THE TORRINGTON WATER COMPANY Financial Statements December 31, 2021, 2020 and 2019
Independent Auditors’ Report Board of Directors and Shareholders The Torrington Water Company Torrington, Connecticut Opinion We have audited the accompanying financial statements of The Torrington Water Company (the “Company”), which comprise the balance sheets as of December 31, 2021, 2020 and 2019, 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. 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, 2021, 2020 and 2019, 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. Basis for Opinion We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Responsibilities of Management 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, and for 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. Auditors’ Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
Board of Directors and Shareholders The Torrington Water Company Page 2 In performing an audit in accordance with generally accepted auditing standards, we:
Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
Shelton, Connecticut March 9, 2022
THE TORRINGTON WATER COMPANY Balance Sheets
ASSETS Utility plant, at cost Less: accumulated depreciation Net utility plant Nonutility property, net of accumulated depreciation Current Assets Cash and cash equivalents Accounts receivable Accrued unbilled revenues Regulatory asset-water revenue adjustment, current portion Materials and supplies inventory Prepaid expenses Total Current Assets Other Assets Other assets Preliminary survey and investigation charges Regulatory asset-income taxes recoverable Regulatory asset-water revenue adjustment, net of current portion Regulatory asset-unfunded postretirement benefits Total Other Assets Total Assets
See notes to financial statements 3
2021
December 31, 2020
2019
$74,999,793 26,458,744 48,541,049
$71,847,851 25,210,076 46,637,775
$69,057,611 24,139,469 44,918,142
202,624
372,935
372,935
1,577,648 554,416 876,500
2,781,302 757,705 858,000
1,064,441 518,129 821,000
627,149 196,635 168,630 4,000,978
631,461 369,507 183,413 5,581,388
707,560 300,436 132,139 3,543,705
1,924,448 154,216 7,375,800
1,976,334 154,216 6,855,660
2,306,894 230,862 6,476,000
146,373
142,065
154,160
3,371,985 12,972,822
3,205,165 12,333,440
3,038,255 12,206,171
$65,717,473
$64,925,538
$61,040,953
THE TORRINGTON WATER COMPANY Balance Sheets (continued)
2021
December 31, 2020
STOCKHOLDERS’ EQUITY AND LIABILITIES Stockholders’ Equity Common stock, no par; 1,000,000 shares authorized; 864,000 issued and outstanding Retained earnings Total Stockholders’ Equity
$ 1,800,000 21,930,762 23,730,762
$ 1,800,000 21,326,808 23,126,808
$ 1,800,000 20,524,284 22,324,284
Long-term debt, net
12,305,080
12,656,619
10,515,289
360,000 191,921 501,964 173,400 113,561 1,340,846
360,000 586,707 695,550 179,520 131,691 1,953,468
360,000 329,619 611,538 185,640 133,408 1,620,205
Current Liabilities Current portion of long-term debt Accounts payable Accrued taxes Accrued interest Other current liabilities Total Current Liabilities
2019
Other Liabilities Deferred income taxes Regulatory liability-excess deferred income taxes Unfunded postretirement benefits Customer advances for construction Contributions in aid of construction Amortized contributions in aid of construction Total Other Liabilities
9,589,665
8,889,230
8,416,575
1,139,918 3,371,985 506,436 11,078,991 2,653,790 28,340,785
1,200,609 3,205,165 544,075 10,772,973 2,576,591 27,188,643
1,261,300 3,038,255 515,481 10,850,172 2,499,392 26,581,175
Total Stockholders’ Equity and Liabilities
$65,717,473
$64,925,538
$61,040,953
See notes to financial statements 4
THE TORRINGTON WATER COMPANY Statements of Income and Retained Earnings Year Ended December 31, 2021 2020 2019 OPERATING REVENUES Contracts with customers Alternative revenue programs Total Operating Revenues
$ 6,934,525 900,619 7,835,144
$ 6,956,272 762,420 7,718,692
$ 6,268,405 1,211,817 7,480,222
2,485,521 703,589 1,217,968 1,382,016 133,200 5,922,294
2,570,359 698,831 1,170,187 1,333,810 135,900 5,909,087
2,381,493 647,629 1,146,922 1,319,487 74,200 5,569,731
1,912,850
1,809,605
1,910,491
123,068 2,411 247,496
123,170 2,212 192,286
116,208 4,025 160,412
42,306 415,281 33,604 381,677
276,057 26,707 620,432 28,604 591,828
10,905 291,550 21,055 270,495
2,294,527
2,401,433
2,180,986
489,624 8,461 168 498,253
466,235 7,998 1,476 475,709
446,760 7,350 1,538 455,648
1,796,274
1,925,724
1,725,338
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 Miscellaneous non-operating income Gain on forgiveness of Paycheck Protection Program loan Allowance for funds used during construction Total Other Income and Deductions Taxes applicable to other income Net Other Income and Deductions Income Before Interest Expense Interest Expense Interest on long-term debt Amortization of deferred financing costs Other interest Total Interest Expense Net Income RETAINED EARNINGS Dividends declared Retained earnings, beginning Retained earnings, ending
(1,192,320) 21,326,808 $21,930,762
PER SHARE AMOUNTS Net income, basic Dividends declared Book value
$ $ $
See notes to financial statements 5
2.08 1.38 27.47
(1,123,200) 20,524,284 $21,326,808
(1,080,000) 19,878,946 $20,524,284
$ $ $
$ $ $
2.23 1.30 26.77
2.00 1.25 25.84
THE TORRINGTON WATER COMPANY Statements of Cash Flows Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization Amortization of deferred financing costs Deferred income taxes Bad debt, nonutility property, and project write-offs Allowance for funds used during construction Paycheck Protection Program loan forgiveness Changes in operating assets and liabilities Receivables and unbilled revenues Regulatory asset-water revenue adjustment Materials and supplies inventory Prepaid expenses Other assets Accounts payable Accrued and other liabilities Regulatory liability-excess income taxes Net Cash From Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Additions to utility plant Cash from disposition of assets Proceeds from developers’ contributions, net of refunds Additions to preliminary survey and investigation charges Net Cash From Investing Activities
$1,796,274
$1,925,724
$1,725,338
1,474,564 8,461 119,604
1,767,805 7,998 32,304
1,434,200 7,350 35,895
9,136 (42,306) -
9,786 (26,707) (276,057)
16,396 (10,905) -
175,653 4 172,872 14,783 (199,202) (394,776) (217,836) 2,917,231
(286,362) 88,194 (69,071) (51,274) (240,382) 256,366 76,175 3,214,499
(13,875) 49,187 (78,329) (16,026) (206,130) 152,046 14,324 (26,982) 3,082,489
(2,914,143) -
(2,532,384) -
(2,207,072) 14,000
345,578
CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt Proceeds from the issuance of long-term debt Net proceeds from Paycheck Protection Program loan Deferred finance costs Dividends declared Net Cash From Financing Activities Net Change in Cash and Cash Equivalents CASH AND CASH EQUIVALENTS Beginning of year End of year
See notes to financial statements 6
29,315
96,048
(2,568,565)
(280,308) (2,783,827)
(58,584) (2,155,608)
(360,000) -
(360,000) 2,500,000
(360,000) -
(1,192,320) (1,552,320)
276,057 (6,668) (1,123,200) 1,286,189
(1,080,000) (1,440,000)
(1,203,654)
1,716,861
2,781,302 $1,577,648
1,064,441 $2,781,302
(513,119) 1,577,560 $1,064,441
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 1. Description of the Company The Torrington Water Company (the “Company”) is a public utility that provides water sources to approximately 10,000 customers in the city of Torrington and the towns of Burlington, Harwinton, Litchfield and New Hartford, Connecticut. As a public utility operating in Connecticut, the Company functions under rules and regulations prescribed by the State of Connecticut Public Utilities Regulatory Authority (“PURA”). 2. Summary of Significant Accounting Policies Basis of Presentation 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 (“US GAAP”), which include the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 980, Regulated Operations (“ASC 980”). Under ASC 980, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate setting process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the statement of income in the period in which the same amounts are reflected in rates charged for service. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accordingly, actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash balances held in bank accounts and highly liquid debt instruments with maturities of three months or less at the time of purchase. From time to time, the Company has on deposit at financial institutions cash and cash equivalents which exceed current federal deposit insurance limitations. The Company has not experienced any losses in such accounts to date and believes it is not exposed to any significant credit risk on cash and cash equivalents. As of December 31, 2021, 2020 and 2019, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation insured limits by $826,448, $2,030,102, and $563,241, respectively.
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 2. Summary of Significant Accounting Policies (continued) Accounts Receivable Accounts receivables are stated at the amount management expects to collect from outstanding balances. 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. Past due accounts are written off by management when collection efforts have been exhausted on a case-by-case basis. Accounts receivable on December 31, 2021, 2020, and 2019 is comprised solely of amounts due from customers related to regulated tariff-based sales of water. Management has determined that an allowance for uncollectable accounts was not required as of December 31, 2021, 2020, and 2019. 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, 2021, 2020 and 2019 consists of the following: Intangible plant Source of supply Pumping Water treatment Transmission and distribution General plant Construction work in progress Property held for future use Total Utility Plant
2021 236,404 2,546,255 2,549,139 12,427,018 53,611,130 3,355,195 997 273,655 $74,999,793 $
2020 236,404 2,492,372 2,438,958 11,963,720 50,880,052 2,931,151 662,332 242,862 $71,847,851 $
2019 236,404 2,462,247 2,420,808 11,863,155 48,960,064 2,846,387 25,684 242,862 $69,057,611 $
Nonutility Plant The Company owns land, buildings, and equipment with an original cost of $202,624 that is not currently used in utility service. 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 income.
8
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 2. Summary of Significant Accounting Policies (continued) Materials and Supplies Inventory Materials and supplies inventory, which is stated at the lower of cost or market using the weighted average cost method, is primarily for the construction and maintenance of utility plant. Other Assets Costs of certain administrative projects relating to regulatory processes and costs of items which benefit more than one accounting period are deferred and amortized to income over their respective lives and/or periods allowed by PURA using the straight-line method. Costs which are “not yet amortizable” may be entirely charged to income if and when the Company believes it is probable that PURA will not allow the Company to recover these costs through rates. Amortization expense charged to operations in 2021, 2020, and 2019 was $251,088, $570,941, and $243,370, respectively. The following costs have been deferred as of December 31, 2021, 2020 and 2019:
2009 tank painting 2010 tank painting 2011 tank painting 2011 tank painting Crystal Lake dam repair Litchfield Street tank painting Soapstone Hill tank painting Prepaid income taxes Highland Avenue tank painting Supply plan update III Other deferred costs Docket 13-01-29 West Pearl Road tank painting - outside West Pearl Road tank painting - inside 2015 tank painting Deferred sales tax Woodridge Lake Future tank paintings Docket 18-01-15 Highland Avenue tank painting 2019 Settlement Agreement Hydraulic model COVID -19 costs 2021 Water Supply Plan 2021 Risk and Resilience Plan Total Other Assets
Original Cost $262,866 318,456 145,227 160,346 263,321 267,997 191,694 Various 291,911 61,240 59,795 8,352
2021 $ 12,206 34,379 41,090 42,763 25,750 206,554 57,627 (69,996) 124,423 3,403 8,352
2020 $ 34,111 60,917 53,192 56,125 50,726 44,610 73,596 (28,567) 148,749 10,207 8,352
2019 $ 42,651 68,558 46,394 51,222 75,702 39,395 77,181 (25,084) 164,199 17,011 8,970 8,352
284,349
108,807
132,503
138,255
338,708 252,213 174,770 308,543 Various 22,135 179,201 7,756 31,963 22,335 14,535 29,706
230,185 131,869 174,770 516,970 22,135 151,354 3,268 31,963 22,335 14,535 29,706 $1,924,448
261,281 152,887 154,793 516,970 22,135 168,981 6,537 31,963 16,266 $1,976,334
274,402 164,639 121,943 308,543 516,970 22,135 177,732 7,756 $2,306,894
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Amortization Period Ends November 2021 July 2022 October 2023 October 2023 May 2022 October 2024 October 2024 Various September 2026 June 2022 Not yet amortizable October 2025 November 2029 October 2027 Not yet amortizable Not yet amortizable Not yet amortizable January 2031 Not yet amortizable Not yet amortizable Not yet amortizable Not yet amortizable Not yet amortizable
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 2. Summary of Significant Accounting Policies (continued) 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. Abandoned costs charged to operations in 2021, 2020, and 2019 was $0, $16,531, and $43,908, respectively. Revenue Recognition Contracts with Customers Substantially all the Company’s revenues are generated from regulated tariff-based sales of water. The Company’s performance obligation is comprised of a stand-ready obligation to deliver water as well as the actual delivery of water to residential, commercial, industrial, public authority, and fire protection customers. The stand-ready obligation is continuous in nature and revenue is recognized through the passage of time in the form of a fixed rate. Revenue from the transfer of water is recognized at a point in time based on the actual flow of water through the meter using tariffs established by PURA through the rate-making process. Customer payment terms are typically less than one year and as such, the Company has applied the practical expedient to exclude consideration of significant financing components from the determination of the transaction price. Costs to obtain a contract are generally immaterial, but the Company has elected the practical expedient to expense these costs as incurred if the amortization period of the capitalized cost would be one year or less. As permitted, the Company has applied a portfolio approach to evaluating the customer's ability to pay, rather than evaluating each customer's ability to pay separately. Depreciation The Company uses the straight-line method of depreciation over the estimated service lives of depreciable plant ranging from 5 to 75 years as approved by PURA. No depreciation for financial statement purposes is charged to income relating to utility plant constructed with developers’ contributions after 1988 as PURA does not allow the Company to recover this expense through rates. The cost of this plant, offset by an equal corresponding amount reported within Customers’ Advances for Construction, Contributions in Aid of Construction and Amortized Contributions in Aid of Construction is $10,663,391, $10,325,622, and $10,289,580, as of December 31, 2021, 2020 and 2019, respectively.
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 2. Summary of Significant Accounting Policies (continued) Income Taxes Deferred income taxes are provided for the expected future tax consequences of events that have been included in the financial statements or tax returns, on a normalized basis. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Deferred income taxes result principally from the use of accelerated depreciation for income tax purposes, deferring investment tax credits for financial reporting purposes, and the future benefits to be recognized upon the utilization of operating loss carryforwards. Deferred tax assets not expected to be realized are reduced by a valuation allowance. Additionally, the Company provides a regulatory asset for income tax benefits (primarily federal and state income tax reductions due to tangible property regulations and state income tax reductions due to accelerated depreciation) which have been flowed through to the ratepayers under PURA ratemaking policies and which the Company believes it will recover in rates when these income tax benefits reverse in the future. The tangible property regulations, among other things, allow for the immediate deduction for tax purposes, as an ordinary and necessary repair expense, qualifying expenditures that previously would have been capitalized and depreciated over the estimated useful life of the asset. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. Customer Advances for Construction In certain cases, real estate developers and others advance funds to the Company for the construction of water main extension projects. A portion of these funds are potentially refundable, without interest, usually within a ten-year period. Advances which have not been refunded within this period are reclassified to Contributions in Aid of Construction. As a result of the Act requiring these advances be included in taxable income, PURA directed the Company to collect additional funds from developers for any additional income taxes incurred by the Company. Amortized Contributions in Aid of Construction Contributions in Aid of Construction that were received prior to 1989 are reclassified over the remaining useful life of the related “contributed” utility plant item to Amortized Contributions in Aid of Construction.
11
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 2. 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. Subsequent Events On March 7, 2022 the Company entered into an Agreement and Plan of Merger (the “Agreement”) with Aquarion Water Company (“Aquarion”). Under the terms of the Agreement, Aquarion will acquire all the outstanding common stock of the Company and the Company will become a wholly owned subsidiary of Aquarion. The transaction is structured to be a taxfree reorganization, with the stockholders of the Company receiving stock in Aquarion’s parent company, Eversource Energy. Consummation of the merger is subject to approval by the Company’s stockholders and PURA. The Agreement was approved unanimously by the Company’s Board of Directors and has been recommended for approval by the stockholders. The transaction is expected to close during 2022. Management has evaluated subsequent events for disclosure and/or recognition in the financial statements through March 9, 2022, the date which the financial statements were available for issue. 3. Regulatory Matters On January 23, 2019, PURA issued a final decision concerning Docket No. 18-01-15, PURA Review of Rate Adjustments Related to the Federal Tax Cuts and Jobs Act (“Docket 18-0115”), which was undertaken by PURA to address the impact on rates charged to customers due to the reduction in the federal corporate tax rate from 34% to 21%. Specifically, Docket 18-01-15 addressed two areas of corporate income taxes: (1) the income tax expense included in rates charged to customers; and (2) the excess accumulated deferred income tax (“EDIT”) liability. In accordance with the final decision, the Company was ordered to create a regulatory liability of $26,982 annually to account for the decrease in its federal income tax expense and to establish a regulatory liability of $1,261,300 to account for its EDIT liability. The Company was further ordered to propose a method of returning such amounts to customers in its next rate case or multi-year rate plan authorized by a settlement agreement.
12
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 3. Regulatory Matters (continued) On August 7, 2019, the Company entered into a Settlement Agreement (“Agreement”) with the Office of Consumer Counsel. The Agreement, as amended, (1) incorporated the April 1, 2019 authorized Water Infrastructure and Conservation Adjustment (“WICA”) into current base rates, (2) set the WICA surcharge to zero and began a new WICA expansion period, (3) reduced the 2019 Water Revenue Adjustment (“WRA”) by $53,964 to reflect the decrease in the Company’s federal income tax expense in 2019 and 2018 as a result of the Act, (4) required the EDIT liability to be returned to customers over the weighted average remaining life of the associated assets, or $60,691 annually, and (5) provided that the Company would not submit a general rate case application that would have new rates in effect before January 1, 2022. PURA issued a final decision approving the Agreement on January 8, 2020. The new rates became effective on January 1, 2020. 4. Long-Term Debt Long-term debt includes Series G First Mortgage Bonds (“Bonds”) with annual principal payments of $360,000 due on January 26th of each respective year through January 2026, at which time the remaining unpaid principal balance of $8,400,000 will be due. The Bonds bear interest at 4.08%, which is paid semi-annually in January and July of each year. The Bonds are secured by substantially all the Company’s utility plant and require the maintenance of certain financial covenants related to plant additions and net operating earnings, as defined. The Company was in compliance with these financial covenants as of December 31, 2021. During 2020, the Company obtained a $2.5 million term loan from a bank to be used for upgrades to the existing filtration plant. The term loan is payable in monthly payments of interest only at 2.85% with a final balloon payment of interest and all outstanding principal due in January 2026. The term loan is secured by substantially all assets of the Company and requires the maintenance of an annual debt service coverage ratio, as defined. The Company was in compliance with this financial covenant as of December 31, 2021. Long-term debt is comprised of the following:
Series G bonds Term loan, bank Less due within one year Net long-term portion due Less unamortized finance costs
2021 $10,200,000 2,500,000 (360,000) 12,340,000 (34,920) $12,305,080
13
December 31, 2020 $10,560,000 2,500,000 (360,000) 12,700,000 (43,381) $12,656,619
2019 $10,920,000 (360,000) 10,560,000 (44,711) $10,515,289
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 5. Note Payable, Bank The Company has available a $750,000 line of credit (“LOC”) to be used for short-term working capital needs. The LOC requires monthly payments of interest only on outstanding advances at the bank’s prime rate less 0.50% (2.75% at December 31, 2021) and expires in July 2023. Any advances on the LOC are secured by substantially all assets of the Company. There were no outstanding advances at December 31, 2021, 2020, or 2019. 6. Revenue Recognition Contracts with Customers The following table presents the Company’s operating revenues by customer class from its contracts with customers: 2021 Residential Commercial Industrial Public authority Fire protection Other Total Contracts with Customers
Year Ended December 31, 2020
$3,951,685 835,946 70,635 181,400 1,607,521 287,338 $6,934,525
$4,032,660 837,986 71,166 199,769 1,599,200 215,491 $6,956,272
2019
$3,511,021 789,884 70,164 178,437 1,470,268 248,631 $6,268,405
Residential, commercial, industrial, and public authority customers are primarily billed quarterly on a cycle basis. Fire protection customers are billed monthly. Customers are billed in arrears and payment is due within 30 days of the invoice date. The Company accrues revenue and a related contract asset for actual or estimated water delivery services provided but not yet billed to customers based on estimated water usage from the latest meter reading to the end of the year. Alternative Revenue Programs The Company’s tariffs include a Water Infrastructure and Conservation Adjustment (“WICA”), which allows for the timely recovery in rates of the cost of approved infrastructure investment, and a Water Revenue Adjustment (“WRA”), which allows the Company to record the amount by which actual revenues from water customers were less than revenues allowed in the Company’s most recent rate decision. These programs, as well the revenue adjustment recorded as a result of Docket 18-01-15, represent contracts with PURA and, as such, are presented as alternative revenue programs.
14
THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 6. Revenue Recognition (continued) Alternative Revenue Programs (continued) The following table presents the Company’s operating revenues from alternative revenue programs:
WICA surcharge Water revenue adjustment Docket 18-01-15 revenue adjustment Total Alternative Revenue Programs
Year Ended December 31, 2021 2020 2019 $315,126 $194,161 $ 568,189 585,493 568,259 670,610 (26,982) $900,619 $762,420 $1,211,817
7. Paycheck Protection Program Loan The Paycheck Protection Program (the “PPP”), established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), provided for loans to qualifying entities for amounts up to 2.5 times the 2019 average monthly payroll expenses of the qualifying entity, as defined. PPP loans bear interest at a rate of 1% per annum. All or a portion of the PPP loan principal and accrued interest were forgivable provided the borrower used the loan proceeds for eligible purposes, as defined in the CARES Act, over a period of either eight or twenty-four weeks (the “Covered Period”). On April 7, 2020, the Company received PPP loan proceeds in the amount of $287,200. In September 2020, the Company applied for PPP loan forgiveness of $276,057. The application was approved by the United States Small Business Administration in November 2020 at which time the Company repaid the remaining balance of $11,143. The loan forgiveness of $276,057 is included as a component of Other Income and Deductions on the accompanying Statement of Income and Retained Earnings. 8. Pension Expense The Company has a defined contribution simplified employee pension plan that covers all fulltime 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, 2021, 2020 and 2019 was $132,169, $138,301, and $131,590, respectively. The Company also sponsors a 401(k) plan for employees to which it contributed $14,611, $14,885, and $17,381 for the years ended December 31, 2021, 2020 and 2019, respectively.
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 9. 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, 2021, 2020 and 2019 was $62,292, $61,461, and $74,647, 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 $3,371,985, $3,205,165, and $3,038,255 as of December 31, 2021, 2020 and 2019, respectively. The Company believes the unfunded postretirement benefits liability will be recovered through future ratemaking processes and as such has deferred recognizing the related costs and has recorded a deferred regulatory asset reflecting future revenues expected to be received when such liabilities are payable. Employees hired after July 1, 2013 are no longer eligible for this benefit. The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid: 2022 $109,000 2023 130,000 2024 140,000 2025 145,000 2026 143,000 Years 2027 - 2031 954,000 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: Accumulated postretirement benefit obligation (“APBO”) Less fair value of plan assets APBO in Excess of Fair Value of Plan Assets Unrecognized amounts Prior service cost Unrecognized (gain) or loss Unfunded Postretirement Benefits at End of the Year
2021
2020
2019
$3,772,356 -
$3,851,023 -
$3,516,112 -
$3,772,356
$3,851,023
$3,516,112
9,293 391,078 400,371
11,955 633,903 645,858
14,617 463,240 477,857
$3,371,985
$3,205,165
$3,038,255
The key actuarial assumptions used to determine the postretirement benefit obligations as of December 31 are as follows: Healthcare cost trend rate: Initial rate Ultimate rate Year ultimate rate achieved Discount rate
2021
2020
2019
6.50% 4.40% 2031 2.85%
6.50% 4.40% 2030 2.60%
6.50% 4.50% 2028 3.50%
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 9. Postretirement Benefits Other than Pensions (continued) The net periodic postretirement benefit cost for the years ended December 31, include the following components: 2021 2020 2019 Service cost-benefit attributed to service during the year $112,186 $ 102,342 $ 93,759 Interest cost 99,121 116,565 122,607 Amortizations of: Unrecognized gain or loss 15,143 6,882 Prior service cost 2,662 2,662 2,663 Total Cost $229,112 $228,451 $219,029 The weighted-average assumed discount rate used to measure the APBO was 2.85% for 2021, 2.60% for 2020, and 3.35% for 2019. As the plan is unfunded and is void of assets there is no expected long-term after-tax-return on plan assets. 10.
Taxes Other than Income Taxes Taxes other than income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows: 2021 $1,289,713 103,626 1,393,339 (11,323) $1,382,016
Property taxes Payroll taxes Total Taxes Other Than Income Taxes Amounts capitalized Net Taxes Other Than Income Taxes 11.
2020 $1,251,346 93,690 1,345,036 (11,226) $1,333,810
2019 $1,232,310 100,411 1,332,721 (13,234) $1,319,487
Income Taxes Income tax expense for the years ended December 31, are as follows: Federal
2021 State
Total
2020 Totals
2019 Totals
Current income taxes $4,800 $42,400 $47,200 $213,200 $104,564 Tax benefit of operating loss carryforwards (81,200) (46,200) Deferred income taxes 123,309 123,309 36,009 39,600 Normalization of prepaid income tax 996 Normalization of investment credits (3,705) (3,705) (3,705) (3,705) Total Income Taxes $125,034 $42,400 166,804 164,504 95,255 Attributed to other income (33,604) (28,604) (21,055) Net Charged to Utility Operations $ 133,200 $ 135,900 $ 74,200
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 11.
Income Taxes (continued) A reconciliation of income tax expense at the federal statutory income tax rate to the effective income tax rate follows: 2021 21.0% 2.6 (16.7) (7.0) 4.1 4.5 8.5%
U.S. statutory rate State income taxes, net of federal benefit Tangible Property Regulations deduction Utility plant related Customer advances for construction Operating loss carryforwards Other, net Effective rate
2020 21.0% 3.3 (14.5) 2.2 (4.0) 1.0 9.0%
2019 21.0% 3.2 (19.9) 2.1 1.1 (2.5) .2 5.2%
The components of the Company’s deferred tax liability are as follows as of December 31, 2021 Deferred tax assets (liabilities) Operating loss carryforwards $ Basis difference resulting from Tangible Property Regulations (6,307,800) Accelerated depreciation on utility plant (3,196,400) Accelerated depreciation on non-utility plant (83,000) Other (2,465) Net Deferred Tax Liability $(9,589,665)
2020 $
2019 -
(5,831,800) (2,958,400) (92,900) (6,130) $(8,889,230)
$
81,000
(5,455,300) (2,940,400) (92,900) (8,975) $(8,416,575)
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 2018 are no longer subject to examination by taxing authorities. 12.
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 2021, 2020 and 2019 the amount of these purchases approximated $232,500, $250,700, and $264,300, respectively.
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THE TORRINGTON WATER COMPANY Notes to Financial Statements December 31, 2021, 2020 and 2019 13.
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. These programs are expected to be financed with internally generated funds. Water Tank Maintenance The Company has a cancellable long-term contract for annual water tank inspection, maintenance, and periodic painting. The contract calls for annual payments of approximately $188,400 through 2023.
14. Supplemental Disclosure of Cash Flow Information Interest paid Income taxes paid PPP Loan forgiveness noncash financing activity
2021 $495,744 260,884
2020 $472,355 57,742
2019 $452,880 62,564
-
276,057
-
15. COVID-19 Pandemic The full duration and extent of the COVID-19 pandemic is uncertain as of the date these financial statements were available for issuance, as the pandemic continues to evolve globally. As a result of the Company’s participation in the WRA and WICA alternative revenue programs, the Company’s operating results have not been significantly impacted to date. However, the full extent of any future adverse impact on the Company’s results of operations, financial position, and cash flows, if any, cannot be reasonably estimated at this time. *****
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