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The fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy used
as of December 31, 2017 was as follows:

(in thousands) Fair Value Level 1 Level 2 Level 3
DB Plan:
Guaranteed Interest Accounts $ 3,215 $ - $ - $ 3,215
Total Assets in the Fair Value Hierarchy 3,215 - - 3,215
Investments measured at net asset value” 14,551 - - -
DB Plan Investments, at Fair Value 17,766 - - 3,215
OPEB Plans:
Common stocks 310 310 - -
Mutual funds 11} lil - -
Fixed income funds 180 180 - -
Money market funds Ul - ll -
Total Assets in the Fair Value Hierarchy 612 601 Il -
Investments measured at net asset value” - - - -
OPEB Plans Investments, at Fair Value 612 601 it -
Totals $ 18,378 $ 601 $ {1 $ 3,215

(a) In accordance with Subtopic 820-10, certain investments that were measured at fair value using the net asset value per share (or its equivalent) practical
expedient have not been classified in the fair value hicrarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair
value hierarchy to the amounts presented in the statements of assets available for benefits of the Plans

Level 1: Based on quoted prices In active markets for identical assets.
Level 2: Based on significant observable inputs.
Level 3: Based on significant unobservable inputs.

The following table summarizes investments at fair value based on NAV per share as of
December 31, 2018 and 2017, respectively:

(in thousands) Fair Value

December 31, 2018
Pooled Separate Accounts:
Equities $ 10,257
Fixed Income 2,677

Total Pooled Separate Accounts $ 12,934

December 31, 2017
Pooled Separate Accounts:
Equities $ 11,117
Fixed Income 3,434

Total Pooled Separate Accounts $ 14,551

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The following table presents a period-end reconciliation of DB Plan assets measured and
recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):

(in thousands) 2018 2017
Balance, beginning of year $ 3,215 $ 2,264
Plan transfers 1,548 1,314
Contributions 219 222
Benefits paid (645) (651)
Return on plan assets (net of investment expenses) 77 66
Balance, end of year $ 4,414 $ 3,215

In order to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, applicable to defined benefit pension plans, the Company anticipates it
will contribute approximately $1.1 million to the DB Plan in 2019.

The following maximum benefit payments, which reflect expected future service, as appro-
priate, are expected to be paid in the years indicated:

(in thousands) DB Plan OPEB Plans
2019 $ 988 $ 84
2020 994 87
2021 1,129 104
2022 1,257 121
2023 1,307 126
2024 - 2028 8,191 820
Total $ 13,866 $ 1,342

Because the Company is subject to regulation in the state in which it operates, we are required
to maintain our accounts in accordance with the regulatory authority’s rules and regulations.
In those instances, we follow the guidance of ASC 980 (“Regulated Operations”). Based on
prior regulatory practice, we recorded underfunded DB Plan and OPEB Plan obligations as a
regulatory asset, and we expect to recover those costs in rates charged to customers.

Defined Contribution Plan

In addition to the defined benefit plan, the Company provides and maintains a defined
contribution plan covering substantially all employees. Under this plan, the Company matches
100% of the first 3% of each participating employee’s salary contributed to the plan. The
matching employer’s contributions, recorded as operating expenses, were approximately
$269,000 and $239,000 for the years ended December 31, 2018 and 2017, respectively.

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Note 7 - Commitments and Contingencies

Operating Leases

The Company’s corporate office space, as well as certain office equipment, is leased under
operating lease agreements. Total rent expense was approximately $367,400 and $309,800 for
the years ended December 31, 2018 and 2017, respectively.

The remaining non-cancelable lease commitments for the corporate office space and leased
equipment as of December 31, 2018 were as follows:

(in thousands) Amount
2019 $ 356
2020 344
2021 345
2022 203
Total $ 1,248

Note 8 — Financial Measurement and Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of its financial instruments.
However, there are inherent weaknesses in any estimation technique. Therefore, for substan-
tially all financial instruments, the fair value estimates herein are not necessarily indicative of
the amounts that we could realize in a sales transaction for these instruments. The estimated
fair value amounts have been measured as of the period end and have not been reevaluated or
updated for purposes of these consolidated financial statements subsequent to those respective
dates.

A fair value hierarchy is used, which prioritizes the inputs to valuation methods used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:

Level 1: Based on quoted prices in active markets for identical assets.
Level 2: Based on significant observable inputs.

Level 3: Based on significant unobservable inputs.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input
that is significant to the fair value measurement.

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For assets and liabilities measured at fair value on a recurring basis, the fair value measure-
ment by levels within the fair value hierarchy used as of December 31, 2018 and 2017 were
as follows:

December 31, 2018
(in thousands) Total Level 1 Level 2 Level 3
Liabilities:
Interest rate swap $ (263) §$ - $ (263) §$ -
December 31, 2017
(in thousands) Total Level I Level 2 Level 3
Liabilities:
Interest rate swap $ (374) $ - $ (374) $ -

The carrying value of certain financial instruments included in the accompanying Consolidated
Balance Sheets, along with the related fair value, as of December 31, 2018 and 2017 was as
follows:

2018 2017
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
Liabilities:
Long-term debt $ (210,588) $ (234,381) $ (207,709) $ (234,509)

Interest rate swap liability $ (263) § (263) $ 374) § (374)

The fair value of long-term debt has been determined by discounting the future cash flows
using current market interest rates for similar financial instruments of the same duration. The
fair value for long-term debt shown above does not purport to represent the amounts at which
those debt obligations would be settled. The fair market value of the interest rate swap
represents the estimated cost to terminate this agreement as of December 31, 2018 and 2017
based upon the then-current interest rates and the related credit risk.

The carrying values of our Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable approximate their fair values because of their short maturity dates. The carrying value
of our CIAC approximates its fair value because it is expected that this is the amount that will
be recovered in future rates.

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Note 9 — Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (the TCJA). The TCJA makes broad and compiex
changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal
corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative
minimum tax (AMT) and changing how existing AMT credits can be realized; (3) changing
rules related to usage and limitation of net operating loss carryforwards created in tax years
beginning after December 31, 2017; (4) changing rules related to limitation of interest expense
deductions; and (5) the taxation of CIAC as income for Regulated Water Utilities, due to the
elimination of an exemption allowed prior to the TCJA. Certain of the TCJA’s provisions
require interpretation, which may be clarified through issuances of guidance by the U.S.
Treasury Department, regulations, or future technical corrections.

FASB ASC 740 requires companies to recognize the effects of tax law changes in the period
of enactment, which for the Company was for the year ended December 31, 2017, even though
the effective date of most provisions of the TCJA is January 1, 2018.

At December 31, 2017, the Company’s revaluation of federal deferred tax balances to reflect
the 21% corporate income tax rate resulted in a one-time, non-cash expense of approximately
$2,500,000, included in the Company’s 2017 provision for income taxes, offset by an increase
in deferred income tax liabilities.

The components of the federal and state income tax provision (benefit) as of December 31,
2018 and 2017 were as follows:

(in thousands) 2018 2017
Federal $ 913 $ 1,057
State 812 84
Amortization of investment tax credits (33) (33)
Total $ 1,692 $ 1,108
Current $ 518 $ -
Deferred 1,174 1,108
Total $ 1,692 $ 1,108

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The following is a reconciliation between the statutory federal income tax rate and the effective
income tax rate for 2018 and 2017:

2018 2017
Statutory federal rate 21.0% 34.0%
State tax rate, net of federal benefits 6.2% 6.2%
Permanent differences -75.7% -15.8%
Tax rate change 0.0% -45.8%
Amortization of investment tax credits 0.9% 0.6%
Effective tax rate -47.6% -20.8%

The temporary items that give rise to the net deferred tax liability as of December 31, 2018
and 2017 were as follows:

(in thousands) 2018 2017
Liabilities:
Property-related, net $ 20,682 $ 19,967
Other 424 373
Total liabilities 21,106 20,340
Assets:
Pension accrued liability 1,272 1,186
Net operating loss carryforward 4,556 5,042
Alternative minimum tax credit 476 476
NH Business Enterprise Tax credits 997 853
Other 692 789
7,993 8,346
Less valuation allowance (997) (853)
Total assets 6,996 7,493
Net non-current deferred income tax liability $ 14,110 $ 12,847

The Company has accumulated federal net operating losses. The federal tax benefit of the
cumulative net operating losses is approximately $3.4 million, begin to expire in 2032, and is
included in deferred income taxes in the Consolidated Balance Sheet as of December 31, 2018.
The net operating losses are 100 percent available to be applied to taxable income in future
years and are not subject to the TCJA as they were generated prior to the 2018 tax year. The
enactment of the TCJA now limits the net operating loss shelter to 80 percent of taxable
income, for post-2017 tax year losses. The TCJA also provides for net operating losses to be
carried forward indefinitely instead of limited to 20 years, as is the case for pre-2018 losses;
however, carrybacks of these losses are no longer permitted.

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The Company has accumulated New Hampshire net operating losses. The New Hampshire tax
benefit of the cumulative net operating loss is approximately $1.1 million which begins to
expire in 2022, and is included in deferred income taxes in the Consolidated Balance Sheet as
of December 31, 2018.

As of December 31, 2018 and 2017, it is estimated that approximately $476,000 and $476,000,
respectively, of cumulative federal alternative minimum tax credits may be carried forward
indefinitely as a credit against our regular tax liability.

As of December 31, 2018 and 2017, the Company had New Hampshire Business Enterprise
Tax (“NHBET”) credits of approximately $997,000 and $853,000, respectively. NHBET
credits begin to expire in 2019. It is anticipated that these NHBET credits will not be fully
utilized before they expire; therefore, a valuation allowance has been recorded related to these
credits. The valuation allowance increased by $144,000 and $126,000 in the years ended
December 31, 2018 and 2017, respectively.

Investment tax credits resulting from utility plant additions are deferred and amortized. The
unamortized investment tax credits are being amortized through the year 2033.

The Company had a regulatory liability related to income taxes of approximately $9,943,000
and $9,955,000 as of December 31, 2018 and 2017, respectively. This represents the estimated
future reduction in revenues associated with deferred taxes which were collected at rates higher
than the currently enacted rates and the amortization of deferred investment tax credits.

A review of the portfolio of uncertain tax positions was performed. In this regard, an uncertain
tax position represents the expected treatment of a tax position taken in a filed tax return, or
planned to be taken in a future tax return, that has not been reflected in measuring income tax
expense for financial reporting purposes. As a result of this review, it was determined that the
Company had no material uncertain tax positions, and tax planning strategies will be used, if
required and when possible, to avoid the expiration of any future net operating loss and/or tax
credits.

The Company’s practice Is to recognize interest and/or penalties related to income tax matters
in “Other, Net” in the Consolidated Statements of Income. We incurred no interest in 2018 and
2017. We incurred no penalties during the years ended December 31, 2018 and 2017,
respectively.

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Note 10 — Long-Term Debt

Long-term debt as of December 31, 2018 and 2017 consisted of the following:

{in thousands)

Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041

Unsecured senior note payabJe due to an insurance company
7.40%, due March 1, 2021

Unsecured Business Finance Authority:
Revenue Bonds (Series 2014A), interest rates from 3.00% to 4.125%,
due January 1, 2045
Revenue Bonds (Series 2014B), 4.50%, due January 1, 2045
Revenue Bonds (Series 2015A), interest rates from 4.00% to 5.00%,
due January 1, 2046
Revenue Bonds (Series 2015B), 5.00%, due January 1, 2046
Revenue Bonds (Series 2018A), interest rates from 4.375% to 5.00%,
due April 1, 2048
Revenue Bonds (Series 2018B), 4.33%, due April 1, 2028
Unsecured notes payable to bank, floating-rate, due March 1, 2030
Unsecured notes payable to bank, 3.62%, due June 20, 2023
Unsecured notes payable to bank, 4.20%, due December 20, 2041
Unsecured notes payable to bank, 4.83%, due December 20, 2041
Unsecured notes payable to bank, 4.25%, due June 20, 2033
Unsecured notes payable to bank, 4.90%, due March 6, 2040
Unsecured notes payable to bank, 5.33%, due June 20, 2043
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1)
Unamortized debt issuance costs for defeased obligations,
allowed by regulation

Total
Less current portion
Less unamnortized debt issuance costs

Total long-term debt, less current portion
and unamortized debt issuance costs

Unamortized
Debt Issuance
Principal Costs
$ 106,830 $ -

3,200 18

38,905 1,803

5,030 114

19,490 1,450

1,840 230

4,460 325

1,075 -

2,928 14

1,367 7

1,192 6

909 5

744 7

573 35

346 19

24,699 182

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210,588 $ 4,344
(6,019)
(4.344)
$__ 200,225

(1) SRF notes are due through 2049 at interest rates ranging from 1% to 3.8%. These notes are payable in 120 to 240
consecutive monthly installments of principal and interest. The 1% rate applies to construction projects still in process
until the earlier of (i) the date of substantial completion of the improvements, or (ii) various dates specified in the note
(such earlier date being the interest rate change date). Commencing on the interest rate change date, the interest rate
changes to the lower of (i) the rate as stated in the note or (ii) 80% of the established 11 General Obligations Bond Index

published during the specified time period before the interest rate change date.

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2017

Unamortized
Debt Issuance
(in thousands) Principal Costs
Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041 $ 108,960 $ -
Unsecured senior note payable due to an insurance company
7.40%, due March 1, 2021 3,600 27
Unsecured Business Finance Authority:
Revenue Bonds (Series 2014A), interest rates from 3.00% to 4.125%,
due January 1, 2045 39,935 1,949
Revenue Bonds (Series 2014B), 4.50%, due January 1, 2045 5,125 118
Revenue Bonds (Series 2015A), interest rates from 4.00% to 5.00%,
due January 1, 2046 20.035 1,527
Revenue Bonds (Series 2015B), 5.00%, due January 1, 2046 1,940 251
Unsecured notes payable to bank, floating-rate, due March 1, 2030 3,134 16
Unsecured notes payable to bank, 3.62%, due June 20, 2023 1,438 9
Unsecured notes payable to bank, 4.20%, due December 20, 2041 1,221 7
Unsecured notes payable to bank, 4.83%, due December 20, 2041 930 5
Unsecured notes payable to bank, 4.25%, due June 20, 2033 780 7
Unsecured notes payable to bank, 4.90%, due March 6, 2040 588 36
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1) 20,023 182
Unamortized debt issuance costs for defeased obligations,
allowed by regulation - 95
Total 207.709 $ 4,229
Less current portion (5,575)
Less unamortized debt issuance costs (4,229)

Total long-term debt, less current portion
and unamortized debt issuance costs $ 197,905

(1) SRF notes are due through 2048 at interest rates ranging from 1% to 3.8%. These notes are payable in 120 to 240
consecutive monthly installments of principal and interest. The 1% rate applies to construction projects still in process
until the earlier of (i) the date of substantial completion of the improvements, or {ii) various dates specified in the note
(such earlier date being the interest rate change date). Commencing on the interest rate change date, the interest rate
changes to the lower of (i) the rate as stated in the note or (ii) 80% of the established 11 General Obligations Bond Index
published during the specified time period before the interest rate change date.

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The aggregate principal payment requirements subsequent to December 31, 2018 are as
follows:

(in thousands) Amount

2019 $ 6,019
2020 6,372
2021 8,660
2022 6,561
2023 7,859
2024 and thereafter 175,117
Total $ 210,588

Several of Pennichuck Water’s loan agreements contain a covenant that prevents Pennichuck
Water from declaring dividends if Pennichuck Water does not maintain a minimum net
worth of $4.5 million. As of December 31, 2018 and 2017, Pennichuck Water’s net worth was
$112.4 million and $118.0 million, respectively.

The 2014A, 2014B, 2015A, 2015B, 2018A and 2018B bonds were issued under a new bond
indenture and loan and trust agreement, established with the issuance of the 2014 Series Bonds,
which contains certain covenant obligations upon Pennichuck Water, which are as follows:

Debt to Capital Covenant - Pennichuck Water cannot create, issue, incur, assume or
guarantee any short-term debt if (1) the sum of the short-term debt plus its funded debt
(“Debt”) shall exceed 85% of the sum of its short-term debt, funded debt and capital
stock plus surplus accounts (“Capital”), unless the short-term debt issued in excess of
the 85% is subordinated to the Series 2014 bonds. Thereby, the ratio of Debt to Capital
must be equal to or less than 1.0. As of December 31, 2018 and 2017, Pennichuck
Water Works has a Debt to Capital Coverage ratio of 0.5 and 0.5, respectively.

All Bonds Test - Additionally, Pennichuck Water cannot create, issue, incur, assume
or guarantee any new funded debt, if the total outstanding funded debt (“Total Funded
Debt”) will exceed the sum of MARA {as defined in Note 1 of these consolidated
financial statements) and 85% of its Net Capital Properties (“MARA and Capital
Properties”), and unless net revenues or EBITDA (earnings before interest, taxes,
depreciation and amortization) shall equal or exceed for at least 12 consecutive months
out of the 15 months preceding the issuance of the new funded debt by 1.1 times the
maximum amount for which Pennichuck Water will be obligated to pay in any future
year (“Max Amount Due”), as a result of the new funded debt being incurred. Thereby,
the ratio of Total Funded Debt to MARA and Capital Properties must be equal to or
less than 1.0; as of December 31, 2018 and 2017, this coverage ratio was 0.4 and 0.4,
respectively. Also, the ratio of EBITDA to the Max Amount Due must be equal to or
greater than 1.1; as of December 31, 2018 and 2017, this ratio was 1.6 and 1.5,
respectively.

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