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On June 16, 2016, Pennichuck East Utility, Inc. completed a financing transaction with CoBank,
ACB in the amount of $2,200,000 for a term of 25 years at an interest rate of 4.2% to be used for
non-SRF funded capitai improvement projects being completed in 2016, and early 2017. Of this
amount, $1.25 million was drawn down at closing, while the remaining $950,000 was drawn
down in the fourth quarter of 2016.

Other Events

Operations Facility

On June 30, 2016, the Will Street Operations facility was sold for $1.01 million. The Company
continued to occupy this facility until December 2016 as a $0 triple-net tenant, pending the
completion and occupancy of the new Operations building on DW Highway in Merrimack,
immediately adjacent to the Pennichuck Water Works Water Treatment Plant. A net gain of
$529,000 from this transaction was recognized in other income, after recognition of the payment
of direct selling expenses and the write-off of net book value carrying costs for the property. The
net cash proceeds from this sale were used in the payment of certain costs related to the
completion of the new Operations building, which was occupied on December 19, 2016.

PFOA Contamination Issues

During 2016, the Company was significantly involved in assisting the New Hampshire
Department of Environmental Services (“NHDES”) in assessing and bringing remediation
solutions to bear, in light of the PFOA contamination issues discovered in the towns surrounding
the Saint Gobain Performance Plastics (“SGPP”) site in north Merrimack. This included self-
instituting comprehensive and regular testing of the Company’s water supplies and water
systems, not only in the area adjacent to this site, but taking and processing at least one set of
tests at all water sources that the Company owns throughout the State. This was done in order to
detect if any levels of contamination existed in the water sources, to aid the NHDES in
completing their statewide assessment, and to allow the Company to respond with certainty to
any of its customers as to any detectable levels. With regards to the water supply systems
directly adjacent to or connected to the Merrimack Village District, the Company has been
taking weekly or monthly samples since this contamination site was disclosed in March of 2016.
The results of these tests were that none of the Company’s water sources had detectable levels
exceeding EPA lifetime advisory levels, or the State’s emergency and now permanent standard
detection levels.

Additionally, at the request of the NHDES, the Company was asked to enter into a contract with
SGPP for the design of the expansion of public water to residents in the northern portion of
Litchfield, where private wells had been contaminated, in some cases well above acceptable
levels. Based upon the results of that design work, the Company was then contracted by SGPP
to expand the public water system owned by the Company in Litchfield to approximately 400
property owners, including nearly 10 miles of new water mains and nearly 10 miles of new
service lines. The cost of the design work and the expansion of the water system has and is
being paid totally by SGPP, and will be contributed to the Company as Contributions in Aid of
Construction (CIAC), as assets to be owned by the Company, the Town, or the residents (in the

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case of the service lines) going forward. Additionally, the Company has been asked by NHDES
to contract for similar design services with SGPP for expansion of its public water system in
southern Bedford as weii as an additional 38 residences in Litchfield, due to this contamination
Site.

A similar effort on behalf of Textiles Coated International, Inc. (“TCT”) in the town of Amherst,
due to PFOA contamination related to their previous existence as a manufacturer in that town,
has also begun at the request of the NHDES, with the initial design phase yet io begin as of
March 2017.

Company Goals — 2017

The Company’s main goals for 2017 are as follows:

¢ Completion of the Pennichuck Water Works, Inc. rate case with the New Hampshire
Public Utilities Commission

° Filing of rate cases for the Company’s Pennichuck East Utility, Inc. and Pittsfield
Aqueduct Company, Inc. subsidiaries

° Successfully negotiate a new collective bargaining agreement in the fourth quarter, to
replace the current contract which expires on October 31, 2017

* Continue the roll-out and implementation of the Company’s comprehensive Asset
Management System

° Complete a round of bond financing for Pennichuck Water Works, Inc. for 2017-2019
capital expenditure needs

° Secure other financing needs for ongoing infrastructure replacement for Pennichuck
Fast Utility, Inc. and Pittsfield Aqueduct Company, Inc.

¢ Completion of a Safe Yield Analysis of the watershed

° Complete the build-out of the expansion of the distribution system in response to the
PFOA contamination issues, all funded by the identified Potential Responsible Parties
(PRP) in cooperation with the New Hampshire Department of Environmental Services.

Other detailed information is included in the Company’s financial statements.

“pad

Larry D. Goodhue
Chief Executive Officer,
Chief Financial Officer
and Treasurer

Pennichuck Corporation and Subsidiaries
Audited Consolidated Financial Statements

December 31, 2016 and 2015

Contents

Independent Auditors’ Report

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statement of Changes in Stockholder’s Equity Current Year

Consolidated Statement of Changes in Stockholder’s Equity Prior Year

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

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MELANSON| gaa

ACCOUNTANTS * AUDITORS

years

121 River Front Drive
Manchester, NH 03102
(603)669-6130

melansonheath.com

Additional Offices:

Nashua, NH
Andover, MA
Greenfield, MA

Board of Directors and Stockholder Ellsworth, ME
Pennichuck Corporation and Subsidiaries

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying consolidated financial statements of Pennichuck Corporation
and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and
2015, and the related consolidated statements of income (loss), comprehensive income (loss),
changes in stockholder’s equity, and cash flows for the years then ended, and the related
notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated
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 consolidated 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 consolidated 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 consolidated financial statements
are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditors’ judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated 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 entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated 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 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pennichuck Corporation and Subsidiaries as of
December 31, 2016 and 2015, and the results of their operations and their cash flows for the
years then ended in accordance with accounting principles generally accepted in the United
States of America.

Molensonr Haath

March 22, 2017

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and 2015
(in thousands, except share data)

2016 2015
ASSETS

Property, Plant and Equipment, net $ 201,698 $ 183,241

Current Assets:
Cash and cash equivalents 2,446 1,246
Restricted cash - RSF 6,530 5,729
Restricted cash - Bond Project Funds 7,568 2,542
Investments - Bond Project Funds - 17,237
Accounts receivable - billed, net 4,137 2,184
Accounts receivable - unbilled, net 1,921 2,283
Accounts receivable - other 28 35
Inventory 666 712
Prepaid expenses 532 667
Prepaid property taxes 1,163 1,334
Deferred and refundable income taxes 352 231
Total Current Assets 25,343 34,200

Other Assets:

Deferred land costs 2,248 2,255
Deferred charges and other assets 10,058 9,066
Investment in real estate partnership 104 104
Acquisition premium, net 75,144 77,028
Total Other Assets 87,554 88,453
TOTAL ASSETS $ 314,595 $ 305,894

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 2016 and 2015
(in thousands, except share data)

2016 2015
STOCKHOLDER'S EQUITY AND LIABILITIES
Stockholder's Equity:
Common stock; $0.01 par value; 1,000 shares
authorized, issued and outstanding $ - $ -
Additional paid in capital 30,561 30,561
Accumulated deficit (10,241) (8,721)
Accumulated other comprehensive income 258 201
Total Stockholder's Equity 20,578 22,041
Long-Term Debt, Less Current Portion
and Unamortized Debt Issuance Costs 200,758 201,283
Current Liabilities:
Current portion of long-term debt 5,162 4,120
Accounts payable 5,975 1,492
Deferred revenue 63 66
Accrued interest payable 1,704 1,318
Other accrued expenses 980 243
Accrued wages and payroll withholding 271 220
Customer deposits and other 805 151
Total Current Liabilities 14,960 7,610
Other Liabilities and Deferred Credits:
Deferred income taxes 20,869 20,642
Accrued pension liability 9,010 8,286
Unamortized debt premium 3,082 3,243
Deferred investment tax credits 537 570
Regulatory liability 760 781
Accrued post-retirement benefits 2,578 2,242
Customer advances 84 84
Contributions in aid of construction, net 40,364 37,929
Derivative instrument 453 548
Other long-term liabilities 562 635
Total Other Liabilities and Deferred Credits 78,299 74,960

TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 314,595 $ 305,894

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the Years Ended December 31, 2016 and 2015

(in thousands)

Operating Revenues

Operating Expenses:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes

Total Operating Expenses
Operating Income

Interest Expense
Allowance for Funds Used During Construction
Other, Net

Loss Before (Provision for) Benefit from Income Taxes
(Provision for) Benefit from Income Taxes

Net Loss

2016

$ 42,697

20,820
6,942
6,159

33,921

8,776

(10,784)
358

545

(1,105)

(135)
$ (1,240)

2015

$ 40,840

19,511
6,610
5,928

32,049
8,791

(10,775)
70
(70)

(1,984)
(308)
$ (2,292)

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2016 and 2015

(in thousands)

Net Loss

Other Comprehensive Income (Loss):
Unrealized loss on derivatives
Reclassification of net income realized in net income
Income tax expense (benefit) relating to
other comprehensive income

Other Comprehensive Income

Comprehensive Loss

2016

$ (1,240)

(28)
123

(38)
57
$ (1,183)

2015
$ (2,292)

(109)
144

(14)
21
$ (2,271)

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