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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 $385,300 and $389,800
for the years ended December 31, 2021 and 2020, respectively.

The remaining non-cancelable lease commitments for the corporate office space and leased
equipment as of December 31, 2021 were as follows:

{in thousands) Amount
2022 $ 364
2023 348
2024 347
2025 330
2026 363
Thereafter 3,449
Total S$ 5,201

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
respective 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 31, 2021 and 2020 were
as follows:

December 31, 2021

(in thousands) Total Level 1 Level 2 Level 3
Liabilities:
Interest rate swap S$ (290) S$ - § (290) S$ -

December 31, 2020

(in thousands) Total Level 1 Level 2 Level 3
Liabilities:
Interest rate swap $ (460) S$ - S (460) S$ -

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, 2021 and 2020
was as follows:

2021 2020
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value

Liabilities:
Interest rate swap liability $ (290) $ (290) $ (460) $ (460)

The fair market value of the interest rate swap represents the estimated cost to terminate
this agreement as of December 31, 2021 and 2020 based upon the then-current interest rates
and the related credit risk.

The carrying values of our cash and cash equivalents, restricted cash, accounts receivable and
accounts payable approximate their fair values because of their short-term maturity dates.
The carrying value of CIAC approximates its fair value because it is expected that this is the
amount that will be recovered in future rates. The carrying values of lines of credit and long-
term debt approximate fair value, as interest rates approximate market rates.

Revenue from Contracts with Customers — Non-Regulated Entities

Revenue is recognized when control of the promised goods or services is transferred to
customers, in an amount that reflects the consideration we expect to be entitled to in
exchange for those goods or services.

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10.

Disaggregation of Revenue
For the years ended December 31, 2021 and 2020, revenue recognized for goods and services
transferred over time totaled $3,339,069 and $2,777,693, respectively.

For the year ended December 31, 2021, approximately 58% of revenues were from large-
contract customers, 25% of revenues were from small contract customers (con-ops), and 17%
of revenues were from residential maintenance and other customers. For the year ended
December 31, 2020, approximately 62% of revenues were from large-contract customers,
21% of revenues were from small contract customers (con-ops), and 17% of revenues were
from residential maintenance and other customers. In addition, substantially all of the
Company's contracts were service-related type contracts.

Income Taxes

The components of the federal and state income tax provision (benefit) as of December 31,
2021 and 2020 were as follows:

(in thousands) 2021 2020
Federal S (151) S 656
State (5) (116)
Amortization of investment tax credits (33) (33)
Total S$ (189) $ 507
Current S$ (127) $ 33
Deferred (62) 474
Total S (189) $ 507

The following is a reconciliation between the statutory federal income tax rate and the
effective income tax rate for 2021 and 2020:

2021 2020
Statutory federal rate 21.0 % 21.0 %
State tax rate, net of federal benefits 6.1 6.1
Permanent differences (23.0) (63.6)
Amortization of investment tax credits 0.9 2.2
Effective tax rate 5.0 % (34.3) %

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The temporary items that give rise to the net deferred tax liability as of December 31, 2021
and 2020 were as follows:

(in thousands) 2021 2020
Liabilities:
Property-related, net S$ 23,417 S$ 22,496
Other 740 704
Total liabilities 24,157 23,200
Assets:
Pension accrued liability 1,817 1,659
Net operating loss carryforward 6,331 5,415
Alternative minimum tax credit 476 476
NH Business Enterprise Tax credits 1,103 957
Other 682 718
10,409 9,225
Less valuation allowance (1,102) (956)
Total assets 9,307 8,269
Net non-current deferred income tax liability $ 14,850 S 14,931

The Company has accumulated federal net operating losses. The federal tax benefit of the
cumulative net operating losses is approximately $5 million, begins to expire in 2033, and is
included in deferred income taxes in the Consolidated Balance Sheet as of December 31,
2021. Approximately 75% of the net operating losses are 100% available to be applied to
taxable income in future years and are not subject to the TCJA as they were generated prior
to the 2018 tax year. The enactment of the TCA now limits the net operating loss shelter to
80% of taxable income, for post-2017 tax year losses. The TCJA also provides for net operating
losses to be carried forward indefinitely instead of limited to 20 years, as is the case for pre-
2018 losses; however, carrybacks of these losses are no longer permitted. Approximately 25%
of the net operating losses were generated in 2019 through 2021 and therefore are subject
to the 80% limitation.

The Company has accumulated New Hampshire net operating losses. The New Hampshire tax
benefit of the cumulative net operating loss is approximately $1.6 million which begins to
expire in 2023 and is included in deferred income taxes in the Consolidated Balance Sheet as
of December 31, 2021.

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As of December 31, 2021 and 2020, 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, 2021 and 2020, the Company had New Hampshire Business Enterprise
Tax (“NHBET”) credits of approximately $1,100,000 and $960,000, respectively. NHBET
credits begin to expire in 2022. 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 decreased by approximately $146,000 and $167,000
in the years ended December 31, 2021 and 2020, respectively.

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 $9,906,000
and $9,918,000 as of December 31, 2021 and 2020, 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 as 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 2021 and 2020. We incurred no penalties during the years ended December 31, 2021 and
2020.

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11.

Long-Term Debt

Long-term debt as of December 31, 2021 and 2020 consisted of the following:

2021
Unamortized
Debt Issuance
(in thousands) Principal Costs
Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041 $ 99,632 $
Unsecured Business Finance Authority:
Revenue Bonds (Series 20148), 4.50%, due January 1, 2045 4,725 101
Revenue Bonds (Series 20184), interest rates from 4.375% to 5.00%,
due April 1, 2048 4,460 235
Revenue Bonds (Series 20188), 4.33%, due April 1, 2028 805 44
Revenue Bonds (Series 20194), interest rates from 2.19% to 4.15%,
due April 1, 2049 7,945 267
Revenue Bonds (Series 2020A), interest rates from 3.15% to 4%,
due April 1, 2050 7,000 275
Revenue Bonds (Series 20208), 5.25%, due April 1, 2023 255 7
Revenue Bonds (Series 2020C), interest rates from 1.25% to 4.02%,
due September 1, 2055 (3) 72,420 7,836
Revenue Bonds (Series 20214}, interest rates from 4% to 5%,
due April 1, 2051 5,065 240
Revenue Bonds (Series 20218), 1.05%, due April 1, 2024 125 5
Unsecured notes payable to bank, floating-rate, due March 1, 2030 2,267 10
Unsecured notes payable to bank, 3.62%, due June 20, 2023 1,141 2
Unsecured notes payable to bank, 4.20%, due December 20, 2041 1,094 4
Unsecured notes payable to bank, 4.83%, due December 20, 2041 840 S
Unsecured notes payable to bank, 4.25%, due June 20, 2033 626 S
Unsecured notes payable to bank, 4.90%, due March 6, 2040 $24 30
Unsecured notes payable to bank, 5.33%, due June 20, 2043 324 10
Unsecured notes payable to bank, 4.38%, due September 20, 2044 1,091 15
Unsecured notes payable to bank, 3.98%, due January 1, 2046 781 12
Unsecured notes payable to bank, 4.18%, due October 20, 2046 1,131 11
Unsecured nates payable to bank, 4.25%, due December 20, 2046 2,547 12
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1) 22,592 182
Unsecured New Hampshire Drinking Water & Groundwater Trust
Fund ("DWGTF") notes (2) 8,520 10
Paycheck Protection Program Loan, 1.00%, due May 7, 2022 2,544 2
Unamortized debt issuance costs for defeased obligations,
allowed by regulation - 2,952
Total 248,454 $ 12,242
Less current postion (9,149)
Less unamortized debt issuance costs (12,242)
Total long-term debt, less current portion
and unamortized debt issuance costs $ 227,063

{1) SRF notes aredue through 20S1 at interest cates ranging from 1% to 3.8%. These notes are payable In 120 to 240 consecutive monthly
installments of principal and Interest. The 1% fate applies to construction projects stil! in process until the earlier of {I} the date of
substantlal completion of the Improvements, or (ii) varlous 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 a5 stated in the note or (ii) 80% of
the established 11 General Obligations Bond Index published during the specified tlme period before the interest rate change date,

(2) OWGTF notes are due through 2050 at interest rates ranging from 2.7% to 3.4%. These notes are payable in 360 consecutive monthly
installments of principle and interest. The 1% rate applies to construction projects still in process untl! the earlier of {i} the date of
substantial completion of the impr of {ii} June 1, 2020 as specified in the note {such earlier date being the interest rate change
date). Commencing on the interest rate change date, the inter est rate change to the rate as Stated in the note.

(3) Revenue Bonds (2020C) proceeds were partially used to advance refund the 2014A, 2015A and 20158 bonds with maturity dates of
January 1, 2045, January 1, 2046, and January 1, 2031 respectively. The advance refunding proceeds are held In escrow until thelr future
call dates of December 2023 and December 2024, to then be used to facllitate retirement of the bonds. Of the remalning $7,836 of
Unamortized Debt Issuance Casts a$ af December 31, 2020 generated by the September 2nd issuance, $6,491 are directly tied the advance
refunding and will fuliy-amortize on a straight-line basis until their respective call dates.

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2020

Unamortized
Debt Issuance
(in thousands) Principal Costs
Unsecured note payable to City of Nashua, 5.75%,
due 12/25/2041 $ 102,173 $
Unsecured Business Finance Authority:
Revenue Bonds (Series 20148), 4.50%, due January 1, 2045 4,830 105
Revenue Bonds (Series 2018A), interest rates from 4.375% to 5.00%,
due April 1, 2048 4,460 244
Revenue Bonds (Series 2018B), 4.33%, due April 1, 2028 $00 50
Revenue Bonds (Series 2019A), interest rates from 2.19% to 4.15%,
due April 1, 2049 8,080 277
Revenue Bonds (Series 2020A}, interest rates from 3.15% to 4%,
due April 1, 2050 7,000 284
Revenue Bonds (Series 20208), 5.25%, due April 1, 2023 380 12
Revenue Bonds (Series 2020C), interest rates from 1.25% to 4.02%,
due September 1, 2055 (3) 73,630 10,654
Unsecured notes payable to bank, floating-rate, due March 1, 2030 2,494 12
Unsecured notes payable to bank, 3.62%, due June 20, 2023 1,219 4
Unsecured notes payable to bank, 4.20%, due December 20, 2041 1,128 4
Unsecured notes payable to bank, 4.83%, due December 20, 2041 864 5
Unsecured notes payable to bank, 4.25%, due June 20, 2033 667 5
Unsecured notes payable to bank, 4.90%, due March 6, 2040 541 31
Unsecured notes payable to bank, 5.33%, due June 20, 2043 332 11
Unsecured notes payable to bank, 4.38%, due September 20, 2044 1,118 15
Unsecured notes payable to bank, 3.98%, due January 1, 2046 800 12
Unsecured New Hampshire State Revolving Fund (“SRF”) notes (1) 23,048 162
Unsecured New Hampshire Drinking Water & Groundwater Trust
Fund ("DWGTF") notes (2) 8,675 11
Paycheck Protection Program Loan, 1.00%, due May 7, 2022 2,544 -
Unamonrtized debt issuance costs for defeased obligations,
altowed by regulation - 3,162
Total 244,883 5 15,060
Less current portion (6,018)
Less unamortized debt issuance costs (15,060)

Total long-term debt, less current portion
and unamortized debt issuance costs $ 223,805

(1) SRF notes are due through 2051 at interest rates ranging from 1% to 3.8% These notes are payable in 120 to 240 consecutive monthly Install ments
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 (rif various dates specified in the note (such eartier 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 Band Index
published during the specified time per od before the interest rate change date.

(2) DWGTF notes are due through 2050 at Interest rates ranging from 1% to 3.38% These notes are payable in 360 consecutive monthly installments
of principle and interest. The 1% rate applies to construction projects st! in process until the eartier of (i) the date of substantial completion of the
impravements or (ii} June 1, 2020 as specified in the note (such earlier date being the Interest rate change date). Commencing on the interest rate
change date, the interest rate change to the rate as stated in the note.

(3) Revenue Bonds (2020C) proceeds were partially used to advance refund the 2014A, 2015A and 20156 bonds with maturity dates of January 1,
2045, January 1, 2046, and January 1. 2031 respectively. The advance refunding proceeds are held in escrow until their future call dates of
December 2023 and December 2024, to then be used to facilitate retirement of the bonds. Of the remaining $10,654 of Unamortized Debt Issuance
Costs as of December 31, 2020 generated by the September 2nd Issuance, $9,269 are directly tied the advance refunding and will fully-amortize ona
stralght-line basts until thelr respective call dates.

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The aggregate principal payment requirements subsequent to December 31, 2021 are as
follows:

(in thousands} Amount

2022 $ 9,149
2023 7,853
2024 7,080
2025 7,338
2026 7,659
2027 and thereafter 203,375
Total $ 248,454

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, 2021 and 2020, Pennichuck Water’s net worth was
$97.8 million and $103.6 million, respectively.

The 2014A, 2014B, 2018A, 2018B, 2019A, 2020A, 2020B, 2020C, 2021A and 2021B 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, 2021 and 2020, Pennichuck Water has a
Debt to Capital Coverage ratio of 0.7 and 0.6, 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 14 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, 2021 and 2020, this coverage ratio was 0.6 and 0.6, respectively. Also,
the ratio of EBITDA to the Max Amount Due must be equal to or greater than 1.1; as of
December 31, 2021 and 2020, this ratio was 2.3 and 2.6, respectively.

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Ward 4 (18)

Broad St — EB1 (Blue Hill Ave — Broad Street Pkwy)
Broad St— WB1 (Broad Street Pkwy — Blue Hill Ave)
Chestnut St (W. Hollis St — Kinsley St)

Kinsley St (Ritter St — Main St)

Ledge St (Stevens Ave — Seventh St)

Main St (W. Hollis St — Prospect St)

Main St (200’N of Lake St — Allds St)

Vine St (Nevada St — Lake St)

West Otterson St (Main St — Vine St)

Ward 5

Calico Cir

Carnation Cir

Colonial Ave

Conant Rd (Main Dunstable Rd — 125’S of Rocky Hill Rd)

Edson St

Governors Ln

Jolori Ln

Larchmont Dr

Main Dunstable Rd — NB (Main Dunstable Rd — 525’S of W. Hollis St)
Main Dunstable Rd — SB (525’S of W. Hollis St — Main Dunstable Rd)
Mandinbarb Cir

Old Coach Rd

Shawnee Dr

Ward 6

Balcom St

Forest Hills Dr

Fox Meadow Rd

Kinsey St (Main Dunstable Rd — Ritter St)
Markar St (New Dunstable Rd — Kinsley St)
Oakland Ave (Burnett St — Dead End)
Wildwood Ln

Page 2|3

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 NHPUC, 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, 2021 and 2020, the Rate Covenant coverage ratio
was 2.19 and 3.57, respectively.

Pennichuck East’s loan agreement for its unsecured notes payable to a bank of $12.4 million
and $9.2 million at December 31, 2021 and 2020, respectively, contains a minimum debt
service coverage ratio requirement of 1.10. At December 31, 2021 and 2020, this ratio was
1.47 and 2.07, respectively.

On September 2, 2020, Pennichuck Water issued approximately $73.6 million of taxable
bonds through the New Hampshire Business Finance Authority to: (1) advance refund and
refinance Pennichuck Water’s series 2014A, 2015A, and 2015B bonds; (2) early retire an AULI
bank loan set to mature on March 1, 2021 with a “bullet” maturity due at that date; (3)
complete the replenishment of the Material Operating Expense Revenue Requirement
(MOERR) RSF for Pennichuck Water back to nearly its authorized imprest value; and (4) repay
Pennichuck Water’s Fixed Asset Line of Credit (FALOC) for monies borrowed while awaiting
rate relief from this bonding event and the Pennichuck Water rate case approved by NHPUC
Order No. 26,425. The bond issuance was approved by the Company's Board of Directors and
the Sole Stockholder. This issuance received NHPUC approval in Order No. 26,383 dated July
24, 2020, which authorized up to $75.0 million in bonds.

On October 29, 2021, the NHPUC issued NISI Order No. 26,538, with an effective date of
November 30, 2021, approving Pennichuck East Utility’s request to borrow $2,546,632 from
CoBank, ACB for a 25-year term. This financing was used to fund a “one time” refill and
replenishment of the Company's Material Operating Expense Revenue Requirement
(MOERR) RSF, as well as repay intercompany debt incurred to support the Company as it
awaits final permanent rate relief (set to occur in early 2022), and the reestablishment of its
RSF funds. On November 30, 2021, Pennichuck East Utility closed on this term loan financing
transaction with CoBank, ACB in the amount of $2,546,632 for a term of 25 years at an
interest rate of 4.25%,

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