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THE TORRINGTON WATER COMPANY

ANNUAL REPORT 2020 CASH DIVIDENDS PAID EVERY YEAR SINCE 1880

THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Shareholders

We have audited the accompanying financial statements of The Torrington Water Company (the “Company”), which comprise the balance sheets as of December 31, 2020, 2019 and 2018, 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 auditors’ judgment, including the assessment of the

risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as 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, 2020, 2019 and 2018, 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.

February 11, 2021 Shelton, Connecticut

PKF O’CONNOR DAVIES, LLP Four Corporate Drive, Suite 488, Shelton, CT 06484 l Tel 203.929.3535 l Fax 203.929.5470 l pkfod.com

PKF O’Connor Davies, LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsiblity or liability for the actions or inactions on the part of any other individual member firms or firms.

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.

THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

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DECEMBER 31, 2020

FIVE-YEAR SELECTED DATA

FINANCIAL

2020

2019

7,718,692 $ 3,269,190 $ 1,809,605 $ 1,925,724 $

7,480,222 3,029,122 1,910,491 1,725,338

2018

2017

2016

Income Statement

Operating Revenues

O & M Expenses

Utility Operating Income Net Income

$ $ $ $

$ $ $ $

7,336,287 3,028,320 1,785,766 1,685,858

$ $ $ $

7,261,523 2,670,715 2,157,832 1,927,085

$ $ $ $

7,061,834 2,689,869 2,246,787 2,010,034

Balance Sheet

Stockholders’ Equity $ 23,126,808 $ 22,324,284 $ 21,678,946 $ 21,012,608 $ 20,035,923 Long Term Debt $ 13,060,000 $ 10,920,000 $ 11,280,000 $ 11,640,000 $ 12,000,000 Stockholders’ Equity % 63.9 67.2 65.8 64.4 62.5 Long Term Debt % 36.1 32.8 34.2 35.6 37.5 Net Utility Plant $ 46,637,775 $ 44,918,142 $ 43,861,080 $ 42,956,221 $ 41,859,685

Per Share Amounts

Earnings Per Share Dividend Per Share

Book Value Per Share

OPERATIONAL

Miles of Main

Number of Hydrants

Gallons Produced (Thou.)

Gallons Sold (Thou.)

Residential

Commercial Industrial

Number of Customers

Number of Employees

$ $ $

2.23 $ 1.30 $ 2 6.77 $

2020

2.00 1.25 25.84

$ $ $

2019

1.95 1.18 25.09

2018

$ $ $

2.23 $ 1.10 $ 24.32 $

2.33 1.02 23.19

2017 2016

169 959 879,835

169 954 861,332

169 950 893,764

169 948 877,247

169 948 895,083

531,805 145,727 9,370 10,125 17

494,957 149,366 10,660 10,089 17

502,487 148,241 11,100 10,057 19

501,114 156,831 10,522 10,039 19

519,189 169,092 10,734 10,013 17

This information is not part of the audited financial statements

The Torrington Water Company • Annual Report 2020

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THE TORRINGTON WATER COMPANY PRESIDENT’S MESSAGE

To Our Stockholders

OFFICERS

Susan M. Suhanovsky President Catherine C. Roscello Secretary / Treasurer

DIRECTORS Edwin G. Booth, Jr. Steven F. Cerruto Diane V. Libby James M. Lucas Gregory S. Oneglia T.J. Oneglia Charles W. Roraback Margaret P. Roraback Susan M. Suhanovsky

OUR COMPANY just weathered and is still weathering an unprecedented time in history.

The COVID-19 pandemic turned our industry, and indeed the whole world, upside down.

We started 2020 with an ambitious plan to upgrade our filtration plant and continue our infrastructure replacement program. At the same time, we certainly expected to conduct business as usual. In March of 2020, everything came to a halt as the pandemic took center stage. We barred outside vendors from coming into the plant; stopped doing meter changes so that our service people would not have to enter customers’ homes (except in emergencies); kept our service people separate from our filtration plant operators; and outfitted the office staff so they could work from home. Isolating our plant operators so that they had little to no contact with other employees was especially vital, since if they fell ill, there would be no one to run the plant to ensure clean, potable water for our customers.

The State of Connecticut, meanwhile, issued a moratorium on water shutoffs for nonpayment of bills. We agreed with this move, as water is a vital necessity for life and health. Once things seemed to settle down, in the summer, we started to have the office staff come in on a rotating basis (and this arrangement continues today). We also started the plant upgrades rolling again, taking all the recommended precautions and having protocols in place for anyone coming into the plant. Everyone was required, and continues to be required, to wear a mask and practice social distancing as much as possible. No one can really say how much longer the pandemic will last, but I know that our company and community will get through it.

I am so grateful for the dedication and commitment that our employees have shown throughout this challenging period.

Financial Highlights Despite all these dislocations, our company’s financial performance last year was better overall than in 2019. Operating revenues increased to $7.72 million, a gain of 3.2% from 2019. The main factor responsible for this growth was our settlement agreement with the state’s Office of Consumer Counsel to amend our rate schedule and thereby avoid a costly

2

The Torrington Water Company • Annual Report 2020

rate case process. The agreement incorporated a Water Infrastructure and Conservation Adjustment (WICA) surcharge of 8.05% into our current base rates as of January 1, 2020.

(The WICA program supports the improvement of water quality and service by covering projects to replace aged or undersized pipes.)

The agreement also continued our participation in the Water Revenue Adjustment program, which enables us to realize, also through a surcharge, all the water sales revenue allowed to us in our last rate case. We agreed not to file a new rate case until at least mid-2021.

Total operating expenses increased to $5.91 million, rising 6.1%. This was due to a variety of factors that drove both operating and maintenance expenses up from 2019. One of those factors was that in 2020, based on the current regulatory environment, the Company wrote off $308,543 of expenses incurred to stop a sewer line which was going to pass through its Allen Dam watershed. Another factor was that for the first time in several years, the Company had to pay federal income taxes. In a prior year, the Company had generated net operating losses, which we were allowed to use to offset any future federal taxable income up to an equal amount. As of year-end 2020, we have utilized all net operating losses carried forward from prior years and therefore will now pay federal income tax.

Net income increased to $1.93 million,an 11.6% improvement from 2019. A primary reason for this improvement was that the Company secured a Paycheck Protection Program loan from the Small Business Administration that allowed us to keep our workforce employed during the COVID-19 shutdown. This loan was forgiven in 2020 and is shown as a one-time component of Other Income and Deductions in the Statements of Income and Retained Earnings.

In December, the Board of Directors raised our quarterly cash dividend to $0.34 per share, making 2020 our 23rd consecutive year of dividend increases. (Our history of annual cash dividends dates back to 1880.)

On a per-share basis, both earnings and year-end book value grew as well—earnings, by 11.5% to $2.23, and book value, by 3.6% to $26.77.

Other Highlights The Company made the decision to forge ahead with its infrastructure improvement program. We felt it was important to do this not only to continue strengthening our water service, but also to keep our employees working and help local businesses that depend on our purchasing the goods and services we normally use. During the 2020 construction season, we invested $1.2 million in WICA-eligible projects.

We replaced 3,410 feet of existing water mains that had reached the end of their useful lives.

We can apply for the allowed return on our WICA-eligible investments (plus recovery of the associated property tax, depreciation expense and income tax) once we complete our WICA projects for the year. If our application for last year’s projects is approved, a surcharge of 5.12% will become effective April 1, 2021, and we expect it to generate $370,600 in revenues.

Our investments in infrastructure enable us to ensure that both existing and future customers will have a reliable supply of high-quality water at reasonable cost. Moreover, the upgrades we have done have led to a steady decrease in lost water in our system. For 2020, lost water totaled 12.1%, down from 13.2% in 2019 and below the 15% maximum mandated by the state’s Public Utilities Regulatory Authority. Even so, we continue to conduct leak surveys and use leak-detection equipment every day to make sure that we find any water main breaks or service line leaks as soon as possible.

In addition to the operating income produced by our core business—treating and distributing water—we generate income from non-utility ventures. We focus on ventures that are low risk and are related to our core business. In 2020, our non-utility segment generated $263,977 in non-operating income, or 13.2% of our total net income. The following ventures make up our non-utility segment: The Water Line Protection Plan provides residential customers with coverage for the cost of repairing a broken or leaking water service line on their property. The nonoperating income generated by this program increased in 2020, to $44,058, a gain of 6.3% from 2019. A total of 825, or 8.1%, of our residential customers have signed up for this coverage.

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We continue to provide utility operating services to the New Hartford Water Pollution Control Authority on a month-to-month basis. We expect that the sale of the New Hartford water assets to Aquarion Water Company will become a reality in 2021, and therefore 2020 will be the last full year we managed their system. In 2020, we realized $71,691 in non-operating income from this contract.

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As part of our forest management plan, in 2020 we conducted sales of timber from our woodlands. The sales brought us $148,228 in non-operating income—a 24.6% improvement from 2019. We were able to harvest more of our ash timber last year than in prior years, despite the presence

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of the emerald ash borer, a pest that has destroyed ash stands throughout New England. Timely sales of carefully selected timber are an important tool in managing and sustaining our 5,000 acres of property.

The Year Ahead The Company will continue to implement the upgrades to its filtration plant which were started in 2020 but then stopped for a while because of the pandemic. Upgrades will include a more robust SCADA (supervisory control and data acquisition) system. A SCADA system’s software and hardware components enable plant operators to control industrial processes locally or remotely; gather, monitor and process real-time data; and control various devices in the system such as valves and pumps.

With the upgraded SCADA system, our plant operators will be able to monitor all aspects of the plant and respond more efficiently to problems. Another upgrade will replace the valves throughout the filtration plant with state-of-the-art valves.

We are unable to get parts for the existing valves, which is a concern if one of them should fail. Additionally, we have just installed a second generator as a backup to our primary generator for the filtration plant; this extra equipment will ensure continued operation in case of an extended power failure. We were extremely fortunate during the extended outage that occurred in August 2020 that our plant was down for only a few hours. Other water utilities were not so fortunate, and their experience highlighted a vulnerable area for us.

Also, the roof at the filtration plant and office is being replaced.

Closing Thoughts All that we do throughout our company centers on one person: our customer. Our customer representatives both in the office and in the field never forget that at the end of every water line, there’s a person depending on us to provide clean, safe water.

Our customers trust us, and we don’t take that trust lightly.

The incredible challenge that we faced in 2020 will continue in 2021, but I am certain that our team of highly motivated and dedicated people will again rise to that challenge. After all, ours is a business that requires us to perform at the highest level to protect public health and provide value to our customers and stockholders.

I would like to welcome our newest director, T. J. Oneglia, to the Board of Directors. T. J. will bring extensive construction knowledge to our board and is very active in our community.

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

The Torrington Water Company • Annual Report 2020

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THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

BALANCE SHEETS

AS OF DECEMBER 31, 2020, 2019 AND 2018

2020

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

71,847,851 25,210,076 46,637,775 372,935

2019 $

2018

69,057,611 24,139,469 44,918,142 372,935

$ 66,976,645 23,115,565 43,861,080 372,935

2,781,302 757,705 858,000

1,064,441 518,129 821,000

1,577,560 517,650 824,000

631,461 369,507 183,413 5,581,388

707,560 300,436 132,139 3,543,705

744,544 222,107 116,113 4,001,974

2,306,894 230,862 6,476,000

2,344,134 216,186 5,919,900

Other assets Other assets

1,976,334 Preliminary survey and investigation charges 154,216 Regulatory asset-income taxes recoverable 6,855,660 Regulatory asset-water revenue adjustment,

net of current portion 142,065

Regulatory asset-unfunded postretirement benefits 3,205,165

Total other assets 12,333,440 TOTAL ASSETS $ $64,925,538 $

154,160 166,363 3,038,255 2,893,865 12,206,171 11,540,448 61,040,953 $ 59,776,437

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

Long-term debt, net Current liabilities Current portion of long-term debt Accounts payable Accrued taxes

Accrued interest Other current liabilities Total current liabilities Other liabilities Deferred income taxes

Regulatory liability-excess deferred income taxes

Regulatory liability-excess income taxes Unfunded postretirement benefits Customer advances for construction Contributions in aid of construction Amortized contributions in aid of construction

Total other liabilities

TOTAL STOCKHOLDERS’ EQUITY AND LIABILITIES See notes to financial statements

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The Torrington Water Company • Annual Report 2020

$

1,800,000 21,326,808 23,126,808

$

1,800,000 $ 1,800,000 20,524,284 19,878,946 22,324,284 21,678,946

12,656,619

10,515,289

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

8,889,230 8,416,575 1,200,609 1,261,300 — — 3,205,165 3,038,255 544,075 515,481 10,772,973 10,850,172 2,576,591 2,499,392 27,188,643 26,581,175 $ 64,925,538 $ 61,040,953

10,867,939 360,000 176,123 596,584 191,760 127,918 1,452,385

7,824,580 1,261,300 26,982 2,893,865 439,286 10,908,961 2,422,193 25,777,167 $ 59,776,437

THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

2020

2019

2018

OPERATING REVENUES

Contracts with customers Alternative revenue programs

Total operating revenues

$

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

6,261,616 1,074,671 7,336,287

2,381,493 647,629 1,146,922 1,319,487 74,200 5,569,731

2,309,743 718,577 1,127,343 1,295,158 99,700 5,550,521

1,809,605

1,910,491

1,785,766

116,208 4,025 160,412 — 10,905 291,550 21,055 270,495

119,801 4,555 264,481 — 10,759 399,596 29,162 370,434

2,180,986

2,156,200

466,235 7,998 1,476 475,709

446,760 7,350 1,538 455,648

461,448 7,350 1,544 470,342

1,925,724

$ 1,725,338

$ 1,685,858

(1,123,200) 20,524,284 $ 21,326,808

(1,080,000) 19,878,946 $ 20,524,284

(1,019,520) 19,212,608 $ 19,878,946

Net income, basic

$

2.23

$

2.00

$

1.95

Dividends declared

$

1.30

$

1.25

$

1.18

Book value

$

26.77

$

25.84

$

25.09

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

PER SHARE AMOUNTS

$

2,570,359 698,831 1,170,187 1,333,810 135,900 5,909,087

2,401,433

Interest expense

$ 6,268,405 1,211,817 7,480,222

123,170 2,212 192,286 276,057­ 26,707 620,432 28,604 591,828

Income before interest expense

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

Total interest expense

Net income

6,956,272 762,420 7,718,692

$

See notes to financial statements

The Torrington Water Company • Annual Report 2020

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THE TORRINGTON WATER COMPANY

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ANNUAL REPORT

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

Adjustments to reconcile net income to net cash from operating activites:

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

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 financing costs

Dividends declared Net cash from financing activities

$

1,725,338

$

1,685,858

1,767,805 7,998 32,304 9,786 (26,707) (276,057)

1,434,200 7,350 35,895 16,396 (10,905) —

1,373,964 7,350 66,795 7,152 (10,759) —

(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

(59,683) (52,223) (56,307) 35,703 (357,755) (96,427) 1,199 26,982 2,571,849

(2,532,834) — 29,315 (280,308) (2,783,827)

(2,207,072) 14,000 96,048 (58,584) ( 2,155,608)

(2,021,443) — — (4,184) (2,025,627)

(360,000) 2,500,000 276,057 (6,668) (1,123,200) 1,286,189

(360,000) — — — (1,080,000) (1,440,000)

(360,000) — — — (1,019,520) (1,379,520)

NET CHANGE IN CASH AND CASH EQUIVALENTS

1,716,861

(513,119)

(833,298)

Cash and cash equivalents, beginning

1,064,441

1,577,560

2,410,858

1,064,441 $

1,577,560

CASH AND CASH EQUIVALENTS, ENDING See notes to financial statements

6

1,925,724

2019 2018

The Torrington Water Company • Annual Report 2020

$

2,781,302

$

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THE TORRINGTON WATER COMPANY

NOTES TO FINANCIAL STATEMENTS

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DECEMBER 31, 2020

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 includes 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, 2020, 2019 and 2018, the Company’s cash and cash equivalents exceeded Federal Deposit Insurance Corporation insured limits by $2,030,102, $563,241 and $826,360, respectively.

Accounts Receivable

Accounts receivable 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 at December 31, 2020, 2019, and 2018 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, 2020, 2019, and 2018. Accounts receivable at January 1, 2018 were $451,119.

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, 2020, 2019 and 2018 consists of the following: 2020

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

$

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

2018

$

236,404 2,462,247 2,420,808 11,863,155 48,960,064 2,846,387 25,684 242,862

$

236,404 2,440,939 2,371,030 11,830,610 47,025,120 2,820,423 9,257 242,862

$

69,057,611

$

66,976,645

Nonutility Plant

The Company owns land, buildings and equipment with an original cost of $559,204 that is not currently 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 income.

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.

The Torrington Water Company • Annual Report 2020

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THE TORRINGTON WATER COMPANY

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NOTES TO FINANCIAL STATEMENTS

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DECEMBER 31, 2020

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 2020, 2019, and 2018 was $570,941, $243,370, and $246,621, respectively.

The following costs have been deferred as of December 31, 2020, 2019 and 2018:

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 Ave Tank Painting Supply Plan Update III Other Deferred Costs Docket 13-01-29 W. Pearl Rd Tank Painting-Outside W. Pearl Rd Tank Painting-Inside 2015 Tank Painting Deferred Sales Tax Woodridge Lake Future Tank Paintings Docket 18-01-15 Highland Ave Tank Painting 2019 Settlement Agreement Hydraulic Model COVID -19 costs Total Other Assets

Original Cost 262,866 318,456 145,227 160,346 263,321 97,903 191,694 Various 291,911 61,240 59,795 8,352 284,349 338,708 252,213 121,943 308,543 Various 22,135 179,201 7,756 31,963 16,266

2020 $

34,111 60,917 53,192 56,125 50,726 44,610 73,596 (28,567) 148,749 10,207 — 8,352 132,503 261,281 152,887 154,793 — 516,970 22,135 168,981 6,537 31,963 16,266

$ 1,976,334

2019 $

2018

42,651 68,556 46,394 51,222 75,702 39,395 77,181 (25,084) 164,199 17,011 8,970 8,352 138,225 274,402 164,639 121,943 308,543 516,970 22,135 177,732 7,756 — —

$

$ 2,306,894

$

Amortization Period Ends

64,556 November 2021 95,094 July 2022 58,496 October 2023 64,584 October 2023 100,678 May 2022 47,545 October 2024 93,150 October 2024 (7,909) Various 188,525 September 2026 23,816 June 2022 20,928 8,352 Not yet amortizable 161,921 October 2025 305,498 November 2029 185,657 October 2027 89,365 Not yet amortizable 308,543 516,970

Not yet amortizable 18,365 Not yet amortizable — January 2031 — Not yet amortizable — Not yet amortizable — Not yet amortizable 2,344,134

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 2020, 2019, and 2018 was $16,531, $43,908, and $0, respectively.

Revenue Recognition

Substantially all of 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 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 $10,325,622, $10,289,580, and $10,207,804, as of December 31, 2020, 2019 and 2018, respectively.

8 The Torrington Water Company • Annual Report 2020

THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2020

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 amortized over the remaining useful life of the related “contributed” utility plant item to Amortized Contributions in Aid of Construction.

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

Management has evaluated subsequent events for disclosure and/or recognition in the financial statements through February 11, 2021, 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 18-01-15”), 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.

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 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. These First Mortgage Bonds are secured by substantially all of the Company’s utility plant.

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. As of December 31, 2020, the Company was in compliance with this financial covenant.

The Torrington Water Company • Annual Report 2020

9

THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2020

4. LONG-TERM DEBT (continued) Long-term debt is comprised of the following:

Series G Bonds

2020

$

Term Loan, Bank Less Due Within One Year Net Long-Term Portion Due Less Unamortized Finance Costs

10,560,000 2,500,000 (360,000) 12,700,000 (43,381) $ 12,656,619

December 31, 2019

$

10,920,000

$

(360,000) 10,560,000 (44,711) 10,515,289

2018 $

11,280,000

— —

$

(360,000) 10,920,000 (52,061) 10,867,939

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, 2020) 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, 2020, 2019, or 2018.

6. REVENUE RECOGNITION Contracts with Customers

The following table presents the Company’s operating revenues by customer class from its contracts with customers:

Year Ended December 31,

Residential Commercial Industrial Public Authority Fire Protection Other Total Contracts with Customers

2020 2019

$

$

4,032,660 $ 837,986 71,166 199,769 1,599,200 215,491 6,956,272 $

3,511,021 789,884 70,164 178,437 1,470,268 248,631 6,268,405

$

$

2018

3,537,947 771,526 71,623 167,256 1,466,303 246,961 6,261,616

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. Accrued unbilled revenues at January 1, 2018 were $838,000.

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.

The following table presents the Company’s operating revenues from alternative revenue programs: Year Ended December 31,

2020 2019

WICA Surcharge $ 194,161 $ 568,189 $

Water Revenue Adjustment 568,259 670,610

Docket 18-01-15 Revenue Adjustment

— (26,982)

Total Alternative Revenue Programs $ 762,420 $ 1,211,817 $

10

The Torrington Water Company • Annual Report 2020

2018

436,202 665,451 (26,982) 1,074,671

THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

l

DECEMBER 31, 2020

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”), provides 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 are forgivable provided the borrower uses 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”). The amount of loan forgiveness is reduced if the borrower terminates employees or reduces salaries above a certain threshold during the Covered Period and does not qualify for certain safe harbors. The unforgiven portion of the PPP loan, if any, is payable within two years from the date of the loan. Loan payments of principal or interest are deferred until the amount of loan forgiveness is determined by the United States Small Business Administration (“SBA”).

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 SBA 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 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, 2020, 2019 and 2018 was $138,301, $131,590 and $137,204, respectively.

The Company also sponsors a 401(k) plan for employees to which it contributed $14,885, $17,381 and $18,470 for the years ended December 31, 2020, 2019 and 2018, respectively.

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, 2020, 2019 and 2018 was $61,461, $74,647 and $63,354, 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 $3,205,165, $3,038,255 and $2,893,865 as of December 31, 2020, 2019 and 2018, 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 table sets forth the postretirement benefit plan’s funded status and unfunded amounts recognized on the Company’s balance sheets as of December 31:

2020

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) Loss

Unfunded Postretirement Benefits

at End of the Year

$ $

3,851,023 — 3,851,023

2019 $

3,516,112 $ — 3,516,112 $

$

11,955 633,903 645,858 $

3,205,165

2018

14,617 463,240 477,857 $

2,888,017 — 2,888,017

17,280 (23,128) (5,848)

3,038,255 $

2,893,865

The net periodic postretirement benefit cost for the years ended December 31, include the following components:

Service Cost-Benefit Attributed to

Service During the Year Interest Cost Amortizations of: Unrecognized Gain or Loss Prior Service Cost

2020 $

Total Cost $

102,342 116,565

2019 $

6,882 2,662 $228,451

2018

93,759 122,607

$

— 2,663

$

219,029

$

124,304 117,748 10,350 2,662 255,064

The weighted-average assumed discount rate used to measure the APBO was 2.6% for 2020, 3.35% for 2019, and 4.30% for 2018.

As the plan is unfunded and is void of assets there is no expected long-term after-tax-return on plan assets.

The Torrington Water Company • Annual Report 2020

11

l

THE TORRINGTON WATER COMPANY

l

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2020

10. TAXES OTHER THAN INCOME TAXES

Taxes other than income taxes for the years ended December 31, are as follows: 2020 2019 2018

Property Taxes Payroll Taxes Total Taxes Other than Income Taxes Amounts Capitalized Net Taxes Other than Income Taxes

$

1,251,346 93,690 1,345,036 (11,226) 1,333,810

$

$ 1,232,310

100,411 1,332,721 (13,234) $ 1,319,487

$

1,201,923 106,506 1,308,429 (13,271) 1,295,158

$

11. INCOME TAXES

Income tax expense for the years ended December 31, are as follows:

2020

Federal State

Current Income Taxes Tax Benefit of Operating Loss Carryforwards Change in Valuation Allowance Deferred Income Taxes Normalization of Prepaid Income Taxes Normalization of Investment Credits

$ 152,200

$

61,000

(81,000) — 36,009 — (3,705)

Total Income Taxes

$ 103,504

Total

Totals

$ 213,200

$ 104,564

(81,000) — 36,009 — (3,705)

(46,200) — 39,600 996 (3,705)

164,504

95,255

(28,604)

(21,055)

— — — — — $

61,000

Attributed to Other Income Net Charged to Utility Operations

2019

$

135,900

$

2018

Totals

$ 185,071 (124,000) (43,800) 114,300 996 (3,705) 128,862 (29,162)

74,200

$

99,700

A reconciliation of income tax expense at the federal statutory income tax rate to the effective income tax rate follows:

2020

U.S. Statutory Rate State Income Taxes, Net of Federal Benefit Tangible Property Regulations Deduction Utility Plant Related Operating Loss Carryforwards Other, Net Effective Rate

2019

2018

21.0% 3.3 (14.5) 2.2 (4.0) 1.0

21.0% 3.2 (19.9) 2.1 (2.5) 1.3

21.0% 3.3 (16.2) 6.2 (9.2) 2.0

9.0%

5.2%

7.1%

The components of the Company’s deferred tax liability are as follows as of December 31,

Deferred Tax Assets (Liabilities): Operating Loss Carryforwards Basis Difference Resulting from Tangible Property Regulations Accelerated Depreciation on Utility Plant Accelerated Depreciation on Non-Utility Plant Other Net Deferred Tax Liability

2020

$

$

—

$

2019

81,000

(5,831,800) (2,958,400) (92,900) (6,130)

(5,455,300) (2,940,400) (92,900) (8,975)

(8,889,230)

$ (8,416,575)

$

2018 127,200 (4,900,700) (2,936,000) (92,900) (22,180)

$

(7,824,580)

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 2017 are no longer subject to examination by taxing authorities.

12

The Torrington Water Company • Annual Report 2020

THE TORRINGTON WATER COMPANY

l

ANNUAL REPORT

l

DECEMBER 31, 2020

12. RELATED PARTY TRANSACTIONS he Company purchases services, materials and supplies from professional firms, contractors and retailers whose principals are also T directors and/or shareholders of the Company. During 2020, 2019 and 2018 the amount of these purchases approximated $250,700, $264,300, and $197,500, respectively.

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. In addition, the Company expects to spend approximately $1,400,000 in 2021 for capital improvements to its filtration plant. These programs are expected to be financed with internally generated funds as well as the $2.5 million in proceeds received from the term loan in 2020.

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 from 2021 through 2023.

14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

2020

Interest Paid Income Taxes Paid

$ $

472,355 57,742

$ $

2019 452,880 62,564

2018 $ $

467,568 62,206

DESIGN: RHODE VAN GESSEL • ESSEX CT

PRINTING: MINUTEMAN PRESS

• TORRINGTON CT

15. COVID-19 PANDEMIC The ongoing outbreak of the coronavirus disease 2019 (“COVID-19”), which was declared a pandemic by the World Health Organization in March 2020, has adversely impacted global commercial activity and contributed to significant volatility in financial markets. Many countries around the world, including the United States, have implemented significant governmental measures to control the spread of COVID-19.

The Company is considered an essential business in Connecticut and has continued its operations and employing its workforce on a full-time basis throughout 2020. In addition, as a result of the Company’s participation in the WRA and WICA alternative revenue programs, the Company’s operating revenues have not been significantly impacted to date. However, in April 2020, PURA imposed various requirements for all public service utilities in Connecticut designed to assist customers impacted by the pandemic. PURA’s decision requires the Company to offer payment plans to all customers requesting financial assistance of up to 24 months, waives all fees and interest in the calculation of amounts due and places a moratorium on the shutting off of customer water through February 2021. PURA’s decision has not materially impacted the Company’s cash flows from operations in the current period, nor is it expected to materially impact any future periods.

The full duration and extent of the COVID-19 pandemic, related business restrictions, and changes to behavior intended to reduce its spread are uncertain as of the date these financial statements were available for issuance, as the pandemic continues to evolve globally. Therefore, the full extent of any future adverse impact on the results of operations, financial position and cash flows cannot be reasonably estimated at this time.

EQUITY 63.9 % VS DEBT 36.1%

EQUITY DEBT

Millions 30– 25–

$21.68

$21.01

$20.03

$22.32

$23.13

20– 15-

$13.06

$12.00

$11.64

$11.28

$10.92

10–

2016

2017

DIVIDENDS PER SHARE $1.02

2016 $2.33

EARNINGS PER SHARE

2016

$1.10

2017

$2.23

2017

2018

$1.18

$1.25

2018

2019

$1.95

$2.00

2018

2019

2019

2020

$1.30

2020

$2.23

2020 $26.77

BOOK VALUE PER SHARE $24.32

$25.09

$25.84

$23.19

2016

2017

2018

2019

2020

THE TORRINGTON WATER COMPANY torringtonwater.com

277 Norfolk Road

PO Box 867

Torrington, Connecticut

06790

860.489.4149