Annual%202012_TWC

The TorringTonWaTer Company

Annual Report 2012

Ca s h D i v i D e n D s

pa i D e v e ry y ea r

s i nC e 1880

TWC AR 2013 final .indd 1 2/12/13 10:13:38 AM

INDEPENDENT AUDITORS’ REPORT TO ThE BOARD Of DIREcTORS AND STOckhOlDERS

We have audited the accompanying financial statements of The Torrington Water company (the company), which comprise the balance sheets as of December 31, 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 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 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 finan-cial 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, 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.

Predecessor AuditorThe financial statements of the company as of and for the year ended December 31, 2010 were audited by another auditor whose report dated January 26, 2011 expressed an unqualified opinion on those financial statements.

Certified Public AccountantJanuary 28, 2013Shelton, connecticut

DIRECTORS

Edwin G. Booth, Jr.

Richard D. calhoun

Diane V. libby

James M. lucas

Gregory S. Oneglia

Andrew W. Roraback

charles W. Roraback

OFFICERS Susan M. SuhanovskyPresident Steven f. cerrutoVice President / Operations catherine c. Roscello Secretary / Treasurer

THE TORRINGTON WATER COMPANY / ANNUAl REPORT

TWC AR 2013 final .indd 2 2/17/13 5:28:34 PM

To The BoARd of diRecToRs And sTockholdeRs

indePendenT AUdiToRs’ RePoRT on The finAnciAl sTATeMenTs

PResidenT’s MessAGe To Our Stockholders:

The TorringTon WaTer Company

our Company DelivereD very satisfactory financial and operational results for 2012. on the financial side, operating revenues and net income both increased. on the operations side, we completed several of the infrastructure projects on our to-do list, and made good progress with the others. The company has a regular program of reinvesting in its utility plant through infrastructure improvements and additions. in deciding on such investments, we carefully consider whether they make good sense operationally, are prudent, and are in line with our capital expenditure plan. And we always try to anticipate new challenges that may arise. during 2012, we invested over $2,200,000 in our system to ensure an adequate supply of high-quality water for our customers well into the future. Projects funded included the following:

n Storage tank painting program—Two tanks in our system were painted under the ongoing agreement we have with a tank servicing company. our soapstone tank had its interior and exterior painted, and our litchfield street tank had its exterior painted. Additionally, as part of the service agreement, all of our tanks underwent their annual inspection and were certified to be free of any sign of deterioration. n Water main replacement—The company continued its program to replace old, small-diameter mains. in 2012, we replaced over 6,600 feet of 4-inch and 6-inch mains, along with the hydrants and company-owned service lines (connections from main to curb) associated with those mains, primarily in our low-service (i.e., gravity-fed) downtown area. We have now replaced approximately 15,000 feet of old 4-inch and 6-inch mains with 6-inch and 8-inch mains in the last three years. The city of Torrington will soon be reevaluated by insurance services office, a private company that provides property/casualty insurers with information on risk factors and fire-protection efforts for communities throughout the country. We anticipate that our capital improvement efforts over the past several years will lead to a rating improvement for Torrington in its upcoming evaluation, with commensurate reductions in fire insurance premiums for property owners in Torrington. Additionally, partly as a result of our water main replacement program, we have seen a reduction in the volume of water we classify as “unaccounted-for.” We expect this trend to continue as we replace more old, small-diameter mains.n Security—The company hired a firm to conduct a security evaluation of its facilities in 2012. We implemented many of the firm’s recommendations, including putting fencing around many of our water tanks, adding more surveillance cameras and updating intrusion alarms. our top priority is to safeguard the facilities in our distribution system, and we will continue to look for ways to improve security in a cost-effective manner.n SCADA—last year, we installed a scAdA system at our filtration plant. The acronym scAdA refers to a centralized computer-based system for monitoring and controlling critical processes and components. This valuable new system allows our plant operators to monitor storage tank levels, pump stations and other critical components of our distribution system. The system also provides alarm alerts and diagnostic data upon sensing an alarm condition, and notifies our plant operators of the condition. n Generator installation—The state of connecticut has experienced several very severe weather events over the past two years. storm irene in August 2011, an october 2011 snowstorm and storm sandy in october 2012 devastated areas of connecticut and caused thousands to lose both electric and water service for days. We are proud that due to the strength of our system not one of our customers lost service during those storms. nonetheless, to ensure that our system will function smoothly if a severe weather event again knocks out electrical power for an extended period, potentially disrupting water service, we have installed emergency generators. in early 2012, we put in a generator at our Torringford West street pump station, and in the fall, we installed one at our squire hill pump station. With the addition of these generators, our entire system will be able to continue operating seamlessly if there is a power failure.n Meter upgrade—As of year-end, we had virtually completed the upgrading of our customer meters to radio-wireless-read meters. By greatly reducing labor-intensive data collection, this project has enabled us to redeploy labor to other areas of need and thereby contain costs.n Allen Dam Reservoir—The company completed the dredging of its Allen dam Reservoir, whose capacity had been diminished by sediment buildup over many years. The reservoir was drained and its accumulated sediment removed. Work proceeded smoothly and the project was completed within 30 days. Allen dam


Reservoir is now at its full storage capacity, ready if needed. We do not expect to have to dredge this reservoir again for 50 years.

2012 FinanCial resulTsour financial performance in 2012 was very satisfactory. net

income grew 1.6% to $942,360 from $927,654 in 2011 (or to $2.18 per share from $2.15). The growth stemmed from a combination of increased operating revenues, increased non-operating income and careful control of our operating and maintenance expenses. operating revenues rose by 1.8% to $5,958,762 from $5,855,145 in 2011. This increase was primarily due to two factors: the state-approved Water infrastructure and conservation Adjustment (WicA) surcharge, which added $126,937 to our revenues; and the sale of water to other water systems, which added $46,770. sales to residential, commercial and industrial customers continued to decrease—partly the result of continued conservation efforts and lack of growth in the customer base. in december 2012, we applied to the state’s Public Utilities Regulatory Authority (PURA) to increase the WicA surcharge to 4.47% from 2.64%. PURA has approved this increase, which will contribute a total of $267,748 to our revenues for 2013.

on december 6, 2012, the company’s Board of directors approved a $0.02 per share increase in the quarterly cash dividend, bringing it to $0.38 per share. for the year, dividends paid to shareholders totaled $1.46 per share compared with $1.38 per share in 2011. The Torrington Water company has paid a dividend to its stockholders for 132 consecutive years and has raised the dividend in each of the last 15 years. stockholders’ equity at year-end totaled $15,134,253, exceeding $15 million for the first time; it represents a book value of $35.03 per share, an increase of $0.72 from the end of 2011.

our stock sold at year-end for $73.50 per share, an increase of $4.50 per share from the 2011 year-end price. Most other water utility stocks are trading at $20.00 to $50.00 per share. in december, our Board of directors approved a stock dividend of one new share for each share presently outstanding, a transaction which requires the approval of PURA. if approved, this stock split will adjust the market price of our stock to a level more in keeping with that for other water utility stocks. We have submitted our application to PURA and await its approval.

oTher DevelopmenTsWe make no secret of our attitude toward customer

service—we want to satisfy our customers by consistently delivering excellent service. in december 2012, we hired an independent research firm to conduct a customer satisfaction survey and find ways to improve our customer service both in the office and in the field. This survey is being conducted now. i am confident that it will generate results similar to those from our last survey (in 2008), which gave us very high marks in customer satisfaction. one of the things that survey showed was that our

customers like not having to listen to an automated telephone message that requires them to push a series of buttons just to get an answer to their question. instead, there is always the live, friendly voice of a skilled customer service representative at the other end of the phone.

Another step we took last year to enhance customer service was the launching of our new company website, www. torringtonwater.com. The site offers an array of information on the company, from conservation tips to water quality reports, and lets customers review and pay their bill online.

As an additional customer benefit, in July 2012 we began offering our customers the safety Valve Water line Protection Plan from the homeowner safety Valve company. This plan provides covered customers with low-cost protection against unexpected and expensive service line repair costs should their water utility service lines develop a problem. The response to date has been very positive; enrollment levels have already surpassed projections for the first year.

Pursuant to the long-range strategic plan the company developed in 2011, we have been looking at ways to generate revenues from company off-watershed and on-watershed lands. early in 2012, we signed an agreement with a wind development company allowing it to erect a meteorological tower on our off-watershed land. The data collected by the tower will enable the company to determine the feasibility of developing a wind farm project.

The year aheaDfor 2013, our capital expenditure plan includes continuing the

replacement of old, small-diameter mains and obsolete hydrants; repairing the gatehouse and retaining wall at our Allen dam reservoir; and making various upgrades at several of our pump stations and at our filtration plant. Additionally, we have begun converting our distribution map to a Geographic information system (Gis)–based system to keep track of distribution networks. With the new system, company personnel will be able to quickly identify various infrastructure locations during an emergency such as a main break. finally, in another project now under way, we are working with the town of Burlington to extend our main further along the town’s economic development corridor.

As we move ahead with these projects, we will maintain our tradition of responding to our customers, stockholders and communities with resourcefulness, competence and care. in closing, i want to thank our employees for their hard work and dedication, and our Board of directors for their support and guidance. And, as always, i thank our stockholders for their support and loyalty.

susan M. suhanovsky

President


ASSETS 2012 2011 2010

Utilityplant,atcost $54,501,584 $52,224,778 $50,367,419Less:accumulateddepreciation 16,840,332 16,017,272 15,186,028Netutilityplant 37,661,252 36,207,506 35,181,391

Nonutilityproperty,netofaccumulateddepreciation 372,935 368,185 368,185

Currentassets: Cashandcashequivalents 2,139,907 2,748,587 591,666 Accountsreceivable 448,058 672,752 422,795 Accruedunbilledrevenues 734,000 708,000 710,000 Materialsandsuppliesinventory 140,126 136,204 154,284 Prepaidincometaxes 180,078 659,207 180,173 Prepaidexpenses 174,422 81,798 81,620 Totalcurrentassets 3,816,591 5,006,548 2,140,538

Otherassets: Otherdeferreddebits 1,526,746 1,391,005 971,975 Preliminarysurveyandinvestigationcharges 154,858 157,723 361,518 Regulatoryasset-incometaxesrecoverable 1,285,700 1,264,000 1,250,000 Unfundedpostretirementbenefits 1,862,439 1,685,736 1,554,166 Totalotherassets 4,829,743 4,498,464 4,137,659

TOTALASSETS $46,680,521 $46,080,703 $41,827,773

STOCKHOLDERS’EQUITYANDLIABILITIESStockholders’equity: Commonstock,nopar;1,000,000sharesauthorized; 432,000issuedandoutstanding $1,800,000 $1,800,000 $1,800,000 Retainedearnings 13,334,253 13,022,613 12,691,119 Totalstockholders’equity 15,134,253 14,822,613 14,491,119

Long-term debt , net of current portion 9,715,000 9,970,000 7,225,000

Currentliabilities: Currentportionoflong-termdebt 255,000 255,000 255,000 Accountspayable 318,414 388,629 411,855 Accruedtaxes 354,351 345,077 338,253 Accruedinterest 162,053 167,981 173,910 Othercurrentliabilities 106,165 132,110 132,490 Totalcurrentliabilities 1,195,983 1,288,797 1,311,508

Othercredits: Deferredincometaxes 5,470,388 5,006,493 4,362,598 Unfundedpostretirementbenefits 1,862,439 1,685,736 1,554,166 Otherdeferredcredits 105,709 105,936 56,390 Customeradvancesforconstruction 3,329,504 3,474,358 3,311,816 Contributionsinaidofconstruction 8,025,577 7,970,031 7,844,167 Amortizedcontributionsinaidofconstruction 1,841,668 1,756,739 1,671,009 Commitments (Note 10) Totalothercredits 20,635,285 19,999,293 18,800,146 TOTALSTOCKHOLDERS’EQUITYANDLIABILITIES $ 46,680,521 $ 46,080,703 $ 41,827,773

The accompanying notes are an integral component of these financial statements

Balance SheetSAS OF DECEMBER 31, 2012, 2011 AND 2010

The TorringTon WaTer Company / AnnUAl RePoRT

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2012 2011 2010

Operating revenues $5,958,762 $5,855,145 $5,995,020

Operating expenses: Operationexpenses 1,830,589 1,856,305 1,861,114 Maintenanceexpenses 484,756 471,055 406,729 Depreciationexpense 1,050,369 1,006,303 979,796 Taxesotherthanincometaxes 780,331 760,261 745,211 Incometaxes 441,906 395,274 571,783 Totaloperatingexpenses 4,587,951 4,489,198 4,564,633 Utility operating income 1,370,811 1,365,947 1,430,387

Other income and deductions: Merchandisingandjobbing–net 73,240 70,057 64,742 Interestincome 4,156 6,737 2,133 Lossfromdispositionofnon-utilityproperty — — (58,407) Miscellaneousnon-operatingincome 108,834 71,935 95,011 Allowanceforfundsusedduringconstruction 11,117 — — Totalotherincomeanddeductions 197,347 148,729 103,479

Taxesapplicabletootherincome 69,818 54,583 63,054 Netotherincomeanddeductions 127,529 94,146 40,425

Income before interest expense 1,498,340 1,460,093 1,470,812 Interest expense: Interestonlong-termdebt 537,427 512,211 418,570 Amortizationofdeferredfinancingcosts 17,166 16,576 15,396 Otherinterestexpense 1,387 3,652 1,505 Totalinterestexpense 555,980 532,439 435,471Net Income 942,360 927,654 1,035,341

Dividendsdeclared (630,720) (596,160) (522,720)Retainedearnings,beginningofyear 13,022,613 12,691,119 12,178,498Retainedearnings,endofyear $13,334,253 $13,022,613 $12,691,119Pershareamounts:

Netincome $2.18 $2.15 $2.40

Dividendsdeclared $1.46 $1.38 $1.21

Bookvalue $35.03 $34.31 $33.54


StatementS of net Income and retaIned earnIngSFOR thE yEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

4TheTorringtonWaterCompany/AnnualReport2012



2012 2011 2010

CASHfLOwSfROmOpERATINgACTIvITIES:Netincome $942,360 $927,654 $1,035,341

Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivites: Depreciationandamortization 1,229,727 1,154,964 1,103,776 Deferredincometaxes 442,195 629,895 244,991 Baddebt,non-utilitypropertyandprojectwrite-offs 5,073 7,706 61,899 Allowanceforfundsusedduringconstruction (11,117)

Changesinoperatingassetsandliabilities: Receivablesandunbilledrevenues 193,621 (5,663) 20,723 Materialsandsuppliesinventory (3,922) 18,080 (34,881) Prepaidincometaxes 479,129 (479,034) 152,977 Prepaidexpenses (92,624) (178) (1,224) Otherassets,net (312,873) (332,634) (335,856) Accountspayable (74,593) (23,226) 123,387 Accruedandotherliabilities (22,599) 515 (866) Deferredcredits (227) (454) 631Netcashprovidedbyoperatingactivities 2,774,150 1,897,625 2,370,898

CASHfLOwSfROmINvESTINgACTIvITIES: Additionstoutilityandnon-utilityplant (2,453,437) (1,951,872) (1,531,262) Proceedsfromdevelopers’contributions,netofrefunds 174,136 (43,232) Additionstopreliminarysurveyandinvestigationcharges (43,673) (111,808) (78,054)Netcashusedininvestingactivities (2,497,110) (1,889,544) (1,652,548)

CASHfLOwSfROmfINANCINgACTIvITIES: Proceedsfromissuanceoflong-termdebt — 3,000,000 — Repaymentoflong-termdebt (255,000) (255,000) (255,000) Dividendsdeclared (630,720) (596,160) (522,720)Netcashprovidedby(usedin)financingactivities (885,720) 2,148,840 (777,720)

NETCHANgEINCASHANDCASHEQUIvALENTS (608,680) 2,156,921 (59,370)

Cashandcashequivalents,beginning $2,748,587 $591,666 $651,036

CASHANDCASHEQUIvALENTS,ENDINg $2,139,907 $2,748,587 $591,666


StatementS of caSh flowSFOR thE yEARS ENDED DECEMBER 31, 2012, 2011 AND 2010


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1. sUMMARY of siGnificAnT AccoUnTinG Policies general The Torrington Water company (the “company”) is a public utility that provides water sources to approximately 9,600

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 liabili-ties 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, 2012, 2011 and 2010 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. in 2010, the company purchased nonutility land for $123,429 and retired nonutility plant with a book value of $58,407 which is reported as a loss on the 2010 statement of income and retained earnings.

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 $9,637,946, $9,666,232, $9,422,344, as of december 31, 2012, 2011 and 2010, 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.

2012 2011 2010IntangiblePlant $196,434 $196,434 $196,434SourceofSupply 2,059,985 1,862,015 1,852,075Pumping 2,042,990 1,944,933 1,935,299WaterTreatment 10,747,894 10,693,381 10,662,674TransmissionandDistribution 37,057,642 35,450,443 33,645,255GeneralPlant 2,101,761 1,860,068 1,853,939ConstructionWorkinProgress 82,535 5,161 9,400Propertyheldforfutureuse 212,343 212,343 212,343TOTALUTILITyPLANT $54,501,584 $52,224,778 $50,367,419

The TorringTon WaTer Company / noTes To finAnciAl sTATeMenTs / deceMBeR 31, 2012




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1. sUMMARY of siGnificAnT AccoUnTinG Policies (continued) accounts receivableThe 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.

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, 2012, 2011 and 2010:

OriginalCost 2012 2011 2010 AmortizableperiodEnds2001tankpainting $58,252 $3,880 August,2011Customersurvey 17,792 1,779 5,337 July,20122002tankpainting 98,949 9,121 19,021 November,2012Ratecasecosts 141,786 $21,273 49,629 77,985 September,2013SeriesFbondissuecosts 153,960 46,188 61,584 76,980 December,2015Costofservicestudy 40,462 23,266 27,312 31,358 September,2018Deferredfinancecosts 8,554 5,604 7,374 February,20162006tankpainting 240,739 83,792 107,733 131,673 July,20162009tankpainting 262,866 195,989 217,894 239,800 November,20212010tankpainting 318,456 254,322 280,860 307,398 July,20222011tankpainting 145,227 131,108 143,210 October,20232011tankpainting 160,346 144,757 158,119 October,2023CrystalLakedamrepair 247,978 235,192 247,978 May,2022LitchfieldStreettankpainting 97,903 96,443 October,2024SoapstoneHilltankpainting 191,694 188,962 October,2024Prepaidincometaxes 396,468 1,815 2,040 7,690 VariousHighlandAvetankpainting 4,889 4,889 4,889 NotyetamortizableSupplyplanupdateIII 52,536 52,536 41,584 41,399 NotyetamortizableOtherdeferredcosts 29,899 29,899 29,899 29,454 Notyetamortizable2013customersurvey 10,711 10,711 NotyetamortizableTotalotherassets $1,526,746 $1,391,005 $971,975

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. 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 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, 2012, 2011 and 2010 is estimated to be $100,300, $101,700, and $112,000, 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 recognitionRevenues 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.


1. sUMMARY of siGnificAnT AccoUnTinG Policies (continued)

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. 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 4.83% 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 3.

long-term debt is comprised of the following: December31, 2012 2011 2010

Notepayable,bank $3,000,000 $3,000,000 —

SeriesFbonds 6,970,000 7,225,000 $7,480,000

Lessduewithinoneyear Netlong-termportiondue $9,715,000 $9,970,000 $7,225,000 3. 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 (3.25% at december 31, 2012) and expires in May 2013. Any advances on the loc are secured by substantially all assets of the company. There were no outstanding advances at december 31, 2012. 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, 2012.

4. 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, 2012, 2011 and 2010:

2012 2011 2010 DeferredRevenues $100,759 $100,936 $51,390

Developers’Advances&Deposits 5,000 5,000 5,000

TotalOtherDeferredCredits $105,709 $105,936 $56,390

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, 2012, 2011 and 2010 was $121,918, $115,594, and $115,134, respectively. The company also sponsors a 401(k) plan for employees to which it contributed $9,049, $8,575 and $8,349 for the years ended december 31, 2012, 2011 and 2010, respectively.



(255,000)(255,000)(255,000)


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, 2012, 2011 and 2010 was $66,205, $66,669 and $65,334, 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 $1,862,439, $1,685,736 and $1,554,166 as of december 31, 2012, 2011 and 2010, 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. 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, 2012, 2011 and 2010:

2012 2011 2010

Accumulatedpostretirementbenefit

obligation(APBO) $2,444,963 $2,113,540 $1,692,438

Lessfairvalueofplanassets — — —

APBOinexcessoffairvalueofplanassets 2,444,963 2,113,540 1,692,438

Unrecognizedamounts:

Transitionobligation 19,606 39,212 58,817

Priorservicecost 33,255 35,917 38,580

Unrecognized(gain)/loss 529,663 352,675 40,875

582,524 427,804 138,272

Unfundedpostretirementbenefitsatendoftheyear $1,862,439 $1,685,736 $1,554,166

The net periodic postretirement benefit cost for 2012, 2011 and 2010 includes the following components:

2012 2011 2010 Servicecost-benefitattributedto

serviceduringtheyear $115,538 $89,584 $57,626

InterestCost 96,604 91,192 81,958

Amortizationsof:

Unrecognizedgainorloss 8,498

Transitionobligation 19,606 19,605 19,605

Priorservicecost 2,662 2,663 2,663

Recognizednet(gain) — — (1,634)

TotalCost $242,908 $203,044 $160,218

The weighted-average assumed discount rate used to measure the APBo was 4.15% for 2012, 4.65% for 2011, and 5.50% for 2010. 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% 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, 2012 by $454,544 and would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $46,958. Accordingly, subsequent changes in the assumed rates will increase or decrease the deferred regulatory assets and liabilities mentioned above.

7. TAXes oTheR ThAn incoMe TAXes Taxes other than income taxes for the years ended december 31, 2012, 2011 and 2010 are as follows:

2012 2011 2010 PropertyTaxes $714,225 $694,861 $681,871 PayrollTaxes 79,535 76,758 74,570 TotalTaxesotherthanIncomeTaxes 793,760 771,619 756,441 Lessamountscapitalized (13,429) (11,358) (11,230) NetTaxesOtherthanIncomeTaxes $780,331 $760,261 $745,211


9


8. incoMe TAXes income tax expense for the years ended december 31, 2012, 2011 and 2010 are as follows: 2012 2011 2010 Federal state Total Total Total income Taxes Accrued $ 47,399 $ 22,738 $ 70,137 $ (163,498) $ 404,397 Related to taxable/refundable contributions in Aid of construction: (1,295) (309) (1,604) (17,536) (14,551) net Attributed to operations 46,104 22,429 68,533 (181,034) 389,846 deferred income Taxes 445,900 445,900 633,600 247,700 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 $ 489,199 $ 22,525 $ 511,724 $ 449,857 $ 634,837 less Attributed to other income (69,818) (54,583) (63,054) 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 2009, except for certain amended state tax returns for 2008 as discussed below, are no longer subject to examination by taxing authorities.

Uncertain tax positions:in 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, 2012 balance sheet. The company’s 2012 tax provision includes fcic credits 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.

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 2012, 2011 and 2010 the amount of these purchases approximated $138,300, $134,000, and $208,000, respectively.

10. 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 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 2012 2011 2010 interest paid $ 543,355 $ 505,662 $ 426,004

income taxes paid $ 175,250 $ 298,000 $ 422,318

12. sUBseqUenT eVenTs in 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. Management has evaluated subsequent events through January 28, 2013, the date which the financial statements were available for issue.



$ 441,906 $ 395,274 $ 571,783


This information is not part of the Audited Financial Statements

2002 200420062008 2010 2012

eQUItY VS deBt

EQUITY

DEBT

16–

14–

12–

10–

8–

6–

4–

2–

0–

Millions

$9.74

$10.98

$12.31$13.35

$9.09$8.40 $8.50

$7.99

$14.49

$7.48

$15.13

$9.97

11

earnIngS Per Share

2002 2003 2004 2005 2006 2007 20082009201020112012

$2.55$2.59

$2.25

$1.75

$2.41

$2.17

$2.36

$2.01

$2.40

dIVIdendS Per Share

2002 2003200420052006 200720082009201020112012

$0.46$0.56

$0.73

$0.89

$0.79

$0.94$1.02

$1.10

$1.21

$1.38

$2.15

nUmBer of cUStomerS

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

8885

8997

9108

9417

9306

9516

9550

9573

9607

9637

7–

6–

5–

4–

3–

2–

1–

Millions

20022003200420052006200720082009201020112012

oPeratIng reVenUe VS o & m exPenSeS

REvENUES

ExpENSES

5.14

1.76

5.33

2.04

5.32

2.01

5.42

1.99

5.36

2.08

5.36 5.49

2.28

5.89

2.20

5.99

2.27

1.84

5.85

2.33

Book ValUe Per ShareBaSed on 432,000 ShareS

2002 2003200420052006 200720082009201020112012

$22.55 $23.74 $25.42 $26.80 $28.50 $29.92 $30.91 $32.36 $33.54 $34.31

The TorringTon WaTer Company / AnnUAl RePoRT / deceMBeR 31, 2012

$2.18

$1.46

5.95

2.32

$35.03

9665


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fInancIal 2012 2011 2010 2009 2008

Income OperatingRevenues $5,958,762 $5,855,145 $5,995,020 $5,893,016 $5,495,622

O&MExpenses 2,315,345 2,327,360 2,267,843 2,204,079 2,283,524

OperatingIncome 1,370,811 1,365,947 1,430,387 1,467,264 1,254,544

NetIncome 942,360 927,654 1,035,341 1,099,700 868,720

BalanceSheet Stockholders’Equity $15,134,253 $14,822,613 $14,491,119 $13,978,498 $13,353,998

LongTermDebt $9,970,000 $10,225,000 $7,480,000 $7,735,000 $7,990,000

Stockholders’Equity% 60.3 59.8 66.0 64.4 62.6

LongTermDebt% 39.7 40.2 34.0 35.6 37.4

NetUtilityPlant $37,661,252 $36,207,506 $35,181,391 $34,727,695 $34,501,461

EarningsPerShare* 2.18 2.15 2.40 2.55 2.01

DividendPerShare* 1.46 1.38 1.21 1.10 1.02

BookValuePerShare* 35.03 34.31 33.54 32.36 30.91

*Persharedatabasedon432,000shares

oPeratIonal

2012 2011 2010 2009 2008

MilesofMain 163 163 162 162 162

NumberofHydrants 920 919 914 915 913

GallonsProduced(Thou.) 918,367 938,601 989,924 1,013,388 978,856

GallonsSold(Thou.)

Residential 531,832 539,669 559,522 548,748 557,453

Commercial 140,850 142,146 146,506 137,644 147,367

Industrial 12,894 14,910 16,781 14,482 18,879

NumberofCustomers 9,665 9,637 9,607 9,573 9,550

NumberofEmployees 16 16 16 16 16

This information is not part of the Audited Financial Statements

fIVe-Year Selected data




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The mission of The Torrington Water Companyis to reliably and cost-effectively provide clean water to its customers while acting inthe best interest of its shareholders.


The TorringTon WaTer Company 277 norfolk Road Po Box 867

Torrington cT 06790 (860) 489-4149


Documents

Annual%202012_TWC