Annual%202012_TWC

The Torrington Water 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 n c e 1880

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THE TORRINGTON WATER COMPANY /

Annual Report

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 Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements

DIRECTORS

OFFICERS

Edwin G. Booth, Jr.

Susan M. Suhanovsky President

Steven F. Cerruto Vice President / Operations

Catherine C. Roscello Secretary / Treasurer

Richard D. Calhoun Diane V. Libby James M. Lucas Gregory S. Oneglia Andrew W. Roraback Charles W. Roraback

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.

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 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 Auditor The 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 Accountant January 28, 2013 Shelton, Connecticut

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THE TORRINGTON WATER COMPANY president’s message To Our Stockholders:

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

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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 Results Our 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 Developments We 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

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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 Ahead For 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

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THE TORRINGTON WATER COMPANY /

Annual Report

Balance Sheets AS OF DECEMBER 31, 2012, 2011 AND 2010

ASSETS

2012

Utility plant, at cost

$ 52,224,778 16,017,272 36,207,506

372,935

368,185

368,185

2,139,907 448,058 734,000 140,126 180,078 174,422 3,816,591

2,748,587 672,752 708,000 136,204 659,207 81,798 5,006,548

591,666 422,795 710,000 154,284 180,173 81,620 2,140,538

1,526,746 154,858 1,285,700 1,862,439 4,829,743 $ 46,680,521

1,391,005 157,723 1,264,000 1,685,736 4,498,464 $ 46,080,703

971,975 361,518 1,250,000 1,554,166 4,137,659 $ 41,827,773

Nonutility property, net of accumulated depreciation

Current assets: Cash and cash equivalents Accounts receivable Accrued unbilled revenues Materials and supplies inventory Prepaid income taxes Prepaid expenses Total current assets

Other assets: Other deferred debits

Preliminary survey and investigation charges Regulatory asset-income taxes recoverable Unfunded postretirement benefits

Total other assets TOTAL ASSETS

2010

$ 54,501,584 16,840,332 37,661,252

Less: accumulated depreciation Net utility plant

2011

$ 50,367,419 15,186,028 35,181,391

STOCKHOLDERS’ EQUITY AND LIABILITIES

Stockholders’ equity: Common stock, no par; 1,000,000 shares authorized; 432,000 issued and outstanding

Retained earnings

Total stockholders’ equity

Long-term debt , net of current portion Current liabilities: Current portion of long-term debt

Accounts payable Accrued taxes Accrued interest Other current liabilities Total current liabilities

$ 1,800,000 13,334,253 15,134,253

$ 1,800,000 $ 1,800,000 13,022,613 12,691,119 14,822,613 14,491,119

9,715,000

9,970,000

7,225,000

255,000 318,414 354,351 162,053 106,165 1,195,983

255,000 388,629 345,077 167,981 132,110 1,288,797

255,000 ­ 411,855 338,253 173,910 132,490 1,311,508

5,470,388 1,862,439 105,709 3,329,504 8,025,577 1,841,668

5,006,493 1,685,736 105,936 3,474,358 7,970,031 1,756,739

4,362,598 1,554,166 56,390 3,311,816 7,844,167 1,671,009

20,635,285 $ 46,680,521

19,999,293 $ 46,080,703

Other credits:

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

Total other credits

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES

The accompanying notes are an integral component of these financial statements

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18,800,146 $ 41,827,773

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THE TORRINGTON WATER COMPANY /

Annual Report

Statements of Net Income and retained earnings For the years Ended DECEMBER 31, 2012, 2011 AND 2010

2012

2011

$ 5,958,762

$ 5,855,145

1,830,589 484,756 1,050,369 780,331 441,906 4,587,951

1,856,305 471,055 1,006,303 760,261 395,274 4,489,198

1,861,114 406,729 979,796 745,211 571,783 4,564,633

1,370,811

1,365,947

1,430,387

Operating revenues

2010 $ 5,995,020

Operating expenses: Operation expenses

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

Utility operating income

Other income and deductions: Merchandising and jobbing – net Interest income Loss from disposition of non-utility property

Miscellaneous non-operating income

Allowance for funds used during construction

Total other income and deductions

Taxes applicable to other income

Net other income and deductions

73,240 4,156 — 108,834 11,117 197,347

70,057 6,737 — 71,935 — 148,729

64,742 2,133 (58,407) 95,011 — 103,479

69,818 127,529

54,583 94,146

63,054 40,425

Income before interest expense

1,498,340

1,460,093

1,470,812

537,427 17,166 1,387 555,980

512,211 16,576 3,652 532,439

942,360

927,654

Interest expense:

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

Net Income

Dividends declared Retained earnings, beginning of year Retained earnings, end of year

Per share amounts:

418,570 15,396 1,505 435,471 1,035,341

(630,720) 13,022,613 $ 13,334,253

(596,160) 12,691,119 $ 13,022,613

(522,720) 12,178,498 $ 12,691,119

Net income

$ 2.18

$ 2.15

$ 2.40

Dividends declared

$ 1.46

$ 1.38

$ 1.21

Book value

$ 35.03

$ 34.31

$ 33.54

The accompanying notes are an integral component of these financial statements

4 The Torrington Water Company / Annual Report 2012

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THE TORRINGTON WATER COMPANY / Statements of Cash Flows For the years Ended DECEMBER 31, 2012, 2011 AND 2010

Annual Report

2012

2011

2010

CASH flows from operating activities: Net income

$ 942,360

$ 927,654

1,229,727 442,195 5,073 (11,117)

1,154,964 629,895 7,706

1,103,776 244,991 61,899

193,621 (3,922) 479,129 (92,624) (312,873) (74,593) (22,599) (227) 2,774,150

(5,663) 18,080 (479,034) (178) (332,634) (23,226) 515 (454) 1,897,625

20,723 (34,881) 152,977 (1,224) (335,856) 123,387 (866) 631 2,370,898

(2,453,437)

(43,673) (2,497,110)

(1,951,872) 174,136 (111,808) (1,889,544)

(1,531,262) (43,232) (78,054) (1,652,548)

— (255,000) (630,720) (885,720)

3,000,000 ­ (255,000) (596,160) 2,148,840

— (255,000) (522,720) (777,720)

Adjustments to reconcile net income to net cash provided by operating activites:

Depreciation and amortization

Deferred income taxes

Bad debt, non-utility property and project write-offs

Allowance for funds used during construction Changes in operating assets and liabilities:

Receivables and unbilled revenues

Materials and supplies inventory

Prepaid income taxes

Prepaid expenses

Other assets, net

Accounts payable

Accrued and other liabilities

Deferred credits Net cash provided by operating activities

$ 1,035,341

Cash flows from investing activities:

Additions to utility and non-utility plant

Proceeds from developers’ contributions, net of refunds

Additions to preliminary survey and investigation charges Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of long-term debt

Repayment of long-term debt

Dividends declared Net cash provided by (used in) financing activities

Net change in cash and cash equivalents

(608,680)

2,156,921

(59,370)

Cash and cash equivalents, beginning

$ 2,748,587

$ 591,666

$ 651,036

Cash and cash equivalents, ending

$ 2,139,907

$ 2,748,587

$ 591,666

The accompanying notes are an integral component of these financial statements

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THE TORRINGTON WATER COMPANY /

NOTES TO FINANCIAL STATEMENTS

/

DECEMBER 31, 2012

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 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, 2012, 2011 and 2010 consists of the following:

2012 Intangible Plant $ 196,434 Source of Supply 2,059,985 Pumping 2,042,990 Water Treatment 10,747,894 Transmission and Distribution 37,057,642 General Plant 2,101,761 Construction Work in Progress 82,535 Property held for future use 212,343 Total Utility Plant $ 54,501,584

2011

2010

$ 196,434 $ 196,434 1,862,015 1,852,075 1,944,933 1,935,299 10,693,381 10,662,674 35,450,443 33,645,255 1,860,068 1,853,939 5,161 9,400 212,343 212,343 $ 52,224,778 $ 50,367,419

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

Cash and Cash Equivalents

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.

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.

6 The Torrington Water Company / Annual Report 2012

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THE TORRINGTON WATER COMPANY /

NOTES TO FINANCIAL STATEMENTS

/

DECEMBER 31, 2012

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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.

Materials and Supplies Inventory

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

Other Assets

Costs of certain administrative projects relating to regulatory processes and costs of items which benefit more than one accounting period are deferred and amortized to income over their respective lives and/or periods allowed by PURA using the straight-line method.

Costs which are “not yet amortizable” may be entirely charged to income if and when the Company believes it is probable that PURA will not allow the Company to recover these costs through rates. The following costs have been deferred as of December 31, 2012, 2011 and 2010: Original Cost 2012 2011 2010 Amortizable Period Ends

2001 tank painting $ 58,252

Customer survey 17,792

2002 tank painting 98,949

Rate case costs 141,786 $ 21,273 Series F bond issue costs 153,960 46,188 Cost of service study 40,462 23,266 Deferred finance costs 8,554 5,604 2006 tank painting 240,739 83,792 2009 tank painting 262,866 195,989 2010 tank painting 318,456 254,322 2011 tank painting 145,227 131,108 2011 tank painting 160,346 144,757 Crystal Lake dam repair 247,978 235,192 Litchfield Street tank painting 97,903 96,443 Soapstone Hill tank painting 191,694 188,962 Prepaid income taxes 396,468 1,815 Highland Ave tank painting 4,889 4,889 Supply plan update III 52,536 52,536 Other deferred costs 29,899 29,899 2013 customer survey 10,711 10,711 Total other assets

$ 1,526,746

$ 3,880 1,779 5,337 9,121 19,021 49,629 77,985 61,584 76,980 27,312 31,358 7,374

107,733 131,673 217,894 239,800 280,860 307,398 143,210

158,119

247,978

2,040 7,690 4,889

41,584 41,399 29,899 29,454

$ 1,391,005 $ 971,975

August, 2011 July, 2012 November, 2012 September, 2013 December, 2015 September, 2018 February, 2016 July, 2016 November, 2021 July, 2022 October, 2023 October, 2023 May, 2022 October, 2024 October, 2024 Various Not yet amortizable Not yet amortizable Not yet amortizable Not yet amortizable

Preliminary Survey and Investigation Charges

Costs of studies for specific construction projects are deferred until the start of the project at which time the costs are capitalized.

If a project is abandoned or if it is determined that any of these costs may not be allowed to be recovered in future rates by PURA, the accumulated costs relating to that project are written off during the year of abandonment or determination.

Income Taxes

Deferred income taxes are provided for the expected future tax consequences of events that have been included in the financial statement or tax returns. 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 Construction

In certain cases real estate developers and others advance funds to the Company for the construction of water main extension projects. A portion of these funds are potentially refundable, without interest, usually within a ten year period. Advances which have not been refunded within this period are reclassified to Contributions in Aid of Construction. The potential amount refundable on completed projects as of December 31, 2012, 2011 and 2010 is estimated to be $100,300, $101,700, and $112,000, respectively.

Amortized Contributions in Aid of Construction

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

Revenue Recognition

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.

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THE TORRINGTON WATER COMPANY /

NOTES TO FINANCIAL STATEMENTS

/

DECEMBER 31, 2012

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 DEBT

The 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:

2012 Note payable, bank Series F bonds Less due within one year Net long-term portion due

December 31, 2011

2010

$ 3,000,000 $ 3,000,000 — 6,970,000 7,225,000 $ 7,480,000 (255,000) (255,000) (255,000) $ 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 CREDITS

Other 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:

Deferred Revenues Developers’ Advances & Deposits Total Other Deferred Credits

2012 $ 100,759 5,000 $ 105,709

2011

2010

$ 100,936 $ 51,390 5,000 5,000 $ 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.

8 The Torrington Water Company / Annual Report 2012

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THE TORRINGTON WATER COMPANY /

Accumulated postretirement benefit obligation (APBO) $ 2,444,963 Less fair value of plan assets — APBO in excess of fair value of plan assets 2,444,963 Unrecognized amounts:

Transition obligation 19,606

Prior service cost 33,255

Unrecognized (gain) / loss 529,663

582,524 Unfunded postretirement benefits at end of the year $ 1,862,439

DECEMBER 31, 2012

service during the year

Interest Cost

Amortizations of:

Unrecognized gain or loss

Transition obligation

Prior service cost

Recognized net (gain) Total Cost

$ 2,113,540 — 2,113,540

$ 1,692,438 — 1,692,438

39,212 35,917 352,675 427,804 $ 1,685,736

58,817 38,580 40,875 138,272 $ 1,554,166

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

Service cost-benefit attributed to

/

6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company pays the health care premiums for its retirees and their spouses. The amount of these premiums paid on behalf of current retirees during the years ended December 31, 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

NOTES TO FINANCIAL STATEMENTS

2012

2011

2010

$ 115,538 96,604

$ 89,584 91,192

$ 57,626 81,958

8,498 19,606 2,662 — $ 242,908

19,605 2,663 — $ 203,044

19,605 2,663 (1,634) $ 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:

Property Taxes Payroll Taxes Total Taxes other than Income Taxes Less amounts capitalized Net Taxes Other than Income Taxes

2012 $ 714,225 79,535 793,760 (13,429) $ 780,331

2011 $ 694,861 76,758 771,619 (11,358) $ 760,261

2010 $ 681,871 74,570 756,441 (11,230) $ 745,211

9

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THE TORRINGTON WATER COMPANY /

NOTES TO FINANCIAL STATEMENTS

/

DECEMBER 31, 2012

8. INCOME TAXES

Income tax expense for the years ended December 31, 2012, 2011 and 2010 are as follows:

2012

Federal State Total Income Taxes Accrued

$ 47,399 $ 22,738 $ 70,137 Related to taxable/refundable Contributions in Aid of Construction: (1,295) (309) Net Attributed to Operations 46,104 22,429 Deferred Income Taxes 445,900 Normalization of Prepaid Income Taxes 900 96

Normalization of Investment Credits (3,705) —

Total Income Taxes $ 489,199 $ 22,525 $

Less Attributed to Other Income

Net Charged to Utility Operations $

2011

2010

Total Total $ (163,498)

$

404,397

(17,536) (181,034) 633,600

996 (3,705) $ 449,857

(14,551) 389,846 247,700

996 (3,705) $ 634,837

(1,604) 68,533 445,900 996 ( 3,705) 511,724

(69,818) 441,906 $

(54,583) 395,274

$

(63,054) 571,783

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

Interest paid

Income taxes paid

12. Subsequent events

2011

2010

$

543,355

$

505,662

$

426,004

$

175,250

$

298,000

$

422,318

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.

10 The Torrington Water Company / Annual Report 2012

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THE TORRINGTON WATER COMPANY /

/

Annual Report

DECEMBER 31, 2012

$1.46 $1.38 $1.21

DIVIDENDS PER SHARE $0.89 $0.73

$1.02

$0.94

$1.10

$0.79

$0.56 $0.46

EQUITY VS DEBT 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EQUITY DEBT

EARNINGS PER SHARE Millions $2.25

16– 14–

$2.40 $2.01

$2.15

$2.18

$1.75

$13.35

$12.31

12–

$2.55 $2.36

$2.17

$15.13

$14.49

10–

$2.59

$2.41

$10.98

2002

$9.97

$9.74 $9.09

$8.50

$8.40

8–

$7.99

2003

2004

2005

2006

2007

2008 2009 2010 2011 2012

$7.48

Book Value Per Share Based on 432,000 Shares

6– 4–

$25.42 $22.55 $23.74

2–

$33.54 $34.31 $35.03 $29.92 $30.91 $32.36 $26.80 $28.50

0– 2002

2004 2006 2008

2010

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2012

Number of Customers

Operating Revenue VS O & M Expenses

2002

Revenues

2003

Expenses

2004

Millions 7–

2005

6– 5–

5.33

5.14

5.42 5.32

5.36

5.49

5.36

5.99

5.89

5.85

2–

1.76

2.04

1.84

2.01

1.99

2.08

2.28

2.20

2.27

2.33

2006

2.32

1–

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TWC AR 2013 final .indd 13

9108 9306 9417

2007

9516

2008

9550

2009

9573

2010 2011

This information is not part of the Audited Financial Statements

8997

5.95

4– 3–

8885

2012

9607 9637 9665

11

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THE TORRINGTON WATER COMPANY / Five-Year Selected DATa

Annual Report

/

DECEMBER 31, 2012

FINANCIAL

2011

2010

$ 5,958,762 2,315,345 1,370,811 942,360

$ 5,855,145 2,327,360 1,365,947 927,654

$ 5,995,020 2,267,843 1,430,387 1,035,341

$ 5,893,016 2,204,079 1,467,264 1,099,700

$ 5,495,622 2,283,524 1,254,544 868,720

Stockholders’ Equity $ 15,134,253

Long Term Debt $ 9,970,000

Stockholders’ Equity % 60.3

Long Term Debt % 39.7

Net Utility Plant $ 37,661,252

Earnings Per Share* 2.18

Dividend Per Share* 1.46

Book Value Per Share* 35.03 * Per share data based on 432,000 shares

$ 14,822,613 $ 10,225,000 59.8 40.2 $ 36,207,506 2.15 1.38 34.31

$ 14,491,119 $ 7,480,000 66.0 34.0 $ 35,181,391 2.40 1.21 33.54

$ 13,978,498 $ 7,735,000 64.4 35.6 $ 34,727,695 2.55 1.10 32.36

$ 13,353,998 $ 7,990,000 62.6 37.4 $ 34,501,461 2.01 1.02 30.91

2011

2010

163 919 938,601

539,669 142,146 14,910 9,637 16

162 914 989,924

559,522 146,506 16,781 9,607 16

2012

2009

2008

Income

Operating Revenues O & M Expenses Operating Income Net Income

Balance Sheet

Miles of Main Number of Hydrants Gallons Produced (Thou.)

Gallons Sold (Thou.)

Residential

Commercial

Industrial Number of Customers Number of Employees

2012 163 920 918,367

531,832 140,850 12,894 9,665 16

2009 162 915 1,013,388

548,748 137,644 14,482 9,573 16

2008 162 913 978,856

557,453 147,367 18,879 9,550 16

This information is not part of the Audited Financial Statements

12 The Torrington Water Company / Annual Report 2012

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Design: Rhode vanGessel Design, Essex CT Printing: Rainbow Press, Torrington, CT

OPERATIONAL

Design: Rhode vanGessel Design, Essex CT Printing: Rainbow Press, Torrington, CT

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.

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The Torrington Water Company 277 Norfolk Road PO Box 867 Torrington CT 06790 (860) 489-4149

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