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PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the Years Ended December 31, 2017 and 2016
(in thousands)

2017 2016
Operating Revenues $ 40,893 $ 42,697
Operating Expenses:
Operations and maintenance 21,312 20,820
Depreciation and amortization 7,762 6,942
Taxes other than income taxes 6,343 6,159
Total Operating Expenses 35,417 33,921
Operating Income 5,476 8,776
Interest Expense (10,833) (10,784)
Allowance for Funds Used During Construction 27 358
Other, Net (3) 545
Loss Before Provision for Income Taxes (5,333) (1,105)
Provision for Income Taxes (1,108) (135)
Net Loss $ (6,441) $ (1,240)

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, 2017 and 2016
(in thousands)

2017 2016

Net Loss $ (6,441) $ (1,240)
Other Comprehensive Income (Loss):

Unrealized gain (loss) on derivatives 3 (28)

Reclassification of net income realized in net income 76 123

Income tax benefit relating to

other comprehensive income (32) (38)

Other Comprehensive Income 47 57
Comprehensive Loss $ (6,394) $ (1,183)

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, 2017
(in thousands, except per share data)

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

Balance as of
January 1, 2017 1,000 $ - $ 30,561 $ (10,241) $ 258 $ 20,578
Common dividends declared- - - - (279) - (279)
$279.25 per share
Net loss - - - (6,441) - (6,441)
Other comprehensive income (loss):

Unrealized gain on derivatives,

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

Reclassification of net income

realized in net income, net of

taxes of $31 7 = - - 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.

Balance as of
January 1, 2016

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 2016
(in thousands, except per share data)

Common dividends declared-

$279.91 per share

Net loss

Other comprehensive income (loss):

Unrealized loss on derivatives,

net of taxes of $(11)

Reclassification of net income
realized in net income, net of

taxes of $49

Balance as of

December 31, 2016

Accumulated
Additional Other
Common Stock Paid in Retained Comprehensive
Shares Amount Capital Earnings/(Deficit) Income (Loss) Total
1,000 $ - $ 30,561 $ (8,721) $ 201 $ 22,041
- - - (280) - (280)
- - - (1,240) - (1,240)
- - - - (17) (17)
- - - - 74 74
1,000 $ - $ 30,561 $ (10,241) $ 258 $ 20,578

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017 and 2016

(in thousands)

2017 2016
Operating Activities:
Net Loss (6,441) $ (1,240)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 7,838 7,019
Equity component of AFUDC (9) (137)
Amortization of deferred investment tax credits (33) (33)
Provision for deferred income tax 1,141 189
Undistributed loss in real estate partnership ] -
Gain on disposition of property (31) (529)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable billed and unbilled 387 (1,584)
Decrease in inventory 62 46
(Increase) decrease in prepaid expenses (46) 185
(Increase) in deferred charges and other assets (625) (456)
(Increase) in refundable income taxes (164) (2)
Increase (decrease) in accounts payable and deferred revenue (4,429) 4,480
Increase (decrease) in accrued interest payable (79) 386
Increase in other 205 2,409
Net cash provided (used) by operating activities (2,223) 10,733
Investing Activities:
Purchase of property, plant and equipment including debt
component of allowance for funds used during construction (7,716) (21,886)
(Increase) decrease in restricted cash 5,857 (5,826)
Proceeds from sale of marketable securities - 17,236
Proceeds from sale of property 37 946
Change in investment in real estate partnership and
deferred land costs (8) 7
Net cash used by investing activities (1,830) (9,523)

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

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2017 and 2016
(in thousands)

2017 2016

Financing Activities:

Borrowings (payments) on line of credit, net $ 5,574 $ -

Payments on long-term debt (5,209) (4,227)

Contributions in aid of construction 61 58

Proceeds from long-term borrowings 2,475 4,498

Debt issuance costs (21) (59)

Dividends paid (279) (280)
Net cash provided (used) by financing activities 2,601 (10)
Increase (Decrease) in cash and cash equivalents (1,452) 1,200
Cash and cash equivalents, beginning of period 2,446 1,246
Cash and cash equivalents, end of period $ 994 $ 2,446

Supplemental Disclosure on Cash Flow and Non-cash Items
For the Years Ended December 31, 2017 and 2016 (in thousands)

2017 2016
Cash paid during the period for:
Interest $ 10,706 $ 10,263
Income taxes 167 123
Non-cash items:
Contributions in aid of construction 8,072 3,309
Forgiveness of debt 77 77

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

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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of Business and Summary of Significant Accounting Policies
Description of Business:

Pennichuck Corporation (“the Company,” “we,” or “our”) is a holding company head-
quartered 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 36,590 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 elimi-
nated 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.

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General Terms and Conditions

ARTICLE 6 —- GENERAL PROVISIONS

1.

The Contract represents the entire and integrated agreement between the parties and
supersedes prior negotiations, representations or agreements, either written or oral. The
Contract may be amended or modified only by a written modification.

The term “Work” means the construction and services required by the Contract Documents,
and include all other labor, materials, equipment and services provided by the
CONTRACTOR to fulfill the CONTRACTOR’s obligations.

The intent of the Contract Documents is to include all items necessary for the proper
execution and completion of the Work by the CONTRACTOR. The Contract Documents are
complementary, and what is required by one shall be as binding as if required by all.

In the case of a discrepancy, calculated dimensions will govern over scaled dimensions,
Contract Drawings will govern over Standard Specifications, and Technical Specifications
will govern over both Contract Drawings and Standard Specifications. In the case of a
discrepancy between the Agreement and other Contract Documents, the more specific or
stringent obligation or requirement to the benefit of the OWNER shall take precedence.

The CONTRACTOR shall take no advantage of any apparent error or omission in the
Contract Drawings or Technical Specifications, and the Engineer will be permitted to make
such corrections and interpretations as may be deemed necessary to fulfill the intent of the
Contract Documents.

ARTICLE 7 —-QWNER

1,

Except for permits and fees, which are the responsibility of the CONTRACTOR under the
Contract Documents, the OWNER shall obtain and pay for other necessary approvals,
easements, assessments and charges.

If the CONTRACTOR fails to correct Work that is not in accordance with the Contract
Documents, the OWNER may direct the CONTRACTOR in writing to stop the Work until the
correction is made.

If the CONTRACTOR defaults or neglects to carry out the Work in accordance with the
Contract Documents and fails within a seven day period after receipt of written notice from
the OWNER to correct such default or neglect with diligence and promptness, the OWNER
may, without prejudice to other remedies, correct such deficiencies. In such case, a Change
Order shall be issued deducting the cost of correction from payments due the
CONTRACTOR.

The OWNER reserves the right to perform construction or operations related to the project
with the OWNER’s own forces, and to award separate contracts in connection with other
portions of the project.

The CONTRACTOR shall coordinate and cooperate with separate CONTRACTORs
employed by the OWNER.

Costs caused by delays or by improperly timed activities or defective construction shall be
borne by the responsible party.

AG-5

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
(“RSE”), which was established in conformity with the requirements of NHPUC Order
25,292, as explained more fully in Note 11 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 $5.0 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. 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, 2017 and 2016, the balances in the RSF were $4.9 million
and $6.5 million, respectively.

Restricted Cash — Bond Project Funds

This restricted cash balance consists of funds remaining from the issuance of the Series 2014
and 2015 tax-exempt bonds (the “Bonds”) in December of 2014 and October of 2015,
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 reim-
bursement 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, 2016, the funds in these restricted cash accounts totaled approximately
$7.6 million. During 2017, approximately $3.3 million was withdrawn from the restricted
cash accounts to make the principal and interest payments for the Bonds, on January 1 and
July 1. Also during 2017, approximately $4.3 million was withdrawn from the restricted cash
accounts, and transferred to the Company’s operating cash accounts, for reimbursements of
qualifying capital projects completed and “used and useful” during 2017, which were
initially funded from working capital. In December 2017, 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 1, 2018 for the Bonds. As of December 31, 2017, the funds in these restricted cash
accounts totaled approximately $3.3 million.

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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, 2017 and 2016, the Company had approximately $9,000,000
and $16,950,000 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 market, cost being determined using the average
cost method which approximates the first-in, first-out (FIF O) method through December 31,
2016. Effective January 1, 2017, inventory is stated at the lower of cost or net realizable
value, cost being determined using the average cost method which approximates the FIFO
method.

Deferred Land Costs

Included in deferred land costs is the Company’s original basis in its undeveloped land-
holdings 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, 2017 and 2016.

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