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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
NHPUC 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 identi-
fied 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, 2017, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Update (ASU) 2015-07, Fair Value Measurement (Topic
820), Disclosures for Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent). Under the amendments in this ASU, investments for which fair
value is measured at net asset value per share (or its equivalent) using the practical expedient
are not categorized in the fair value hierarchy. The amendments are to be applied
retrospectively. The changes are reflected in the fair value leveling tables in Note 5.

Effective January 1, 2017, the Company adopted FASB ASU 2015-1 1, Inventory (Topic 330):
Simplifying the Measurement of Inventory, which simplifies the subsequent measurement of
inventory by replacing the lower of cost or market test with a lower of cost or net realizable
value test. Net realizable value is defined as estimated selling price in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. Prior
to 2017, the Company reported inventory at the lower of cost or market. This guidance is
applied prospectively as determined by the standard. There is no prior year or current year
effect to the financial statements 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

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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.

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, 2017 and 2016 were
as follows:

Useful Lives
(in thousands) 2017 2016 (in years)
Utility Property:
Land and land rights $ 3,305 $ 3,079 -
Source of supply 65,608 61,450 3-70
Pumping and purification 31,075 30,851 7-64
Transmission and distribution, including 161,193 145,202
services, meters and hydrants 15-91
General and other equipment 16,541 15,000 7-75
Intangible plant 790 790 20
Construction work in progress 1,978 10,022
Total utility property 280,490 266,394
Total non-utility property 5 5 5-10
Total property, plant and equipment 280,495 266,399
Less accumulated depreciation (69,997) (64,701)
Property, plant and equipment, net $ 210,498 $ 201,698

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The provision for depreciation is computed on the straight-line method over the estimated
useful lives of the assets, which range from 3 to 91 years. The weighted average composite
depreciation rate was 2.56% and 2.54% in 2017 and 2016, respectively.

Note 3 — Accounts Receivable

Accounts receivable consisted of the following at December 31, 2017 and 2016:

(in thousands) 2017 2016
Accounts receivable - billed $ 3,457 $ 4,188
Less allowance for doubtful accounts (37) (51)
Accounts Receivable - billed, net $ 3,420 $ 4,137
Accounts receivable - unbilled $ 2,265 $ 1,921

Less allowance for doubtful accounts - -

Accounts Receivable - unbilled, net $ 2,265 $ 1,921

Note 4 — Deferred Charges and Other Assets

Deferred charges and other assets as of December 31, 2017 and 2016 consisted of the
following:

Recovery
Period
(in thousands) 2017 2016 (in years)
Regulatory assets:
Source development charges $ 952 $1,041 5 ~25
Miscellaneous studies 980 854 2 - 25
Unrecovered pension and post-retirement
benefits expense 8,244 7,457 a
Total regulatory assets 10,176 9,352
Supplemental executive retirement plan asset 735 706
Total deferred charges and other assets $ 10,911 $ 10,058

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

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Note 5 — 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 tates 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 $341 based on years of service.

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 inee It
Benefits paid, excluding expenses (643) (52)
Fair value of plan 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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The following table sets forth information regarding our DB Plan and our OPEB Plans as of
December 31, 2016 and for the year then ended:

(in thousands) DB Plan OPEB Plans
Projected benefit obligations $ 23,899 $ 3,165
Employer contribution 970 10
Benefits paid, excluding expenses (1,056) (47)
Fair value of plan assets 14,889 586
Accumulated benefit obligation 21,547 -
Funded status (9,010) (2,578)
Net periodic benefit cost 1,284 194

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

Current liability - -
Non-current liability (9,010) (2,578)
Total $ (9,010) $ (2,578)

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 loss 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

Changes in plan assets and benefit obligations recognized in regulatory assets, for the year
ended December 31, 2016, were as follows:

(in thousands) DB Plan OPEB Plans
Regulatory asset balance, beginning of period $ 6,658 § 237
Net actuarial gain incurred during the period 737 145
Prior service cost incurred during the period - 17
Recognized net actuarial (gain)/loss (328) (9)
Regulatory asset balance, end of period $ 7,067 $ 390

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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

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,

2016:

(in thousands) DB Plan OPEB Plans
Net actuarial loss $ 7,067 $ 570
Prior service cost - (180)
Regulatory asset $ 7,067 $ 390

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

2017 2016
Discount rate for net periodic benefit cost, beginning of year 4.02% 4.21%
Discount rate for benefit obligations, end of year @) 3.50% 4.02%
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) 7.50% 8.00%

® An increase or decrease in the discount rate of 0.5% would result in a change in the funded status as of December 31, 2017, for
the DB Plan and the OPEB Plans of approximately $2.1 million and $324 thousand, respectively.

The estimated net actuarial loss for our DB Plan that will be amortized in 2018 from the
regulatory assets into net periodic benefit costs is $361,000. The estimated net actuarial gain
and prior service cost for our OPEB Plans that will be amortized in 2018 from the regulatory
assets into net periodic benefit costs is $13,000.

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.

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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, 2017, as well as the targeted allocation
range:

DB Plan OPEB Plans
Asset Asset
Allocation Allocation
Range Range
Equities 63% 30% - 100% 69% 30% - 100%
Fixed income 37% 20% - 70% 29% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 2% 0% - 15%
Total 100% 100%

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, 2016, as well
as the targeted allocation range:

DB Plan OPEB Plans
Asset Asset
Allocation Allocation
Range Range
Equities 64% 30% - 100% 68% 30% - 100%
Fixed income 36% 20% - 70% 30% 0% - 50%
Cash and cash equivalents 0% 0% - 15% 2% 0% - 15%
Total 100% 100%

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 ail 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 year-end and have not been reevaluated or

updated for purposes of these consolidated financial statements subsequent to those respective
dates.

Investments in common stock and mutual funds are stated at fair value by reference to quoted
market prices. Money market funds are valued utilizing the net asset value per unit based on
the fair value of the underlying assets as determined by the directed trustee.

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ARTICLE 8 - CONTRACTOR

1,

10.

11.

12.

13.

Execution of the Contract by the CONTRACTOR is a representation that the CONTRACTOR
has visited the site, become familiar with local conditions under which the Work is to be
performed and correlated personal observations with requirements of the Contract Documents.
The CONTRACTOR shall carefully study and compare the Contract Documents with each
other and with information furnished by the OWNER. Before commencing activities, the
CONTRACTOR shall: (1) take field measurements and verify field conditions; (2) carefully
compare this and other information known to the CONTRACTOR with the Contract
Documents; and (3) promptly report errors, inconsistencies or omissions discovered to the
OWNER.

Within ten (10) days of notification of award, and prior to commencement of work, the
CONTRACTOR shall obtain and forward to OWNER a Performance Bond and a Payment
Bond representing 100% of the contract work

The CONTRACTOR shall supervise and direct the Work, using the CONTRACTOR’s best
skill and attention. The CONTRACTOR shall be solely responsible for and have control over
construction means, methods, techniques, sequences and procedures, and for coordinating all
portions of the Work.

The CONTRACTOR, as soon as practicable after award of the Contract, shall furnish in
writing to the OWNER the names of SUBCONTRACTORs or suppliers for each portion of
the Work. The OWNER will promptly reply to the CONTRACTOR in writing if, after due
investigation, he has reasonable objection to the SUBCONTRACTORs or suppliers listed.
Unless otherwise provided in the Contract Documents, the CONTRACTOR shall provide and
pay for labor, materials, equipment, tools, utilities, transportation, and other facilities and
services necessary for proper execution and completion of the work.

The CONTRACTOR shall deliver, handle, store and install materials in accordance with
manufacturers’ instructions.

The CONTRACTOR warrants to the OWNER that (1) materials and equipment furnished
under the contract will be new and of good quality unless otherwise required or permitted by
the Contract Documents; (2) the Work will be free from defects not inherent in the quality
required or permitted; and (3) the Work will conform to the requirements of the Contract
Documents.

The CONTRACTOR shall pay sales, consumer, use and similar taxes that are legally required
when the Contract is executed.

The CONTRACTOR shall obtain and pay for the building permit and other permits and
governmental fees, licenses and inspections necessary for proper execution and completion of
the Work.

The CONTRACTOR shall comply with and give notices required by agencies having
jurisdiction over the Work. If the CONTRACTOR performs Work knowing it to be contrary
to laws, statutes, ordinances building codes, and rules and regulations without notice to the
OWNER, the CONTRACTOR shall assume full responsibility for such Work and shall bear
the attributable costs. The CONTRACTOR shall promptly notify the OWNER in writing of
any known inconsistencies in the Contract Documents with such governmental laws, rules and
regulations.

The CONTRACTOR shall promptly review, approve in writing and submit Shop Drawings,
Product Data, Samples and similar submittals required by the Contract Documents. Shop
Drawings, Product Data, Samples and similar submittals are not Contract Documents.

The CONTRACTOR shall confine operations at the site to areas permitted by law,
ordinances, permits, the Contract Documents and the OWNER.

AG-6

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 (NAV) per unit of participation in the fund. The NAV is used
as a practical expedient to estimate fair values. This practical expedient is not used when it is
determined to be probable that the fund will sell the investment for an amount different than
that reported at NAV. These accounts 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.

A fair value hierarchy which prioritizes the inputs to valuation methods is 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, 2017 was as follows:

(in thousands) Fair Value Level 1 Level 2 Level 3
DB Plan:
Guaranteed Interest Accounts $ 3,215 $ - $ - $ 3,215
Total Assets in the Fair Value Hierarchy 3,215 - - 3,215
Investments measured at net asset value” 14,551 - - -
DB Plan Investments, at Fair Value 17,766 - - 3,215
(continued)

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