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PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2015 and 2014

(in thousands)
2015 2014
Operating Revenues $ 40,840 $ 38,815
Operating Expenses:
Operations and maintenance 19,511 18,221
Depreciation and amortization 6,610 6,148
Taxes other than income taxes 5,928 5,541
Total Operating Expenses 32,049 29,910
Operating Income 8,791 8,905
Interest Expense (10,775) (10,156)
Allowance for Funds Used During Construction 70 7
Other, Net (70) 20
Loss Before (Provision for) Benefit from Income Taxes (1,984) (1,224)
(Provision for) Benefit ftom Income Taxes (308) (551)
Net Loss $ (2,292) $ (1,775)

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2015 and 2014
(in thousands)

2015 2014

Net Loss $ (2,292) $ (1,775)
Other Comprehensive Income:

Unrealized loss on derivatives (109) (349)

Reclassification of net loss realized in net income 144 152

Income tax expense (benefit) relating to other

other comprehensive income (14) 79

Other Comprehensive Income (Loss) 21 (118)
Comprehensive Loss $ (2,271) $ (1,893)

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2015
(in thousands, except per share data)

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings/(Deficit) Income (Loss) Total

Balance as of
January 1, 2015 1,000 § - $ 30,561 $ (6,151) $ 180 $ 24,590
Common dividends declared-
$277.85 per share - - . (278) - (278)
Net loss - - - (2,292) - (2,292)
Other comprehensive income (loss):

Unrealized loss on derivatives,

net of taxes of $(44) - - - - (65) (65)

Reclassification of net loss

realized in net income, net of

taxes of $58 - - - - 86 86
Balance as of
December 31, 2015 1,000 § - $ 30,561 $ (8,721) $ 201 $ 22,041

SSS = —SS ———SSS—=_= ——————_—_—_—_ }

The accompanying notes are an integral part of these consolidated financial statements,

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2014
(in thousands, except per share data)

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings/(Deficit) Income (Loss) Total
Balance as of
January 1, 2014 1,000 §$ - $ 30,561 $ (4,099) $ 298 $ 26,760
Common dividends declared-
$276.554 per share - - - (277) - (277)
Net loss - - : (1,775) - (1,775)
Other comprehensive income (loss):
Unrealized gain on derivatives,
het of taxes of $(140) - : - - (209) (209)
Reclassification of net loss
realized in net income, net of
taxes of $61 : - : : 9] 9]
Balance as of
December 31, 2014 1,000 $ - $ 30,561 $ (6,151) $ 180 $ 24,590
——= >= == === ——

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015 and 2014
(in thousands)

2015 2014
Operating Activities:
Net Loss $ (2,292) $ (1,775)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,586 6,447
Amortization of original issue discount 252 12
Equity component of AFUDC (25) (4)
Amortization of deferred investment tax credits (33) (33)
Provision for deferred income tax 294 606
Undistributed loss in real estate partnership | 6
Changes in assets and liabilities:
(Increase) decrease in accounts receivable billed and unbilled 129 (195)
Decrease in inventory 90 18
(Increase) in prepaid expenses (550) (120)
(Increase) decrease in deferred charges and other assets 1,123 (1,004)
(Increase) decrease in refundable income taxes (23) I
(Increase) decrease in accounts payable and deferred revenue (152) 557
(Increase) in accrued interest payable 636 106
(Increase) in other 530 2,726
Net cash provided by operating activities 6,566 7,348
Investing Activities:
Purchase of property, plant and equipment including debt
component of allowance for funds used during construction (13,866) (8,585)
(Increase) decrease in restricted cash 37,565 (40,273)
Purchase of marketable securities (17,237) -
Change in investment in real estate partnership and
deferred land costs (5) -
Net cash provided (used) by investing activities 6,457 (48,858)

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015 and 2014

(in thousands)
2015 2014

Financing Activities:

Borrowings (payments) on line of credit, net $ - $ (1,966)

Payments on long-term debt (42,484) (3,036)

Contributions in aid of construction 132 78

Proceeds from long-term borrowings 28,098 49,935

Debt issuance costs (232) (1,275)

Dividends paid (278) (277)
Net cash provided (used) by financing activities (14,764) 43,459
Increase (Decrease) in cash and cash equivalents (1,741) 1,949
Cash and cash equivalents, beginning of period 2,987 1,038
Cash and cash equivalents, end of period $ 1,246 $ 2,987

Supplemental Disclosure on Cash Flow and Non-cash Items
For the Years Ended December 31, 2015 and 2014 (in thousands)

2015 2014
Cash paid during the period for:
Interest $ 9,99] $ =. 9,809
Income taxes 233 93
Non-cash items:
Contributions in aid of construction 2,128 2,586
Forgiveness of debt 77 75

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of Business and Summary of Significant Accounting Policies

Description of Business:

Pennichuck Corporation (our “Company,” “we,” or “our’) is a holding company
headquartered in Merrimack, New Hampshire with five wholly owned operating subsidiaries:
Pennichuck Water Works, Inc., (“Pennichuck Water”) Pennichuck East Utility, Inc.,
(“Pennichuck East”) and Pittsfield Aqueduct Company, Inc. (“PAC”) (collectively referred to
as our Company’s “utility subsidiaries”), which are involved in regulated water supply and
distribution to customers in New Hampshire; Pennichuck Water Service Corporation
(“Service Corporation”) which conducts non-regulated water-related services; and The
Southwood Corporation (“Southwood”) which owns several parcels of undeveloped land.

Our Company’s utility subsidiaries are engaged principally in the collection, storage, treat-
ment and distribution of potable water to approximately 35,400 customers throughout the
State of New Hampshire. The utility subsidiaries, which are regulated by the New Hampshire
Public Utilities Commission (the “NHPUC”), are subject to the provisions of Accounting
Standards Codification (“ASC”) Topic 980 “Regulated Operations.”

Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying consolidated financial statements include the accounts of our Company
and its wholly owned subsidiaries. All significant intercompany transactions have been elimi-
nated in consolidation.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Property, Plant and Equipment

Property, plant and equipment, which includes principally the water utility assets of our
Company’s utility subsidiaries, is recorded at cost plus an allowance for funds used during
construction on major, long-term projects and includes property funded with contributions in
aid of construction.

Maintenance, repairs and minor improvements are charged to expense as incurred. Improve-
ments which significantly increase the value of property, plant and equipment are capitalized.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash, money market funds and other short-
term liquid investments with original maturities of three months or less.

Restricted Cash - RSF

This restricted cash balance consists of funds maintained for the Rate Stabilization Fund
(“RSF”), which was established in conformity with the requirements of NHPUC Order
25,292, as explained more fully in Note 12 of these financial statements. The RSF is an
imprest fund of $5 million, which is subject to funding above or below the imprest fund
balance, reflecting actual revenue performance as it relates to prescribed revenue levels
supported by the RSF. Of the approximately $5.7 million in restricted cash as of December
31, 2015 and in compliance with the rules governing the use of the RSF, approximately
$729,000 is reserved as a potential return to rate payers as a component of the new water
rates set as a result of the next promulgated rate case before the NHPUC, for which that
timing and occurrence is yet to be determined.

Restricted Cash — Bond Project Funds

This restricted cash balance consists of funds which resulted from the issuance of the Series
2014 and 2015 tax-exempt bonds in December of 2014 and October of 2015, respectively.
The new money proceeds, as described in Note 10, from those bond issuances are maintained
in a separate restricted cash account, and are subject to withdrawal as a reimbursement of
eligible capital project expenditures for the years 2014 through 2016, as defined by the
indenture and issuance documents associated with each offering. This fund was initially
funded at a level of $19.5 million, at the time the 2014 bonds were issued in December of
2014, then increased by approximately $7.5 million to approximately $27 million, with the
proceeds from the 2015 bond issuance, in October 2015. In the period beginning in
December of 2014 through December 31, 2015, a total of approximately $7.3 million has
been drawn from the fund for payment of closing costs and as reimbursements for qualifying
capital projects completed and “used and useful” during late 2014 and throughout 2015. In
late 2015, $17.2 million was drawn from these restricted cash amounts and invested in
financial instruments with varying maturities throughout 2016.

Restricted Cash — Bond Refund Escrow

This restricted cash balance consists of funds that resulted from the issuance of the Series
2014A tax-exempt bonds in December of 2014, as notated and fully described in Note 10 of
these audited financial statements. The refinance money proceeds, as described in Note 10,
from that bond issuance are maintained in a separate restricted cash account, pending the
completion of the refinance of existing tax-exempt bonds on January 20, 2015, the date at
which the required 30-day notice period to bondholders has expired from the date of
notification after the close of the December 15, 2014 bond closing. As of January 20, 2015,

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the entire balance in this account, which included $23.4 million of principal due on the bonds
being refunded, as well as approximately $375,000 of accrued interest due on these bonds,
was paid out to the holders of those debt instruments.

This restricted cash balance also consists of funds that resulted from the issuance of the
Series 2015A tax-exempt bonds in October of 2015, as notated and fully described in Note
10 of these audited financial statements. The refinance money proceeds, as described in Note
10, from that bond issuance are maintained in a separate restricted cash account, pending the
completion of the refinance of existing tax-exempt bonds on November 30, 2015, the date at
which the required 30-day notice period to bondholders has expired from the date of
notification after the close of the October 27, 2015 bond closing. As of November 27, 2015,
the entire balance in this account, which included $16.2 million of principal due on the bonds
being refunded, as well as approximately $165,000 of accrued interest due on these bonds,
was paid out to the holders of these debt instruments.

Investments — Bond Project Funds

As discussed above, approximately $17.2 million of monies from the 2014 and 2015
restricted cash bond project funds were invested in instruments of varying maturities through
the end of 2016. At maturity, these funds will be utilized to reimburse qualifying and eligible
capital project expenditures as they go “used and useful” throughout 2016.

The Company determines the appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such determinations at each balance-sheet
date. Debt securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded
as either short-term or long-term on the consolidated balance sheet, based on contractual
maturity date and are stated at amortized cost.

The fair value of all securities is determined by quoted market prices. The estimated fair
value of securities for which there are no quoted market prices is based on similar types of
securities that are traded in the market.

Concentration of Credit Risks

Financial instruments that subject our Company to credit risk consist primarily of cash
(including cash equivalents and restricted cash) and accounts receivable. Cash balances are
invested in financial institutions insured by the Federal Deposit Insurance Corporation
(“FDIC”). At December 31, 2015 and 2014, the Company had approximately $9,200,000 and
$48,700,000 in excess of FDIC insured limits, respectively. Our accounts receivable balances
primarily represent amounts due from the residential, commercial and industrial customers of
our regulated water utility operations, as well as receivables from our Service Corporation

customers.

Accounts Receivable — Billed, Net

Accounts receivable are recorded at the invoiced amounts. The allowance for doubtful
accounts is our best estimate of the amount of probable credit losses in our existing accounts
receivable, and is determined based on historical write-off experience and the aging of
account balances. We review the allowance for doubtful accounts quarterly. Account bal-
ances are written off against the allowance when it is probable the receivable will not be
recovered.

Accounts Receivable — Unbilled, Net

We read our customer meters on a monthly basis and record revenues based on meter reading
results. Information from the last meter reading date is used to estimate the value of unbilled
revenues through the end of the accounting period. Estimates of water utility revenues for
water delivered to customers but not yet billed are accrued at the end of each accounting
period. Actual results could differ from those estimates.

Inventory

Inventory is stated at the lower of cost, using the average cost method, or market.

Deferred Land Costs

Included in deferred land costs is our Company’s original basis in its undeveloped land-
holdings and any land improvement costs, which are stated at the lower of cost or market.
All costs associated with real estate and land projects are capitalized and allocated to the
project to which the costs relate. Administrative labor and the related fringe benefit costs
attributable to the acquisition, active development, and construction of land parcels are
capitalized as deferred land costs. No labor and benefits were capitalized for the years ended
December 31, 2015 and 2014.

Deferred Charges and Other Assets

Deferred charges include certain regulatory assets and costs of obtaining debt financing.
Regulatory assets are amortized over the periods they are recovered through NHPUC-
authorized water rates. Deferred financing costs are amortized over the term of the related
bonds and notes. Our Company’s utility subsidiaries have recorded certain regulatory assets
in cases where the NHPUC has permitted, or is expected to permit, recovery of these costs
over future periods. Currently, the regulatory assets are being amortized over periods ranging
from 2 to 25 years.

Contributions in Aid of Construction
Under construction contracts with real estate developers and others, our Company’s utility

subsidiaries may receive non-refundable advances for the cost of installing new water mains.
These advances are recorded as Contributions in Aid of Construction (“CIAC”). The utility

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