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Note 4— Accounts Receivable

Accounts receivable consisted of the following at December 31, 2016 and 2015:

(in thousands) 2016 2015
Accounts receivable - billed $ 4,188 $ 2,235
Less allowance for doubtful accounts (51) (51)
Accounts Receivable - billed, net $ 4,137 $ 2,184
Accounts receivable - unbilled $ 1,921 $ 2,283
Less allowance for doubtful accounts - -
Accounts Receivable - unbilled, net $ 1,921 $ 2,283

Note 5 — Deferred Charges and Other Assets

Deferred charges and other assets as of December 31, 2016 and 2015 consisted of the
following:

Recovery
Period
(in thousands) 2016 2015 (in years)
Regulatory assets:
Source development charges $ 1,041 $ 652 5 - 25
Miscellaneous studies 854 862 2-25
Unrecovered pension and post-retirement
benefits expense 7,457 6,895 0
Total regulatory assets 9,352 8,409
Supplemental executive retirement plan asset 706 645
Subtotal 10,058 9,054
Line of credit debt issuance expenses, net - 2 @
Total deferred charges and other assets $ 10,058 $ 9,066

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

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

The Company has a non-contributory, defined benefit pension plan (the “DB Plan”) that
covers substantially all employees. The benefits are based on years of service and participant
compensation levels. The Company’s 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.

Post-retirement medical benefits are provided 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, which are fully 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, 2016 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 23,899 $ 3,165
Employer contribution 970 10
Benefits paid, excluding expenses (1,056) (47)
Fair value of plan assets 14,889 586
Accumulated benefit obligation 21,547 N/A
Funded status (9,010) (2,578)
Net periodic benefit cost 1,284 194

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

Current liability . -
Non-current liability (9,010) (2,578)
Total $ (9,010) $ (2,578)

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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 N/A
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)

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year

ended December 31, 2016, were as follows:

(in thousands) DB Plan OPEB Plans
Regulatory asset balance, beginning of period $ 6,658 $ 237
Net actuarial loss incurred during the period 737 145
Prior service cost incurred during the period - 17
Recognized net actuarial (gain)/loss (328) (9)
Regulatory asset balance, end of period $ 7,067 $ 390

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year

ended December 31, 2015, were as follows:

(in thousands) DB Plan OPEB Plans
Regulatory asset balance, beginning of period $ 6,668 $ (185)
Net actuarial gain 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

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City of Nashua
Office of the Chief Financial Officer

; ~ (603) 589-3171
229 Main Street - Nashua, NH 03060 Fan thee 98920953

TO: Mayor Jim Donchess
Board of Aldermen ry
\y
FROM: John L. Griffin, Chief Financial officer}
DATE: June 23, 2016 l/

SUBJECT: City and School Retirement Trust Funds

The purpose of this communication is to provide clarification in connection with the
establishment of the City and Schools non-capital reserve funds created to cover retirement
expenses.

R-0068 was adopted by the Board of Aldermen on June 27, 2000 as follows:

RESOLVED by the 8oard of Aldermen of the City of Nashua that a Non-Capital
Reserve Fund is established in the amount of $300,000 to cover retirement expenditures in
excess of yearly budgeted retirement appropriations. The fund may continue to increase, funds
permitting, to a level which is deemed appropriate by the Comptroller. Funds may be
transferred from this account into appropriate departmental accounts, only after administrative
review by the Mayor, President of the Board of Aldermen, Treasurer and Comptroller. The
Board of Aldermen will receive written notification prior to the transfer of funds. Any amount
expended from this account will be replenished as allowed, funds permitting, on a yearly basis.

The intent of this legistation was to provide a mechanism to deal with employee final
separation pay (i.e. accrued vacation and accrued sick time) upon retirement. in order to
qualify, the employee must meet the retirement eligibility rules of the New Hampshire
Retirement System (NHRS} and the Board of Public Works Retirement System (BPW).

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,
2016:

(in thousands) DB Plan OPEB Plans
Net actuarial loss $ 7,067 $ 570
Prior service cost - (180)
Regulatory asset $ 7,067 $ 390

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 loss $ 6,658 $ 433
Prior service cost - (196)
Regulatory asset $ 6,658 $ 237

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

2016 2015
Discount rate for net periodic benefit cost, beginning of year 4.21% 3.85%
Discount rate for benefit obligations, end of year @) 4.02% 4.21%
Expected return on plan assets for the period (net of investment expenses) 7.00% 7.50%
Rate of compensation increase, beginning of year 3.00% 2.75%
Healthcare cost trend rate (applicable only to OPEB Plans) 8.00% 8.50%

An increase or decrease in the discount rate of 0.5% would result in a change in the funded status as of December 31, 2016, for
the DB Plan and the OPEB Plans of approximately $2 million and $288,000, respectively.

The estimated net actuarial loss for our DB Plan that will be amortized in 2017 from the
regulatory assets into net periodic benefit costs is $346,000. The estimated net actuarial gain
and prior service cost for our OPEB Plans that will be amortized in 2017 from the regulatory
assets into net periodic benefit costs is $0.

In establishing its investment policy, the Company has considered the fact that the DB Plan is
a major retirement vehicle for its employees and the basic goal underlying the establishment
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. The
Company’s investment strategy applies to its OPEB Plans as well as the DB Plan. The
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.

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

The investment strategy for the Company’s DB Plan and 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, 2016, as well as the targeted allocation
range:

DB Plan OPEB Plans
Asset Asset
Allocation Allocation
Range Range
Equities 64% 30% - 100% 68% 30% - 100%
Fixed income 36% 20% - 70% 30% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 2% 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, 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%

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.

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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.

A fair value hierarchy which prioritizes the inputs to valuation methods is 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, 2016 was as follows:

(in thousands) Totals Level 1 Level 2 Level 3
DB Plan:
Equities:
Pooled separate accounts $ 9,561 $ - $ 9,561 $ -
Fixed income:
General investment account 2,264 - - 2,264
Pooled separate accounts 3,064 - 3,064 -
Total DB Plan 14,889 - 12,625 2,264
(continued)

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(continued)

(in thousands) Totals Level 1 Level 2 Level 3
OPEB Plans:
Common stocks 268 268 - -
Mutual funds 131 131
Fixed income funds 173 173 - -
Cash and cash equivalents:
Money market funds 13 - 13 -
Total OPEB Plans 585 572 13 -
Totals $ 15,474 $ 572 $ 12,638 $ 2,264

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
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

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.

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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) 2016 2015
Balance, beginning of year $ 2,581 $ 2,625
Plan transfers 493 182
Contributions 196 187
Benefits paid (1,068) (497)
Return on plan assets (net of investment expenses) 62 84
Balance, end of year $ 2,264 $ 2,581

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 million to the DB Plan in 2017.

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
2017 $ 752 $ 63
2018 823 71
2019 956 89
2020 961 92
2021 1,096 109
2022 - 2026 7,113 698
Total $11,701 $ 1,122

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 Opera-
tions”). 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
$215,000 and $217,000 for the years ended December 31, 2016 and 2015, 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 $344,800 and $307,000
for the years ended December 31, 2016 and 2015, respectively.

The remaining non-cancelable lease commitments for the corporate office space and leased
equipment as of December 31, 2016 were as follows:

(in thousands) Amount
2017 $ 326
2018 352
2019 348
2020 333
2021 338
Thereafter 199
Total $ 1,896

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 respec-
tive 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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