2013%20annual%20report

THE TORRINGTON WATER COMPANY

Annual Report 2013

CA 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 / 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, 2013, 2012 and 2011, 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 presenta-tion 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 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 entity’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 entity’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.

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, 2013, 2012 and 2011, 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 MethodAs discussed in Note 2 to the financial statements, in connection with the adoption of final tangible property regulations issued by the Internal Revenue Service, the Company elected to change its method of accounting for income taxes. This method has been applied retrospectively to all periods presented.

January 27, 2014Shelton, Connecticut

The mission of The TorringtonWater Company is to reliably and cost-effectively provide clean water

to its customers while acting in the best interest of its shareholders.

OFFICERS Susan M. SuhanovskyPresident Steven F. CerrutoVice President / Operations Catherine C. Roscello Secretary / Treasurer

DIRECTORS

Edwin G. Booth, Jr.

Richard D. Calhoun

Diane V. Libby

James M. Lucas

Gregory S. Oneglia

Charles W. Roraback

Margaret P. Roraback

PRESIDENT’S MESSAGE To Our Stockholders:

THE TORRINGTON WATER COMPANY

I am pleased to report that 2013 was a very successful year for The Torrington Water Company.

Financial HighlightsOperating revenues for 2013 grew by 9.3% to $6,515,526, and operating income grew by 33.0% to $2,058,884. Net income increased 50.4% to $1,685,123, a gain that was mirrored by a 50.0% rise in earnings per share to $1.95. At year-end, stockholders’ equity was up 6.3% to $17,079,196, representing a book value of $19.77 per share (adjusted for the stock split described below). Without the following adjustments to our revenue that resulted from state legislation and regulatory mechanisms, 2013 operating revenue would have been $5,775,979, a decrease of $182,800 from 2012. In 2013, the State of Connecticut passed legislation that provided several mechanisms for water utilities to use. These included authorization of a new Water Revenue Adjustment (WRA) mechanism; an increase in the maximum allowable surcharge to 10.0% from 7.5% for the existing Water Infrastructure and Conservation Adjustment (WICA); and expansion of the list of projects eligible for WICA. In addition to state legislation, we also were affected last year by action at the federal level. In September 2013, the Internal Revenue Service (IRS) issued new final regulations regarding expenditures for tangible property. These state and federal measures had the following effects on our 2013 financial results:

WRA—Under this mechanism, water utilities regulated by the state’s Public Utilities Regulatory Authority (PURA) are allowed to adjust their rates either upward or downward each year—through a surcharge or credit on customer bills—to reflect the difference between the actual revenues billed in a calendar year and the revenues that PURA approved at the time of the utilities’ last general rate case and WICA proceeding. A shortfall in actual revenues can be due to weather, conservation, slow growth or other factors, while a surplus in actual revenues can be caused by a hot summer or an increase in customers. Last year, we experienced a shortfall of $489,547 and therefore are allowed to recover that amount through a surcharge. This shortfall has been included in our operating revenues for utility accounting and income tax purposes, and in a regulatory-asset account representing the future collection of the WRA surcharge. To collect the 2013 shortfall, we will add a surcharge of 8.12% to customer bills starting in April 2014.

WICA—This mechanism allows water utilities to add a surcharge to customer bills to recover part of their infrastructure investments for a given year as well as allowed expenses associated with those projects. In 2013, the revenue attributed to the increased WICA surcharge for the year was approximately $250,000, or $123,000 higher than the revenue realized in 2012. The Company’s cumulative capital investment in WICA projects through the end of 2013 was $1,869,246, based on which the Company will be allowed revenues of $390,100 in 2014. The 2013 legislation expanded the list of WICA-eligible projects to include purchases of energy- efficient equipment for water company operations; capital improvements needed to comply with state stream flow regulations; and PURA-approved reasoable and necessary system improvements for acquired water systems. The application of WICA to more types of capital projects is a welcome development.

IRS rules—The new regulations now allow us to immediately deduct, as ordinary and necessary repair costs, certain qualifying expenditures that previously would have been capitalized and depreciated over the estimated useful life of the asset. The method of accounting we adopted to record this change resulted in a significant decrease in the Company’s effective income tax rate and a reduction in a component of the Company’s deferred tax liability, which resulted in a corresponding increase in net income. In connection with this accounting change, the Company has restated its balance sheets and income statements for 2012 and 2011. See Note 2 to the 2013 audited financial statements for the impact of the accounting change on the Company’s previously reported financial results. Operating and Maintenance expenses for 2013 rose 5.8% from 2012. Factors contributing to this increase were higher pension and benefit costs, added regulatory obligations and increased monitoring costs due to new security measures. In April 2013, the Company carried out a stock split, providing one new share for each share outstanding. This brought the total number of outstanding shares to 864,000. The price of each share

was effectively split in half to $36.75 from $73.50. The new price is more in keeping with the share price of most other water utilities. In addition, the Board of Directors increased our quarterly cash dividend to $0.20 from $0.19 per share. We are proud that we have paid a cash dividend on our shares every year since 1880.

Operational HighlightsIn December 2013, we filed an application with PURA to purchase all of the assets of the City of Torrington’s water system. If approved, the acquisition of this municipal water system will add 250 customers to our customer base, bringing the total number of customers we serve to 10,000. The Company has been oper-ating and maintaining the city’s distribution system since 1967, so we have a thorough knowledge of its workings. We believe that the acquisition of this system—which is supplied through an interconnection to our system and is in our existing service area—will bolster long-term value for our shareholders. We continued to devote considerable attention, effort and money to maintaining and improving our system. Last year, our WICA program replaced another 7,172 feet of 4-inch and 6-inch main with 8-inch main in our downtown area. We also painted the exterior of our West Pearl Road standpipe; continued replacing obsolete hydrants; eliminated dead ends in our distribution system; finished upgrading our customer meters to radio-wireless-read meters; and upgraded and replaced windows and doors in two of our pump stations. Because of the emphasis we place on customer service, we were very gratified by the results of our second Customer Satisfaction Survey. An independent market research firm conducted the survey for us. On all of the important measures—water quality, pressure, price, value, customer representative responsive-ness and knowledge—more than 96% of the respondents rated The Torrington Water Company’s overall customer service as very good or good. This very positive evaluation was due largely to our excellent employees, who are distinguished by their diligence in the field, their knowledge of the system and their helpfulness to customers. I express a sincere thank you to all of them. Our customers have made it clear that they enjoy the Company’s website and especially appreciate being able to pay their bills online. We will continue to find ways to enhance customer service. As reported last year, we signed an agreement with a wind farm development company allowing it to erect a meteorological tower on our off-watershed land. The data collected by the tower so far indicates that a wind farm project is feasible. However, the project cannot move forward as Connecticut has failed to approve wind farm siting rules. This has resulted in a moratorium on all wind projects in Connecticut. When and if such rules are approved, the Company will determine the best course for proceeding.

Looking ForwardPursuant to an agreement with the Town of New Hartford’s Water Pollution Control Authority (WPCA), our company will manage and operate that town’s water supply and distribution system beginning in February 2014. The WPCA selected us after several months of negotiations. The agreement has a term of two years with an option for two additional terms. It will give us a high-profile presence in the area and will furnish additional revenues each year. We plan to apply to the state’s Department of Energy and Environmental Protection (DEEP) to renew our water diversion permit for the sale of water to Aquarion’s Litchfield system. We will again request an increase (to 400,000 gallons per day from 200,000) in the volume of water we may sell. DEEP disallowed that increase in our last renewal bid (in 2007), and instead issued a permit allowing the continued sale of up to 200,000 gallons per day for seven years. The permit did not require the release of water from our reservoirs but did require us to provide very intensive stream flow monitoring during the permit period. Now that DEEP has finalized its stream flow regulations, we are hopeful that the agency will allow our requested increase and will not put any requirements for releases of water in our permit. With our excellent water quality, reasonable cost structure and very strong physical plant, we believe we will be able to capitalize on the opportunities the future holds for our company. On a final note, it was with mixed feelings that the Board accepted the resignation of one of our Directors. Andrew W. Roraback was appointed as a Superior Court Judge for the State of Connecticut and left the Board in February 2013. Margaret P. Roraback was elected to the Board the same month. Margaret is an attorney in Torrington and is a welcome and valuable addition to our Board. It is with sadness that I report on the passing of one of our retired employees. William L. Jones passed on January 20, 2014. Bill was with our company for over 43 years. He was a dedicated, hard-working and knowledgeable employee. He held the position of Superintendent for several years until his retirement in 2007. Even after retiring, he was always willing to help when asked. He will be missed. As always, I extend my sincere thanks to our stockholders for their loyalty, to our Directors for their thoughtful guidance and planning, and to our employees for their dedication and skill.

Susan M. Suhanovsky

President

ASSETS 2013 2012 2011 Utility plant, at cost $ 56,179,154 $ 54,501,584 $ 52,224,778 Less: accumulated depreciation 17,786,892 16,840,332 16,017,272 Net utility plant 38,392,262 37,661,252 36,207,506

Nonutility property, net of accumulated depreciation 372,935 372,935 368,185

Current assets: Cash and cash equivalents 1,564,077 2,139,907 2,748,587 Accounts receivable 444,035 448,058 672,752 Accrued unbilled revenues 748,000 734,000 708,000 Regulatory asset-water revenue adjustment, current portion 367,160 — — Materials and supplies inventory 120,598 140,126 136,204 Prepaid income taxes 165,000 180,078 659,207 Prepaid expenses 219,735 174,422 81,798 Total current assets 3,628,605 3,816,591 5,006,548

Other assets: Other assets 1,628,453 1,526,746 1,391,005 Preliminary survey and investigation charges 184,564 154,858 157,723 Regulatory asset-income taxes recoverable 5,537,100 4,821,700 4,198,200 Regulatory asset-water revenue adjustment, net of current portion 122,387 — —

Unfunded postretirement benefits 2,053,701 1,862,439 1,685,736 Total other assets 9,526,205 8,365,743 7,432,664

TOTAL ASSETS $ 51,920,007 $ 50,216,521 $ 49,014,903

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 15,279,196 14,259,353 13,770,013 Total stockholders’ equity 17,079,196 16,059,353 15,570,013

Long-term debt , net of current portion 9,460,000 9,715,000 9,970,000

Current liabilities: Current portion of long-term debt 255,000 255,000 255,000 Accounts payable 203,648 318,414 388,629 Accrued taxes 384,801 354,351 345,077 Accrued interest 156,124 162,053 167,981 Other current liabilities 113,862 106,165 132,110 Total current liabilities 1,113,435 1,195,983 1,288,797

Deferred income taxes 8,869,983 8,081,288 7,193,293 Unfunded postretirement benefits 2,053,701 1,862,439 1,685,736 Other deferred credits 105,709 105,709 105,936 Customer advances for construction 3,370,737 3,329,504 3,474,358 Contributions in aid of construction 7,940,648 8,025,577 7,970,031 Amortized contributions in aid of construction 1,926,598 1,841,668 1,756,739 Commitments (Note 12) 24,267,376 23,246,185 22,186,093 TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES $ 51,920,007 $ 50,216,521 $ 49,014,903

BALANCE SHEETS AS OF DECEMBER 31, 2013, 2012 AND 2011

3


The accompanying notes are an integral component of these financial statements

2013 2012 2011

Operating revenues $ 6,515,526 $ 5,958,762 $ 5,855,145 Operating expenses: Operation expenses 1,933,411 1,830,589 1,856,305 Maintenance expenses 516,026 484,756 471,055 Depreciation expense 1,098,713 1,050,369 1,006,303 Taxes other than income taxes 839,929 780,331 760,261 Income taxes 68,563 264,206 120,074 Total operating expenses 4,456,642 4,410,251 4,213,998 Utility operating income 2,058,884 1,548,511 1,641,147

Other income and deductions: Merchandising and jobbing – net 64,797 73,240 70,057 Interest income 1,909 4,156 6,737 Miscellaneous non-operating income 96,728 108,834 71,935 Allowance for funds used during construction 11,193 11,117 — Total other income and deductions 174,627 197,347 148,729 Taxes applicable to other income 7,843 69,818 54,583 Net other income and deductions 166,784 127,529 94,146

Income before interest expense 2,225,668 1,676,040 1,735,293 Interest expense: Interest on long-term debt 521,774 537,427 512,211 Amortization of deferred financing costs 17,362 17,166 16,576 Other interest expense 1,409 1,387 3,652 Total interest expense 540,545 555,980 532,439 Net income 1,685,123 1,120,060 1,202,854

Dividends declared (665,280) (630,720) (596,160) Retained earnings, beginning of year 14,259,353 13,770,013 13,163,319 Retained earnings, end of year $ 15,279,196 $ 14,259,353 $ 13,770,013 Per share amounts:

Net income, basic $ 1.95 $ 1.30 $ 1.39

Dividends declared $ .77 $ .73 $ .69

Book value $ 19.77 $ 18.59 $ 18.02

STATEMENTS OF INCOME AND RETAINED EARNINGSFOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

4 The Torrington Water Company / Annual Report 2013



2013 2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES:Net income $ 1,685,123 $ 1,120,060 $ 1,202,854

Adjustments to reconcile net income to net cash provided by operating activites: Depreciation and amortization 1,294,603 1,229,727 1,154,964 Deferred income taxes 73,295 264,495 354,695 Bad debt, nonutility property and project write-offs 6,980 5,073 7,706 Allowance for funds used during construction (11,193) (11,117) —

Changes in operating assets and liabilities: Receivables and unbilled revenues (16,957) 193,621 (5,663) Regulatory asset-water revenue adjustment (489,547) — — Materials and supplies inventory 19,528 (3,922) 18,080 Prepaid income taxes 15,078 479,129 (479,034) Prepaid expenses (45,313) (92,624) (178) Other assets, net (297,585) (312,873) (332,634) Accounts payable (121,295) (74,593) (23,226) Accrued and other liabilities 32,218 (22,599) 515 Deferred credits — (227) (454)

Net cash provided by operating activities 2,144,935 2,774,150 1,897,625

CASH FLOWS FROM INVESTING ACTIVITIES: Additions to utility and nonutility plant (1,805,190) (2,453,437) (1,951,872) Proceeds from developers’ contributions, net of refunds 47,763 — 174,136 Additions to preliminary survey and investigation charges (43,058) (43,673) (111,808) Net cash used in investing activities (1,800,485) (2,497,110) (1,889,544) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt — — 3,000,000 Repayment of long-term debt (255,000) (255,000) (255,000) Dividends declared (665,280) (630,720) (596,160) Net cash provided by (used in) financing activities (920,280) (885,720) 2,148,840

NET CHANGE IN CASH AND CASH EQUIVALENTS (575,830) (608,680) 2,156,921

Cash and cash equivalents, beginning $ 2,139,907 $ 2,748,587 $ 591,666

CASH AND CASH EQUIVALENTS, ENDING $ 1,564,077 $ 2,139,907 $ 2,748,587

STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011


5


THE TORRINGTON WATER COMPANY / NOTES TO FINANCIAL STATEMENTS / DECEMBER 31, 2013

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Torrington Water Company (the “Company”) is a public utility that provides water sources to approximately 9,700

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

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, 2013, 2012 and 2011 consists of the following:

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 $9,676,135, $9,637,946, and $9,666,232, as of December 31, 2013, 2012 and 2011 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.

2013 2012 2011Intangible Plant $ 196,434 $ 196,434 $ 196,434Source of Supply 2,062,849 2,059,985 1,862,015 Pumping 2,214,200 2,042,990 1,944,933Water Treatment 10,801,751 10,747,894 10,693,381 Transmission and Distribution 38,298,855 37,057,642 35,450,443General Plant 2,227,256 2,101,761 1,860,068Construction Work in Progress 165,466 82,535 5,161Property Held for Future Use 212,343 212,343 212,343

Total Utility Plant $ 56,179,154 $ 54,501,584 $ 52,224,778


7

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, 2013, 2012 and 2011:

Original Cost 2013 2012 2011 Amortization Period Ends

Customer Survey $ 17,792 $ 1,779 July, 2012

2002 Tank Painting 98,949 9,121 November, 2012

Rate Case Costs 141,786 $ 21,273 49,629 September, 2013

Series F Bond Issue Costs 153,960 30,792 46,188 61,584 December, 2015

Cost of Service Study 40,462 19,220 23,266 27,312 September, 2018

Deferred Finance Costs 11,054 6,138 5,604 7,374 February, 2016

2006 Tank Painting 240,739 59,852 83,792 107,733 July, 2016

2009 Tank Painting 262,866 174,083 195,989 217,894 November, 2021

2010 Tank Painting 318,456 227,784 254,322 280,860 July, 2022

2011 Tank Painting 145,227 119,006 131,108 143,210 October, 2023

2011 Tank Painting 160,346 131,395 144,757 158,119 October, 2023

Crystal Lake Dam Repair 247,978 210,216 235,192 247,978 May, 2022

Litchfield Street Tank Painting 97,903 88,293 96,443 October, 2024

Soapstone Hill Tank Painting 191,694 172,994 188,962 October, 2024

Prepaid Income Taxes Various (10,600) 1,815 2,040 Various

Highland Ave Tank Painting 4,889 4,889 4,889 4,889 Not yet amortizable

Supply Plan Update III 61,240 57,838 52,536 41,584 June, 2022

Other Deferred Costs 30,024 30,024 29,899 29,899 Not yet amortizable

2013 Customer Survey 20,125 17,777 10,711 May, 2018

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

West Pearl Road Tank Painting 284,349 280,400 October, 2025

Total Other Assets $ 1,628,453 $ 1,526,746 $ 1,391,005

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 tax liabilities result principally from the use of accelerated depreciation for income tax purposes and also from deferring investment credits for financial reporting purposes. 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 (see Note 2) 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. 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 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, 2013, 2012 and 2011 is estimated to be $76,900, $100,300, and $101,700, 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, 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 $489,547 in operating revenues related to the implementation of the WRA in 2013, with a corresponding entry to a regulatory asset representing the future collection of the WRA surcharge, which is expected to begin in April 2014.

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. CHANGE IN ACCOUNTING METHOD: Effective January 1, 2013, the Company adopted, for tax purposes, final tangible property regulations issued by

the IRS in September 2013. The final 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. In connection with this adoption, the Company elected to change, retrospectively, its method of accounting for the timing differences between these book and tax expenditures. In accordance with ASC 980 and previous regulatory decisions, the Company elected to flow-through, rather than normalize, these timing differences.

The financial statements as of and for the years ended December 31, 2012 and 2011 have been retrospectively and cumulatively adjusted to reflect this change in accounting method as follows:

December 31, 2012

Regulatory Asset-Income Taxes Recoverable $ 1,285,700 $ 3,536,000 $ 4,821,700

Total Assets 46,680,521 3,536,000 50,216,521

Retained Earnings 13,334,253 925,100 14,259,353

Total Stockholders’ Equity 15,134,253 925,100 16,059,353

Deferred Income Taxes 5,470,388 2,610,900 8,081,288

Total Stockholders’ Equity and Liabilities $ 46,680,521 $ 3,536,000 $ 50,216,521

December 31, 2011

Regulatory Asset-Income Taxes Recoverable $ 1,264,000 $ 2,934,200 $ 4,198,200

Total Assets 46,080,703 2,934,200 49,014,903

Retained Earnings 13,022,613 747,400 13,770,013

Total Stockholders’ Equity 14,822,613 747,400 15,570,013

Deferred Income Taxes 5,006,493 2,186,800 7,193,293

Total Stockholders’ Equity and Liabilities $ 46,080,703 $ 2,934,200 $ 49,014,903


As CurrentlyReported

As Previously Reported

To Reflect Change in Accounting For

Income Taxes

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Income Taxes

December 31, 2010

Retained Earnings $ 12,691,119 $ 472,200 $ 13,163,319 Total Stockholders’ Equity $ 14,491,119 $ 472,200 $ 14,963,319

Year Ended December 31, 2012

Income Taxes $ 441,906 $ (177,700) $ 264,206 Total Operating Expenses 4,587,951 (177,700) 4,410,251

Utility Operating Income 1,370,811 177,700 1,548,511

Income Before Interest Expense 1,498,340 177,700 1,676,040

Net Income $ 942,360 $ 177,700 $ 1,120,060

Net Income Per Share, Basic $ 1.09 $ .21 $ 1.30

Year Ended December 31, 2011

Income Taxes $ 395,274 $ (275,200) $ 120,074

Total Operating Expenses 4,489,198 (275,200) 4,213,998

Utility Operating Income 1,365,947 275,200 1,641,147

Income Before Interest Expense 1,460,093 275,200 1,735,293

Net Income $ 927,654 $ 275,200 $ 1,202,854

Net Income Per Share, Basic $ 1.08 $ .31 $ 1.39

3. STOCK SPLITIn January 2013, the Company filed an application with PURA for approval to issue 432,000 additional shares of common stock in conjunction with a 2-for-1 stock split. The stock split was approved by the Board of Directors in December 2012, and by PURA in February 2013. The stock split was affected in the form of a 100% common stock distribution in April 2013. All share and per share values in the financial statements have been adjusted for all periods to reflect the common stock split.

4. 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. The Company also has a $3,000,000 note payable from a financial institution. The note requires monthly payments of interest 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 5.

December 31,

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

Series F Bonds 6,715,000 6,970,000 7,225,000

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

Net Long-term Portion Due $ 9,460,000 $ 9,715,000 $ 9,970,000


2. CHANGE IN ACCOUNTING METHOD: (continued)




Income Taxes




Income Taxes




Income Taxes

2 013 2012 2011

9

5. NOTE PAYABLEThe 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 (3.25% at December 31, 2013) and expires in May 2016. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2013. The LOC and the $3,000,000 note payable require that the Company meet certain cash flow and net worth requirements, as defined, on a semi-annual basis. The Company was in compliance with these covenants at December 31, 2013.

6. OTHER DEFERRED CREDITSOther deferred credits include revenues billed but not earned and, at times, funds advanced from developers for water main extensions that were not completed and/or started as of the balance sheet date. When a project is completed the amount related to the project is reclassified to Customer Advances for Construction with any advance in excess of the project cost reimbursable back to the developer. The following summarizes this account as of December 31, 2013, 2012 and 2011:

2013 2012 2011

Deferred Revenues $ 100,709 $ 100,709 $ 100,936

Developers’ Advances and Deposits 5,000 5,000 5,000

Total Other Deferred Credits $ 105,709 $ 105,709 $ 105,936

7. 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, 2013, 2012 and 2011 was $126,010, $121,918, and $115,594, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $9,380, $9,049, and $8,575 for the years ended December 31, 2013, 2012 and 2011, respectively.

8. 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, 2013, 2012 and 2011 was $65,042, $66,205, and $66,669, 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 $2,053,701, $1,862,439, and $1,685,736 as of December 31, 2013, 2012 and 2011, 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 will no longer be 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, 2013, 2012 and 2011:

2013 2012 2011 Accumulated Postretirement Benefit Obligation (APBO) $ 2,169,276 $ 2,444,963 $ 2,113,540 Less Fair Value of Plan Assets — — — APBO in Excess of Fair Value of Plan Assets 2,169,276 2,444,963 2,113,540 Unrecognized Amounts: Transition Obligation 19,606 39,212 Prior Service Cost 30,592 33,255 35,917 Unrecognized (Gain) /Loss 84,983 529,663 352,675 115,575 582,524 427,804 Unfunded Postretirement Benefits at End of the Year $ 2,053,701 $ 1,862,439 $ 1,685,736



11


The net periodic postretirement benefit cost for 2013, 2012 and 2011 includes the following components:

2013 2012 2011 Service Cost-Benefit Attributed to Service During the Year $ 115,828 $ 115,538 $ 89,584 Interest Cost 99,856 96,604 91,192 Amortizations of: Unrecognized Gain or Loss 18,351 8,498 — Transition Obligation 19,606 19,606 19,605 Prior Service Cost 2,663 2,662 2,663 Total Cost $ 256,304 $ 242,908 $ 203,044

The weighted-average assumed discount rate used to measure the APBO was 5.05% for 2013, 4.15% for 2012, and 4.65% for 2011. 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 9.00% in 2011 down to 5.00% in 2015 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, 2013 by $370,342 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $51,969. Accordingly, subsequent changes in the assumed rates will increase or decrease the deferred regulatory assets and liabilities mentioned above.

9. TAXES OTHER THAN INCOME TAXES Taxes other than income taxes for the years ended December 31, 2013, 2012 and 2011 are as follows:

2013 2012 2011 Property Taxes $ 773,699 $ 714,225 $ 694,861 Payroll Taxes 81,465 79,535 76,758 Total Taxes Other than Income Taxes 855,164 793,760 771,619 Less Amounts Capitalized (15,235) (13,429) (11,358) Net Taxes Other than Income Taxes $ 839,929 $ 780,331 $ 760,261

10. INCOME TAXES Income tax expense for the years ended December 31, 2013, 2012 and 2011 are as follows:

2013 2012 2011 Federal State Total Total Totals

Income Taxes Accrued $ 3,017 $ (181) $ 2,836 $ 70,137 $ (163,498)

Related to Taxable/Refundable CIAC (582) (139) (721) (1,604) (17,536) Net Attributed to Operations 2,435 (320) 2,115 68,533 (181,034) Deferred Income Taxes 77,000 — 77,000 268,200 358,400 Normalization of Prepaid Income Taxes 900 96 996 996 996 Normalization of Investment Credits (3,705) — (3,705) (3,705) (3,705) Total Income Taxes $ 76,630 $ (224) $ 76,406 $ 334,024 $ 174,657 Less Attributed to Other Income (7,843) (69,818) (54,583)

Net Charged to Utility Operations

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 2010, except for certain amended state tax returns for 2009 as discussed below, are no longer subject to examination by taxing authorities.

$ 68,563 $ 264,206 $ 120,074

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)

Uncertain Tax PositionsIn 2012, the Company amended its Connecticut corporate income tax returns for the years ended December 31, 2008 through 2010, requesting a refund of $160,445 related to the utilization of the fixed capital investment credit (FCIC). The Company received a refund of $41,579 related to the 2008 amended return, which is included in miscellaneous non-operating income on the 2012 statement of income and retained earnings. The Company was subsequently notified by the Connecticut Department of Revenue Services (DRS) that, in the opinion of DRS, certain fixed capital additions did not qualify for the FCIC. As a result of this disallowance, the Company’s refund claims for the 2009 and 2010 tax years were significantly reduced, and DRS assessed the Company taxes and interest of $87,445 related to the 2008 refund and the FCIC credit claimed on the Company’s 2011 tax return. The Company believes that DRS’ position is both factually and legally incorrect and, accordingly, has filed an appeal of the DRS ruling. In connection with the appeal, the Company posted a deposit in the nature of a cash bond in the amount of the DRS assessment, which stops the accrual of additional interest. This deposit is included in prepaid expenses on the December 31, 2013 balance sheet. The Company’s 2012 tax provision included FCIC of $45,600, calculated based on the Company’s interpretation of the Connecticut General Statutes related to fixed capital additions that qualify for the FCIC. In 2013, the Company posted an additional deposit in the nature of a cash bond in the amount of the FCIC claimed on the Company’s 2012 tax return. This deposit is also included in prepaid expenses on the December 31, 2013 balance sheet. As a result of the Company’s adoption of final tangible property regulations issued by the IRS in 2013, the Company’s 2013 tax provision does not include the utilization of FCIC.

11. 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 2013, 2012 and 2011 the amount of these purchases approximated $120,000, $138,300 and $134,000, respectively.

12. 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. A majority of this program is expected to be financed with internally generated funds.

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.

Acquisition of the City of Torrington Water SystemIn December 2013, the Company filed an application with PURA requesting approval to purchase all of the assets of the City of Torrington water system for $350,000. If approved by PURA, the acquisition is expected to add approximately 250 customers to the Company’s customer base.

13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2013 2012 2011 Interest Paid $ 527,704 $ 543,355 $ 505,662

Income Taxes Paid $ 132,752 $ 175,250 $ 298,000

14. SUBSEQUENT EVENTS Management has evaluated subsequent events through January 27, 2014, the date which the financial statements were available for issue.


10. INCOME TAXES (continued)


FINANCIAL 2013 2012 2011 2010 2009

Income Statement Operating Revenues $ 6,515,526 $ 5,958,762 $ 5,855,145 $ 5,995,020 $ 5,893,016

O & M Expenses 2,449,437 2,315,345 2,327,360 2,267,843 2,204,079

Utility Operating Income* 2,058,884 1,548,511 1,641,147 1,560,287 1,532,764

Net Income* 1,685,123 1,120,060 1,202,854 1,165,241 1,165,200

Balance Sheet Stockholders’ Equity* $ 17,079,196 $ 16,059,353 $ 15,570,013 $ 14,963,319 $ 14,320,798

Long Term Debt $ 9,715,000 $ 9,970,000 $ 10,225,000 $ 7,480,000 $ 7,735,000

Stockholders’ Equity %* 63.7 61.7 60.4 66.7 64.9

Long Term Debt % 36.3 38.3 39.6 33.3 35.1

Net Utility Plant $ 38,392,262 $ 37,661,252 $ 36,207,506 $ 35,181,391 $ 34,727,695

Earnings Per Share* 1.95 1.30 1.39 1.35 1.35

Dividend Per Share* 0.77 0.73 0.69 0.61 0.55

Book Value Per Share* 19.77 18.59 18.02 17.32 16.57

* Reflects the 2-for-1 stock split that took place in April 2013 and the change in the Company’s method of accounting for income taxes effective January 1, 2013. All prior periods have been adjusted to reflect these changes. See Notes 2 and 3 to the financial statements.

OPERATIONAL

2013 2012 2011 2010 2009

Miles of Main 164 163 163 162 162

Number of Hydrants 920 920 919 914 915

Gallons Produced (Thou.) 918,299 918,367 938,601 989,924 1,013,388

Gallons Sold (Thou.)

Residential 529,742 531,832 539,669 559,522 548,748

Commercial 135,894 140,850 142,146 146,506 137,644

Industrial 11,168 12,894 14,910 16,781 14,482

Number of Customers 9,688 9,665 9,637 9,607 9,573

Number of Employees 16 16 16 16 16

This information is not part of the audited financial statements

FIVE-YEAR SELECTED DATA

THE TORRINGTON WATER COMPANY / ANNUAL REPORT / DECEMBER 31, 2013

DES

IGN

: RH

OD

E VA

N G

ESSE

L •

ESSE

X C

T P

RIN

TIN

G: R

AIN

BO

W P

RIN

TIN

G •

TO

RR

ING

TON

, CT

THE TORRINGTON WATER COMPANY 277 Norfolk Road PO Box 867

Torrington CT 06790 (860) 489.4149

Documents

2013%20annual%20report