748,000

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

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

567,794 145,174 147,235 2,404,933

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

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

1,693,833 190,613 6,551,500

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

$

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

141,291 2,212,111 10,789,348 $ 53,949,604

1,800,000 18,235,923 20,035,923

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

STOCKHOLDERS’ EQUITY AND LIABILITIES Stockholders’ equity:

Common stock, no par; 1,000,000 shares authorized; 864,000 issued and outstanding Retained earnings Total stockholders’ equity

Long-term debt , net of current portion Current liabilities: Note payable, bank Current portion of long-term debt Accounts payable Accrued taxes Accrued interest Other current liabilities Total current liabilities

Deferred income taxes Unfunded postretirement benefits Other deferred credits Customer advances for construction Contributions in aid of construction Amortized contributions in aid of construction Commitments (Note 10)

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES

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

The Torrington Water Company • Annual Report 2016

$

11,573,239

$ 1,800,000 17,107,169 18,907,169 9,197,115

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

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

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

10,562,295 2,377,008 — 1,877,720 9,658,120 2,187,511

27,421,946 $ 60,491,114

26,662,654 $ 56,206,260

9,186,412 — 255,000 ­ 282,756 425,186 150,195 111,549 1,224,686 9,808,000 2,212,111 — 3,069,316 8,350,450 2,100,748

25,540,625 $ 53,949,604


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

2016

Operating revenues Operating expenses:

$

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

7,061,834

2015 $

2014

7,025,115

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

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

2,246,787

2,013,450

$

6,594,940 1,948,997 676,495 1,150,538 928,457 (33,000) 4,671,487

1,923,453

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

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

Income before interest expense

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

2,508,836

2,235,148

128,010 1,198 131,675 — 260,883 27,859 233,024

2,156,477

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

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

Interest expense:

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

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

Net income

2,010,034

1,721,448

1,635,805

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

(881,280) 17,107,169 $ 18,235,923

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

Net income, basic

$

2.33

$

1.99

$

1.89

Dividends declared

$

1.02

$

.94

$

.83

Book value $

23.19

$

21.88

$

20.83

The accompanying notes are an integral component of these financial statements

The Torrington Water Company • Annual Report 2016

5


THE TORRINGTON WATER COMPANY

l ANNUAL REPORT

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

2016

2015

2014

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

$

2,010,034

$

1,721,448

$

1,635,805

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

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

1,356,768 (76,383) 8,027 —

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

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

17,020 (219,538) (24,576) 237,500 (290,198) 69,448 32,143 (105,709) 2,640,307

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

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

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

Borrowings from note payable, bank Proceeds (repayment) of long-term debt Deferred finance costs Dividends declared Net cash provided by (used in) financing activities

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

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

NET CHANGE IN CASH AND CASH EQUIVALENTS

2,725,557

183,592

(1,186,335)

561,334

377,742

1,564,077

Changes in operating assets and liabilities: Receivables and unbilled revenues Regulatory asset-water revenue adjustment Materials and supplies inventory Prepaid expenses Other assets, net Accounts payable Accrued and other liabilities Deferred credits Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant Acquisition of the City of Torrington water system Proceeds from developers’ contributions, net of refunds Additions to preliminary survey and investigation charges Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

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 2016

$

3,286,891

$

561,334

— (255,000) — (717,120) (972,120)

$

377,742


THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2016

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General

The Torrington Water Company (the “Company”) is a public utility that provides water service to approximately 10,000 customers in the city of Torrington and the towns of Burlington, Harwinton, Litchfield and New Hartford, Connecticut. As a public utility operating in Connecticut, the Company functions under rules and regulations prescribed by the State of Connecticut Public Utilities Regulatory Authority (“PURA”).

Regulation

The Company maintains its accounts in accordance with the PURA Uniform System of Accounts as prescribed for Water Utilities Class A. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America which include the provisions of the Financial Accounting Standards Board (“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, 2016, 2015 and 2014 consists of the following: 2016 2015 2014

Intangible Plant Source of Supply Pumping Water Treatment Transmission and Distribution General Plant Construction Work in Progress Property Held for Future Use Total Utility Plant

$

$

236,404 2,219,854 2,346,198 11,349,742 43,896,897 2,585,061 13,884 242,862 62,890,902

$

$

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

$

$

196,434 2,216,319 2,289,100 10,927,611 41,041,132 2,508,033 18,085 212,343 59,409,057

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 $10,214,051, $10,161,490, and $9,958,488, as of December 31, 2016, 2015 and 2014, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments that have an original maturity of less than three months to be cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk on cash and cash equivalents.

Accounts Receivable

The Company continuously monitors the creditworthiness of customers and establishes, when necessary, an allowance for amounts that may become uncollectible in the future based on current economic trends, historical payment and bad debt write-off experience, and any specific customer related collection issues.

The Torrington Water Company • Annual Report 2016

7


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l DECEMBER 31, 2016

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Materials and Supplies Inventory

Materials and supplies inventory, which is stated at the lower of cost or market using the weighted average cost method, is primarily for the construction and maintenance of utility plant.

Other Assets

Costs of certain administrative projects relating to regulatory processes and costs of items which benefit more than one accounting period are deferred and amortized to income over their respective lives and/or periods allowed by PURA using the straight-line method. Costs which are “not yet amortizable” may be entirely charged to income if and when the Company believes it is probable that PURA will not allow the Company to recover these costs through rates. The following costs have been deferred as of December 31, 2016, 2015 and 2014: Original Cost 2016 2015 2014 Amortization Period Ends Cost of Service Study 40,462 $ 7,081 $ 11,127 2006 Tank Painting 240,739 — 11,970 2009 Tank Painting 262,866 108,367 130,273 2010 Tank Painting 318,456 148,171 174,708 2011 Tank Painting 145,227 82,700 94,802 2011 Tank Painting 160,346 91,308 104,671 Crystal Lake Dam Repair 247,978 135,287 160,263 Litchfield Street Tank Painting 97,903 63,844 71,994 Soapstone Hill Tank Painting 191,694 125,087 141,056 Prepaid Income Taxes Various (11,242) (10,630) Highland Ave Tank Painting 291,911 237,177 261,504 Supply Plan Update III 61,240 37,425 44,229 Other Deferred Costs 59,795 44,845 56,809 2013 Customer Survey 20,125 5,709 9,732 Docket 13-01-29 8,352 8,352 8,352 West Pearl Road Tank Painting 284,349 209,312 233,008 2015 Tank Painting 252,213 227,693 248,710 Deferred Sales Tax 29,684 29,684 11,054 Emergency Action Plan 18,496 18,496 — Woodridge Lake 172,533 172,533 — Future Tank Paintings 294,098 294,098 — Total Other Assets $ 2,035,927 $ 1,763,632

$

15,174 35,911 152,178 201,246 106,904 118,033 185,239 80,144 157,025 (10,577) 285,830 51,034 36,881 13,755 8,352 256,704 — — — — — $ 1,693,833

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

Preliminary Survey and Investigation Charges

Costs of studies for specific construction projects are deferred until the start of the project at which time the costs are capitalized. If a project is abandoned or if it is determined that any of these costs may not be allowed to be recovered in future rates by PURA, the accumulated costs relating to that project are written off during the year of abandonment or determination.

Income Taxes

Deferred income taxes are provided for the expected future tax consequences of events that have been included in the financial statement or tax returns, on a normalized basis. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Deferred income taxes result principally from the use of accelerated depreciation for income tax purposes, deferring investment tax credits for financial reporting purposes, and the future benefits to be recognized upon the utilization of operating loss carryforwards. Deferred tax assets not expected to be realized are reduced by a valuation allowance. Additionally, the Company provides a regulatory asset for income tax benefits (primarily federal and state income tax reductions due to the adoption of final tangible property regulations issued by the Internal Revenue Service (IRS) in 2013 and state income tax reductions due to accelerated depreciation) which have been flowed-through to the ratepayers under PURA ratemaking policies and which the Company believes it will recover in rates when these income tax benefits reverse in the future. The final tangible property regulations, among other things, allow for the immediate deduction for tax purposes, as an ordinary and necessary repair expense, qualifying expenditures that previously would have been capitalized and depreciated over the estimated useful life of the asset. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets.

Customer Advances for Construction

In certain cases real estate developers and others advance funds to the Company for the construction of water main extension projects. A portion of these funds are potentially refundable, without interest, usually within a ten year period. Advances which have not been refunded within this period are reclassified to Contributions in Aid of Construction. The potential amount refundable on completed projects as of December 31, 2016, 2015 and 2014 is estimated to be $35,500, $46,500, and $75,200, respectively. 8 The Torrington Water Company • Annual Report 2016


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l DECEMBER 31, 2016

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Amortized Contributions in Aid of Construction

Contributions in Aid of Construction that were received prior to 1989 are amortized over the remaining useful life of the related “contributed” utility plant item to Amortized Contributions in Aid of Construction.

Revenue Recognition

Operating revenues include amounts billed to customers on a cycle basis, adjusted for accrued unbilled amounts based on estimated water usage from the latest meter reading to the end of each year. Operating revenues also include a Water Infrastructure and Conservation Adjustment (WICA), which allows for the timely recovery in rates of the cost of approved infrastructure investment. Beginning in 2013, as permitted by PURA, operating revenues also include amounts related to the Water Revenue Adjustment (WRA). The WRA allows the Company to record, on an annual basis, the amount by which actual revenues from water customers were less than revenues allowed in the Company’s most recent rate decisions. The goal of the WRA is to remove any disincentive to implement conservation rates and programs, postpone the filing of general rate increase applications, and reduce overall water consumption. The Company recorded $513,587, $612,525, and $536,701 in operating revenues related to the WRA in 2016, 2015 and 2014, respectively, with a corresponding entry to a regulatory asset representing the future collection of the WRA surcharge.

Allowance for Funds Used During Construction (AFUDC)

The Company recognizes AFUDC, which is a non-cash credit to income and a corresponding debit to utility plant, by applying the last allowed rate of return on rate base approved by PURA to costs on large construction projects lasting longer than three months. The inclusion of AFUDC in utility plant enables the Company to earn a fair return on its utility plant, and the recovery of these capitalized costs by their inclusion in rate base and depreciation in the ratemaking process.

2. REGULATORY MATTERS During 2015, the Company reached the allowed 10% cap for the WICA surcharge and was at the end of the WRA

period. To avoid the potential filing of a costly general rate case application, the Company entered into a rate settlement agreement (Agreement) with the Office of Consumer Counsel. The Agreement, among other things, (1) incorporated the April 1, 2015 authorized WICA surcharge of 9.29% into current base rates, (2) set the WICA surcharge to zero and began a new WICA expansion period, (3) allowed for the continuation of the WRA at its present rate, and (4) provided that the Company will not submit a rate case application that would become effective prior to July 1, 2017. The Agreement was approved by PURA in September 2015, and the new rates became effective on October 1, 2015.

3. LONG-TERM DEBT

In January 2016, the Company issued $12,000,000 Series G First Mortgage Bonds. The Series G bonds bear interest at 4.08%, require annual principal payments of $360,000, mature in January 2026, and are secured by substantially all of the Company’s utility plant. The proceeds of the Series G First Mortgage Bonds were used to repay the 5.58% $6,205,000 Series F First Mortgage Bonds, the 4.58% $3,000,000 note payable, bank, and the 3.50% $350,000 line of credit. In April 2015, FASB issued Accounting Standards Update No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-3 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than an asset. ASU 2015-3 is effective for annual reporting periods beginning after December 15, 2015. The new guidance has been applied retrospectively to each prior period presented.

Long-term debt is comprised of the following:

2016

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

December 31,

$

$

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

2015

$

$

— 6,205,000 3,000,000 — 9,205,000 (7,885) 9,197,115

2014 $

$

— 6,460,000 3,000,000 (255,000) 9,205,000 (18,588) 9,186,412

The Torrington Water Company • Annual Report 2016

9


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l

DECEMBER 31, 2016

4. NOTE PAYABLE

The Company has available a $750,000 line of credit (LOC) to be used for short term working capital needs. The LOC requires monthly payments of interest only on outstanding advances at the bank’s prime rate less 0.50% (3.25% at December 31, 2016) and expires in May 2018. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2016.

5. PENSION EXPENSE

The Company has a defined contribution simplified employee pension plan that covers all full-time employees who have been employed in three of the preceding five years and attained the age of 21. The Company contributes 12% of the participants’ annual payroll to this plan. The pension contribution for the years ended December 31, 2016, 2015 and 2014 was $122,866, $125,097, and $131,775, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $12,543, $11,448, and $9,782 for the years ended December 31, 2016, 2015 and 2014, respectively.

6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company pays the health care premiums for its retirees and their spouses. The amount of these premiums paid on behalf of current retirees during the years ended December 31, 2016, 2015 and 2014 was $70,193, $68,322, and $49,068, 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 $2,540,732, $2,377,008, and $2,212,111 as of December 31, 2016, 2015 and 2014, respectively. The Company believes the deferred liability related to this benefit will be recovered through future ratemaking processes and as such has recorded an offsetting deferred regulatory asset reflecting future revenues expected to be received when such liabilities become payable. Employees hired after July 1, 2013 are no longer eligible for this benefit. The Company has elected to recognize the transition obligation over 20 years. The following table sets forth the postretirement benefit plan’s funded status and unfunded amounts recognized on the Company’s balance sheets as of December 31, 2016, 2015 and 2014:

2016

Accumulated Postretirement Benefit Obligation (APBO) $ 2,835,776 Less Fair Value of Plan Assets — APBO in Excess of Fair Value of Plan Assets 2,835,776 Unrecognized Amounts: Prior Service Cost 22,605 Unrecognized Loss 272,439 295,044 Unfunded Postretirement Benefits at End of the Year $ 2,540,732

2015 $

2014

2,751,593 $ 2,552,310 — — 2,751,593 2,552,310 25,267 349,318 374,585 $

2,377,008 $

27,930 312,269 340,199 2,212,111

The net periodic postretirement benefit cost for 2016, 2015 and 2014 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 $

2016 104,748 122,013 4,494 2,662 233,917

2015 $

$

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

2014 $

$

97,226 107,590 — 2,662 207,478

The weighted-average assumed discount rate used to measure the APBO was 4.25% for 2016, 4.50% for 2015, and 4.05% for 2014. The weighted-average discount rate used to determine the transition obligation at January 1, 1994 was 7.25%. As the plan is unfunded and is void of assets there is no expected long-term after-tax-return of plan assets. A health care cost trend graded from 6.00% in 2014 down to 4.75% in 2021 was also used in determining APBO for each of the three years. This health care trend significantly affects the calculation of the APBO and net period cost. A one-percentage-point increase in the assumed health care cost trend rates would increase the APBO at December 31, 2016 by $549,861 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $53,382. Accordingly, subsequent changes in the assumed rates will increase or decrease the deferred regulatory assets and liabilities mentioned above.

10 The Torrington Water Company • Annual Report 2016


THE TORRINGTON WATER COMPANY

l NOTES TO FINANCIAL STATEMENTS l

DECEMBER 31, 2016

7. TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes for the years ended December 31, 2016, 2015 and 2014 are as follows:

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

2016 $

$

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

2015 $

$

2014

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

$

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

$

8. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014 are as follows:

2016 2015

Federal Current Income Taxes

$

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

State

200,000 (200,000) (200,000) (35,600) 996 (3,705) (238,309)

Less Attributed to Other Income

Net Charged to Utility Operations

Total

Totals

$

58,861 $ 258,861 — (200,000) — (200,000) — (35,600) — 996 — (3,705) $ 58,861 $ (179,448)

2014

Totals

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

(21,552) $ (201,000)

$

(11,727) 34,000

(27,859) $ (33,000)

The Company has net operating loss carryforwards of approximately $1,764,000 to offset federal taxable income through 2034. For financial reporting purposes, a deferred tax asset of $600,000 and a related valuation allowance of $400,000 have been recognized at December 31, 2016. 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 2013 are no longer subject to examination by taxing authorities.

9. RELATED PARTY TRANSACTIONS

The Company purchases services, materials and supplies from professional firms, contractors and retailers whose principals are also directors and/or shareholders of the Company. During 2016, 2015 and 2014 the amount of these purchases approximated $231,700, $108,500, and $136,600, respectively.

1o. COMMITMENTS Capital Budget The Company is engaged in a continuous construction program and expects to spend from $1,000,000 to $2,000,000 annually over the next five years for routine new utility plant and/or improvements. This program is expected to be financed with internally generated funds and proceeds from long-term debt. Water Tank Maintenance In 2010, the Company entered into a long-term contract for annual water tank inspection, maintenance and periodic painting. The contract calls for annual payments of $299,108 through 2018.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2016

2015

2014

Interest Paid

$

430,806

$

499,650

$

508,259

Income Taxes Paid

$

52,961

$

50,217

$

20,000

12. SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 27, 2017, the date which the financial statements were available for issue. The Torrington Water Company • Annual Report 2016

11


l ANNUAL REPORT l DECEMBER 31, 2016

THE TORRINGTON WATER COMPANY

EQUITY VS DEBT EQUITY

Millions 22–

DEBT

21– $20.04

20– 19– $18.00

18– 17– $16.06

16–

$14.96

14– $12.31

$13.35 $12.0

12– $9.97

10–

$9.46

$8.50 $7.99

8– 2006

2008

$7.48

2010

2012

2014

2016

$1.02

DIVIDENDS PER SHARE

$0.94

$0.45

$0.47

2006

2007

$0.51

2008

$0.55

2009

$0.61

2010

$0.69

2011

$0.73

$0.77

2012

2013

$0.83

2014

2015

2016

$2.33

EARNINGS PER SHARE $1.30

2006

$1.18

$1.01

2007

2008

$1.35

$1.35

2009

2010

$1.39

2011

$1.95

$1.89

2013

2014

$1.99

$1.30

2012

2015

2016

$23.19

BOOK VALUE PER SHARE $14.25 $14.96

2006

12 The Torrington Water Company • Annual Report 2016

2007

$15.46 $16.57

2008

2009

$17.32

2010

$18.02 $18.59

2011

2012

$19.77

2013

$20.83

2014

$21.88

2015

2016

This information is not part of the Audited Financial Statements


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

TORRINGTON RESERVOIR STREAM Cover & IBC Photography: Susan Suhanovsky 2016


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

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