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(continued)

(in thousands) Fair Value Level 1 Level 2 Level 3
OPEB Plans:
Common stocks 310 310 - -
Mutual funds 111 111 - 7
Fixed income funds 180 180 - -
Money market funds 11 - 11 -
Total Assets in the Fair Value Hierarchy 612 601 11 -
Investments measured at net asset value!” : - - “
OPEB Plans Investments, at Fair Value 612 601 11 -

Totals $ 18,378 $ 601 $ li $ 3,215

{a) In accordance with Subtopic 820-10, certain investments that were measured at fair value using the net asset value per share (or its
equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of assets available for benefits of
the Plans.

The fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy
used as of December 31, 2016 was as follows:

(in thousands) Fair Value Level t Level 2 Level 3
DB Plan:
Guaranteed Interest Accounts $ 2,264 § - $ - $ 2,264
Total Assets in the Fair Value Hierarchy 2,264 - - 2,264
Investments measured at net asset value” 12,625 - - -
DB Plan Investments, at Fair Value 14,889 - - 2,264
(continued)

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(continued)

(in thousands) Fair Value Level 1 Level 2 Level 3
OPEB Plans:
Common stocks 268 268 - -
Mutual funds 131 131 - -
Fixed income funds 173 173 - -
Money market funds 13 - 13 -
Total Assets in the Fair Value Hierarchy 585 572 13 -
Investments measured at net asset value” - - - -
OPEB Plans Investments, at Fair Value 585 572 13 -
Totals $ 15,474 $ 572 $ 13 $ 2,264

{a) In accordance with Subtopic 820-10, certain investments that were measured at fair value using the net asset value per share (or its
equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are
intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statements of assets available for benefits of
the Plans.

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.

The following table summarizes investments at fair value based on NAV per share as of
December 31, 2017 and 2016, respectively:

(in thousands) Fair Value
December 31, 2017
Pooled Separate Accounts:
Equities $ 11,117
Fixed Income 3,434

Total Pooled Separate Accounts $ 14,551

December 31, 2016
Pooled Separate Accounts:
Equities $ 9,561
Fixed Income 3,064

Total Pooled Separate Accounts $ 12,625

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The following table presents a period-end reconciliation of DB Plan assets measured and
recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3):

(in thousands) 2017 2016
Balance, beginning of year $ 2,264 $ 2,581
Plan transfers 1,314 493
Contributions 222 196
Benefits paid (651) (1,068)
Return on plan assets (net of investment expenses) 66 62
Balance, end of year $ 3,215 $ 2,264

In order to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, applicable to defined benefit pension plans, the Company anticipates it
will contribute approximately $1.1 million to the DB Plan in 2018.

The following maximum benefit payments, which reflect expected future service, as appro-
priate, are expected to be paid in the years indicated:

(in thousands) DB Plan OPEB Plans
2018 $ 818 $ 70
2019 974 87
2020 980 90
2021 1,115 108
2022 1,248 123
2023 - 2027 7,663 745
Total $ 12,798 $ 1,223

Because the Company is subject to regulation in the state in which it operates, we are
required to maintain our accounts in accordance with the regulatory authority’s rules and
regulations. In those instances, we follow the guidance of ASC 980 (‘Regulated
Operations”). Based on prior regulatory practice, we recorded underfunded DB Plan and
OPEB Plan obligations as a regulatory asset, and we expect to recover those costs in rates
charged to customers.

Defined Contribution Plan

In addition to the defined benefit plan, the Company provides and maintains a defined
contribution plan covering substantially all employees. Under this plan, the Company
matches 100% of the first 3% of each participating employee’s salary contributed to the plan.
The matching employer’s contributions, recorded as operating expenses, were approximately
$239,000 and $215,000 for the years ended December 31, 2017 and 2016, respectively,

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Note 6 - Commitments and Contingencies

Operating Leases

The Company’s corporate office space, as well as certain office equipment, is leased under
operating lease agreements. Total rent expense was approximately $309,800 and $344,800
for the years ended December 31, 2017 and 2016, respectively.

The remaining non-cancelable lease commitments for the corporate office space and leased
equipment as of December 31, 2017 were as follows:

(in thousands) Amount
2018 $ 348
2019 343
2020 333
2021 338
2022 199
Total $ 1,561

Note 7 — 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 respec-
tive dates.

A fair value hierarchy is used, 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 1 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.

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For assets and liabilities measured at fair value on a recurring basis, the fair value measure-
ment by levels within the fair value hierarchy used as of December 3 1, 2017 and 2016 were
as follows:

December 31, 2017

(in thousands) Total Level I Level 2 Level 3
Liabilities:
Interest rate swap $ (374) §$ - $ (374, §$ -

December 31, 2016

(in thousands) Total Level 1 Level 2 Level 3
Liabilities:
Interest rate swap $ (453) §$ - $ (453) $ -

The carrying value of certain financial instruments included in the accompanying Consoli-
dated Balance Sheets, along with the related fair value, as of December 31, 2017 and 2016
was as follows:

2017 2016
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
Liabilities:
Long-term debt $ (207,709) $ (234,509) $ (210,443) $ (264,700)
Interest rate swap liability $ (374) §$ (374) $ (453) §$ (453)

The fair value of long-term debt has been determined by discounting the future cash flows
using current market interest rates for similar financial instruments of the same duration. The
fair value for long-term debt shown above does not purport to represent the amounts at which
those debt obligations would be settled. The fair market value of the interest rate swap
represents the estimated cost to terminate this agreement as of December 31, 2017 and 2016
based upon the then-current interest rates and the related credit risk.

The carrying values of our Cash and Cash Equivalents, Accounts Receivable and Accounts
Payable approximate their fair values because of their short maturity dates. The carrying
value of our CIAC approximates its fair value because it is expected that this is the amount
that will be recovered in future rates.

Note 8 — Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act (the TCJA). The TCJA makes broad and
complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S.
federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate
alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (3)
changing rules related to usage and limitation of net operating loss carryforwards created in

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tax years beginning after December 31, 2017; and (4) changing rules related to limitation of
interest expense deductions. Certain of TCJA’s provisions require interpretation, which may
be clarified through issuances of guidance by the U.S. Treasury Department, regulations, or
future technical corrections.

FASB ASC 740 requires companies to recognize the effects of tax law changes in the period
of enactment, which for the Company is for the year ended December 31, 2017, even though
the effective date of most provisions of TCJA is January 1, 2018.

The Company’s revaluation of federal deferred tax balances to reflect the 21% corporate
income tax rate resulted in a one-time, non-cash expense of approximately $2,500,000,
included in the Company’s provision for income taxes, offset by an increase in deferred
income tax liabilities.

The components of the federal and state income tax provision (benefit) as of December 31,
2017 and 2016 were as follows:

(in thousands) 2017 2016
Federal $ 1,057 $ 284
State 84 (116)
Amortization of investment tax credits (33) (33)
Total $ 1,108 $ 135
Current $ - $ -
Deferred 1,108 135
Total $ 1,108 $ 135

The following is a reconciliation between the statutory federal income tax rate and the
effective income tax rate for 2017 and 2016:

2017 2016
Statutory federal rate 34.0% 34.0%
State tax rate, net of federal benefits 6.2% 5.4%
Permanent differences -15.8% -54.8%
Tax rate change -45.8% 0.0%
Amortization of investment tax credits 0.6% 3.0%
Effective tax rate -20.8% -12.4%

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The temporary items that give rise to the net deferred tax liability as of December 31, 2017
and 2016 were as follows:

(in thousands) 2017 2016
Liabilities:
Property-related, net $ 19,967 $ 27,599
Other 373 363
Total liabilities 20,340 28,162
Assets:
Pension accrued liability 1,186 1,55$
Net operating loss carryforward 5,042 4,480
Alternative minimum tax credit 476 476
NH Business Enterprise Tax credits 853 727
Other 789 782
8,346 8,020
Less valuation allowance (853) (727)
Total assets 7,493 7,293
Net non-current deferred income tax liability $ 12,847 $ 20,869

The Company had a federal net operating loss in 2017 and 2016 in the amounts of
approximately $6.7 million and $1.6 million, respectively. The federal tax benefit of the
cumulative net operating loss is approximately $3.8 million which begins to expire in 2032,
and is included in deferred income taxes in the Consolidated Balance Sheet as of
December 31, 2017.

The Company also had a New Hampshire net operating loss in 2017 and 2016 in the amounts
of approximately $7.3 million and $2.5 million, respectively. The New Hampshire tax benefit
of the cumulative net operating loss is approximately $1.2 million which begins to expire in
2022, and is included in deferred income taxes in the Consolidated Balance Sheet as of
December 31, 2017.

As of December 31, 2017 and 2016, it is estimated that approximately $476,000 and
$476,000, respectively, of cumulative federal alternative minimum tax credits may be carried
forward indefinitely as a credit against our regular tax liability.

As of December 31, 2017 and 2016, the Company had New Hampshire Business Enterprise
Tax (“NHBET”) credits of approximately $853,000 and $727,000, respectively. NHBET
credits begin to expire in 2018. It is anticipated that these NHBET credits will not be fully
utilized before they expire; therefore, a valuation allowance has been recorded related to
these credits. The valuation allowance increased by $126,000 and $358,000 in the years
ended December 31, 2017 and 2016, respectively.

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Investment tax credits resulting from utility plant additions are deferred and amortized. The
unamortized investment tax credits are being amortized through the year 2033.

The Company had a regulatory liability related to income taxes of approximately $9,955,000
and $760,000 as of December 31, 2017 and 2016, respectively. This represents the estimated
future reduction in revenues associated with deferred taxes which were collected at rates
higher than the currently enacted rates and the amortization of deferred investment tax
credits.

A review of the portfolio of uncertain tax positions was performed. In this regard, an
uncertain tax position represents the expected treatment of a tax position taken in a filed tax
return, or planned to be taken in a future tax return, that has not been reflected in measuring
income tax expense for financial reporting purposes. As a result of this review, it was
determined that the Company had no material uncertain tax positions, and tax planning
strategies will be used, if required and when possible, to avoid the expiration of any future
net operating loss and/or tax credits.

The Company’s practice is to recognize interest and/or penalties related to income tax
matters in “Other, Net” in the Consolidated Statements of Income. We incurred no interest in
2017 and 2016. We incurred $0 and $0 of penalties during the years ended December 31,
2017 and 2016, respectively.

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Note 9— Debt

Long-term debt as of December 31, 2017 and 2016 consisted of the following:

2017
Unamortized
Debt Issuance
(in thousands) Principal Costs
Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041 $ 108,960 3 -
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 201 5A), interest rates from 4.00% to 5.00%,
due January 1, 2046 20,035 1,527
Revenue Bonds (Series 201 5B), 5.00%, due January 1, 2046 1,940 251
Revenue Bonds (Series 20144), 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
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 nole or (ii) 80% of the established 11 General Obligations Bond
Index published during the specified time period before the interest rate change date.

31

‘14, The CONTRACTOR shall be responsible for cutting, fitting or patching required to complete

id.

16.

the Work or to make its parts fit together properly.

The CONTRACTOR shall keep the premises and surrounding area free from accumulation of

debris and trash related to the Work.

CONTRACTOR warrants and guarantees to OWNER, for 1(one) year, upon completion of

work, that all Work will be in accordance with the Contract Documents and will not be

defective. CONTRACTOR’s warranty and guarantee hereunder excludes defects or damage

caused by:

> Abuse, modification, or improper maintenance or operation by persons other than
CONTRACTOR, SUBCONTRACTORs, Suppliers, or any other individual or entity
for whom CONTRACTOR is responsible; or

P Normal wear and tear under normal usage.

ARTICLE 9 —- CHANGES IN THE WORK

L,

After execution of the Contract, changes in the Work may be accomplished by Change Order
or by order for a minor change in the Work. The OWNER, without invalidating the Contract,
may order changes in the Work within the general scope of the Contract consisting of
additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted
accordingly.

A Change Order shall be a written order to the CONTRACTOR signed by the OWNER to
change the Work, Contract Sum or Contract Time.

Change Order requests must include material and equipment cost plus labor with a profit
margin of no more than 10%. Change Orders may require approval by the OWNER Finance
Committee vote prior to proceeding.

The OWNER will have authority to order minor changes in the Work not involving changes
in the Contract Sum or the Contract Time and not inconsistent with the intent of the Contract
Documents. Such changes shall be written orders and shall be binding on the OWNER and
CONTRACTOR. The CONTRACTOR shall carry out such written orders promptly.

If concealed or unknown physical conditions are encountered at the site that differ materially
from those indicated in the Contract Documents or from those conditions ordinarily found to
exist, the Contract Sum and Contract Time shall be subject to equitable adjustment following
authorization of the OWNER to the charges.

ARTICLE 10 — TIME

1.
2

Time limits stated in the Contract Documents are of the essence to the Contract.

If the CONTRACTOR is delayed at any time in progress of the Work by changes ordered in
the Work, or by labor disputes, fire, unusual delay in deliveries, unavoidable casualties or
other causes beyond the CONTRACTOR’s control, the Contract Time shall be extended by
Change Order for such reasonable time as may be determined.

ARTICLE 11 —- PAYMENTS AND COMPLETION

a

The Contract Sum stated in the Agreement, including authorized adjustments, is the total
amount payable by the OWNER to the CONTRACTOR for performance of the Work under
the Contract Documents.

Once every thirty (30) days, the CONTRACTOR shall submit an itemized Application for
Payment for operations completed in accordance with the values stated in the Agreement.

AG-7