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Concentration of Credit Risks

Financial instruments that subject the Company to credit risk consist primarily of cash
(including cash equivalents and restricted cash) and accounts receivable. Cash balances are
invested in financial institutions insured by the Federal Deposit Insurance Corporation
(“FDIC”). At December 31, 2018 and 2017, the Company had approximately $6,900,000 and
$9,000,000 in excess of FDIC insured limits, respectively. Our accounts receivable balances
primarily represent amounts due from the residential, commercial and industrial customers of
our regulated water utility operations, as well as receivables from our Service Corporation
customers.

Accounts Receivable — Billed, Net

Accounts receivable are recorded at the invoiced amounts. The allowance for doubtful
accounts is our best estimate of the amount of probable credit losses in our existing accounts
receivable and is determined based on historical write-off experience and the aging of account
balances. We review the allowance for doubtful accounts quarterly. Account balances are
written off against the allowance when it is probable the receivable will not be recovered.

Accounts Receivable — Unbilled, Net

We read our customer meters on a monthly basis and record revenues based on meter reading
results. Information from the last meter reading date is used to estimate the value of unbilled
revenues through the end of the accounting period. Estimates of water utility revenues for water
delivered to customers but not yet billed are accrued at the end of each accounting period.
Actual results could differ from those estimates.

Inventory

Inventory is stated at the lower of cost or net realizable value, cost being determined using the
average cost method which approximates the first-in, first-out (FIFO) method.

Deferred Land Costs

Included in deferred land costs is the Company’s original basis in its undeveloped landholdings
and any land improvement costs, which are stated at the lower of cost or market. All costs
associated with real estate and land projects are capitalized and allocated to the project to which
the costs relate. Administrative labor and the related fringe benefit costs attributable to the
acquisition, active development, and construction of land parcels are capitalized as deferred
land costs. No labor and benefits were capitalized for the years ended December 31, 2018 and
2017.

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Deferred Charges and Other Assets

Deferred charges include certain regulatory assets and other assets. Regulatory assets are
amortized over the periods they are recovered through NHPUC-authorized water rates. The
Company’s utility subsidiaries have recorded certain regulatory assets in cases where the
NHPUWC has permitted, or is expected to permit, recovery of these costs over future periods.
Currently, the regulatory assets are being amortized over periods ranging from 2 to 25 years.

Unamortized Debt Issuance Costs

Unamortized debt issuance costs are amortized over the term of the related bonds and notes.
The Company’s utility subsidiaries have recorded unamortized debt issuance costs in cases
where the NHPUC has permitted or is expected to permit recovery of these costs over future
periods. The debt issuance costs are being amortized over the lives of the associated debt.

Contributions in Aid of Construction

Under construction contracts with real estate developers and others, the Company’s utility
subsidiaries may receive non-refundable advances for the cost of installing new water mains.
These advances are recorded as Contributions in Aid of Construction (“CIAC”). The utility
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 the 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 identified
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. The
Company’s real estate holdings outside of our regulated utilities are comprised primarily of
undeveloped land.

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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 Statements of Income
(Loss) 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.

Change in Accounting Principles

Effective January 1, 2018, the Company adopted Financial Accounting Standards Board
(FASB) Accounting Standards Update (ASU) 2015-17, Income Taxes (Topic 740): Balance
Sheet Classification of Deferred Taxes, which requires companies to report deferred tax assets
and liabilities together as a single noncurrent item in their classified balance sheet. The
Company has elected to apply the guidance prospectively as allowed by the standard, therefore
there is no prior year effect to the financial statements as a result of this change.

Effective January 1, 2018, the Company adopted FASB ASU 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the
change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalent. As a result, restricted cash and restricted cash
equivalents are now included with cash and cash equivalents when reconciling the beginning-
of-period and end-of-period total amounts shown on the statement of cash flows. This guidance
is applied retrospectively as determined by the standard. The prior year statement of cash
flows has been restated as a result of this change.

New Accounting Standards to be Adopted in the Future
Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The
standard’s core principle is that a company will recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or services. This standard also
includes expanded disclosure requirements that result in an entity providing users of financial
statements with comprehensive information about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from the entity’s contracts with customers. This standard will
be effective for the Company for the year ending December 31, 2019. The Company is currently
in the process of evaluating the impact of adoption of this ASU on the financial statements.

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Leases

In February 2016, the FASB issued ASU 2016-02, Leases. The ASU requires all leases with
lease terms more than 12 months to be capitalized as a right of use asset and lease liability on
the balance sheet at the date of lease commencement. Leases will be classified as either finance
leases or operating leases. This distinction will be relevant for the pattern of expense
recognition in the income statement. This ASU will be effective for the Company for the year
ending December 31, 2020. The Company is currently in the process of evaluating the impact
of adoption of this ASU on the financial statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial
Instruments. The ASU requires a financial asset (including trade receivables) measured at
amortized cost basis to be presented at the net amount expected to be collected. Thus, the
income statement will reflect the measurement of credit losses for newly-recognized financial
assets as well as the expected increases or decreases of expected credit losses that have taken
place during the period. This ASU will be effective for the Company for the year ending
December 31, 2021. The Company is currently in the process of evaluating the impact of
adoption of this ASU on the financial statements.

Note 2 — Property, Plant and Equipment

The components of property, plant and equipment as of December 31, 2018 and 2017 were as
follows:

Useful Lives
(in thousands) 2018 2017 (in years)
Utility Property:
Land and land rights $ 3,346 $ 3,305 -
Source of supply 65,807 65,608 3-70
Pumping and purification 29,823 31,075 7-64
Transmission and distribution, including
services, meters and hydrants 176,263 161,193 15-91]
General and other equipment 16,742 16,541 7-75
Intangible plant 790 790 20
Construction work in progress 2,175 1,978
Total utility property 294,946 280,490
Total non-utility property 5 $ 5-10
Total property, plant and equipment 294,951 280,495
Less accumulated depreciation (73,091) (69,997)
Property, plant and equipment, net $ 221,860 $ 210,498

The provision for depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from 3 to 9f years. The weighted average composite
depreciation rate was 2.54% and 2.56% in 2018 and 2017, respectively.

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Note 3 — Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash
reported within the consolidated balance sheets that sum to the total of the same such amounts
shown in the statement of cash flows.

(in thousands) 2018 2017

Cash and cash equivalents $ 1,575 $ 994
Restricted cash - RSF 3,428 4,953
Restricted cash - Bond Project Funds 3,337 3,288

Total cash, cash equivalents and restricted cash
shown in the consolidated statements of cash flows $ 8,340 $ 9,235

Amounts included in restricted cash represent those required to be set aside as outlined in Note 1.
Note 4 — Accounts Receivable

Accounts receivable consisted of the following at December 31, 2018 and 2017:

(in thousands) 2018 2017
Accounts receivable - billed $ 3,461 $ 3,457
Less allowance for doubtful accounts _ 44) _ G67)
Accounts receivable - billed, net $ 3,417 $ 3,420
Accounts receivable - unbilled $ 2,927 $ 2,265

Less allowance for doubtful accounts ~ -

Accounts receivable - unbilled, net $ 2,927 $ 2,265

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(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.

Note 5 — Deferred Charges and Other Assets

Deferred charges and other assets as of December 31, 2018 and 2017 consisted of the
following:

Recovery
Period
(in thousands) 2018 2017 (in years)
Regulatory assets:
Source development charges $ 873 $ 952 5-25
Miscellaneous studies 865 980 2-25
Unrecovered pension and post-retirement
benefits expense 8,197 8,244 (1)
Total regulatory assets 9,935 10,176
Supplemental executive retirement plan asset 762 735
Total deferred charges and other assets $ 10,697 $ 10,911

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

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 $350 based on years of service.

The following table sets forth information regarding our DB Plan and our OPEB Plans as of
December 31, 2018 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 27,369 $ 3,735
Employer contribution 1,097 11
Benefits paid, excluding expenses (648) (58)
Fair value of plan assets 17,348 534
Accumulated benefit obligation 24,823 -
Funded status (10,021) (3,201)
Net periodic benefit cost 1,286 251

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

Current liability - -
Non-current bability (10,021) (3,201)
Total $ (10,021) $ (3,201)

The following table sets forth information regarding our DB Plan and our OPEB Plans as of
December 31, 2017 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 27,558 $ 3,660
Employer contribution 1111 11
Benefits paid, excluding expenses (643) (52)
Fair value of pian assets 17,766 612
Accumulated benefit obligation 24,760 -
Funded status (9,792) (3,047)
Net periodic benefit cost 1,368 218

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

Current liability - -
Non-current liability (9,792) (3,047)
Total $ (9,792) $ (3,047)

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Changes in plan assets and benefit obligations recognized in regulatory assets, for the year
ended December 31, 2018, were as follows:

(in thousands) DB Plan OPEB Plans
Regulatory asset balance, beginning of period $ 7,593 $ 651
Net actuarial loss incurred during the period 374 (77)
Prior service cost incurred during the period - 16
Recognized net actuarial (gain)/loss (335) (25)
Regulatory asset balance, end of period $ 7,632 $ 565

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year
ended December 31, 2017, were as follows:

(in thousands) DB Plan OPEB Plans
Regulatory asset balance, beginning of period $ 7,067 $ 390
Net actuarial gain incurred during the period 871 259
Prior service cost incurred during the period - 16
Recognized net actuarial (gain)/loss (345) (14)
Regulatory asset balance, end of period $ 7,593 $ 651

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,
2018:

(in thousands) DB Plan OPEB Plans
Net actuarial loss $ 7,632 $ 712
Prior service cost - (147)
Regulatory asset $ 7,632 $ 565

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,
2017:

(in thousands) DB Plan OPEB Plans
Net actuarial loss $ 7,593 $ 815
Prior service cost - (164)
Regulatory asset $ 7,593 $ 651

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

2018 2017
Discount rate for net periodic benefit cost, beginning of year 3.50% 4.02%
Discount rate for benefit obligations, end of year (a) 4.15% 3.50%
Expected return on plan assets for the period (net of investment expenses) 7.00% 7.00%
Rate of compensation increase, beginning of year 3.00% 3.00%
Healthcare cost trend rate (applicable only to OPEB Plans) 7.00% 7.50%

‘) An increase or decrease in the discount rate of 0.5% would result ina change in the funded status as of December 31, 2018,
for the DB Plan and the OPEB Plans of approximately $2.0 million and $316 thousand, respectively .

The estimated net actuarial loss for our DB Plan that will be amortized in 2019 from the
regulatory assets into net periodic benefit costs is $372,000. The estimated net actuarial gain
and prior service cost for our OPEB Plans that will be amortized in 2019 from the regulatory
assets into net periodic benefit costs is $5,300.

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.

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, 2018, as well as the targeted allocation range:

DB Plan OPEB Plans
Asset Asset
Allocation Allocation
Range Range
Equities 59% 30% - 100% 65% 30% - 100%
Fixed income 41% 20% - 70% 32% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 3% 0% - 15%
Total 100% 100%

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