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ie=)) THE CITY OF NASHUA The Gate City

Financial Services

Purchasing Department

April 28, 2016
Memo #16-133

TO: MAYOR DONCHESS
FINANCE COMMITTEE

SUBJECT: PICTOMETRY CONTRACT (VALUE: $104,217)
DEPARTMENT: 134 GIS; FUND: GENERAL FUND OPERATING BUDGET
ACCOUNTING CLASSIFICATION: 54 PROPERTY EQUIPMENT

Please see attached communication from Angelo Marino, GISP, GIS Manager dated March 10, 2016 for
the information related to this contract award.

Pursuant to NRO § 5-84 A. (5) Special purchase procedures. Purchases from a sole manufacturer,
where it is determined to be more efficient and economical to reduce costs of maintenance of additional
repair parts, supplies or services.

The GIS Manager and the Purchasing Department recommend awarding the contract to Pictometry
international Corp of Rochester, NY in the amount of $104,217.

Respectfully,

Dan Kooken
Purchasing Manager

Cc: A Marino J Graziano

229 Main Street « Nashua, New Hampshire 03061 « Phone (603) 589-3330 * Fax (603) 589-3344

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Second, retaining the corporate structure provided continuity for the regulatory and financial
status of the companies and their respective businesses. The New Hampshire Public Utilities
Commission continues to provide regulatory oversight for the utility companies, and banks,
lenders and other contract parties continue to be able to rely on existing contracts and other rules
with respect to financing and other operations.

Third, the Mayor and Board of Aldermen unanimously agreed to establish a corporate
governance system for the purposes of managing Pennichuck Corporation. This corporate
governance system relies upon well-established principles of corporate law, and is established
pursuant to Pennichuck Corporation’s Articles of Incorporation and By-Laws, as adopted by the
City and the Company at the time of the acquisition pursuant to the Merger Agreement.

This well-known corporate governance model, which incorporates well-established principles
regarding fiduciary obligations of board members, was structured to provide assurances to the
City’s rating agencies, potential lenders, the New Hampshire Public Utilities Commission and
the many communities we serve that decisions are based on sound business and financial
analysis, and in a manner that minimizes political considerations.

Operations, Communities and Customers. Our companies provide water service to a wide
range of communities and customers.

Pennichuck Water Works, Inc. provides water service to approximately 28,200 customers in
11 communities which include Amherst, Bedford, Derry, Epping, Hollis, Merrimack, Milford,
Nashua, Newmarket, Plaistow and Salem.

Pennichuck East Utility, Inc. provides water service to approximately 7,400 customers in
19 communities which include Atkinson, Barnstead, Bow, Chester, Conway, Derry, Exeter,
Hooksett, Lee, Litchfield, Londonderry, Middleton, Pelham, Plaistow, Raymond, Sandown,
Tilton, Weare and Windham.

Pittsfield Aqueduct Company, Inc. provides water service to approximately 630 customers in
Pittsfield.

Pennichuck Water Service Corporation provides service in connection with the management
of water services for three communities; billing, collection and customer services for

three communities; and water meter testing services, as well as contracted water services at
various levels for approximately 85 small independentiy owned water systems.

The Southwood Corporation owns various parcels of land in the Town of Merrimack.

The Company’s mission is to be a premier supplier of water in New Hampshire by providing
reliable, high quality and affordable water in sufficient quantities, and be New England’s
premier supplier of water related contract services by providing high quality solutions to meet
our customers’ needs.

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Strategies supporting the corporate mission have been developed relative to our water resources,
employees, financing, customer services and Company assets. These strategies together with
the goals and plans to support the strategies are available on the Company’s website,
www.pennichuck.com, under the “Company Reports” caption.

The Company currently has 113 employees. The employees are committed to supporting the
Company’s mission. Each of our managers has goals and objectives to support the strategies
supporting the mission. Pennichuck is an Equal Opportunity/A ffirmative Action Employer. It is
the policy of the Company to hire, train, promote, and otherwise provide terms and conditions of
employment without regard to race, color, religion, sex, sexual orientation, gender identity,
national origin, ancestry, age, marital status, pregnancy, disability or veteran status. All
employment and promotion decisions are based solely on valid requirements, in accordance with
the principles of equal employment opportunity and affirmative action.

Financial Performance During the Last Year. The Company’s audited consolidated financial
statements for the year ended December 31, 2016 are attached to this report.

($ Millions)
4" Quarter Year-to-Date
2016 2015 2016 2015
Revenues $ 8.8 $ 8.9 $ 42.7 $ 40.8
Operating Expenses (8.3) (8.1) (33.9) (32.0)
Operating Income 0.5 0.8 8.8 8.8
Interest Expense (2.8) (3.1) (10.8) (10.9)
Other Income - 0.1 0.9 _ 0.1
Pre-Tax Income (Loss) (2.2) (2.2) (1.1) (2.0)
Income Tax Expense (Benefit) (0.1) 0.3 0.1 0.3
Net Income (Loss) (2.1) (2.5) (1.2) (2.3)
Dividends Paid to the Shareholder 0.1 0.1 0.3 0.3
Earnings Before Interest, Taxes,
Depreciation and Amortization(EBITDA) 2.3 2.7 16.3 15.4

e Consolidated revenues for the fourth quarter decreased by $0.1 million from
$8.9 million in 2015 to $8.8 million in 2016. The decrease is primarily
attributable to lower water usage for Pennichuck Water Works, Inc.

e Consolidated year-to-date revenues increased from $40.8 million in 201 5 to
$42.7 million in 2016. Revenues from the regulated utilities increased primarily
due to increased consumption in 2016 resulting from the dry weather patterns
during the summer months.

e Consolidated operating expenses increased by $0.2 million for the fourth quarter
of 2016, over the same quarter in 2015. The increase is related to increases in
property taxes and higher depreciation costs associated with ongoing capital
investments.

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Consolidated operating expenses increased by $1.9 million from 2015 to 2016
mainly due to higher water treatment and production costs related to higher
consumption ievels, depreciation adjustments, property taxes, and pension and
labor related costs.

A decrease in interest expense from 2015 to 2016 of approximately $0.1 million is
primarily due to the overall reduction in principal amounts outstanding at year-
end, resulting from the amortization of the debt instruments relating to their
repayment over time.

Pre-tax loss for the fourth quarter remained at $2.2 million in 2016 versus 2015
due to a decrease in operating income which was offset by lower interest costs,
year-over-year.

The pre-tax loss for the year decreased from $2.0 million in 2015 to $1.1 million
in 2016 due to the higher revenues discussed previously, offset by increased
operating costs.

Dividends paid to the sole shareholder in both 2015 and 2016 were consistent
with, and were paid pursuant to, the CBFRR structure provided for in the New
Hampshire Public Utilities Commission’s Order approving the City’s ownership
of the Company.

Income Tax Expense in the current year reflects the tax accounting for the
amortization of the Municipal Acquisition Regulatory Asset, which is not
deductible for tax purposes. Therefore, the year-to-date results reflect a tax
provision of approximately -12.1% of pre-tax income compared to the statutory
tax rate expense of 39.6%,

Earnings Before Interest, Taxes, Depreciation and Amortization decreased in the
fourth quarter from $2.7 million in 2015 to $2.3 million in 2016 due to lower
revenues, and enhanced by operating expense variations (excluding depreciation
and interest).

Earnings Before Interest, Taxes, Depreciation and Amortization for 2016
increased over 2015 by approximately $0.9 million, again due to higher revenues
earned year-over-year, offset by operating expense increases, excluding
depreciation and interest expenses.

Unaudited Cash Flow Statement

Cash Fiow on a GAAP basis for the fourth quarter of 2016 as comp
2015, and the year-to-date 2016 versus 2015, are as follows:

ared to the fourth quarter of

Operating Activities:

Net Income (Loss)
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Depreciation and Amortization
Provision for Deferred Taxes
Gain on Disposition of Property
Other
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable
(Increase) Decrease in Inventory
(Increase) Decrease in Other Assets
Increase (Decrease) in Accounts Payable
Increase (Decrease) in Other Liabilities

Net Cash Provided by (Used in) Operating Activities
Investing Activities:

Purchases of Property, Plant & Equipment,
including the Debt Component of AFUDC

(Increase) Decrease in Restricted Cash/Investments

Proceeds from Sale of Property

Change in Deferred Land Costs

Net Cash Provided by (Used in) Investing Activities
Financing Activities:

Borrowings (Repayments) on Line of Credit
Payments on Long-term Debt

Contributions in Aid of Construction
Proceeds from Long-term Borrowings

Debt Issuance Costs

Dividends Paid

Net Cash Provided by (Used in) F inancing Activities

Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Period

($000’s)
Quarter Ended Year-to-Date

December 31, December 31, December 31, December 31,

2016 2015 2016 2015
$ (2,108) $ (2,473) $ (1,240) $ (2,292)
1,837 2,132 6,986 6,804
(61) 244 190 294
(529) - (529) -
(30) 9 (137) (24)
1,004 2,030 (1,584) 129
16 53 46 90
(2,274) (831) (273) 550
3,220 23 4,480 (152)
2,020 _1,145 2,794 1,166
3,095 2,332 10,733 6,565
(8,043) (5,215) (21,886) (13,866)
532 (5,436) 11,410 20,328
311 - 946 -
- - 7 (4)
(7,200) (10.651) (9,523) 6,458
(737) (16,849) (4,227) (42,485)
33 117 58 133
1,893 23,730 4,498 28,098
(2) (95) (59) (232)
(70) (71) (280) (278)
1,117 6,832 (10) (14,764)
(2,988) (1,486) 1,200 (1,741)
5,434 2,732 1,246 2,987
$_ 2,446 $ _ 1,246 $2,446 $ 1,246

Cash and Cash Equivalents at End of Period

Balance Sheet ($000’s)
AS of As of
December 31, 2016 December 31, 2015
(Audited) (Audited)
Assets
Property, Plant & Equipment, Net $ 201.698 $ 183,241

Current Assets:

Cash 2,446 1,246
Restricted Cash 6,530 5,729
Investments — 2014 and 2015 Bond Project Funds 7,568 19,779
Investments — Bond Refund Escrow - -
Accounts Receivable 6,086 4,502
Inventory 666 712
Other Current Assets N°! 2,047 2,232
Total Current Assets 25,343 34,200
Other Assets:
Acquisition Premium “°*? 75,144 77,028
Other Assets 12.410 11,425
Total Other Assets 87,554 88.453
TOTAL ASSETS $_314,595 $ 305,894
Shareholders’ Equity and Liabilities
Shareholders’ Equity $ 20,578 $ _22,041
Bonds, Notes and Mortgages 200,758 201,283
Current Liabilities:
Line of Credit - -
Current Portion of Long-Term Debt 5,162 4,120
Other Current Liabilities 9,798 3.490
Total Current Liabilities 14,960 7,610

Other Long-Term Liabilities:

CIAC, net 40,364 37,929
Deferred Income Taxes 20,869 20,642
Accrued Pension Liability N°? 9,010 8,286
Other Long-Term Liabilities 8,056 8,103
Total Other Long-Term Liabilities 78,299 74,960
TOTAL SHAREHOLDERS’ EQUITY AND $ _314,595 $ _305,894

LIABILITIES

Notes to Balance Sheet

Note 1 (Other Current Assets) ~ At December 31, 2016, approximately $1.2 million of this
balance is comprised of prepaid property taxes, which will be expensed in the first quarter of
2017, relating to taxes paid in November and December of 2016 for the second half of the
property tax year ended March 31, 2017.

Note 2 — In accordance with GAAP, the Acquisition Premium is being written-off over the
30-year life of the principal of the City Acquisition Debt.

Note 3 — During 2016, approximately $970,000 was contributed into the Pension Plan, while
approximately $1,056,000 in benefit payments were made to participants and approximately
$1,103,000 of investment gains and appreciation was added to the plan.

Capital Expenditures

Capital expenditures in the fourth quarter of 2016 were $8.1 million compared to $5.0 million
in the fourth quarter of 2015. For the year 2016, capital expenditures were $20.8 million as
compared to $12.9 million in 2015.

The major expenditures for 2016 were as follows:

($000’s)
New Operations Building $ 7,000
Harris Dam Spillway $ 1,900
Varney Road (Locke Lake), Barnstead, NH $ 1,700
Merrimack Raw Water Transmission Main $ 1,100
Asset Management / GIS / DPaC $ 612
Meter Replacements $ 403
Dean & Main Building Renovation $ 317
Manchester Road Water Main Replacement (Amherst) $ 245
Maple Haven Booster Station Upgrade $ 229

Rate Case — Pennichuck Water Works, Inc.

On September 23, 2016, Pennichuck Water Works, Inc. (“PWW”) filed a request with the New
Hampshire Public Utilities Commission (“NHPUC”) for a rate increase of 17.21% over its
current rates for the test year 2015, for which 7.86% is related to a Permanent rate increase, and
9.35% is related to a prospective Step increase (associated with capital investments and other
allowable expenditures in the twelve months following the test year). The overall rate increase is
subject to the normal regulatory filing process with the NHPUC, as followed for all prior rate
case filings, and as such, the final Permanent rate increase granted will be effective retroactive
back to bills rendered on or after December 7, 2016, once approved by the NHPUC. The Step
increase, once approved and granted, would be earned on a forward looking basis, as of the date
of the order granting such increase. In addition, PWW requested that a Temporary rate increase
of 6.21% be granted as a subset of the final permanent rate increase, with the intention that this

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Temporary rate increase would be approved very early in 2017. In early 2017, the Company and
the NHPUC Staff and Office of Consumer Advocate, agreed to a Temporary rate increase at
current rates, which resulted in a Temporary rate increase of 0%, awaiting the final outcome of
the Permanent and Step rate increase proceedings. The request for this overall increase is based
upon increases in PWW’s operating costs since the last allowed rate increase in 2010/2011 (for
the 2009 test year), as the last rate case filed for PWW for the 2012 test year resulted in a rate
increase at that time of 0%. The current rate increase filing is also based upon the revenues
needed to pay the debt service on over $40 million of infrastructure replacements made since the
last rate case (inclusive of the $20.8 million invested in replacements during 2016, as indicated
previously). The Company continues to invest in infrastructure to maintain the overall assets of
the Company, with those dollars being invested in its real property assets, distribution and
treatment systems, and other necessary capital items, to ensure continued compliance with the
Safe Drinking Water Act and prudent ongoing replacement of aging infrastructure to properly
maintain the Company’s operating systems. A prehearing conference on the rate case filing
occurred on November 21, 2016 at the NHPUC, and notices were mailed to all PWW customers
along with a FAQ fact sheet, on November 7, 2016. To date, two rounds of data discovery have
been completed along with technical sessions between the parties, leading to a final order which
the Company hopes to receive in the third or fourth quarter of 2017.

Water Infrastructure and Conservation Adjustment (WICA)

On May 9, 2016, the New Hampshire Public Utilities Commission issued Order No. 25,896
approving a Water Infrastructure and Conservation Adjustment (WICA) surcharge of 3.03% for
customers of Pennichuck Water Works, Inc. in the Nashua Core System. The surcharge is
effective for service rendered on and after June 1, 2016. The Order was effective May 31, 2016.
The WICA surcharge is a subset of the overall permanent rate increase being sought by
Pennichuck Water Works, Inc.

Financing

On June 2, 2016, Pennichuck Water Works, Inc. completed a financing transaction with the New
Hampshire Department of Environmental Services under the State of New Hampshire’s Drinking
Water Revolving Loan Fund (the “SRF”) in the amount of $1 ,400,000 for a 30-year term at an
interest rate of 2.5%. The loan was entered into to fund the replacement of a portion of the water
mains on Amherst Street, and up to three adj oining streets, in Nashua.

On June 2, 2016, Pennichuck East Utility, Inc. completed a financing transaction with the New
Hampshire Department of Environmental Services under the State of New Hampshire’s Drinking
Water Revolving Loan Fund in the amount of $1,650,000 for a 20-year term at an interest rate of
2.5%. The loan was entered into to fund the replacement of a water main on Varney Road in the
Locke Lake water system in Barnstead.

On June 2, 2016, Pittsfield Aqueduct Company, Inc. completed a financing transaction with the
New Hampshire Department of Environmental Services under the State of New Hampshire’s
Drinking Water Revolving Loan Fund in the amount of $440,000 for a 30-year term at an
interest rate of 3.2%. The loan was entered into to fund the installation of a water main on
Fairview Street and Catamount Road in Pittsfield,

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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