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Note 10 — Long-Term Debt

Long-term debt as of December 31, 2018 and 2017 consisted of the following:

{in thousands)

Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041

Unsecured senior note payabJe due to an insurance company
7.40%, due March 1, 2021

Unsecured Business Finance Authority:
Revenue Bonds (Series 2014A), interest rates from 3.00% to 4.125%,
due January 1, 2045
Revenue Bonds (Series 2014B), 4.50%, due January 1, 2045
Revenue Bonds (Series 2015A), interest rates from 4.00% to 5.00%,
due January 1, 2046
Revenue Bonds (Series 2015B), 5.00%, due January 1, 2046
Revenue Bonds (Series 2018A), interest rates from 4.375% to 5.00%,
due April 1, 2048
Revenue Bonds (Series 2018B), 4.33%, due April 1, 2028
Unsecured notes payable to bank, floating-rate, due March 1, 2030
Unsecured notes payable to bank, 3.62%, due June 20, 2023
Unsecured notes payable to bank, 4.20%, due December 20, 2041
Unsecured notes payable to bank, 4.83%, due December 20, 2041
Unsecured notes payable to bank, 4.25%, due June 20, 2033
Unsecured notes payable to bank, 4.90%, due March 6, 2040
Unsecured notes payable to bank, 5.33%, due June 20, 2043
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1)
Unamortized debt issuance costs for defeased obligations,
allowed by regulation

Total
Less current portion
Less unamnortized debt issuance costs

Total long-term debt, less current portion
and unamortized debt issuance costs

Unamortized
Debt Issuance
Principal Costs
$ 106,830 $ -

3,200 18

38,905 1,803

5,030 114

19,490 1,450

1,840 230

4,460 325

1,075 -

2,928 14

1,367 7

1,192 6

909 5

744 7

573 35

346 19

24,699 182

- 129

210,588 $ 4,344
(6,019)
(4.344)
$__ 200,225

(1) SRF notes are due through 2049 at interest rates ranging from 1% to 3.8%. These notes are payable in 120 to 240
consecutive monthly installments of principal and interest. The 1% rate applies to construction projects still in process
until the earlier of (i) the date of substantial completion of the improvements, or (ii) various dates specified in the note
(such earlier date being the interest rate change date). Commencing on the interest rate change date, the interest rate
changes to the lower of (i) the rate as stated in the note or (ii) 80% of the established 11 General Obligations Bond Index

published during the specified time period before the interest rate change date.

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2017

Unamortized
Debt Issuance
(in thousands) Principal Costs
Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041 $ 108,960 $ -
Unsecured senior note payable due to an insurance company
7.40%, due March 1, 2021 3,600 27
Unsecured Business Finance Authority:
Revenue Bonds (Series 2014A), interest rates from 3.00% to 4.125%,
due January 1, 2045 39,935 1,949
Revenue Bonds (Series 2014B), 4.50%, due January 1, 2045 5,125 118
Revenue Bonds (Series 2015A), interest rates from 4.00% to 5.00%,
due January 1, 2046 20.035 1,527
Revenue Bonds (Series 2015B), 5.00%, due January 1, 2046 1,940 251
Unsecured notes payable to bank, floating-rate, due March 1, 2030 3,134 16
Unsecured notes payable to bank, 3.62%, due June 20, 2023 1,438 9
Unsecured notes payable to bank, 4.20%, due December 20, 2041 1,221 7
Unsecured notes payable to bank, 4.83%, due December 20, 2041 930 5
Unsecured notes payable to bank, 4.25%, due June 20, 2033 780 7
Unsecured notes payable to bank, 4.90%, due March 6, 2040 588 36
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1) 20,023 182
Unamortized debt issuance costs for defeased obligations,
allowed by regulation - 95
Total 207.709 $ 4,229
Less current portion (5,575)
Less unamortized debt issuance costs (4,229)

Total long-term debt, less current portion
and unamortized debt issuance costs $ 197,905

(1) SRF notes are due through 2048 at interest rates ranging from 1% to 3.8%. These notes are payable in 120 to 240
consecutive monthly installments of principal and interest. The 1% rate applies to construction projects still in process
until the earlier of (i) the date of substantial completion of the improvements, or {ii) various dates specified in the note
(such earlier date being the interest rate change date). Commencing on the interest rate change date, the interest rate
changes to the lower of (i) the rate as stated in the note or (ii) 80% of the established 11 General Obligations Bond Index
published during the specified time period before the interest rate change date.

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The aggregate principal payment requirements subsequent to December 31, 2018 are as
follows:

(in thousands) Amount

2019 $ 6,019
2020 6,372
2021 8,660
2022 6,561
2023 7,859
2024 and thereafter 175,117
Total $ 210,588

Several of Pennichuck Water’s loan agreements contain a covenant that prevents Pennichuck
Water from declaring dividends if Pennichuck Water does not maintain a minimum net
worth of $4.5 million. As of December 31, 2018 and 2017, Pennichuck Water’s net worth was
$112.4 million and $118.0 million, respectively.

The 2014A, 2014B, 2015A, 2015B, 2018A and 2018B bonds were issued under a new bond
indenture and loan and trust agreement, established with the issuance of the 2014 Series Bonds,
which contains certain covenant obligations upon Pennichuck Water, which are as follows:

Debt to Capital Covenant - Pennichuck Water cannot create, issue, incur, assume or
guarantee any short-term debt if (1) the sum of the short-term debt plus its funded debt
(“Debt”) shall exceed 85% of the sum of its short-term debt, funded debt and capital
stock plus surplus accounts (“Capital”), unless the short-term debt issued in excess of
the 85% is subordinated to the Series 2014 bonds. Thereby, the ratio of Debt to Capital
must be equal to or less than 1.0. As of December 31, 2018 and 2017, Pennichuck
Water Works has a Debt to Capital Coverage ratio of 0.5 and 0.5, respectively.

All Bonds Test - Additionally, Pennichuck Water cannot create, issue, incur, assume
or guarantee any new funded debt, if the total outstanding funded debt (“Total Funded
Debt”) will exceed the sum of MARA {as defined in Note 1 of these consolidated
financial statements) and 85% of its Net Capital Properties (“MARA and Capital
Properties”), and unless net revenues or EBITDA (earnings before interest, taxes,
depreciation and amortization) shall equal or exceed for at least 12 consecutive months
out of the 15 months preceding the issuance of the new funded debt by 1.1 times the
maximum amount for which Pennichuck Water will be obligated to pay in any future
year (“Max Amount Due”), as a result of the new funded debt being incurred. Thereby,
the ratio of Total Funded Debt to MARA and Capital Properties must be equal to or
less than 1.0; as of December 31, 2018 and 2017, this coverage ratio was 0.4 and 0.4,
respectively. Also, the ratio of EBITDA to the Max Amount Due must be equal to or
greater than 1.1; as of December 31, 2018 and 2017, this ratio was 1.6 and 1.5,
respectively.

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Rate Covenant Test - If during any fiscal year, the EBITDA of Pennichuck Water
shall not equal at least 1.1 times all amounts paid or required to be paid during that year
(“Amounts Paid’), then the Company shall undertake reasonable efforts to initiate a
rate-making proceeding with the NH Public Utilities Commission, to rectify this
coverage requirement in the succeeding fiscal years. Thereby, the ratio of EBITDA to
Amounts Paid must be equal to or greater than 1.1; as of December 31, 2018 and 2017,
the Rate Covenant coverage ratio was 1.48 and 1.41, respectively.

Pennichuck East’s loan agreement for its unsecured notes payable to a bank of $8.1 million
and $8.1 million at December 31, 2018 and 2017, respectively, contains a minimum debt
service coverage ratio requirement of 1.10. At December 31, 2018 and 2017, this ratio was
0.89 and 0.92, respectively. This covenant has not been met, and the Bank has waived such
noncompliance. Also, Pennichuck East is required to maintain a maximum ratio of total debt
to total capitalization of 65%; at December 31, 2018 and 2017, this ratio was 65% and 59%,
respectively.

As of December 31, 2018 and 2017, the Company had a $2.9 million and $3.1 million,
respectively, interest rate swap which qualifies as a derivative. This financial derivative is
designated as a cash flow hedge. This financial instrument is used to mitigate interest rate risk
associated with our outstanding $2.9 million loan which has a floating interest rate based on
the three-month London Interbank Offered Rate (“LIBOR”) plus 1.75% as of December 31,
2018. The combined effect of the LIBOR-based borrowing formula and the swap produces an
“all-in fixed borrowing cost” equal to 5.95%. The fair value of the financial derivative, as of
December 31, 2018 and 2017, included in our Consolidated Balance Sheets under “Other
Liabilities and Deferred Credits” as “Derivative instrument” was $263,000 and $374,000,
respectively. Changes in the fair value of this derivative were deferred in accumulated other
comprehensive income.

Swap settlements are recorded in the statement of income (loss) with the hedged item as
interest expense. During the years ended December 31, 2018 and 2017, $59,000 and $76,000,
respectively, was reclassified pre-tax from accumulated other comprehensive income to
interest expense as a result of swap settlements. The Company expects to reclassify
approximately $66,000, pre-tax, from accumulated other comprehensive income to interest
expense as a result of swap settlements, over the next twelve months.

Note 11 — Lines of Credit

In April of 2018, the Company’s existing Line of Credit, which had a $6 million limit for
borrowings was replaced by a new $4 million Working Capital Line of Credit, and two new
Fixed Asset Lines of Credit for Pennichuck Water Works, Inc. ($10 million FALOC) and
Pennichuck East Utility, Inc. ($3 million FALOC), to be used to fund Construction Work in
Progress on capital projects, which will be refinanced into long-term debt term loan obligations
or issued bond indebtedness, annually.

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Short-term borrowing activity under Pennichuck Corp.’s Working Capital Line of Credit for

the years ended December 31, 2018 and 2017 was:

(in thousands)

Established line as of December 31, $
Maximum amount outstanding during period

Average amount outstanding during period

Amount outstanding as of December 31,

Weighted average interest rate during period

Interest rate as of December 3 I,

2018 2017
4,000 $ 6,000
5,981 5,574
1,701 228

361 5,574
3.45% 3.01%
4.27% 3.10%

Short-term borrowing activity under Pennichuck Water’s Fixed Asset Line of Credit for the

year ended December 31, 2018 was:

(in thousands)

Established line as of December 31,
Maximum amount outstanding during period
Average amount outstanding during period
Amount outstanding as of December 31,
Weighted average interest rate during period
Interest rate as of December 31,

2018

$ 10,000
5,574
1,821
5,574
3.05%
4.27%

Short-term borrowing activity under Pennichuck East’s Fixed Asset Line of Credit for the year

ended December 31, 2018 was:

(in thousands)

Established line as of December 31,

Maximum amount outstanding during period

Average amount outstanding during period
Amount outstanding as of December 31,
Weighted average interest rate during period
Interest rate as of December 31,

2018

$ 3,000
691

113

691

3.11%
4.71%

The Company’s revolving credit loan facilities with TD Bank contain certain covenant

obligations upon Pennichuck Water, which are as follows:

Debt to Capital Covenant - Pennichuck Water cannot create, issue, incur, assume or
guarantee any short-term debt if (1) the sum of the short-term debt plus its funded debt
(“Debt”) shall exceed 85% of the sum of its short-term debt, funded debt and capital
stock plus surplus accounts (“Capital”), unless the short-term debt issued in excess of
the 85% is subordinated to the loan facility. Thereby, the ratio of Debt to Capital must
be equal to or less than 1.0. As of December 31, 2018, Pennichuck Water Works has a

Debt to Capital Coverage ratio of 0.5.

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All Bonds Test - Additionally, Pennichuck Water cannot create, issue, incur, assume
or guarantee any new funded debt, if the total outstanding funded debt (“Total Funded
Debt”) will exceed the sum of MARA {as defined in Note | of these consolidated
financial statements) and 85% of its Net Capital Properties (“MARA and Capital
Properties”), and unless net revenues or EBITDA (earnings before interest, taxes,
depreciation and amortization) shall equal or exceed for at least 12 consecutive months
out of the 15 months preceding the issuance of the new funded debt by 1.1 times the
maximum amount for which Pennichuck Water will be obligated to pay in any future
year (“Max Amount Due”), as a result of the new funded debt being incurred. Thereby,
the ratio of Total Funded Debt to MARA and Capital Properties must be equal to or
less than 1.0; as of December 31, 2018, this coverage ratio was 0.4. Also, the ratio of
EBITDA to the Max Amount Due must be equal to or greater than 1.1; as of
December 31, 2018 this ratio was 1.6.

Rate Covenant Test - If during any fiscal year, the EBITDA of Pennichuck Water
shall not equal at least 1.1 times all amounts paid or required to be paid during that year
(“Amounts Paid”), then the Company shall undertake reasonable efforts to initiate a
rate-making proceeding with the NH Public Utilities Commission, to rectify this
coverage requirement in the succeeding fiscal years. Thereby, the ratio of EBITDA to
Amounts Paid must be equal to or greater than 1.1; as of December 31, 2018, the Rate
Covenant coverage ratio was 1.48.

Note 12 — Accumulated Other Comprehensive Income

The following table presents changes in accumulated other comprehensive income by
component for the years ended December 31, 2018 and 2017:

Interest Rate Contract

(in thousands) 2018 2017
Beginning balance $ 305 $ 258
Other comprehensive income (loss) before reclassifications 32 l
Amounts reclassified from accumulated other
comprehensive income 35 46
Net current period other comprehensive income 67 47
Ending balance $ 372, $ 305

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The following table presents reclassifications out of accumulated other comprehensive income
for the years ended December 31, 2018 and 2017:

Amounts Reclassified Affected Line Item in

Details about Accumulated Other from Accumulated Other the Statement Where
Comprehensive Income Components Comprehensive Income Net Income is Presented
(in thousands) 2018 2017
Gain (loss) on cash flow hedges

Interest rate contracts $ 59 § 77 Interest expense

(24) (31) Tax expense

Amounts reclassified from accumulated

other comprehensive income $ 35. $ 46 Net of tax

Note 13 — Transaction with the City of Nashua

On January 25, 2012, in full settlement of an ongoing Eminent Domain lawsuit filed by the
City of Nashua (“City”) and with the approval of the New Hampshire Public Utilities
Commission (““NHPUC”), the City acquired all of the outstanding shares of Pennichuck
Corporation (“Pennichuck’”) and, thereby, indirect acquisition of its regulated subsidiaries. The
total amount of the acquisition was $150.6 million (“Acquisition Price”) of which $138.4
million was for the purchase of the outstanding shares, $5.0 million for the establishment of a
Rate Stabilization Fund, $2.6 million for legal and due diligence costs, $2.3 million for
severance costs, $1.3 million for underwriting fees, and $1.0 million for bond discount and
issue costs. The entire purchase of $150.6 million was funded by General Obligation Bonds
(“Bonds”) issued by the City of Nashua. Pennichuck is not a party to the Bonds and has not
guaranteed nor is obligated in any manner for the repayment of the Bonds. Pennichuck remains
an independent corporation with an independent Board of Directors, with the City of Nashua
as its sole shareholder.

Pennichuck Water Works, Inc. (“PWW”), Pennichuck East Utility, Inc. (“PEU”), Pittsfield
Aqueduct Company, Inc. (“PAC”), Pennichuck Water Service Corporation, and The
Southwood Corporation will continue as subsidiaries of Pennichuck Corporation and PWW,
PEU and PAC will continue as regulated companies under the jurisdiction of the New
Hampshire Public Utilities Commission. The terms of the merger and the requisite accounting
and rate-setting mechanisms were agreed to in the NHPUC Order 25,292 (“PUC Order”) dated
November 23, 2011.

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NH Tax Shift Plan
Earned Income Tax Credit Payments
(for estimating purposes only)

Number of Children

AGI 0 l 4 | 2 | 3ormore
82,000 | Sr S207 $24 8273
aoo | an ee
$6000 | $138 $015 grasses
$8000 | Sis se10_——sees——_soss
$10,000 | isi stioos_—_$1903_§1'3es
$12,000 | sis1_s1.008_siaas__ tees
14000 | sisi $1008 _—Stiese__gt.ers
$16,000 553 St 008 31 664 1573
$18,000 oy a 08 a ‘564 7 873
$20,000 $9 51 008 51 664 31873
$22,000 e 51 008 ; 64 ; } 873
sam [eae let
soa | Sue ee aie
some [ate
som | Sar ets
sso | $9 SME $78 $808,
$34,000 | gen gg
$36.00 | $s gat
s3e.00 | $0 S88 $405 S84
$40,000 eo 009 a09 3037
$42,000 eo $136 e503 710
$44,000 eo - 5376 cad
sas.o00 | $2 $080 S108
$48,000 eo a0 5193 331
$50,000 eo eo 20 5205

Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married
Single
Married

Note 7 - Commitments and Contingencies

Operating Leases

We lease our corporate office space as well as certain office equipment under operating lease
agreements. Total rent expense was approximately $307,000 and $315,000 for the years
ended December 31, 2015 and 2014, respectively.

Our remaining non-cancelable lease commitments for our corporate office space and leased
equipment as of December 31, 2015 were as follows:

(in thousands) Amount
2016 $ 301
2017 176
2018 9
2019 and thereafter -
Total $ 486

—_
SS

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

respective dates.

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 | 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.

25

Transactions with Related Party — City of Nashua

Pennichuck issued a promissory note to the City of Nashua in the amount of approximately
$120 million to be repaid over a thirty (30) year period with monthly payments of
approximately $707,000, including interest at 5.75%. Pennichuck recorded an additional
amount of approximately $30.6 million as contributed capital. The remaining outstanding
balance of the note payable to the City at December 31, 2018 and 2017 was approximately
$107 million and $109 million, respectively, as disclosed in Note 10 to these consolidated
financial statements. During 2018 and 2017, dividends of approximately $280,000 and
$279,000, respectively, were declared and paid to the City. The dividends paid to the City
during 2018 comprised approximately $280,000 of regular quarterly dividends declared and
paid; and no special dividend was declared or paid in 2018. The dividends paid to the City
during 2017 comprised approximately $279,000 of regular quarterly dividends declared and
paid; and no special dividend was declared or paid in 2017.

Additional ongoing transactions occur in the normal course of business, between the Company
and the City, related to municipal water usage, fire protection and sewer billing support
services, and property taxes related to real property owned by the Company within the City of
Nashua. For the years ended December 31, 2018 and 2017, respectively, approximately $3.4
million and $3.2 million were paid to the Company by the City for municipal water
consumption, fire protection charges, and sewer billing support services. Conversely, the
Company paid property taxes to the City of Nashua of approximately $2.6 million for the year
ended December 31, 2018, and approximately $2.9 million for the year ended December 31,
2017.

Rate Stabilization Fund — Restricted Cash

As a part of the acquisition, Pennichuck agreed to contribute $5,000,000 of the proceeds from
the settlement transaction to PWW, which was used to establish a Rate Stabilization Fund
(“RSF”), allowing for the maintenance of stable water utility rates and providing a mechanism
to ensure the Company’s continued ability to meet its obligations under the promissory note to
the City, in the event of adverse revenue developments. Restricted cash consists of amounts
set aside in the RSF account and is adjusted monthly as required in the PUC Order, as discussed
in Note | of these financial statements.

Municipal Acquisition Regulatory Asset (“MARA”)

Pursuant to the PUC Order, Pennichuck established a new Regulatory asset (MARA) which
represents the amount that the Acquisition Price exceeded the net book assets of Pennichuck’s
regulated subsidiaries (PWW, PEU, and PAC) at December 31, 2011. The initial amount of the
MARA was approximately $89 million for the regulated companies, offset by a non-regulated
amount of approximately $4.8 million. The MARA is to be amortized over a thirty (30) year
period in the same manner as the repayment of debt service for the City’s acquisition bonds. The
balance in the MARA at December 31, 2018 was approximately $75.4 million, reduced by the
non-regulated credit of approximately $4.1 million.

Aggregate amortization expense for the years ended December 31, 2018 and 2017 totaled
approximately $1,958,000 and $1,917,000, respectively.

38