annual 2015 twc

THE TORRINGTON WATER COMPANY

Annual Report 2015C 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

INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders

THE TORRINGTON WATER COMPANY l ANNUAL REPORT

Report on the Financial Statements We have audited the accompanying financial statements of The Torrington Water Company (the Company), which comprise the balance sheets as of December 31, 2015, 2014 and 2013, and the related statements of income and retained earnings, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement 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’ ResponsibilityOur responsibility is to express an opinion on these finan-cial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment

of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as wellas evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

January 27, 2016Shelton, 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.

FINANCIAL 2015 2014 2013 2012 2011

Income Statement Operating Revenues $ 7,025,115 $ 6,594,940 $ 6,515,526 $ 5,958,762 $ 5,855,145

O & M Expenses $ 2,657,355 $ 2,625,492 $ 2,449,437 $ 2,315,345 $ 2,327,360

Utility Operating Income $ 2,013,450 $ 1,923,453 $ 2,058,884 $ 1,548,511 $ 1,641,147

Net Income $ 1,721,448 $ 1,635,805 $ 1,685,123 $ 1,120,060 $ 1,202,854

Balance Sheet Stockholders’ Equity $ 18,907,169 $ 17,997,881 $ 17,079,196 $ 16,059,353 $ 15,570,013

Long Term Debt $ 9,205,000 $ 9,460,000 $ 9,715,000 $ 9,970,000 $ 10,225,000

Stockholders’ Equity % 67.3 65.5 63.7 61.7 60.4

Long Term Debt % 32.7 34.5 36.3 38.3 39.6

Net Utility Plant $ 41,236,243 $ 40,382,388 $ 38,392,262 $ 37,661,252 $ 36,207,506

Earnings Per Share $ 1.99 $ 1.89 $ 1.95 $ 1.30 $ 1.39

Dividend Per Share $ 0.94 $ 0.83 $ 0.77 $ 0.73 $ 0.69

Book Value Per Share $ 21.88 $ 20.83 $ 19.77 $ 18.59 $ 18.02

OPERATIONAL

2015 2014 2013 2012 2011

Miles of Main 169 164 164 163 163

Number of Hydrants 947 920 920 920 919

Gallons Produced (Thou.) 882,838 908,973 918,299 918,367 938,601

Gallons Sold (Thou.)

Residential 512,304 513,115 529,742 531,832 539,669

Commercial 163,491 134,643 135,894 140,850 142,146

Industrial 13,180 9,875 11,168 12,894 14,910

Number of Customers 9,994 9,969 9,688 9,665 9,637

Number of Employees 17 17 16 16 16

This information is not part of the audited financial statements

FIVE-YEAR SELECTED DATA

THE TORRINGTON WATER COMPANY l ANNUAL REPORT l DECEMBER 31, 2015

The Torrington Water Company • Annual Report 2015 1

OFFICERS Susan M. SuhanovskyPresident Steven F. CerrutoVice 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

PRESIDENT’S MESSAGE

To Our Stockholders


FINANCIAL HIGHLIGHTSI am pleased to report solid financial results for our company in 2015.

Operating revenues increased to $7,025,115 from 2014, a gain of $430,175, or 6.5%, while net income grew to $1,721,448 ($1.99 per share), a gain of $85,643, or 5.2%. Two factors were primarily responsible for the growth in revenues:

• We began 2015 with a larger customer base as a result of acquiring the City of Torrington’s water system assets in 2014. The 260 customers added by the acquisition expanded our base to just under 10,000. The operating revenue realized from this acquisitionwasapproximately$100,000.• Earlyin2015,wemetwiththeOfficeofConsumerCounsel(OCC)todiscussthepossibilityof a settlement agreement to amend our rate schedule and thereby avoid a costly rate case process. OCC agreed with our proposal. The resulting agreement incorporated a Water Infrastructure Conservation Adjustment (WICA)

surcharge of 9.29% into our current base rates as of October 1, 2015. The agreement also continued our participation in the Water Revenue Adjustment (WRA) program. We agreed not to file a rate case until at least mid-2017. The state’s Public Utilities Regulatory Authority (PURA) approved the settlement agreement on September 2, 2015.

The provisions of the agreement produced an increase of $275,000 in our 2015 operating revenues.

As for costs during 2015, Operation and Maintenance expenses grew to $2,657,355, but through diligent cost control, we were able to limit their rate of growth to $31,863, or 1.2%, over 2014. This was substantially lower than the 7.2% increase in expenses we had absorbed in 2014. We also saw a significant increase in property taxes in 2015, which increased $208,540, or 24.4%, to $1,063,952. These combined cost increases, however, were more than offset by the overall gain in revenues.

In December, the Board of Directors raised our quarterly cash dividend by 8.7%, to $0.25per share, making 2015 our 18th consecutive year of dividend increases. (Our history of annual cash dividends dates back to 1880.) Book value per share grew to $21.88 at year-end from $20.83 at year-end 2014.

OTHER HIGHLIGHTSOur Series F bonds, originally sold in 2006, were due to mature in January 2016. During the second quarterof2015,weexploredthepotentialsourcesofborrowing,interestratesandtermsthatwouldbe available to us. On September 18, 2015, we accepted an offer from Modern Woodmen of America to lend us $12,000,000 for 10 years at an interest rate of 4.08%. The sale of those bonds (called Series G) closed on January 26, 2016. We used the proceeds from this financing to repay the 5.58% Series F bonds, repay our 4.58% bank term loan and pay down our outstanding line of credit. We will use the $2,300,000 remaining to finance future WICA-eligible capital infrastructure investments over the next two construction seasons.

During the 2015 construction season, we invested $1.5 million in WICA-eligible projects. We replaced 8,700 feet of existing water mains that had reached the end of their useful lives. We again concentrated on replacing our old 4-inch mains; to date, we have replaced 38% of the 4-inch main in our system.

We can apply for the allowed return on our WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax) once we complete our WICA projects for the year. If our application for last year’s projects is approved, a surcharge of 3.42% will become effective April 1, 2016, and we expect it to generate $220,000 in revenues.

Our investments in infrastructure enable us to ensure that both existing and future customers willhaveareliablesupplyofhigh-qualitywateratreasonablecost.Moreover,theupgradeswehavedone have led to a steady decrease in lost water in our system. For 2015, lost water totaled 13%, below the PURA-mandated maximum of 15%. Even so, we continue to conduct leak surveys and use leak-detectionequipmenteverydaytoensurethatwefindanywatermainbreaksorservicelineleaks as soon as possible.

2 The Torrington Water Company • Annual Report 2015

In July 2015, the Department of Energy and Environmental Protection approved our 2014 application to renew our water diversion permit for the sale of water toAquarion’s Litchfield system. This newpermit allows us to sell up to 400,000 gallons of water per day to Aquarion,anincreaseof200,000gallons,andguaranteesusrevenuefor125,000gallonsperdaywhetherAquarionusesthatquantityornot.

In addition to operating income produced by our core business—treating and distributing water—we generate income from non-utility ventures. We focus on ventures that are low risk and are related to our core business.

In December 2015, we extended for another two years our contract to provide operations and maintenance support for the water system owned by the New Hartford Water Pollution Control Authority (WPCA). Our experience and expertise are clearly valued by the WPCA and its customers. Our employees treat both the system and its customers as if they were their own.Thequalificationsofourmanagementteamandthe system’s close proximity to our Torrington operations makeusuniquelypositionedtoserveNewHartford.This partnership generated over $77,000 in income in 2015.

For the past three years, we have contracted with Homeowner Safety Valve Company to provide coverage, with no liability on our part, for the cost of repairing broken or leaking water or sewer lines on our customers’ property. Under the contract, we receive 15% of the revenue realized when a customer signs up. After analyzing the risks and benefits, we decided to take over the water line portion of this program, starting in January 2016. We will now realize 100% of the revenue generated and will take on the liability for any water line repairs. Our customers like that the same company that delivers their water will now cover their water service line. Over 225 customers have signed up for the Torrington Water Company service line protection program, and we anticipate that by year end we will have over 600 customers. Last year, the Safety Valve contract provided us with revenue of $12,000.

As part of our forest management plan, in 2015 we conducted a sale of timber from our woodlands. The sale brought us $92,500 in non-operating income. Timely sales of carefully selected timber are an important tool in managing and sustaining our 5,000 acres of property.

In September 2015, we signed a letter of intent with a wind turbine company to negotiate a long-term agreement for a wind farm on our off-watershed property. This is the second company to express interest in developing a wind farm, and we hope that this time the project will come to fruition. It will most likely take

several years, as we have to get many regulatory approvals. If approved, this project will generate income which will benefit both our ratepayers and our shareholders.

This year marks the 20th anniversary of our filtration plant. When it was first built, our water treatment plant was considered to be state-of-the-art. Designed to provide high-quality, low-cost service to our customersover the long term, the plant has met all expectations. These are a few of the design highlights:

•The main process flow through the plant is by gravity, so we avoid the substantial cost of providing and operating large pumps.•Theentirestructuresitsonrock,whicheliminates future leakage and maintenance problems resulting from settlement.•All process vessels are constructed of concrete, so we avoid the continuing maintenance and operating costs associated with steel vessels.Now, 20 years later, the plant continues to serve our

system and community with no significant problems. Nor do we foresee the need to make any major capital improvements for several years.

CLOSING THOUGHTSAll that we do – in our office and in the field – centers on one person: our customer. Our customer representatives both in the office and in the field never forget that at the end of every water line, there’s a person depending on us to provide clean, safe water. Our customers trust us, and we don’t take that trust lightly. Our employees have to be ready to respond at any time and in any kind of weather. The winter of 2014–2015 was particularly severe, and our employees worked diligently to keep water flowing to our customers.

I am fortunate to serve with a team of highly motivated and skillful people, since ours is a business that challenges us to perform at the highest level to protect public health and provide value to our customers and stockholders.

Once again, I thank our Board of Directors for their hard work and dedication, and our stockholders for their continued loyalty and support. And to everyone else who has worked to produce another successful year for our company, I extend my deep appreciation as well.

Susan M. SuhanovskyPresident



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


The accompanying notes are an integral component of these financial statements

2015 2014 2013 ASSETSUtility plant, at cost $ 61,357,843 $ 59,409,057 $ 56,179,154 Less: accumulated depreciation 20,121,600 19,026,669 17,786,892 Net utility plant 41,236,243 40,382,388 38,392,262

Nonutility property, net of accumulated depreciation 372,935 372,935 372,935

Current assets: Cash and cash equivalents 561,334 377,742 1,564,077 Accounts receivable 483,704 418,988 444,035 Accrued unbilled revenues 844,000 748,000 748,000 Regulatory asset-water revenue adjustment, current portion 625,512 567,794 367,160 Materials and supplies inventory 171,243 145,174 120,598 Prepaid income taxes 2,800 10,219 165,000 Prepaid expenses 96,117 137,016 219,735 Total current assets 2,784,710 2,404,933 3,628,605

Other assets: Other assets 1,771,517 1,712,421 1,628,453 Preliminary survey and investigation charges 199,932 190,613 184,564 Regulatory asset-income taxes recoverable 7,318,700 6,551,500 5,537,100 Regulatory asset-water revenue adjustment, net of current portion 153,100 141,291 122,387 Unfunded postretirement benefits 2,377,008 2,212,111 2,053,701 Total other assets 11,820,257 10,807,936 9,526,205

TOTAL ASSETS $ 56,214,145 $ 53,968,192 $ 51,920,007

STOCKHOLDERS’ EQUITY AND LIABILITIESStockholders’ equity:Common stock, no par; 1,000,000 shares authorized; 864,000 issued and outstanding $ 1,800,000 $ 1,800,000 $ 1,800,000 Retained earnings 17,107,169 16,197,881 15,279,196 Total stockholders’ equity 18,907,169 17,997,881 17,079,196

Long-term debt , net of current portion 9,205,000 9,205,000 9,460,000 Current liabilities: Note payable, bank 350,000 — — Current portion of long-term debt — 255,000 255,000 Accounts payable 292,454 282,756 203,648 Accrued taxes 529,058 425,186 384,801 Accrued interest 144,266 150,195 156,124 Other current liabilities 123,544 111,549 113,862 Total current liabilities 1,439,322 1,224,686 1,113,435

Deferred income taxes 10,562,295 9,808,000 8,869,983 Unfunded postretirement benefits 2,377,008 2,212,111 2,053,701 Other deferred credits — — 105,709 Customer advances for construction 1,877,720 3,069,316 3,370,737 Contributions in aid of construction 9,658,120 8,350,450 7,940,648 Amortized contributions in aid of construction 2,187,511 2,100,748 1,926,598 Commitments (Note 10) 26,662,654 25,540,625 24,267,376

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES $ 56,214,145 $ 53,968,192 $ 51,920,007


2015 2014 2013

Operating revenues $ 7,025,115 $ 6,594,940 $ 6,515,526 Operating expenses: Operation expenses 2,019,042 1,948,997 1,933,411 Maintenance expenses 638,313 676,495 516,026 Depreciation expense 1,181,293 1,150,538 1,098,713 Taxes other than income taxes 1,139,017 928,457 839,929 Income taxes (benefit) 34,000 (33,000) 68,563 Total operating expenses 5,011,665 4,671,487 4,456,642 Utility operating income 2,013,450 1,923,453 2,058,884

Other income and deductions: Merchandising and jobbing – net 111,058 128,010 64,797 Interest income 237 1,198 1,909 Miscellaneous non-operating income 106,032 131,675 96,728 Allowance for funds used during construction 16,098 — 11,193 Total other income and deductions 233,425 260,883 174,627 Taxes applicable to other income 11,727 27,859 7,843 Net other income and deductions 221,698 233,024 166,784

Income before interest expense 2,235,148 2,156,477 2,225,668 Interest expense: Interest on long-term debt 493,721 500,962 521,774 Amortization of deferred financing costs 18,588 18,342 17,362 Other interest expense 1,391 1,368 1,409 Total interest expense 513,700 520,672 540,545 Net income 1,721,448 1,635,805 1,685,123

Dividends declared (812,160) (717,120) (665,280) Retained earnings, beginning of year 16,197,881 15,279,196 14,259,353 Retained earnings, end of year $ 17,107,169 $ 16,197,881 $ 15,279,196 Per share amounts:

Net income, basic $ 1.99 $ 1.89 $ 1.95

Dividends declared $ .94 $ .83 $ .77

Book value $ 21.88 $ 20.83 $ 19.77

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




2015 2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES:Net income $ 1,721,448 $ 1,635,805 $ 1,685,123 Adjustments to reconcile net income to net cash provided by operating activites: Depreciation and amortization 1,412,510 1,356,768 1,294,603 Deferred income taxes (benefit) (12,905) (76,383) 73,295 Bad debt, nonutility property and project write-offs 6,352 8,027 6,980 Allowance for funds used during construction (16,098) — (11,193)

Changes in operating assets and liabilities: Receivables and unbilled revenues (167,068) 17,020 (16,957) Regulatory asset-water revenue adjustment (69,527) (219,538) (489,547) Materials and supplies inventory (26,069) (24,576) 19,528 Prepaid income taxes 7,419 154,781 15,078 Prepaid expenses 40,899 82,719 (45,313) Other assets, net (290,311) (290,198) (297,585) Accounts payable 3,155 69,448 (121,295) Accrued and other liabilities 109,938 32,143 32,218 Deferred credits — (105,709) — Net cash provided by operating activities 2,719,743 2,640,307 2,144,935

CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility plant (1,970,257) (2,568,675) (1,805,190) Acquisition of the City of Torrington water system — (350,000) — Proceeds from developers’ contributions, net of refunds 209,379 115,510 47,763 Additions to preliminary survey and investigation charges (58,113) (51,357) (43,058) Net cash used in investing activities (1,818,991) (2,854,522) (1,800,485) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from note payable, bank 350,000 — — Repayment of long-term debt (255,000) (255,000) (255,000) Dividends declared ( 812,160) (717,120) (665,280) Net cash used in financing activities ( 717,160) (972,120) (920,280)

NET CHANGE IN CASH AND CASH EQUIVALENTS 183,592 (1,186,335) (575,830)

Cash and cash equivalents, beginning $ 377,742 $ 1,564,077 $ 2,139,907

CASH AND CASH EQUIVALENTS, ENDING $ 561,334 $ 377,742 $ 1,564,077

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




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Torrington Water Company (the “Company”) is a public utility that provides water sources to approximately 10,000

customers in the city of Torrington and the towns of Burlington, Harwinton, Litchfield and New Hartford, Connecticut. As a public utility operating in Connecticut, the Company functions under rules and regulations prescribed by the State of Connecticut Public Utilities Regulatory Authority (“PURA”).

Regulation The Company maintains its accounts in accordance with the PURA Uniform System of Accounts as prescribed for Water

Utilities Class A. The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America which include the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 980, Regulated Operations (“ASC 980”). Under ASC 980, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate setting process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in rates charged for service.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of

Americarequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesat the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

Utility Plant The cost of additions to utility plant and improvements are capitalized. Costs include labor, materials, services and charges

for such indirect costs as engineering, supervision, payroll taxes, employee benefits, transportation and certain preliminary survey and investigation charges. The cost of repairs and maintenance is expensed. When depreciable utility plant is retired or disposed of its book cost along with the cost of removal, less salvage value, is charged to accumulated depreciation. Utility plant as of December 31, 2015, 2014 and 2013 consists of the following:

In December 2014, the Company purchased all of the assets of the City of Torrington water system for $350,000.

Nonutility Plant TheCompanyowns land,buildingsandequipmentwithanoriginalcostof$559,204that isnotused inutilityservice.

Depreciation in the amount of $186,269 was accumulated during the period these items were in service and for financial statement presentation this amount is netted against the original cost. No depreciation for this property is currently being charged against income. Upon retirement or disposal of this plant the book cost, accumulated depreciation and any salvage are netted and any gain or loss is recognized in the statement of net income.

Depreciation The Company uses the straight-line method of depreciation over the estimated service lives of depreciable plant

ranging from 5 to 75 years as approved by PURA. No depreciation for financial statement purposes is charged to income relating to utility plant constructed with developers’ contributions after 1988 as PURA does not allow the Company to recover this expense through rates. The cost of this plant, offset by an equal corresponding amount reported within Customers’ Advances for Construction, Contributions in Aid of Construction and Amortized Contributions in Aid of Construction is $10,161,490, $9,958,488 and $9,676,135, as of December 31, 2015, 2014 and 2013, respectively.

Cash and Cash Equivalents TheCompanyconsidersallhighly liquid investments thathaveanoriginalmaturityof less than threemonths tobecash

equivalents. TheCompanymaintains its cash inbankdeposit 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 cashandcashequivalents.

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 l NOTES TO FINANCIAL STATEMENTS l DECEMBER 31, 2015

2015 2014 2013

Intangible Plant $ 236,404 $ 196,434 $ 196,434Source of Supply 2,216,319 2,216,319 2,062,849 Pumping 2,292,736 2,289,100 2,214,200Water Treatment 11,145,417 10,927,611 10,801,751 Transmission and Distribution 42,733,144 41,041,132 38,298,855General Plant 2,517,727 2,508,033 2,227,256Construction Work in Progress 3,753 18,085 165,466Property Held for Future Use 212,343 212,343 212,343 Total Utility Plant $ 61,357,843 $ 59,409,057 $ 56,179,154



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Materials and Supplies InventoryMaterials 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 AssetsCosts of certain administrative projects relating to regulatory processes and costs of items which benefit more than one accounting period are deferred and amortized to income over their respective lives and/or periods allowed by PURA using the straight-line method. Costs which are “not yet amortizable” may be entirely charged to income if and when the Company believes it is probable that PURA will not allow the Company to recover these costs through rates. The following costs have been deferred as of December 31, 2015, 2014 and 2013:

Original Cost 2015 2014 2013 Amortization Period Ends

Series F Bond Issue Costs $ 153,960 $ — $ 15,396 $ 30,792 December 2015

Deferred Finance Costs 11,054 — 3,192 6,138 December 2015

Cost of Service Study 40,462 11,127 15,174 19,220 September 2018

2006 Tank Painting 240,739 11,970 35,911 59,852 July 2016

2009 Tank Painting 262,866 130,273 152,178 174,083 November 2021

2010 Tank Painting 318,456 174,708 201,246 227,784 July 2022

2011 Tank Painting 145,227 94,802 106,904 119,006 October 2023

2011 Tank Painting 160,346 104,671 118,033 131,395 October 2023

Crystal Lake Dam Repair 247,978 160,263 185,239 210,216 May 2022

Litchfield Street Tank Painting 97,903 71,994 80,144 88,293 October 2024

Soapstone Hill Tank Painting 191,694 141,056 157,025 172,994 October 2024

Prepaid Income Taxes Various (10,630) (10,577) (10,600) Various

Highland Ave Tank Painting 291,911 261,504 285,830 4,889 September 2026

Supply Plan Update III 61,240 44,229 51,034 57,838 June 2022

Other Deferred Costs 59,795 56,809 36,881 30,024 September 2020

2013 Customer Survey 20,125 9,732 13,755 17,777 May 2018

Docket 13-01-29 8,352 8,352 8,352 8,352 Not yet amortizable

West Pearl Road Tank Painting 284,349 233,008 256,704 280,400 October 2025

2015 Tank Painting 252,213 248,710 — — October 2027

Series G Bond Issue Costs 7,885 7,885 — — Not yet amortizable

Deferred Sales Tax 11,054 11,054 — — Not yet amortizable

Total Other Assets $ 1,771,517 $ 1,712,421 $ 1,628,453

Preliminary Survey and Investigation ChargesCosts 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 TaxesDeferred 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,asanordinaryandnecessaryrepairexpense,qualifyingexpendituresthatpreviouslywouldhavebeencapitalizedand 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 ConstructionIn certain cases real estate developers and others advance funds to the Company for the construction of water main In certain cases real estate developers and others advance funds to the Company for the construction of water main extension projects. A portion of these funds are potentially refundable, without interest, usually within a ten year period. Advances which have not been refunded within this period are reclassified to Contributions in Aid of Construction. The potential amount refundable on completed projects as of December 31, 2015, 2014 and 2013 is estimated to be $46,500, $75,200 and $76,900, respectively.



Amortized Contributions in Aid of ConstructionContributions 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 RecognitionOperating revenues include amounts billed to customers on a cycle basis, adjusted for accrued unbilled amounts based on estimated water usage from the latest meter reading to the end of each year. Operating revenues also include a Water Infrastructure and Conservation Adjustment (WICA), which allows for the timely recovery in rates of the cost of approved infrastructure investment. Beginning in 2013, as permitted by PURA, operating revenues also include amounts related to the Water Revenue Adjustment (WRA). The WRA allows the Company to record, on an annual basis, the amount by which actual revenues from water customers were less than revenues allowed in the Company’s most recent rate decisions. The goal of the WRA is to remove any disincentive to implement conservation rates and programs, postpone the filing of general rate increase applications, and reduce overall water consumption. The Company recorded $612,525, $536,701 and $489,547 in operating revenues related to the WRA in 2015, 2014 and 2013, respectively, with a corresponding entry to a regulatory asset representing the future collection of the WRA surcharge.

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

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

period. To avoid the potential filing of a costly general rate case application, the Company entered into a rate settlement agreement (Agreement) with the Office of Consumer Counsel. The Agreement, among other things, (1) incorporates the April 1, 2015 authorized WICA surcharge of 9.29% into current base rates, (2) sets the WICA surcharge to zero and begins a new WICA expansion period, (3) allows for the continuation of the WRA at its present rate, and (4) provides that the Company will not submit a rate case application that would become effective prior to July 1, 2017.

The Agreement was approved by PURA in September 2015, and the new rates became effective on October 1, 2015.

3. LONG-TERM DEBTThe Company has long-term debt consisting of Series F First Mortgage Bonds with annual principal payments of $255,000 due on January 26th of each respective year through January 2016, with a balloon payment of any remaining principal due at that time. The bonds bear interest at 5.58%, which is paid semi-annually in January and July of each year. These First Mortgage Bonds are secured by substantially all of the Company’s utility plant. (A)TheCompanyalsohasa$3,000,000notepayablefromafinancialinstitution.Thenoterequiresmonthlypaymentsofinterest only at 4.58% through February 2016, at which time all outstanding principal is payable in full. The note payable is secured by substantially all assets of the Company. See Note 4. (A)

(A) On January 26, 2016, the Company issued $12,000,000 Series G First Mortgage Bonds. The Series G bonds bear

interestat4.08%,requireannualprincipalpaymentsof$360,000,matureonJanuary26,2026,andaresecuredbysubstantially all of the Company’s utility plant. The proceeds of the Series G First Mortgage Bonds were used, in part, to repay the 5.58% $6,205,000 Series F First Mortgage Bonds and the 4.58% $3,000,000 note payable, bank. Accordingly, these obligations have been classified as long-term debt at December 31, 2015.

Long-term debt is comprised of the following:

December 31,

Note Payable, Bank $ 3,000,000 $ 3,000,000 $ 3,000,000

Series F Bonds 6,205,000 6,460,000 6,715,000

Less Due Within One Year — (255,000) (255,000)

Net Long-term Portion Due $ 9,205,000 $ 9,205,000 $ 9,460,000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


2015 2014 2013


4. NOTE PAYABLEThe Company has available a $750,000 line of credit (LOC) to be used for short term working capital needs. The LOC requiresmonthlypaymentsofinterestonlyonoutstandingadvancesatthebank’sprimerate(3.50%atDecember31,2015) and expires in May 2016. Any advances on the LOC are secured by substantially all assets of the Company. The Company had $350,000 of outstanding advances on the LOC at December 31, 2015. There were no outstanding advances at December 31, 2014 and 2013. TheLOCandthe$3,000,000notepayablerequirethattheCompanymeetcertaincashflowandnetworthrequirements,as defined, on a semi-annual basis. The Company was in compliance with these covenants at December 31, 2015.

5. PENSION EXPENSEThe Company has a defined contribution simplified employee pension plan that covers all full-time employees who have been employed in three of the preceding five years and attained the age of 21. The Company contributes 12% of the participants’ annual payroll to this plan. The pension contribution for the years ended December 31, 2015, 2014 and 2013 was $125,097, $131,775 and $126,010, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $11,448, $9,782 and $9,380 for the years ended December 31, 2015, 2014 and 2013, respectively.

6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONSThe Company pays the health care premiums for its retirees and their spouses. The amount of these premiums paid on behalf of current retirees during the years ended December 31, 2015, 2014 and 2013 was $68,322, $49,068 and $65,042, respectively. The Company defers and records the future liability relating to current employees who have yet to retire as of the balance sheet date. This estimated liability is $2,377,008, $2,212,111 and $2,053,701 as of December 31, 2015, 2014 and 2013, respectively. The Company believes the deferred liability related to this benefit will be recovered through future ratemaking processes and as such has recorded an offsetting deferred regulatory asset reflecting future revenues expected to be received when such liabilities become payable. Employees hired after July 1, 2013 are no longer eligible for this benefit. The Company has elected to recognize the transition obligation over 20 years. The following table sets forth the postretirement benefit plan’s funded status and unfunded amounts recognized on the Company’s balance sheets as of December 31, 2015, 2014 and 2013: 2015 2014 2013

Accumulated Postretirement Benefit Obligation (APBO) $ 2,751,593 $ 2,552,310 $ 2,169,276 Less Fair Value of Plan Assets — — — APBO in Excess of Fair Value of Plan Assets 2,751,593 2,552,310 2,169,276 Unrecognized Amounts: Prior Service Cost 25,267 27,930 30,592 Unrecognized Loss 349,318 312,269 84,983 374,585 340,199 115,575 Unfunded Postretirement Benefits at End of the Year $ 2,377,008 $ 2,212,111 $ 2,053,701

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

2015 2014 2013 Service Cost-Benefit Attributed to Service During the Year $ 124,986 $ 97,226 $ 115,828 Interest Cost 101,989 107,590 99,856 Amortizations of: Unrecognized Gain or Loss 3,581 — 18,351 Transition Obligation — — 19,606 Prior Service Cost 2,663 2,662 2,663 Total Cost $ 233,219 $ 207,478 $ 256,304

The weighted-average assumed discount rate used to measure the APBO was 4.50% for 2015, 4.05% for 2014, and 5.05% for 2013. The weighted-average discount rate used to determine the transition obligation at January 1, 1994 was 7.25%. As the plan is unfunded and is void of assets there is no expected long-term after-tax-return of plan assets. A health care cost trend graded from 7.00% in 2013 down to 5.00% in 2020 was also used in determining APBO for each of the three years. This health care trend significantly affects the calculation of the APBO and net period cost. A one-percentage-point increase in the assumed health care cost trend rates would increase the APBO at December 31, 2015 by $542,965 and would increase the aggregate of the service and interest cost components of net periodic postretirementbenefitcostfortheyearthenendedby$54,599.Accordingly,subsequentchangesintheassumedrateswill increase or decrease the deferred regulatory assets and liabilities mentioned above.


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

2015 2014 2013 Property Taxes $ 1,063,952 $ 855,412 $ 773,699 Payroll Taxes 86,927 86,784 81,465 Total Taxes Other than Income Taxes 1,150,879 942,196 855,164 Less Amounts Capitalized (11,862) (13,739) (15,235) Net Taxes Other than Income Taxes $ 1,139,017 $ 928,457 $ 839,929 8. INCOME TAXES Income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as follows:

2015 2014 2013

Federal State Total Totals Totals

Current Income Taxes $ 111,000 $ 92,636 $ 203,636 $ 70,246 $ 2,115 Tax Benefit of Operating Loss Carryforwards (111,000) (35,000) (146,000) — — Deferred Income Taxes (Benefit) (9,200) — (9,200) (73,000) 77,000 Normalization of Prepaid Income Taxes 900 96 996 1,318 996 Normalization of Investment Credits (3,705) — (3,705) (3,705) (3,705) Total Income Taxes (Benefit) $ (12,005) $ 57,732 $ 45,727 $ (5,141) $ 76,406

Less Attributed to Other Income (11,727) ( 27,859) (7,843)

Net Charged to Utility Operations

The Company has net operating loss carryforwards of approximately $2,400,000 to offset federal and state taxable income through 2034. For financial reporting purposes, a valuation allowance of $936,000 has been recognized for the related deferred tax asset. The conclusions of the Company’s management regarding tax positions may be subject to review and adjustment at a later date based on an ongoing analysis of tax laws, regulations, and interpretations. Generally, federal and state authorities may examinetheCompany’staxreturnsthreeyearsfromdateoffiling.Consequently,incometaxreturnsforyearspriorto2012are no longer subject to examination by taxing authorities.

9. RELATED PARTY TRANSACTIONSThe Company purchases services, materials and supplies from professional firms, contractors and retailers whose principals are also directors and/or shareholders of the Company. During 2015, 2014 and 2013 the amount of these purchases approximated $108,500, $136,600 and $120,000, respectively.

1o. COMMITMENTSCapital BudgetThe 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 MaintenanceIn 2010, the Company entered into a long-term contract for annual water tank inspection, maintenance and periodic painting. The contract calls for annual payments of $299,108 through 2018.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2015 2014 2013 Interest Paid $ 499,650 $ 508,259 $ 527,704

Income Taxes Paid $ 50,217 $ 20,000 $ 132,752

12. SUBSEQUENT EVENTS ManagementhasevaluatedsubsequenteventsthroughJanuary27,2016,thedatewhichthefinancial statements were available for issue.


7. TAXES OTHER THAN INCOME TAXES

$ 34,000 $ (33,000) $ 68,563


This information is not part of the Audited Financial Statements

THE TORRINGTON WATER COMPANY l ANNUAL REPORT l DECEMBER 31, 2015

EQUITY VS DEBT EQUITY

DEBT

DIVIDENDS PER SHARE

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$0.45$0.40

$0.47$0.51 $0.55

$0.61$0.69 $0.73 $0.77

$0.83

EARNINGS PER SHARE

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$1.30 $1.09 $1.18 $1.01

$1.35 $1.39 $1.30

$1.95 $1.89

BOOK VALUE PER SHARE BASED ON 864,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$13.40 $14.25 $14.96 $15.46 $16.57$17.32 $18.02 $18.59

$19.77$20.83

$1.35

2003 2005 2007 2009 2011 2013 2015

19–

18–

17–

16–

14–

12–

10–

8–

6–

4–

2–

Millions

$10.26

$11.58

$12.93

$8.74$8.05 $8.25

$14.32

$7.74

$15.57

$10.23

$17.08

$18.91

$9.72 $9.21

$1.99

$0.94

$21.88


This information is not part of the Audited Financial Statements

Celebrating Our Filtration Plant’s 20TH Anniversary

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THE TORRINGTON WATER COMPANY 277 Norfolk Road PO Box 867 Torrington CT 06790

(860) 489.4149

annual 2015 twc

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