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projects, and preliminarily approve proposed 2018 WICA projects. This petition process was in
a “suspended” state for most of 2017, as the results of the PWW Rate Case, if approved per the
Settlement Agreement, would terminate the WICA program and replace it with a new program
inclusive in those rates. The new program would be analogous to the WICA program, but would
be eligible for all capital improvement projects and expenditures, not just certain main
replacement projects. The new program, if approved in that rate order, would be called the
Qualified Capital Project Adjustment Charge (QCPAC), and would be subject to ongoing and
annual filings and compliancy with the NHPUC.

On November 7, 2017, the PUC issued Order No. 26,070 which approved replacement of the
current WICA program with an annual QCPAC, which will apply an annual surcharge between
rate cases. This surcharge will be based on essentially all of the capital projects undertaken and
completed by PWW each year.

Financing

On June 8, 2017, Pennichuck East Utility, Inc. completed a financing transaction with the New
Hampshire Department of Environmental Services under the State of New Hampshire’s Drinking
Water Revolving Loan Fund in the amount of $2,400,000 for a 20-year term at an interest rate of
1.96%. The loan will fund the installation of a Merrimack River crossing interconnection pipeline
connecting the distribution main owned by Pennichuck Water Works, Inc. in the Town of Merrimack
to the existing Pennichuck East Utility, Inc. distribution system in the Town of Litchfield.

On June 8, 2017, Pennichuck East Utility, Inc. completed a financing transaction with the New
Hampshire Department of Environmental Services under the State of New Hampshire’s Drinking
Water Revolving Loan Fund in the amount of $570,000 for a 30-year term at an interest rate of
1.96%. The loan will fund the replacement of approximately 2,400 linear feet of water main on
Brady Avenue in the Maple Hills Community Water System in Derry, NH.

On June 8, 2017, Pennichuck East Utility, Inc. completed a financing transaction with the New
Hampshire Department of Environmental Services under the State of New Hampshire’s Drinking
Water Revolving Loan Fund in the amount of $245,000 for a 20-year term at an interest rate of
1.96%. The loan will fund the replacement of approximately 1,200 linear feet of water main on
Hillerest Road in Litchfield, NH.

On October 19, 2017, Pennichuck East Utility, Inc. filed a petition with the Public Utilities
Commission relative to debt financings, to be serviced by CoBank ACB, as well as the refinance
of intercompany loans with Pennichuck Corporation. Pennichuck East Utility, Inc. seeks
approval for (1) a term loan of up to $500,000 to fund 2017 capital projects not funded by SRF
loans, (2) a 3-year $3.0 million Fixed Asset Line of Credit to provide for short-term financing of
capital projects, and (3) the refinance of three Intercompany Loans with Pennichuck Corporation,
in the amount of $2,858,919, for a new term of 30 years. The order on these financings is still
pending with the NHPUC as of this date.

On November 29, 2017, Pennichuck Water Works, Inc. filed a petition with the Public Utilities
Commission relative to debt financings, to: (1) issue up to $32.5 million of tax-exempt or taxable
bonds through the NH Business Finance Authority and (2) to put a 2-year, renewable, $10 million

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Fixed Asset Line of Credit (FALOC) in place with TD Bank, NA, in order to provide for short-
term financing of capital projects each year coupled with the annual QCPAC surcharge, and annual
issuances of bonds under the $32.5 million facility described above. On February 2, 2018, the

. NHPUC approved a portion of this order, allowing for the issuance of the $32.5 million in bonds
early in the second quarter of 2018; the order on the FALOC with TD Bank, NA, is still pending.

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 one set 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 now 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, the Company has been asked by NHDES to contract for similar design services
with SGPP for expansion of its public water system in southern Bedford as well as an additional
38 residences in Litchfield, due to this contamination site. Once approved by SGPP and the
NHDES, it is anticipated that SGPP will enter into another contract with the Company for the
expansion of the Company’s water system in those areas, construction of which would expect to
begin within 60 days of the approvals, 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.

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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,
has also begun 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 will be fully completed in the Spring
of 2018. Once again, the entire cost of this project was borne by TCI, and will become part of

the Company’s owned infrastructure as CIAC assets.

Company Goals — 2017

The Company’s main goals for 2017 and status at the end of the year are as follows:

¢ Completion of the Pennichuck Water Works, Inc. rate case with the New Hampshire Public
Utilities Commission, which was completed with the order received in November 2017.

* Filing of rate cases for the Company’s Pennichuck East Utility, Inc. subsidiary, which
was filed in September 2017.

* Successfully negotiate a new collective bargaining agreement in the fourth quarter, to
replace the current contract which was set to expire on October 31, 2017. A new 3-year
contract was successfully negotiated prior to the expiration of the former contract, and the
new contract is in existence until October 31, 2020.

* Continue the roll-out and implementation of the Company’s comprehensive Asset
Management System. Ongoing installation, implementation and enhancement of this
platform was accomplished in 2017, and continues into 2018.

* Complete a round of bond financing for Pennichuck Water Works, Inc. for 2017-2020
capital expenditure needs. The initial issuance of bonds under this overall facility are
expected to be issued in early April 2018.

* Secure other financing needs for ongoing infrastructure replacement for Pennichuck
East Utility, Inc. and Pittsfield Aqueduct Company, Inc. F inancing approvals are in
process for both companies, at this time.

* Completion of a Safe Yield Analysis of the watershed. The initial phases of this were
completed in 2017, with further analysis and results expected in Q2 of 2018.

* Complete the build-out of the expansion of the distribution system in response to the
PFOA contamination issues, all funded by the identified Potential Responsible Parties
(PRP) in cooperation with the New Hampshire Department of Environmental Services.

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

Sincerely, LA
a £

Larry D. Goodhue
Chief Executive Officer,
Chief Financial Officer
and Treasurer

Pennichuck Corporation and Subsidiaries
Consolidated Financial Statements

December 31, 2017 and 2016

(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

il

MELANSON| maa

ACCOUNTANTS * AUDITORS

12! River Front Drive

Manchester, NH 03102
(603)669-6130
melansonheath.com

Additional Offices:

Nashua, NH
Andover, MA
Greenfield, MA

Board of Directors and Stockholder Ellsworth, 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, 2017 and
2016, 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.

>» The specified insurance requirements do not relieve CONTRACTOR of its responsibilities or
limit the amount of its liability to the OWNER or other persons, and CONTRACTOR is
encouraged to purchase such additional insurance, as it deems necessary.

» The insurance provided herein is primary, and no insurance held or owned by the OWNER
shall be called upon to contribute to a loss.

» CONTRACTOR is responsible for and required to remedy all damage or loss to any property,
including property of the City, caused in whole or part by CONTRACTOR or anyone
employed, directed, or supervised by CONTRACTOR.

Regardless of any coverage provided by any insurance, CONTRACTOR agrees to indemnify and
shall defend and hold harmless the City, its agents, officials, employees and authorized
representatives and their employees from and against any and all suits, causes of action, legal or
administrative proceedings, arbitrations, claims, demands, damages, liabilities, interest, attorney’s
fees, costs and expenses of any kind or nature in any manner caused, occasioned, or contributed to
in whole or in part by reason of any negligent act, omission, or fault or willful misconduct,
whether active or passive, of CONTRACTOR or of anyone acting under its direction or contro] or
on its behalf in connection with or incidental to the performance of this contract.
CONTRACTOR’s indemnity, defense and hold harmless obligations, or portions thereof, shall
not apply to liability caused by the sole negligence or willful misconduct of the party indemnified
or held harmless.

AG-4

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, 2017 and 2016, 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.

Mebenson Haath

March 21, 2018

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2017 and 2016
(in thousands, except share data)

2017 2016

ASSETS

Property, Plant and Equipment, net $ 210,498 $ 201,698

Current Assets:
Cash and cash equivalents 994 2,446
Restricted cash - RSF 4.953 6,530
Restricted cash - Bond Project Funds 3,288 7,568
Accounts receivable - billed, net 3,420 4,137
Accounts receivable - unbilled, net 2,265 1,921
Accounts receivable - other 14 28
Inventory 604 666
Prepaid expenses 598 532
Prepaid property taxes 1,143 1,163
Deferred and refundable income taxes 516 352
Total Current Assets 17,795 25,343

Other Assets:

Deferred land costs 2,297 2,248
Deferred charges and other assets 10,911 10,058
Investment in real estate partnership 103 104
Acquisition premium, net 73,227 75,144
Total Other Assets 86,498 87,554
TOTAL ASSETS $ 314,791 $ 314,595

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
As of December 31, 2017 and 2016
(in thousands, except share data)

2017 2016
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 (16,961) (10,241)
Accumulated other comprehensive income 305 258
Total Stockholder's Equity 13,905 20,578
Long-Term Debt, Less Current Portion
and Unamortized Debt Issuance Costs 197,905 200,758
Current Liabilities:
Line of credit 5,574 -
Current portion of long-term debt 5,575 5,162
Accounts payable 1,543 5,975
Accrued property taxes 115 -
Deferred revenue 66 63
Accrued interest payable 1,625 1,704
Other accrued expenses 394 980
Accrued wages and payroll withholding 358 271
Customer deposits and other 19] 805
Total Current Liabilities 15,441 14,960
Other Liabilities and Deferred Credits:
Deferred income taxes 12,847 20,869
Accrued pension liability 9,792 9,010
Unamortized debt premium 2,964 3,082
Deferred investment tax credits 504 537
Regulatory liability 9,955 760
Accrued post-retirement benefits 3,047 2,578
Customer advances 84 84
Contributions in aid of construction, net 47,458 40,364
Derivative instrument 374 453
Other long-term liabilities 515 562
Total Other Liabilities and Deferred Credits 87,540 78,299
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 314,791 $ 314,595

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