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2016

(in thousands) Principal

Unsecured note payable to City of Nashua, 5.75%,

due 12/25/2041 $
Unsecured senior note payable due to an insurance company

7.40%, due March 1, 2021

Unsecured Business Finance Authority:
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 2014A), interest rates from 3.00% to 4.125%,
due January 1, 2045
Revenue Bonds (Series 2014B), 4.50%, due January |, 2045
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 New Hampshire State Revolving Fund (“SRF”) notes (1)
Unamortized debt issuance costs for defeased obligations,
allowed by regulation

Total
Less current portion
Less unamortized debt issuance costs

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

200,758

Unamortized
Debt Issuance
Costs
110,970 $ -

4,000 36

20,555 1,614

2,035 272

40,930 2,114

5,215 123

3,332 17

1,505 11

1,250 7

950 5

815 7

602 38

18,284 168

- 111

210,443 $ 4,523
(5,162)
___ 4,523)

(1) SRF notes are due through 2035 at interest rates ranging from 1% to 4.488%, 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, 2017 are as
follows:

(in thousands) Amount

2018 $ 5,576
2019 5,911
2020 6,169
2021 8,450
2022 6,343
2023 and thereafter 175,260
Total $ 207,709

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, 2017 and 2016, Pennichuck Water’s net worth
was $118.0 million and $122.1 million, respectively.

The 2014A, 2014B, 2015A and 2015B 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, 2017 and 2016,
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 11 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, 2017 and 2016, 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, 2017 and 2016, this
ratio was 1.5 and 1.8, 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,
2017 and 2016, the Rate Covenant coverage ratio was 1.41 and 1.93, respectively.

Pennichuck East’s loan agreement for its unsecured notes payable to a bank of $8.1
million and $8.5 million at December 31, 2017 and 2016, respectively, contains a minimum
debt service coverage ratio requirement of 1.25. At December 31, 2017 and 2016, this ratio
was 0.92 and 1.29, 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, 2017 and 2016, this ratio was 59% and
56%, respectively.

The Company’s revolving credit loan facility with TD Bank contains a covenant that requires
the Company to maintain a minimum fixed charge coverage ratio of at least 1.0; at
December 31 2017 and 2016, the fixed charge coverage ratio was 0.81 and 1.05,
respectively. The Company is also required to maintain an equity capitalization ratio of not
less than 35%; at December 31, 2017 and 2016, the equity capitalization ratio was 34% and
36%, respectively. These covenants have not been met, and TD Bank has waived such
noncompliance.

Under this agreement, the Company is also precluded from declaring or paying dividends, or
making any other payment or distribution of its equity without the bank’s prior written
consent, except for: (1) its obligations under Rate Order No. 25,292 as it pertains to the
Company’s specific obligations under the City Bond Fixed Revenue Requirement
(“CBFRR”) which provides for payments of approximately $707,000 per month of the note
payable to the City of Nashua (the “City”), and quarterly dividends to the City for the
remainder of this annual obligation, as defined by the order; and (2) a specific allowance,
under Rate Order No. 25,292, whereby the Company is allowed to make distributions to the
City from current earnings and profits in excess of the CBFRR, to provide funds to allow the
City to reimburse itself for the costs incurred by the City relating to its efforts in pursuing the
eminent domain proceedings from January 2002 through August 2009; provided, however,
that such amount shall not exceed $500,000 in any fiscal year, or $5,000,000 in the aggre-
gate, of all such distributions. No special dividend was declared or paid in 2017 or 2016.

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Short-term borrowing activity under this revolving credit loan facility for the years ended
December 31, 2017 and 2016 was:

(in thousands) 2017 2016

Established line as of December 31, $ 6,000 $ 10,000
Maximum amount outstanding during period 5,574 1,118
Average amount outstanding during period 228 73
Amount outstanding as of December 31, 5,574 -

Weighted average interest rate during period 3.01% 2.22%
Interest rate as of December 31, 3.10% 2.251%

As of December 31, 2017 and 2016, the Company had a $3.1 million and $3.3 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 $3.1 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, 2017. 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, 2017 and 2016, included in our Consolidated
Balance Sheets under “Other Liabilities and Deferred Credits” as “Derivative instrument” was
$374,000 and $453,000, respectively. Changes in the fair value of this derivative were deferred
in accumulated other comprehensive income (loss).

Swap settlements are recorded in the statement of income (loss) with the hedged item as
interest expense. During the years ended December 31, 2017 and 2016, $76,000 and
$123,000, respectively, was reclassified pre-tax from accumulated other comprehensive
income (loss) to interest expense as a result of swap settlements. The Company expects to
reclassify approximately $109,000, pre-tax, from accumulated other comprehensive income
(loss) to interest expense as a result of swap settlements, over the next twelve months.

Note 10 — Accumulated Other Comprehensive Income
The following table presents changes in accumulated other comprehensive income by

component for the years ended December 31, 2017 and 2016:
Interest Rate Contract

(in thousands) 2017 2016
Beginning balance $ 258 8=6$ 201
Other comprehensive income (loss) before reclassifications 1 (17)

Amounts reclassified from accumulated other

comprehensive income 46 74
Net current period other comprehensive income 47 37
Ending balance $ 305 $ 258

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The following table presents reclassifications out of accumulated other comprehensive
income for the years ended December 31, 2017 and 2016:

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) 2017 2016
Gain (loss) on cash flow hedges

Interest rate contracts $ 77 = § 123 Interest expense

(31) (49) Tax expense

Amounts reclassified from accumulated

other comprehensive income $ 46 $ 74 Net of tax

Note 11 — 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 account-
ing and rate-setting mechanisms were agreed to in the NHPUC Order 25,292 (“PUC Order”)
dated November 23, 2011.

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, 2017 and 2016 was approximately
$109 million and $111 million, respectively, as disclosed in Note 9 to these consolidated
financial statements. During 2017 and 2016, dividends of approximately $279,000 and

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$280,000, respectively, were declared and paid to the City. The dividends paid to the City
during 2017 comprised approximately $279,000 of regular quarterly dividends declared and
paid; and ne special dividend was declared or paid in 2017. The dividends paid to the City
during 2016 comprised approximately $280,000 of regular quarterly dividends declared and
paid; and no special dividend was declared or paid in 2016.

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, 2017 and 2016, respectively,
approximately $3.2 million and $3.1 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
$2.9 million for the year ended December 31, 2017, and approximately $2.8 million for the
year ended December 31, 2016.

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, 2017 was approximately $77.5 million, reduced by
the non-regulated credit of approximately $4.3 million.

Aggregate amortization expense for the years ended December 31, 2017 and 2016 totaled
approximately $1,917,000 and $1,884,000, respectively.

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The following table represents the total estimated amortization of MARA:

Estimated

Amortization

(in thousands) Expense
2018 $ 1,958
2019 2,006
2020 2,061
2021 2,119
2022 2,183
2023 and thereafter 62,900
Total $ 73,227

Note 12 — Rate Cases

Pennichuck Water Works, Inc.

On September 23, 2016, Pennichuck Water Works, Inc. (“PWW”) filed a request with the
New Hampshire Public Utilities Commission (“NHPUC”) for a rate increase of 17.21% over
its current rates for the test year 2015, for which 7.86% was related to a permanent rate
increase, and 9.35% was related to a prospective step increase (associated with capital
investments and other allowable expenditures in the twelve months following the test year).
The overall rate increase is subject to the normal regulatory filing process with the NHPUC,
as followed for all prior rate case filings, and as such, the final permanent rate increase
granted will be effective retroactive back to the filing date, once approved by the NHPUC.
The step increase, once approved and granted, would be earned on a forward-looking basis,
as of the date of the order granting such increase. In addition, PWW requested that a
temporary rate increase of 6.21% be granted as a subset of the final permanent rate increase,
with the intention that this temporary rate increase would be approved very early in 2017.
The Company, NHPUC Staff and the Office of Consumer Advocate agreed to a temporary
rate increase at "current rates," and as such, there was no impact on ratepayers for any
temporary rate increases.

The request for the overall permanent rate increase was based upon increases in PWW’s
operating costs since the last allowed rate increase in 2010/2011 (for the 2009 test year), as
well as revenues needed to pay the debt service on over $40 million of infrastructure
replacements made since the last rate case, with those dollars being invested in its real
property assets, distribution and treatment systems, and other necessary capital items, to
ensure continued compliance with the Safe Drinking Water Act and prudent ongoing
replacement of aging infrastructure to properly maintain the company’s operating systems.

On November 7, 2017, the PUC issued Order No. 26,070 approving a permanent rate
increase of 3.12% and a 7.69% step increase for its customers. The permanent rate increase
was effective on a bills-rendered basis on and after December 7, 2016. The step increase is
effective the date of the order, November 7, 2017.

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Pennichuck East Utility. Inc.

On October 18, 2017, Pennichuck. East Utility, Inc. (“PEU”) filed a request with the New
Hampshire Public Utilities Commission (“NHPUC”) for a rate increase of 21.24% over its
current rates for the test year 2016, for which 20.08% of this increase is related to a
permanent rate increase and 1.16% is related to a prospective step increase (associated with
capital investments and other allowable expenditures in the twelve months following the test
year). The overall rate increase is subject to the normal regulatory filing process with the
NHPUC, as followed for all prior rate case filings, and as such, the final permanent rate
increase granted will be effective retroactive back to the filing date, once approved by the
NHPUC. The step increase, once approved and granted, would be earned on a forward-
looking basis, as of the date of the order granting such increase. In addition, PEU requested
that a temporary rate increase of 13.70% be granted as a subset of the final permanent rate
increase, with the intention that this temporary rate increase would be approved in early
2018, and with permanent rates being set in the summer or fall of 2018.

The last general rate increase for PEU was in 2014, based upon 2012 as a test year. Since
then, PEU’s operating expenses have increased ratably, and for some items like local
property taxes, well above the rate of inflation. Additionally, since the beginning of 2013, the
Company has borrowed and invested over $7.5 million in new capital assets to serve its
customers through ongoing investments in infrastructure replacements and system
improvements. The rate increase being requested will allow PEU to pay the debt service
attributable to these new capital investments, pay its necessary operating costs, and continue
to meet the needs of its customers now and into the future.

A hearing was held on the Temporary Rate request on February 26, 2018, where the
Commissioners were asked to opine on a temporary rate increase of 12.24%, pursuant to a
Settlement Agreement entered into between the Company, the PUC Staff and the Office of
Consumer Advocate and other intervenors to the case. Upon receiving an order authorizing a
temporary rate increase, the new rates resulting from that will begin to be billed to customers
in 2018.

Note 13 — Subsequent Events
The Company has evaluated the events and transactions that have occurred through March 21,

2018, the date that these consolidated financial statements were available for issuance, for
which no reportable events were discovered.

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25 MANCHESTER STREET
PO BOX 1947
MERRIMACK, NH 03054-1947

V2 PENNICHUGK"

1603) 882-5191
FAX {603) 913-2305
VIA HAND DELIVERY
WWW.PENNICHUCK COM
March 27, 2018

Mr. Steven A. Bolton
Corporation Counsel
City of Nashua

229 Main Street
Nashua, NH 03060

Re: _ Pittsfield Aqueduct Company, Inc. - Request for Approval to Refinance

Intercompany Debt with Pennichuck Corporation

Dear Attorney Bolton:

Introduction. As you know, the City of Nashua, New Hampshire (the “City”) is the sole corporate
shareholder of Pennichuck Corporation (“Pennichuck”). The City has been the sole shareholder since
the acquisition of Pennichuck on January 25, 2012.

The purpose of this letter is to request that the City, acting in its capacity as sole shareholder, approve
resolutions authorizing Pennichuck’s regulated public water utility subsidiary, Pittsfield Aqueduct
Company, Inc. (“PAC”), to refinance intercompany debt with Pennichuck Corporation.

Background. As part of the City’s acquisition of Pennichuck, in accordance with special legislation
enacted by the State Legislature, and as unanimously approved by the Mayor and Board of Aldermen
on January 11, 2011, the corporate structure of Pennichuck and its utility subsidiaries was retained.
This corporate structure was retained for several reasons. First, the Mayor and Board of Aldermen
desired to maintain stability and continuity for customers and employees of the Pennichuck utilities
and the communities they serve. Second, retaining the corporate structure provided continuity for the
existing relationships with regulatory agencies and financial/banking partners. Third, the Mayor and
Board of Aldermen unanimously agreed that the corporate structure would encourage business-smart
decisions and rely upon well-established governance principles of corporate law, pursuant to
Pennichuck’s Articles of Incorporation and its by-laws.

Shareholder Approval of Borrowings Required. Under Article IX of Pennichuck’s Articles of

Incorporation, the City, acting in its capacity as Pennichuck’s sole shareholder, must approve:

“(3) any action to (A) create, incur or assume any indebtedness for borrowed money
or guarantee any such indebtedness of any person, (B) issue or sell any debt
securities or warrants or other rights to acquire any debt securities of the
[Pennichuck] Corporation or any of its Subsidiaries, or (C) guarantee any debt
securities of any person.”

-2-

Intercompany Loan with Pennichuck Corporation

PAC is seeking the City’s approval to:

(1) refinance a 10-year $776,850 7% fixed rate intercompany note payable between
PAC and Pennichuck Corporation which matures on May 1, 2018; and

(2) convert $409,150 of variable rate short term intercompany debt to a long term note.

These two existing notes would be aggregated into one new long-term intercompany note payable as a
new single intercompany loan. The new intercompany loan would be in the aggregate amount of
$1,186,000, repaid over a 30-year term, on a fully amortizing basis, at an interest rate of 3.2%.

Approval by Pennichuck and PAC Board of Directors. The new intercompany loan has been

approved by the respective Board of Directors of Pennichuck and PAC.

New Hampshire Public Utilities Commission PUC) Approval Required. As a regulated
public utility, PAC must obtain approval of the new intercompany loan from the NHPUC. PAC has
filed a petition to request this approval on March 8, 2018. Said approval is conditioned upon
receiving shareholder approval from the City of Nashua, in conjunction with this request.

Requested Approvals. For the reasons described above, Pennichuck respectfully requests that the
City, acting in its capacity as sole shareholder of Pennichuck and pursuant to Article IX (3) of

Pennichuck’s Articles of Incorporation, authorize the following actions:

RESOLVED, that the City hereby approves the refinancing of a 10-year $776,850
intercompany note payable between Pittsfield Aqueduct Company, Inc. and
Pennichuck Corporation, and the conversion of $409,150 of variable rate short term
intercompany debt to a long term note; the two notes to be aggregated into a single
long term intercompany loan in the aggregate amount of $1,186,000 to be repaid over
a 30-year term, on a fully amortizing basis, at an interest rate of 3.2%.

FURTHER RESOLVED, that the City authorizes Pennichuck Corporation and
Pittsfield Aqueduct Company, Inc., their Boards of Directors, and their Officers, to
take any and all actions required to obtain ail necessary approvals with respect to the
actions described in the prior resolution and to execute and deliver such documents as
are necessary to effect the long term intercompany loan described in the prior
resolution.

Respectfully submitted,
PENNICHUCK CORPORATION

By: LA _
D. Goodhue

Chief Executive Officer

cc: Mayor James Donchess

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