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final permanent rate increase, with the intention that this temporary rate increase would be
approved in early 2018, and with permanent rates being set in the summer or fall of 2018.

The last general rate increase for PEU was in 2014, based upon 2012 as a test year. Since then,
PEU’s operating expenses increased ratably, and for some items like local property taxes, well
above the rate of inflation. Additionally, since the beginning of 2013, the Company borrowed
and invested over $7.5 million in new capital assets to serve its customers through ongoing
investments in infrastructure replacements and system improvements. The rate increase being
requested would allow PEU to pay the debt service attributable to these new capital investments,
pay its necessary operating costs, and continue to meet the needs of its customers now and into
the future.

On May 31, 2018, the NHPUC issued Order No. 26,136 approving the requested 12.24%
increase in temporary rates effective on a bills-rendered basis as of January 8, 2018.

On October 4, 2018, the NHPUC issued Order No. 26,179 approving an overall permanent rate
increase of 17.86%, inclusive of the 12.24% increase in temporary rates previously approved on
May 31, 2018, on a bills-rendered basis as of January 8, 2018. This overall rate increase also
included a 1.43% Step increase earned on a forward-looking basis for bills rendered on or after
November 16, 2018.

Qualified Capital Project Adjustment Charge (OCPAC)

On October 29, 2018, the NHPUC issued Nisi Order No. 26,183 approving a 1.69% surcharge on
all capital improvements completed and placed in service by Pennichuck Water Works, Inc.
(PWW) in 2017. This surcharge went into effect in December 2018, on a going forward basis, as
a subset of PWW’s next allowed permanent rate increase.

Financing

On August 28, 2018, Pennichuck East Utility, Inc. filed a petition with the New Hampshire
Public Utilities Commission (NHPUC) for approval to borrow $4,240,000 for a 30-year term
from the State of New Hampshire’s Drinking Water Revolving Loan Fund Program, to be used
to finance the cost of the Locke Lake New Groundwater Source project in Barnstead, NH. The
financing was approved by the Pennichuck Corporation and the Pennichuck East Utility, Inc.
Boards of Directors, and by the City of Nashua, as sole shareholder of Pennichuck Corporation.
On November 6, 2018, the NHPUC issued Order No. 26,189 approving this financing. The loan
closing was completed on February 12, 2019, with the funds to be drawn down for this project
during the 2019 and 2020 calendar years.

On August 29, 2018, Pennichuck Water Works, Inc. filed a petition with the NHPUC for
approval to borrow $3,375,000 for a 30-year term from the State of New Hampshire’s Drinking
Water and Groundwater Trust Fund, to be used to finance the cost of the Pennichuck Core Water
Main Replacement project. The financing was approved by the Pennichuck Corporation and the
Pennichuck Water Works, Inc. Boards of Directors, and by the City of Nashua, as sole
shareholder of Pennichuck Corporation. On December 3, 2018, the NHPUC issued Order No.
26,197 approving this financing. The loan closing was completed on February 12, 2019, with
the entire project scheduled to be completed within 2019.

Other Events

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 two sets 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 impending 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 was 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
case of the service lines) going forward.

Additionally, during 2018 the Company was asked by NHDES to contract for similar design
services with SGPP for expansion of its public water system in southern Bedford. This project
was initiated in 2018, and is slated for completion in the first half of 2019, bringing water to
approximately 90 new customers in that community.

The Company was also asked by the NHDES to design a further buildout for SGPP in Litchfield
to bring public water to an additional 30 residences in Litchfield, due to this contamination site.
It is anticipated that SGPP will enter into another contract with the Company for the expansion
of the Company’s water system in that area, construction of which would expect to begin in the
Summer of 2019, and would be fully paid for by SGPP, and included in CIAC assets at such time
as those projects were completed.

As of March 20, 2018, SGPP and NHDES entered into a Consent Decree, and as such, the
Company is currently working with SGPP in the scheduling of these projects, including the
construction management agreements tied to this activity. Under the Consent Decree, SGPP
needs to fulfill their obligations by November 2019 on all of these currently identified activities.

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A similar effort on behalf of Textiles Coated International, Inc. (“TCI”) in the town of Amherst,
due to PFOA contamination related to their previous existence as a manufacturer in that town,
was also undertaken at the request of the NHDES. The Company was contracted to do design
services for the expansion of the public water system in that area of Amherst, by TCI, and
construction of the expansion of that part of the system began in 2017, and was fully completed
in 2018. Once again, the entire cost of this project was borne by TCI, and has become part of the
Company’s owned infrastructure as CIAC assets.

Company Goals — 2019

The Company’s main goals for 2019 are as follows:

File a PWW Rate Case for test year 2018, including a request for further rate structure
modification relating to an annual surcharge for inflationary increases in operating
expenses, and the inclusion of income taxes in recoverable operating expenses.

File the initial PEU QCPAC case, as well as the annual PWW QCPAC case, for Capex
investments placed in service during 2018.

Research considerations of the effective usage of social media in customer relations and
outreach.

Complete design and approval of the Locke Lake (Barnstead) overflow intake and
treatment facilities upgrades.

Complete the installation and replacement of water mains during 2019 in the northwest
portion of the PWW “core” distribution system, in preparation for the replacement of the
Kessler Farm Tank in 2020.

Continued development and implementation of the Asset Management, GIS and DPaC
modules, including criticality and vulnerability assessment to establish a framework for
2020 Capex planning.

Continued roll-out and implementation of the company-wide Customer Security Program,
to the benefit and safety of customers and employees.

Continued disposal of “excess” land portfolio, with additional lots to be swapped or placed
on the market during 2019.

Completion and ongoing response and action to PFOA contamination issues in
Merrimack, Litchfield, Bedford and Amherst, in cooperation with the NHDES and other
State agencies.

Complete the design of a rebuild of the Bowers Dam, in preparation for a project to be
completed in 2020.

Work with NHDES in assessment and implementation of new State MCL’s for 1,4
dioxane, arsenic, PFAS and lead testing in schools.

Complete Bond issuance reimbursement financing in April 2019, for PWW 2018 Capex.

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.

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¢ Implementation of the new Revenue Recognition standard (ASU No. 2014-09), including
new accounting methodology and reporting.

e Complete the evaluation, design and negotiations relating to the potential move of the
Company’s headquarters facilities to a new location in the City during 2020.

¢ Continued participation in multiple educational outreach efforts within the Company’s
customer coverage radius.

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

Sincerely,

2 f
Larry D. Goodhue
Chief Executive Officer,

Chief Financial Officer
and Treasurer

Pennichuck Corporation and Subsidiaries
Consolidated Financial Statements
December 31, 2018 and 2017

(With Independent Auditors’ Report Thereon)

CONTENTS

Independent Auditors’ Report

Consolidated Balance Sheets

Consolidated Statements of Income (Loss)

Consolidated Statements of Comprehensive Income (Loss)

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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ACCOUNTANTS * AUDITORS [ia

MELANSON ga

121 River Frant Drive
Manchester, NH 03102
(603}669-6130

melansomheath.com

Additional Offices:
Nashua, NH
Andover, MA
Greenfield, MA

Board of Directors and Stockholder Elisworth, 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, 2018 and
2017, 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, 2018 and 2017, 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.

Molaro Hoa th

March 20, 2019

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2018 and 2017
(in thousands, except share data)

2018 2017
ASSETS

Property, Plant and Equipment, net $ 221,860 $ 210,498

Current Assets:
Cash and cash equivalents 1,575 994
Restricted cash - RSF 3,428 4,953
Restricted cash - Bond Project Funds 3,337 3,288
Accounts receivable - billed, net 3,417 3,420
Accounts receivable - unbilled, net 2,927 2,265
Accounts receivable - other 4 14
Inventory 6ll 604
Prepaid expenses 610 598
Prepaid property taxes 1,021 1,143
Deferred and refundable income taxes - 516
Total Current Assets 16,930 17,795

Other Assets:

Deferred land costs 2,275 2,257
Deferred charges and other assets 10,697 10,911
Investment in real estate partnership 104 103
Acquisition premium, net 71,268 73,227
Total Other Assets 84,344 86,498
TOTAL ASSETS $ 323,134 $ 314,791

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

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