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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 our 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. Our
Company’s real estate holdings outside of our regulated utilities are comprised primarily of
undeveloped land.

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 State-
ments of Income 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.

13

Note 2 — Property, Plant and Equipment

The components of property, plant and equipment as of December 31, 2015 and 2014 were
as follows:

Useful Lives
(in thousands) 2015 2014 (in years)
Utility Property:
Land and land rights $ 3,078 $ 2,939 -
Source of supply 52,347 51,489 3-70
Pumping and purification 30,508 30,115 7-64
Transmission and distribution, including 138,756 130,983
services, meters and hydrants 15-9]
General and other equipment 13,189 11,358 7-75
Intangible plant 790 770 20
Construction work in progress 4,494 2,677
Total utility property 243,162 230,331
Total non-utility property 5 5 5-10
Total property, plant and equipment 243,167 230,336
Less accumulated depreciation (59,926) (57,049)

Property, plant and equipment, net $§ 183,241 $173,287

The provision for depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from 3 to 91 years. The weighted average composite
depreciation rate was 2.53% and 2.43% in 2015 and 2014, respectively.

Note 3 — Investments — Bond Project Funds

At December 31, 2015, the Company held investments in marketable securities that were
classified as held-to-maturity and consisted of the following:

Unrecognized Estimated

Amortized Holding Fair
(in thousands) Cost Losses Value
U.S. government bonds $ 17,237 §$ (27) § 17,210

Investments - Bond Project Funds $ 17,237 $ (27) $ 17,210

16

At December 31, 2015, contractual maturities of held-to-maturity securities, in the carrying
amount of approximately $17,237,000, were due in one year or less. Actual maturities may
differ from contractual maturities because some borrowers have the right to call or prepay
obligations with or without call or prepay penalties.

Note 4 ~ Accounts Receivable

Accounts receivable consisted of the following at December 31, 2015 and 2014:

(in thousands} 2015 2014
Accounts receivable - billed $ 2,235 $ 2,240
Less allowance for doubtful accounts (51) (51)
Accounts Receivable - billed, net $ 2,184 $ 2,189
Accounts receivable - unbilled $ 2,283 $ 2,399
Less allowance for doubtful accounts - -
Accounts Receivable - unbilled, net $ 2,283 $ 2,399

Note 5 — Deferred Charges and Other Assets

Deferred charges and other assets as of December 31, 2015 and 2014 consisted of the
following:

Recovery
Period
(in thousands) 2015 2014 (in years)
Regulatory assets:
Source development charges $ 652 $ 708 5-25
Miscellaneous studies 862 1,080 2-25
Unrecovered pension and post-retirement
benefits expense 6,895 6,483 wv
Total regulatory assets 8,409 8,271
Supplemental executive retirement plan asset 645 649
Subtotal 9,054 8,920
Debt issuance expenses, net 4,781 4,422 ()
Total deferred charges and other assets $ 13,835 $ 13,342

‘ We expect to recover these amounts consistent with the anticipated expense recognition of these assets.

7

Note 6 — Post-retirement Benefit Plans
Pension Plan and Other Post-retirement Benefits

We have a non-contributory, defined benefit pension plan (the “DB Plan”) that covers sub-
stantially all employees. The benefits are based on years of service and participant compensa-
tion levels. Our funding policy is to contribute annual amounts that meet the requirements for
funding under the U.S. Department of Labor’s Pension Protection Act. Contributions are
intended to provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.

We provide post-retirement medical benefits for eligible retired employees through one of
two plans (collectively referred to as our “OPEB Plans”). For employees who retire on or
after the normal retirement age of 65, benefits are provided through a post-retirement plan
(the “Post-65 Plan”). For eligible non-union employees who retire prior to their normal
retirement age and who have met certain age and service requirements, benefits are provided
through a post-employment medical plan (the “Post-employment Plan”). Future benefits
under the Post-65 Plan increase annually based on the actual percentage of wage and salary
increases earned from the plan inception date to the normal retirement date. The benefits
under the Post-employment Plan allow for the continuity of medical benefits coverage at
group rates from the employee’s retirement date until the employee becomes eligible for
Medicare and are funded by the retiree. The liability related to the Post-65 Plan will be
funded from the general assets of our Company.

Upon retirement, if a qualifying employee elects to receive medical benefits under our Post+
65 Plan, we pay up to a maximum monthly benefit of $330 based on years of service.

The following table sets forth information regarding our DB Plan and our OPEB Plans as of
December 31, 2015 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 22,158 $ 2,861
Employer contribution 936 298
Benefits paid, excluding expenses (497) (37)
Fair value of plan assets 13,872 619
Accumulated benefit obligation 19,911 -
Funded status (8,286) (2,242)
Net periodic benefit cost 1,215 158

Amount of the funded status recognized in the
Consolidated Balance Sheet consisted of:
Current liability - -
Non-current liability (8,286) (2,242)

Total $ (8,286) $ (2,242)

18

The following table sets forth information regarding our DB Plan and our OPEB Plans as of
December 31, 2014 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 21,512 $ 3,000
Employer contribution 986 -
Benefits paid, excluding expenses (429) (34)
Fair value of plan assets 13,495 962
Accumulated benefit obligation 19,374 -
Funded status (8,017) (2,038)
Net periodic benefit cost 893 130

Amount of the funded status recognized in the
Consolidated Balance Sheet consisted of:

Current liability : (22)
Non-current liability (8,017) (2,016)
Total $ (8,017) $ (2,038)

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year
ended December 31, 2015, were as follows:

(in thousands) DB Pian OPEB Plans
Regulatory asset balance, beginning of period $ = 6,668 $ (185)
Net actuarial loss incurred during the period 347 332
Prior service cost incurred during the period - 16
Recognized net actuarial (gain)/loss (357) 74
Regulatory asset balance, end of period $6,658 $ 237

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year
ended December 31, 2014, were as follows:

(in thousands) DB Pian OPEB Plans
Regulatory asset balance, beginning of period $ 3,815 $ (473)
Net actuarial gain incurred during the period 2,986 299
Prior service cost incurred during the period - (51)
Recognized net actuarial (gain)/loss (133) 40
Regulatory asset balance, end of period $ 6,668 § (185)

Amounts recognized in regulatory assets for the DB and OPEB Plans that have not yet been
recognized as components of net periodic benefit cost of the following as of December 31,
2015:

(in thousands) DB Plan OPEB Plans
Net actuarial (gain)/loss $ 6,658 $ 433
Prior service cost - (196)
Regulatory asset $6,658 $ 237

Amounts recognized in regulatory assets for the DB and OPEB Plans that have not yet been
recognized as components of net periodic benefit cost of the following as of December 31,
2014:

(in thousands) DB Plan OPEB Plans
Net actuarial loss $ 6,668 $ 28

Prior service cost - (213)
Regulatory asset $ 6,668 $ (185)

The key assumptions used to value benefit obligations and calculate net periodic benefit cost
for our DB and OPEB Plans include the following:
2015 2014

Discount rate for net periodic benefit cost, beginning of year 3.85% 4.84%
Discount rate for benefit obligations, end of year (a) 4.21% 3.85%
Expected return on plan assets for the period (net of investment expenses) 7.50% 7.50%
Rate of compensation increase, beginning of year 2.75% 2.75%
Healthcare cost trend rate (applicable only to OPEB Plans) 8.50% 9.00%

(a) An increase or decrease in the discount rate of 0.5% would result in a change in the funded status as of December 31, 2015, for
the DB Plan and the OPEB Plans of approximately $1.7 million and $244 thousand, respectively,

The estimated net actuarial loss for our DB Plan that will be amortized in 2016 from the
regulatory assets into net periodic benefit costs is $341,000. The estimated net actuarial gain
and prior service cost for our OPEB Plans that will be amortized in 2016 from the regulatory
assets into net periodic benefit costs is $(6,000).

In establishing its investment policy, our Company has considered the fact that the DB Plan
is a major retirement vehicle for its employees and the basic goal underlying the establish-
ment of the policy is to provide that the assets of the DB Plan are invested in accordance with
the asset allocation range targets to achieve our expected return on DB Plan assets. Our
Company’s investment strategy applies to its OPEB Plans as well as the DB Plan. Our
expected long-term rate of return on DB Plan and OPEB Plan assets is based on the Plans’
expected asset allocation, expected returns on various classes of Plan assets, as well as
historical returns.

20

The assets of our Post-65 Plan are held in two separate Voluntary Employee Beneficiary
Association (“VEBA”) trusts. We maintain our VEBA plan assets in directed trust accounts
at a commercial bank.

The investment strategy for our DB Plan and our OPEB Plans utilizes several different asset
classes with varying risk/return characteristics. The following table indicates the asset
allocation percentages of the fair value of the DB Plan and OPEB Plans’ assets for each
major type of plan asset as of December 31, 2015, as well as the targeted allocation range:

DB Plan OPEB Plans
Asset Asset
Allocation Allocation
___Range __Range
Equities 62% 30% - 100% 66% 30% - 100%
Fixed income 38% 20% - 70% 31% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 3% 0% - 15%
Total 100% 100%

The following table indicates the asset allocation percentages of the fair value of the DB Plan
and OPEB Plans’ assets for each major type of plan asset as of December 31, 2014, as well
as the targeted allocation range:

DB Pian OPEB Plans
Asset Asset
Allocation Allocation
Range Range
Equities 61% 30% - 100% 71% 30% - 100%
Fixed income 39% 20% - 70% 28% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 1% 0% - 15%
Total 100% 100%

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 year-end and have not been reevaluated or
updated for purposes of these consolidated financial statements subsequent to those respective
dates.

Investments in common stock and mutual funds are stated at fair value by reference to quoted

market prices. Money market funds are valued utilizing the Net Asset Value per unit based
on the fair value of the underlying assets as determined by the directed trustee.

2]

The DB Plan also holds assets under an immediate participation guarantee group annuity
contract with a life insurance company. The assets under the contract are invested in pooled
separate accounts and in a general investment account. The pooled separate accounts are
valued based on net asset value per unit of participation in the fund and have no unfunded
commitments or significant redemption restrictions at year-end. The value of these units is
determined by the trustee based on the current market values of the underlying assets of the
pooled separate accounts. Therefore, the value of the pooled separate accounts is deemed to
be at estimated fair value.

The general investment account is not actively traded and significant other observable inputs are
not available. The fair value of the general investment account is calculated by discounting the
related cash flows based on current yields of similar instruments with comparable durations.

The methods described above may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the Plan’s management
believes the valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of
certain investments could result in a different fair value measurement at the reporting date.

We use a fair value hierarchy 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 fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy
used as of December 31, 2015 was as follows:

(in thousands) Totals Level 1 Level 2 Level 3
DB Plan:
Equities:
Pooled separate accounts $ 8569 $§$ - $ 8569 $§ -
Fixed income:
General investment account 2,581 - - 2,581
Pooled separate accounts 2,722 - 2,722 -
Total DB Plan 13,872 - 11,291 2,581
(continued)

22

(continued)

(in thousands) Totals Level 1 Level 2 Level 3
OPEB Plans:
Common stocks 287 287 - >
Mutual funds 104 104
Fixed income funds 185 185 . -
Cash and cash equivalents:
Money market funds 43 - 43 -
Total OPEB Plans 619 576 43 -
Totals $ 14,491 $576 $ 11,334 $ 2,581

The fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy
used as of December 31, 2014 was as follows:

(in thousands) Totals Level 1 Level 2 Level 3
DB Plan:
Equities:
Pooled separate accounts $ 8204 $ - $ 8204 $$ -
Fixed income:
General investment account 2,625 - - 2,625
Pooled separate accounts 2,666 - 2,666 -
Total DB Plan 13,495 - 10,870 2,625
OPEB Plans:
Mutual funds:
Balanced/hybrid funds 173 173 - -
USS. equity securities funds 447 447 - -
International equity funds 66 66 - -
Fixed income funds 269 269 - -
Cash and cash equivalents:
Money market funds 7 - 7 -
Total OPEB Plans 962 955 7 -
Totals $14,457 $ 955 $ 10877 $ 2,625

Level |: 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 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) 2015 2014
Balance, beginning of year $ 2,625 $ 2,940
Plan transfers 182 (494)
Contributions 187 537
Benefits paid (497) (438)
Return on plan assets (net of investment expenses) 84 80
Balance, end of year $ 2,581 $ 2,625
=—=—_ —aEaE

In order to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, applicable to defined benefit pension plans, we anticipate that we will
contribute approximately $1.1 million to the DB Plan in 2016.

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
2016 $ 686 $ 54
2017 756 64
2018 845 72
2019 977 91
2020 978 92
2021 - 2025 6,666 642
Total $ 10,908 $1,015

Because we are subject to regulation in the state in which we operate, 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, we have a defined contribution plan covering
substantially all employees. Under this plan, our Company matches 100% of the first 3% of
each participating employee’s salary contributed to the plan. The matching employer’s con-
tributions, recorded as operating expenses, were approximately $217,000 and $207,000 for
the years ended December 31, 2015 and 2014, respectively,

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