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PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2017
(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, 2017 1,000 $ - $ 30,561 $ (10,241) $ 258 $ 20,578
Common dividends declared- - - - (279) - (279)
$279.25 per share
Net loss - - - (6,441) - (6,441)
Other comprehensive income (loss):

Unrealized gain on derivatives,

net of taxes of $1 - - - - 1 1

Reclassification of net income

realized in net income, net of

taxes of $31 7 = - - 46 46

Balance as of

December 31, 2017

1,000 §$ $30,561 $ (16,961) $ 305 $ 13,905

!

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

Balance as of
January 1, 2016

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2016
(in thousands, except per share data)

Common dividends declared-

$279.91 per share

Net loss

Other comprehensive income (loss):

Unrealized loss on derivatives,

net of taxes of $(11)

Reclassification of net income
realized in net income, net of

taxes of $49

Balance as of

December 31, 2016

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings/(Deficit) Income (Loss) Total
1,000 $ - $ 30,561 $ (8,721) $ 201 $ 22,041
- - - (280) - (280)
- - - (1,240) - (1,240)
- - - - (17) (17)
- - - - 74 74
1,000 $ - $ 30,561 $ (10,241) $ 258 $ 20,578

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, 2017 and 2016

(in thousands)

2017 2016
Operating Activities:
Net Loss (6,441) $ (1,240)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 7,838 7,019
Equity component of AFUDC (9) (137)
Amortization of deferred investment tax credits (33) (33)
Provision for deferred income tax 1,141 189
Undistributed loss in real estate partnership ] -
Gain on disposition of property (31) (529)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable billed and unbilled 387 (1,584)
Decrease in inventory 62 46
(Increase) decrease in prepaid expenses (46) 185
(Increase) in deferred charges and other assets (625) (456)
(Increase) in refundable income taxes (164) (2)
Increase (decrease) in accounts payable and deferred revenue (4,429) 4,480
Increase (decrease) in accrued interest payable (79) 386
Increase in other 205 2,409
Net cash provided (used) by operating activities (2,223) 10,733
Investing Activities:
Purchase of property, plant and equipment including debt
component of allowance for funds used during construction (7,716) (21,886)
(Increase) decrease in restricted cash 5,857 (5,826)
Proceeds from sale of marketable securities - 17,236
Proceeds from sale of property 37 946
Change in investment in real estate partnership and
deferred land costs (8) 7
Net cash used by investing activities (1,830) (9,523)

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, 2017 and 2016
(in thousands)

2017 2016

Financing Activities:

Borrowings (payments) on line of credit, net $ 5,574 $ -

Payments on long-term debt (5,209) (4,227)

Contributions in aid of construction 61 58

Proceeds from long-term borrowings 2,475 4,498

Debt issuance costs (21) (59)

Dividends paid (279) (280)
Net cash provided (used) by financing activities 2,601 (10)
Increase (Decrease) in cash and cash equivalents (1,452) 1,200
Cash and cash equivalents, beginning of period 2,446 1,246
Cash and cash equivalents, end of period $ 994 $ 2,446

Supplemental Disclosure on Cash Flow and Non-cash Items
For the Years Ended December 31, 2017 and 2016 (in thousands)

2017 2016
Cash paid during the period for:
Interest $ 10,706 $ 10,263
Income taxes 167 123
Non-cash items:
Contributions in aid of construction 8,072 3,309
Forgiveness of debt 77 77

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

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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 (“the Company,” “we,” or “our”) is a holding company head-
quartered 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.

The Company’s utility subsidiaries are engaged principally in the collection, storage,
treatment and distribution of potable water to approximately 36,590 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 the 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 the
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.

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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
(“RSE”), which was established in conformity with the requirements of NHPUC Order
25,292, as explained more fully in Note 11 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. The excess or deficient amount (versus the $5.0 million imprest
balance) is subject to return or collection to rate payers over the succeeding three-year period
of time, as of the rate order issued with the next promulgated rate case filing. On November
7, 2017, the NH PUC approved and issued Order No. 26,070 which established new rates for
Pennichuck Water. In addition, the rate order then authorized the reallocation of the existing
$5,000,000 Rate Stabilization Fund among the Company’s three utilities. Such that,
Pennichuck Water’s allocated share of the RSF would now be $3,920,000, with the
remaining balance of $1,080,000 to be allocated between Pennichuck East and Pittsfield
Aqueduct. The purpose for splitting and allocating the existing RSF is to provide additional
reserves which ensure sufficient capital to enable the Company to support its operations. For
the years ending December 31, 2017 and 2016, the balances in the RSF were $4.9 million
and $6.5 million, respectively.

Restricted Cash — Bond Project Funds

This restricted cash balance consists of funds remaining from the issuance of the Series 2014
and 2015 tax-exempt bonds (the “Bonds”) in December of 2014 and October of 2015,
respectively. The proceeds from those bond issuance transactions are maintained in separate
restricted cash accounts, with Trustee oversight, and are subject to withdrawal as a reim-
bursement of eligible capital project expenditures for the years 2014 through 2019, as defined
by the indenture and issuance documents associated with each offering. The restricted cash
accounts are also used as a “conduit” for the transfer of money from operating cash to
restricted cash, allowing the Trustee to make the required payments to bondholders for
principal and interest due semi-annually.

As of December 31, 2016, the funds in these restricted cash accounts totaled approximately
$7.6 million. During 2017, approximately $3.3 million was withdrawn from the restricted
cash accounts to make the principal and interest payments for the Bonds, on January 1 and
July 1. Also during 2017, approximately $4.3 million was withdrawn from the restricted cash
accounts, and transferred to the Company’s operating cash accounts, for reimbursements of
qualifying capital projects completed and “used and useful” during 2017, which were
initially funded from working capital. In December 2017, approximately $3.3 million was
transferred into these restricted cash accounts from the Company’s operating cash accounts,
to provide the funds needed to make the net principal and interest payments due on
January 1, 2018 for the Bonds. As of December 31, 2017, the funds in these restricted cash
accounts totaled approximately $3.3 million.

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Concentration of Credit Risks

Financial instruments that subject the 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, 2017 and 2016, the Company had approximately $9,000,000
and $16,950,000 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
balances 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 or market, cost being determined using the average
cost method which approximates the first-in, first-out (FIF O) method through December 31,
2016. Effective January 1, 2017, inventory is stated at the lower of cost or net realizable
value, cost being determined using the average cost method which approximates the FIFO
method.

Deferred Land Costs

Included in deferred land costs is the 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, 2017 and 2016.

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Deferred Charges and Other Assets

Deferred charges include certain regulatory assets and other assets. Regulatory assets are
amortized over the periods they are recovered through NHPUC-authorized water rates. The
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.

Unamortized Debt Issuance Costs

Unamortized debt issuance costs are amortized over the term of the related bonds and notes.
The Company’s utility subsidiaries have recorded unamortized debt issuance costs in cases
where the NHPUC has permitted or is expected to permit recovery of these costs over future
periods. The debt issuance costs are being amortized over the lives of the associated debt.

Contributions in Aid of Construction

Under construction contracts with real estate developers and others, the 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
subsidiaries also record to plant and CIAC the fair market value of developer installed mains
and any excess of fair market value over the cost of community water systems purchased
from developers. CIAC are amortized over the life of the related properties.

Revenues

Standard charges for water utility services to customers are recorded as revenue, based upon
meter readings and contract service, as services are provided. The majority of the Company’s
water revenues are based on rates approved by the NHPUC. Estimates of unbilled service
revenues are recorded in the period the services are provided. Provision is made in the
consolidated financial statements for estimated uncollectible accounts.

Non-regulated water management services include contract operations and maintenance, and
water testing and billing services to municipalities and small, privately owned community
water systems. Contract revenues are billed and recognized on a monthly recurring basis in
accordance with agreed-upon contract rates. Revenues from unplanned additional work are
based upon time and materials incurred in connection with activities not specifically identi-
fied in the contract, or for which work levels exceed contracted amounts.

Revenues from real estate operations, other than undistributed earnings or losses from
equity method joint ventures, are recorded upon completion of a sale of real property. The
Company’s real estate holdings outside of our regulated utilities are comprised primarily of
undeveloped land.

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Investment in Joint Venture

Southwood uses the equity method of accounting for its investment in a joint venture in which it
does not have a controlling interest. Under this method, Southwood records its proportionate
share of losses under “Other, net” in the accompanying Consolidated Statements of Income
(Loss) with a corresponding decrease in the carrying value of the investment.

Income Taxes

Income taxes are recorded using the accrual method and the provision for federal and state
income taxes is based on income reported in the consolidated financial statements, adjusted
for items not recognized for income tax purposes. Provisions for deferred income taxes
are recognized for accelerated depreciation and other temporary differences. A valuation
allowance is provided to offset any net deferred tax assets if, based upon available evidence,
it is more likely than not that some or all of the deferred tax assets will not be realized.
Investment tax credits previously realized for income tax purposes are amortized for financial
statement purposes over the life of the property, giving rise to the credit.

Change in Accounting Principles

Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Update (ASU) 2015-07, Fair Value Measurement (Topic
820), Disclosures for Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent). Under the amendments in this ASU, investments for which fair
value is measured at net asset value per share (or its equivalent) using the practical expedient
are not categorized in the fair value hierarchy. The amendments are to be applied
retrospectively. The changes are reflected in the fair value leveling tables in Note 5.

Effective January 1, 2017, the Company adopted FASB ASU 2015-1 1, Inventory (Topic 330):
Simplifying the Measurement of Inventory, which simplifies the subsequent measurement of
inventory by replacing the lower of cost or market test with a lower of cost or net realizable
value test. Net realizable value is defined as estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. Prior
to 2017, the Company reported inventory at the lower of cost or market. This guidance is
applied prospectively as determined by the standard. There is no prior year or current year
effect to the financial statements as a result of this change.

New Accounting Standards to be Adopted in the Future
Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The
standard’s core principle is that a company will recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or services. This standard also
includes expanded disclosure requirements that result in an entity providing users of financial
statements with comprehensive information about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from the entity’s contracts with customers. This standard will

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be effective for the Company for the year ending December 31, 2019. The Company is currently
in the process of evaluating the impact of adoption of this ASU on the financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU requires all leases with
lease terms more than 12 months to be capitalized as a right of use asset and lease liability on
the balance sheet at the date of lease commencement. Leases will be classified as either
finance leases or operating leases. This distinction will be relevant for the pattern of expense
recognition in the income statement. This ASU will be effective for the Company for the year
ending December 31, 2020. The Company is currently in the process of evaluating the impact
of adoption of this ASU on the financial statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial
Instruments. The ASU requires a financial asset (including trade receivables) measured at
amortized cost basis to be presented at the net amount expected to be collected. Thus, the
income statement will reflect the measurement of credit losses for newly-recognized
financial assets as well as the expected increases or decreases of expected credit losses that
have taken place during the period. This ASU will be effective for the Company for the year
ending December 31, 2021. The Company is currently in the process of evaluating the impact
of adoption of this ASU on the financial statements.

Note 2 — Property, Plant and Equipment

The components of property, plant and equipment as of December 31, 2017 and 2016 were
as follows:

Useful Lives
(in thousands) 2017 2016 (in years)
Utility Property:
Land and land rights $ 3,305 $ 3,079 -
Source of supply 65,608 61,450 3-70
Pumping and purification 31,075 30,851 7-64
Transmission and distribution, including 161,193 145,202
services, meters and hydrants 15-91
General and other equipment 16,541 15,000 7-75
Intangible plant 790 790 20
Construction work in progress 1,978 10,022
Total utility property 280,490 266,394
Total non-utility property 5 5 5-10
Total property, plant and equipment 280,495 266,399
Less accumulated depreciation (69,997) (64,701)
Property, plant and equipment, net $ 210,498 $ 201,698

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