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

2018 2017
STOCKHOLDER'S EQUITY AND LIABILITIES
Stockholder's Equity:
Common stock; $0.01 par value; 1,000 shares
authorized, issued and outstanding $ - $ -
Additional paid in capital 30,561 30,561
Accumulated deficit (22,523) (16,961)
Accumulated other comprehensive income 372 305
Total Stockholder's Equity 8,410 13,905
Long-Term Debt, Less Current Portion
and Unamortized Debt Issuance Costs 200,225 197,905
Current Liabilities:
Lines of credit 6,626 5,574
Current portion of long-term debt 6,019 5,575
Accounts payable 5,362 1,543
Accrued property taxes - 115
Deferred revenue 63 66
Accrued interest payable 1,682 1,625
Other accrued expenses 700 394
Accrued wages and payroll withholding 346 358
Customer deposits and other 235 191
Total Current Liabilities 21,033 15,441
Other Liabilities and Deferred Credits:
Deferred income taxes 14,110 12,847
Accrued pension liability 10,021 9,792
Unamortized debt premium 2,966 2,964
Deferred investment tax credits 470 504
Regulatory liability 9,943 9,955
Accrued post-retirement benefits 3,201 3,047
Customer advances 84 84
Contributions in aid of construction, net 51,961 47,458
Derivative instrument 263 374
Other long-term liabilities 447 515
Total Other Liabilities and Deferred Credits 93,466 87,540

TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 323,134 $314,791

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the Years Ended December 31, 2018 and 2017
(in thousands)

Operating Revenues

Operating Expenses:
Operations and maintenance
Depreciation and amortization
Taxes other than income taxes

Total Operating Expenses
Operating Income

Interest Expense
Allowance for Funds Used During Construction
Other, Net

Loss Before Provision for Income Taxes
Provision tor Income Taxes

Net Loss

$

$

2018 2017
45,265 $ 40,893
23,540 21,312
8,113 7,762
6,509 6,343
38,162 35,417
7,103 5,476
(10,910) (10,833)
106 27
it (3)
(3,590) (5,333)
(1,692) (1,108)
(5,282) $ (6,441)

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2018 and 2017
(in thousands)

2018 2017

Net Loss $ (5,282) $ (6,441)

Other Comprehensive Income (Loss):
Unrealized gain on derivatives

53 3
Reclassification of net income realized in net income 59 76
Income tax benefit relating to

other comprehensive income (45) (32)
Other Comprehensive Income 67 47

Comprehensive Loss

$ (5,215) $_ (6,394)

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2018
(in thousands, except per share data)

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings/(Deficit) Income Total

Balance as of
January 1, 2018 1,000 =$ - $ 30.561 $ (16,961) $ 305 $ 13,905
Common dividends declared - - - (280) - (280)
Net loss - - - (3,282) - (5,282)
Other comprehensive income:

Unrealized gain on derivatives,

net of taxes of $21 - - - - 32 32

Reclassification of net income

realized in net income, net of

taxes of $24 - - - - 35 35
Balance as of
December 31, 2018 1,000 § - $ 30,561 $ (22,523) $ 372 $ 8.410

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

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2017
(in thousands, except per share data)

Accumulated

Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings /(Deficit) Income Total

Balance as of
January t, 2017 1,000 $ - $ 30,561 $ (10,241) $ 258 $ 20,578
Common dividends declared - - - (279) - (279)
Net loss - - - (6,441) - (6,441)
Other comprehensive income:

Unrealized gain on derivatives,

net of taxes of $1 - - - - l 1

Reclassification of net income

realized in net income, net of

taxes of $31 - - - - 46 46
Balance as of
December 31, 2017 1.000 $ - $ 30,561 $ (16,961) $ 305 $ 13,905

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

8

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018 and 2017
(in thousands)

2018
Operating Activities:
Net Loss $ (5,282) $
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 8,196
Equity component of AFUDC (20)
Amortization of deferred investment tax credits (33)
Provision for deferred income tax 1,206
Undistributed (income) loss in real estate partnership (1)
Gain on disposition of property (114)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable billed and unbilled (649)
(Increase) decrease in inventory (7)
(Increase) decrease in prepaid expenses 110
(Increase) decrease in deferred charges and other assets 550
(Increase) decrease in refundable income taxes 516
Increase (decrease) in accounts payable and deferred revenue 3,817
Increase (decrease) in accrued interest payable 57
Increase in other 534
Net cash provided (used) by operating activities 8,880
Investing Activities:
Purchase of property, piant and equipment including debt .
component of allowance for funds used during construction (13,790)
Proceeds from sale of property 119
Change in investment in real estate partnership and
deferred land costs (19)
Net cash used by investing activities (13,690)

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

2017

(6,441)

7,838
(9)
(33)
1,141
l

(31)

387

62
(46)
(625)
(164)
(4,429)
(79)

205

(2,223)

(7,716)
37

(8)
(7,687)

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018 and 2017

(in thousands)

Financing Activities:
Borrowings (payments) on lines of credit, net
Payments on long-term debt
Contributions in aid of construction
Proceeds from long-term borrowings
Debt issuance costs
Dividends paid

Net cash provided by financing activities
Increase (Decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period

Cash, cash equivalents, and restricted cash at end of period

2018

1,052
(5,614)
696
8,492
(431)

(280)
3,915

(895)
9,235

8,340

$

$

Supplemental Disclosure on Cash Flow and Non-cash Items

For the Years Ended December 31, 2018 and 2017 (in thousands)

Cash paid during the period for:
Interest
Income taxes

Non-cash items:
Contributions in aid of construction
Forgiveness of debt

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

10

§

2018

10,645
14]

4,962
87

$

2017

5,574

(5,209)
61
2,475

(21)

(279)
2,601

(7,309)

16,544
9,235

2017

10,706
167

8,072
77

PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note lI — Description of Business and Summary of Significant Accounting Policies

Description of Business:

Pennichuck Corporation (“the Company,” “we,” or “our’”) is a holding company headquartered
in Merrimack, New Hampshire with five wholly owned operating subsidiaries: Pennichuck
Water Works, Inc., (“Pennichuck Water’) Pennichuck East Utility, Inc., (“Pennichuck East’’)
and Pittsfield Aqueduct Company, Inc. (“PAC”) (collectively referred to as our Company’s
“utility subsidiaries”), which are involved in regulated water supply and distribution to
customers in New Hampshire; Pennichuck Water Service Corporation (“Service Corporation”)
which conducts non-regulated water-related services; and The Southwood Corporation
(“Southwood”) which owns several parcels of undeveloped land.

The Company’s utility subsidiaries are engaged principally in the collection, storage, treatment
and distribution of potable water to approximately 37,242 customers throughout the State of
New Hampshire. The utility subsidiaries, which are regulated by the New Hampshire Public
Utilities Commission (the “NHPUC”), are subject to the provisions of Accounting Standards
Codification (“ASC”) Topic 980 “Regulated Operations.”

Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions have been eliminated
in consolidation.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Property, Plant and Equipment

Property, plant and equipment, which includes principally the water utility assets of the
Company’s utility subsidiaries, is recorded at cost plus an allowance for funds used during
construction on major, long-term projects and includes property funded with contributions in
aid of construction.

Maintenance, repairs and minor improvements are charged to expense as incurred. Improve-
ments which significantly increase the value of property, plant and equipment are capitalized.

11

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash, money market funds and other short-term
liquid investments with original maturities of three months or less.

Restricted Cash - RSF

This restricted cash balance consists of funds maintained for the Rate Stabilization Fund.
(“RSF”), which was established in conformity with the requirements of NHPUC Order 25,292,
as explained more fully in Note 13 of these financial statements. The RSF is an imprest fund
of $5 million, which is subject to funding above or below the imprest fund balance, reflecting
actual revenue performance as it relates to prescribed revenue levels supported by the RSF.
The excess or deficient amount (versus the $5 million imprest balance) is subject to return or
collection to rate payers over the succeeding three-year period of time, as of the rate order
issued with the next promulgated rate case filing. On November 7, 2017, the NH PUC approved
and issued Order No. 26,070 which established new rates for Pennichuck Water. In addition,
the rate order then authorized the reallocation of the existing $5,000,000 Rate Stabilization
Fund among the Company’s three utilities. Such that, Pennichuck Water’s allocated share of
the RSF would now be $3,920,000, with the remaining balance of $1,080,000 to be allocated
between Pennichuck East and Pittsfield Aqueduct. Rate order No. 26,179, under docket DW
17-128 then allocated $980,000 of the $1,080,000 to Pennichuck East Utility with the
remaining $100,000 to Pittsfield Aqueduct. The purpose for splitting and allocating the
existing RSF is to provide additional reserves which ensure sufficient capital to enable the
Company to support its operations. For the years ending December 31, 2018 and 2017, the
- balances in the RSF were $3.4 million and $4.9 million, respectively.

Restricted. Cash — Bond Project Funds

This restricted cash balance consists of funds remaining from the issuance of the Series 2014,
2015 and 2018 tax-exempt bonds (the “Bonds”) in December of 2014, October of 2015 and
April of 2018, respectively. The proceeds from those bond issuance transactions are
maintained in separate restricted cash accounts, with Trustee oversight, and are subject to
withdrawal as a reimbursement of eligible capital project expenditures for the years 2014
through 2019, as defined by the indenture and issuance documents associated with each
offering. The restricted cash accounts are also used as a “conduit” for the transfer of money
from operating cash to restricted cash, allowing the Trustee to make the required payments to
bondholders for principal and interest due semi-annually.

As of December 31, 2017, the funds in these restricted cash accounts totaled approximately
$3.3 million. During 2018, approximately $3.3 million was withdrawn from the restricted cash
accounts to make the principal and interest payments for the Bonds, on January |, July | and
October 1. In December 2018, approximately $3.3 million was transferred into these restricted
cash accounts from the Company’s operating cash accounts, to provide the funds needed to
make the net principal and interest payments due on January |, 2019 for the Bonds. As of
December 31, 2018, the funds in these restricted cash accounts totaled approximately $3.3
million.