Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - PENNICHUCK CORP | c24131exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - PENNICHUCK CORP | c24131exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - PENNICHUCK CORP | c24131exv32w2.htm |
EX-99.1 - EXHIBIT 99.1 - PENNICHUCK CORP | c24131exv99w1.htm |
EX-31.1 - EXHIBIT 31.1 - PENNICHUCK CORP | c24131exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - PENNICHUCK CORP | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
0-18552
(Commission File Number)
PENNICHUCK CORPORATION
(Exact name of registrant as specified in its charter)
New Hampshire | 02-0177370 | |
(State or other jurisdiction | (IRS Employer | |
of incorporation or organization) | Identification No.) |
25 Manchester Street, Merrimack, New Hampshire 03054
(Address and zip code of principal executive offices)
(Address and zip code of principal executive offices)
(603) 882-5191
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date:
Common Stock, $1 Par Value, 4,690,329 shares outstanding as of November 1, 2011
PENNICHUCK CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
September 30, 2011
QUARTERLY REPORT ON FORM 10-Q
September 30, 2011
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
Exhibit 99.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
- i -
Table of Contents
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. | FINANCIAL STATEMENTS |
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
As of | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Property, Plant and Equipment, net |
$ | 159,638 | $ | 158,796 | ||||
Current Assets: |
||||||||
Cash and cash equivalents |
4,477 | 2,383 | ||||||
Accounts receivable, net of allowance of $48 as of
September 30, 2011 and $54 as of December 31, 2010 |
2,420 | 2,153 | ||||||
Unbilled revenues |
4,326 | 2,389 | ||||||
Materials and supplies |
762 | 743 | ||||||
Deferred and refundable income taxes |
49 | 717 | ||||||
Prepaid expenses |
580 | 1,307 | ||||||
Total Current Assets |
12,614 | 9,692 | ||||||
Other Assets: |
||||||||
Deferred land costs |
2,528 | 2,497 | ||||||
Deferred charges and other assets |
9,920 | 10,502 | ||||||
Investment in real estate partnership |
112 | 114 | ||||||
Total Other Assets |
12,560 | 13,113 | ||||||
TOTAL ASSETS |
$ | 184,812 | $ | 181,601 | ||||
See notes to condensed consolidated financial statements
- 1 -
Table of Contents
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) CONTINUED
(in thousands, except share data)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) CONTINUED
(in thousands, except share data)
As of | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
SHAREHOLDERS EQUITY AND LIABILITIES |
||||||||
Shareholders Equity: |
||||||||
Common stock $1 par value;
Authorized - 11,500,000 shares in 2011 and 2010;
Issued 4,690,237 and 4,677,105 shares, respectively;
Outstanding 4,689,035 and 4,675,903 shares, respectively |
$ | 4,690 | $ | 4,677 | ||||
Additional paid in capital |
41,573 | 41,312 | ||||||
Retained earnings |
11,855 | 10,488 | ||||||
Accumulated other comprehensive loss |
(492 | ) | (189 | ) | ||||
Treasury stock, at cost; 1,202 shares in 2011 and 2010 |
(138 | ) | (138 | ) | ||||
Total Shareholders Equity |
57,488 | 56,150 | ||||||
Preferred stock, $100 par value, 15,000 shares authorized; and,
no par value, 100,000 shares authorized, no shares issued in
2011 and 2010 |
| | ||||||
Long-term Debt, Less Current Portion |
59,116 | 59,666 | ||||||
Current Liabilities: |
||||||||
Current portion of long-term debt |
1,073 | 1,053 | ||||||
Accounts payable |
1,018 | 1,972 | ||||||
Accrued interest payable |
349 | 701 | ||||||
Accrued wages and payroll withholding |
495 | 565 | ||||||
Accrued liability retainage |
136 | 178 | ||||||
Other current liabilities |
406 | 406 | ||||||
Total Current Liabilities |
3,477 | 4,875 | ||||||
Deferred Credits and Other Reserves: |
||||||||
Deferred income taxes |
21,400 | 19,180 | ||||||
Other deferred credits and other reserves |
10,396 | 9,846 | ||||||
Total Deferred Credits and Other Reserves |
31,796 | 29,026 | ||||||
Contributions in Aid of Construction |
32,935 | 31,884 | ||||||
TOTAL SHAREHOLDERS EQUITY AND LIABILITIES |
$ | 184,812 | $ | 181,601 | ||||
See notes to condensed consolidated financial statements
- 2 -
Table of Contents
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share data)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating Revenues |
$ | 11,901 | $ | 11,765 | $ | 30,214 | $ | 28,294 | ||||||||
Operating Expenses: |
||||||||||||||||
Operations and maintenance |
4,918 | 4,980 | 14,054 | 13,817 | ||||||||||||
Depreciation and amortization |
1,049 | 1,049 | 3,147 | 3,152 | ||||||||||||
Taxes other than income taxes |
1,065 | 974 | 3,304 | 2,877 | ||||||||||||
Total Operating Expenses |
7,032 | 7,003 | 20,505 | 19,846 | ||||||||||||
Operating Income |
4,869 | 4,762 | 9,709 | 8,448 | ||||||||||||
Eminent Domain and Merger-related Costs |
(99 | ) | (159 | ) | (672 | ) | (392 | ) | ||||||||
Net Loss from Investment Accounted for
Under the Equity Method |
(1 | ) | (2 | ) | (5 | ) | (5 | ) | ||||||||
Other Expense, Net |
(1 | ) | (1 | ) | (19 | ) | (1 | ) | ||||||||
Allowance for Funds Used During Construction |
| 4 | 4 | 14 | ||||||||||||
Interest Income |
| 1 | | 2 | ||||||||||||
Interest Expense |
(831 | ) | (841 | ) | (2,449 | ) | (2,528 | ) | ||||||||
Income Before Provision for Income Taxes |
3,937 | 3,764 | 6,568 | 5,538 | ||||||||||||
Provision for Income Taxes |
1,560 | 1,491 | 2,602 | 2,194 | ||||||||||||
Net Income |
2,377 | 2,273 | 3,966 | 3,344 | ||||||||||||
Other Comprehensive Loss, Net of Tax: |
||||||||||||||||
Unrealized loss on derivatives |
(285 | ) | (105 | ) | (304 | ) | (385 | ) | ||||||||
Comprehensive Income |
$ | 2,092 | $ | 2,168 | $ | 3,662 | $ | 2,959 | ||||||||
Earnings per Common Share: |
||||||||||||||||
Basic |
$ | 0.51 | $ | 0.49 | $ | 0.85 | $ | 0.72 | ||||||||
Diluted |
$ | 0.50 | $ | 0.48 | $ | 0.83 | $ | 0.71 | ||||||||
Weighted Average Common Shares Outstanding: |
||||||||||||||||
Basic |
4,685,170 | 4,660,077 | 4,682,220 | 4,657,404 | ||||||||||||
Diluted |
4,759,575 | 4,696,338 | 4,755,818 | 4,685,389 | ||||||||||||
Dividends Paid per Common Share |
$ | 0.185 | $ | 0.180 | $ | 0.555 | $ | 0.540 |
See notes to condensed consolidated financial statements
- 3 -
Table of Contents
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Operating Activities: |
||||||||
Net income |
$ | 3,966 | $ | 3,344 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||
Depreciation and amortization |
3,311 | 3,320 | ||||||
Amortization of deferred investment tax credits |
(25 | ) | (25 | ) | ||||
Provision for deferred income taxes |
2,423 | 447 | ||||||
Equity component of allowance for funds used during construction |
(2 | ) | (7 | ) | ||||
Undistributed loss in real estate partnership |
5 | 5 | ||||||
Stock-based compensation expense |
87 | 207 | ||||||
Changes in assets and liabilities |
(1,460 | ) | 366 | |||||
Net cash provided by operating activities |
8,305 | 7,657 | ||||||
Investing Activities: |
||||||||
Purchases of property, plant and equipment, including debt component of
allowance for funds used during construction |
(3,200 | ) | (4,959 | ) | ||||
Increase in investment in real estate partnership and deferred land costs |
(34 | ) | (17 | ) | ||||
Net cash used in investing activities |
(3,234 | ) | (4,976 | ) | ||||
Financing Activities: |
||||||||
Payments on long-term debt |
(1,289 | ) | (6,190 | ) | ||||
Contributions in aid of construction |
5 | 215 | ||||||
Proceeds from long-term borrowings |
750 | 5,602 | ||||||
Debt issuance costs |
(31 | ) | (43 | ) | ||||
Proceeds from issuance of common stock |
187 | 181 | ||||||
Dividends paid |
(2,599 | ) | (2,515 | ) | ||||
Net cash used in financing activities |
(2,977 | ) | (2,750 | ) | ||||
Increase (decrease) in cash and cash equivalents |
2,094 | (69 | ) | |||||
Cash and cash equivalents, beginning of period |
2,383 | 1,570 | ||||||
Cash and cash equivalents, end of period |
$ | 4,477 | $ | 1,501 | ||||
Supplemental disclosure on cash flow and non-cash items for the nine months ended
September 30, 2011 and 2010 is presented below.
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash paid (refunded) during the period for: |
||||||||
Interest |
$ | 2,628 | $ | 2,788 | ||||
Income taxes |
$ | (438 | ) | $ | 718 | |||
Non-cash items: |
||||||||
Contributions in aid of construction |
$ | 1,573 | $ | 179 | ||||
See notes to condensed consolidated financial statements
- 4 -
Table of Contents
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Description of Business, Acquisition of Company and Summary of Significant Accounting
Policies
The terms we, our, the Company, our Company, and us refer, unless the context
suggests otherwise, to Pennichuck Corporation and its subsidiaries, Pennichuck Water Works, Inc.
(Pennichuck Water), Pennichuck East Utility, Inc. (Pennichuck East), Pittsfield Aqueduct
Company, Inc. (Pittsfield Aqueduct), Pennichuck Water Service Corporation (Service Corporation)
and The Southwood Corporation (Southwood).
Operating results for the three and nine months ended September 30, 2011 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2011. The
condensed consolidated balance sheet amounts shown under the December 31, 2010 column have been
derived from the audited financial statements of our Company as contained in our Annual Report on
Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission
(SEC).
Description of Business:
We are an investor-owned holding company headquartered in Merrimack, New Hampshire. We have
five wholly-owned operating subsidiaries: Pennichuck Water, Pennichuck East, and Pittsfield
Aqueduct (collectively referred to as our Companys utility subsidiaries), which are involved in
regulated water supply and distribution to customers in New Hampshire; Service Corporation which
conducts non-regulated water-related services; and Southwood which owns several parcels of
undeveloped land.
Our Companys regulated water utility subsidiaries are engaged principally in the collection,
storage, treatment and distribution of potable water to approximately 34,500 customers throughout
the State of New Hampshire. The utility subsidiaries, which are regulated by the New Hampshire
Public Utilities Commission (the NHPUC), are subject to the provisions of Accounting Standards
Codification (ASC) Topic 980 Regulated Operations.
Acquisition of Company:
On November 11, 2010, the City of Nashua (the City) and the Company entered into a
definitive merger agreement (the Merger Agreement) pursuant to which the City will, subject to a
number of conditions precedent and contingencies, purchase all of the outstanding common stock and
common stock equivalents of Pennichuck Corporation for $29.00 per share, or approximately $138
million, in cash. Pursuant to the terms of a Settlement Agreement that was entered into
contemporaneously with the Merger Agreement, the Company and the City have agreed that this
transaction constitutes full settlement of their eminent domain dispute.
The Shareholders of the Company approved the Merger Agreement at a Special Shareholder Meeting
on June 15, 2011.
The merger is subject to approval by the NHPUC. The Citys obligation to complete the
transaction is subject to (a) there being no approval conditions imposed by the NHPUC that would
materially adversely affect the Citys expected economic benefits from the transaction,
and (b) the Citys ability to obtain appropriate financing after all other conditions
precedent have been met.
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Table of Contents
Relating to NHPUC approval of the proposed merger with the City, on October 18, 2011, the
Company, the City, the NHPUC Staff and certain other parties entered into and filed with the NHPUC
a Settlement Agreement (the 2011 Settlement Agreement) in which they recommended that the NHPUC
approve the merger. The final hearing before the NHPUC was held on October 25, 2011 and all
parties are now awaiting the ruling of the NHPUC. The NHPUCs ruling is subject to appeal during
the 30-day period following its issuance; thereafter, if no appeal is filed, it becomes final.
Additionally, under the terms of the Merger Agreement, the City, in effect, has 90 days after
the NHPUC ruling becomes final to complete the financing. Therefore, while the merger could
possibly be completed by December 31, 2011, we believe that if the NHPUC approves the merger, it is
more likely to be completed in the first quarter of 2012.
Summary of Significant Accounting Policies:
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial statements and with the instructions to Form 10-Q and Regulation S-X of the SEC.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring and non-recurring
adjustments) considered necessary for a fair presentation have been included.
The accompanying condensed consolidated financial statements include the accounts of our
Company and its wholly-owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
(b) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
- 6 -
Table of Contents
(c) Property, Plant and Equipment
The components of property, plant and equipment as of September 30, 2011 and December 31, 2010
were as follows:
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Utility Property: |
||||||||
Land and land rights |
$ | 2,946 | $ | 2,994 | ||||
Source of supply |
49,449 | 49,304 | ||||||
Pumping & purification |
28,413 | 28,072 | ||||||
Transmission & distribution, including
Services, meters and hydrants |
112,874 | 109,817 | ||||||
General and other equipment |
9,853 | 9,496 | ||||||
Intangible plant |
759 | 747 | ||||||
Construction work in progress |
993 | 684 | ||||||
Total utility property |
205,287 | 201,114 | ||||||
Total non-utility property |
5 | 5 | ||||||
Total property, plant & equipment |
205,292 | 201,119 | ||||||
Less accumulated depreciation |
(45,654 | ) | (42,323 | ) | ||||
Property, plant and equipment, net |
$ | 159,638 | $ | 158,796 | ||||
(d) Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, money market funds and other short-term
liquid investments with original maturities of three months or less.
(e) Concentration of Credit Risks
Financial instruments that subject our Company to credit risk consist primarily of cash and
accounts receivable. Our cash balances are invested both in a money market fund consisting of
government-backed securities and in a financial institution insured by the Federal Deposit
Insurance Corporation (FDIC). Occasionally, our cash balance with this financial institution
exceeds the FDIC limit. Our accounts receivable balances primarily represent amounts due from the
residential, commercial and industrial customers of our regulated water utility operations as well
as receivables from our Service Corporation customers.
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Table of Contents
(f) Deferred Charges and Other Assets
Deferred charges include certain regulatory assets and costs of obtaining debt financing.
Regulatory assets are amortized over the periods they are recovered through NHPUC-authorized water
rates. Deferred financing costs are amortized over the term of the related bonds and notes. Our
Companys 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 four to 25 years. Deferred charges
and other assets as of September 30, 2011 and December 31, 2010 consisted of the following:
As of | ||||||||||||
September 30, | December 31, | Recovery | ||||||||||
(in thousands) | 2011 | 2010 | Period | |||||||||
Regulatory assets: |
||||||||||||
Source development charges |
$ | 890 | $ | 932 | 5 25 | |||||||
Miscellaneous studies |
537 | 681 | 4 25 | |||||||||
Sarbanes-Oxley costs |
98 | 244 | 5 | |||||||||
Unrecovered pension and post-retirement
benefits expense |
3,822 | 3,960 | | |||||||||
Total regulatory assets |
5,347 | 5,817 | ||||||||||
Franchise fees and other |
| 7 | ||||||||||
Supplemental executive retirement plan asset |
690 | 636 | ||||||||||
Deferred financing costs |
3,883 | 4,042 | ||||||||||
Total deferred charges and other assets |
$ | 9,920 | $ | 10,502 | ||||||||
| We expect to recover the deferred pension and other post-retirement amounts consistent
with the anticipated expense recognition of the pension and other post-retirement costs. |
(g) 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 our Companys water
revenues is 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 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 identified 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. Our Companys real
estate holdings outside of our regulated utilities are comprised primarily of undeveloped land.
(h) Earnings Per Share
Basic net income per share is computed using the weighted average number of common shares
outstanding for a period. Diluted net income per share is computed using the weighted average
number of common and dilutive potential common shares outstanding for the period. For the three
and nine months ended September 30, 2011 and 2010, dilutive potential common shares consisted of
outstanding stock options.
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Table of Contents
The dilutive effect of outstanding stock options is computed using the treasury stock method.
Calculations of the basic and diluted net income per common share and potential common share for
the three and nine months ended September 30, 2011 and 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except share and per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Basic net income per share |
$ | 0.51 | $ | 0.49 | $ | 0.85 | $ | 0.72 | ||||||||
Dilutive effect of unexercised stock options |
(0.01 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | ||||||||
Diluted net income per share |
$ | 0.50 | $ | 0.48 | $ | 0.83 | $ | 0.71 | ||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 2,377 | $ | 2,273 | $ | 3,966 | $ | 3,344 | ||||||||
Denominator: |
||||||||||||||||
Basic weighted average common
shares outstanding |
4,685,170 | 4,660,077 | 4,682,220 | 4,657,404 | ||||||||||||
Dilutive effect of unexercised
stock options |
74,405 | 36,261 | 73,598 | 27,985 | ||||||||||||
Diluted weighted average common
shares outstanding |
4,759,575 | 4,696,338 | 4,755,818 | 4,685,389 | ||||||||||||
The following table lists the number of options to purchase shares of common stock that
was not included in the computation of diluted earnings per share for the three and nine months
ended September 30, 2011 and 2010 because their effect would have been antidilutive.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Number of options to purchase shares
of common stock excluded from the
computation of diluted earnings per share |
| | | 34,200 | ||||||||||||
(i) Interest Rate Swap
As of September 30, 2011, we had an interest rate swap that qualifies as a derivative. This
financial instrument is designated as a cash flow hedge and is used to mitigate interest rate risk
associated with our outstanding $4.3 million loan that has a floating interest rate based on the
three-month London Interbank Offered Rate (LIBOR) plus 1.75% as of September 30, 2011. 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 this derivative, as of September 30, 2011 and
December 31, 2010, included in our condensed consolidated balance sheet under Other deferred
credits and other reserves was $820,000 and $314,000, respectively. Changes in the fair value of
this derivative were deferred in accumulated other comprehensive loss.
Swap settlements are recorded in the income statement with the hedged item as interest
expense. During the three months ended September 30, 2011 and 2010, $43,000 and $43,000,
respectively, was reclassified from accumulated other comprehensive loss to interest expense as a
result of swap settlements. During the nine months ended September 30, 2011 and 2010, $128,000 and
$102,000, respectively, was reclassified from accumulated other comprehensive loss to interest
expense as a result of swap settlements. We expect to reclassify approximately
$161,000 from accumulated other comprehensive loss to interest expense as a result of swap
settlements, over the next twelve months.
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Table of Contents
(j) Recently Issued Accounting Standards
On May 12, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in GAAP and IFRSs. This ASU represents the
converged guidance of the FASB and the International Accounting Standards Board (the Boards) on
fair value measurement. The collective efforts of the Boards have resulted in common requirements
for measuring fair value and for disclosing information about fair value measurements. The
amendments are effective for public entities for interim and annual periods beginning after
December 15, 2011, and should be applied prospectively. Early adoption is not permitted for public
entities; therefore, we currently expect to adopt this standard in the first quarter of 2012. We
are currently reviewing the effect this new pronouncement will have on our consolidated financial
statements.
On June 16, 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. This ASU amends the ASC to allow an entity the option to
present the total of comprehensive income, the components of net income, and the components of
other comprehensive income either in a single statement of comprehensive income or in two separate
but consecutive statements. The amendments are effective for public entities for interim and
annual periods beginning after December 15, 2011, and should be applied retrospectively. Early
adoption is permitted for public entities. We currently expect to adopt this standard in the
fourth quarter of 2011. We are currently reviewing the effect this new pronouncement will have on
our consolidated financial statements.
We do not expect the adoption of any other recently issued accounting pronouncements to have a
material impact on our financial condition or results of operations.
Note 2 Post-retirement Benefit Plans
We have a non-contributory defined benefit pension plan (the DB Plan) that covers
substantially all employees. The benefits are formula-based, considering both past and future
service as well as participant compensation levels. Our funding policy is to contribute annual
amounts that meet the requirements for funding under Section 404 of the Internal Revenue Code and
the 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.
We provide post-retirement medical benefits 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 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 rates from the employees retirement date until the employee becomes
eligible for Medicare. The Post-employment Plan is funded from the general assets of our Company.
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Upon retirement, if a qualifying employee elects to receive benefits, we pay up to a maximum
monthly benefit of $293 based on eligibility and years of service.
During the three and nine months ended September 30, 2011 and 2010, we made the following
contributions to the DB Plan:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Amount of contribution to the Plan |
$ | 494 | $ | 134 | $ | 837 | $ | 380 | ||||||||
In order to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, we anticipate that we will contribute approximately $1.0 million to the DB
Plan in 2011.
The components of net DB Plan costs were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost, benefits earned during the period |
$ | 171 | $ | 164 | $ | 512 | $ | 492 | ||||||||
Interest cost on projected benefit obligation |
165 | 155 | 494 | 464 | ||||||||||||
Expected return on plan assets |
(135 | ) | (124 | ) | (403 | ) | (372 | ) | ||||||||
Recognized net actuarial loss |
42 | 42 | 127 | 127 | ||||||||||||
Net periodic benefit cost |
$ | 243 | $ | 237 | $ | 730 | $ | 711 | ||||||||
During the three and nine months ended September 30, 2011 and 2010, we made the following
contributions to the OPEB Plans.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Amount of contribution into the program |
$ | 14 | $ | 10 | $ | 39 | $ | 31 | ||||||||
The components of net OPEB Plans costs were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost, benefits earned during the period |
$ | 30 | $ | 32 | $ | 91 | $ | 95 | ||||||||
Interest cost on accumulated
post-retirement and post-employment
benefit obligation |
35 | 35 | 104 | 104 | ||||||||||||
Expected return on plan assets |
(14 | ) | (13 | ) | (42 | ) | (37 | ) | ||||||||
Amortization of prior service cost |
5 | | 15 | | ||||||||||||
Recognized net actuarial loss |
(2 | ) | 5 | (6 | ) | 16 | ||||||||||
Net periodic benefit cost |
$ | 54 | $ | 59 | $ | 162 | $ | 178 | ||||||||
The net periodic pension and other post-retirement benefit costs were estimated based on
2010 year end participant census data.
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Note 3 Stock-based Compensation Plan
Share-based payments to employees, from grants of stock options, are recognized as
compensation expense in the condensed consolidated financial statements based on their fair value
on the grant date. For purposes of calculating the fair value of each stock grant as of the date
of grant, our Company uses the Black Scholes Option Pricing model.
The impact of stock-based compensation on the condensed consolidated statements of income and
comprehensive income for the three and nine months ended September 30, 2011 and 2010 was as
follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Stock-based compensation |
$ | 24 | $ | 32 | $ | 87 | $ | 207 | ||||||||
Income taxes |
(10 | ) | (13 | ) | (35 | ) | (83 | ) | ||||||||
Stock-based compensation, net of tax |
$ | 14 | $ | 19 | $ | 52 | $ | 124 | ||||||||
The total compensation cost related to non-vested stock option awards was approximately
$46,000, net of tax, as of September 30, 2011. These costs are expected to be recognized during
the remainder of 2011 through 2013.
We have periodically granted our officers and key employees incentive and non-qualified stock
options on a discretionary basis pursuant to the 2009 Equity Incentive Plan (the 2009 Plan);
however, during the term of the Merger Agreement, we are not permitted to issue options or other
forms of equity.
Options issued under the 2009 Plan during the three and nine months ended September 30, 2011
and 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Options issued under the 2009 Plan |
| | | 71,900 | ||||||||||||
As of September 30, 2011, 111,934 shares were available for future grant under the 2009 Plan.
Note 4 Commitments and Contingencies
Merger Agreement with the City of Nashua and Prior Eminent Domain Proceedings
In 2002, the City of Nashua (the City) began an effort to acquire all or a significant
portion of Pennichuck Waters assets through an eminent domain proceeding under New Hampshire
Revised Statutes Annotated Chapter 38, as well as the assets of the Companys Pennichuck East and
Pittsfield Aqueduct utility subsidiaries. As discussed in Note 1, Description of Business,
Acquisition of Company and Summary of Significant Accounting Policies in Part I, Item I, in this
Quarterly Report on Form 10-Q, on November 11, 2010, we entered into a Merger Agreement with the
City pursuant to which the City will, subject to a number of conditions precedent and
contingencies, purchase all the outstanding common stock and common stock equivalents of Pennichuck
Corporation for $29.00 per share. Concurrently,
we and the City also agreed to terminate the current eminent domain proceeding as of the end
of the term of the Merger Agreement and regardless of whether the merger is ultimately completed.
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History of the City of Nashuas Eminent Domain Proceeding and the Merger Agreement
We entered into an agreement in April 2002 to be acquired by Aqua America, Inc. (then named
Philadelphia Suburban Corporation) by merger. The merger was subject to several conditions,
including approval by our shareholders and approval by the NHPUC.
The Citys Mayor at that time stated his opposition to our proposed merger with Aqua America
after we announced it. In November 2002, the City of Nashua Board of Aldermen adopted a formal
resolution to hold a City-wide referendum to approve the initiation of an eminent domain proceeding
or other acquisition of all or a portion of Pennichuck Waters system serving the residents of
Nashua and others. In January 2003, Nashuas residents approved the referendum. In February 2003,
before we submitted the merger to vote by our shareholders, we and Aqua America agreed to abandon
the proposed merger because of actions taken by the City to acquire our assets by eminent domain.
In March 2004, as part of the eminent domain process, the City filed a petition with the NHPUC
seeking approval to acquire all of our water utility assets, whether or not related to our Nashua
service area. The NHPUC ruled in January 2005 that the City could not use the eminent domain
procedure to acquire any of the assets of Pennichuck East or Pittsfield Aqueduct, and that, with
regard to the assets of Pennichuck Water, the question of which assets, if any, could be taken by
the City was dependent on a determination to be made by the NHPUC after a hearing as to what was in
the public interest.
The NHPUC conducted a hearing on the merits of the Citys proposed eminent domain taking of
the assets of Pennichuck Water, which hearing was completed on September 26, 2007. On July 25,
2008, the NHPUC issued its order in this matter, ruling that a taking of the assets of Pennichuck
Water is in the public interest provided certain conditions are met, and provided that the City
pays to Pennichuck Water $203 million for such assets determined as of December 31, 2008. The
conditions included a requirement that the City pay an additional $40 million into a mitigation
fund to protect the interests of the customers of Pennichuck East and Pittsfield Aqueduct.
Subsequently, both the Company and the City filed appeals with the New Hampshire Supreme
Court. On March 25, 2010, the Court issued its decision, unanimously affirming the NHPUCs ruling
in its entirety. Following the Courts decision, neither party filed a request for rehearing with
the Court and, accordingly, on April 7, 2010, the Court issued its mandate to the NHPUC, at which
time the NHPUCs July 25, 2008 order became effective.
On November 11, 2010, the City and the Company entered into a Merger Agreement pursuant to
which the City will, subject to a number of conditions precedent and contingencies, purchase all of
the outstanding common stock and common stock equivalents of the Company for $29.00 per share, or
approximately $138 million, in cash. On January 11, 2011, the Citys Board of Aldermen voted 14
1 to approve and ratify the Merger Agreement and the issuance of bonds to finance the acquisition.
The shareholders of the Company approved the Merger Agreement at a Special Shareholder Meeting
held on June 15, 2011.
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The consummation of the merger is also subject to approval by the NHPUC. If the NHPUC
approves the merger, the Citys obligation to complete the transaction is subject to (a) there
being no burdensome approval conditions imposed by the NHPUC that would materially adversely affect
the Citys expected economic benefits from the transaction and (b) the Citys ability to obtain
appropriate financing after all the conditions precedent (including those specified above and other
customary closing conditions) have been met.
Relating to NHPUC approval of the proposed merger with the City, on October 18, 2011, the
Company, the City, the NHPUC Staff and certain other parties entered into and filed with the NHPUC
the 2011 Settlement Agreement in which they recommended that the NHPUC approve the merger. The
final hearing before the NHPUC was held on October 25, 2011 and all parties are now awaiting the
ruling of the NHPUC. The NHPUCs ruling is subject to appeal during the 30-day period following
its issuance; thereafter, if no appeal is filed, it becomes final.
Additionally, under the terms of the Merger Agreement, the City, in effect, has 90 days after
the NHPUC ruling becomes final to complete the financing. Therefore, while the merger could
possibly be completed by December 31, 2011, we believe that if the NHPUC approves the merger, it is
more likely to be completed in the first quarter of 2012.
Other Eminent Domain Proceedings
The Town of Pittsfield, New Hampshire voted at its town meeting in 2003 to acquire the assets
of our Companys Pittsfield Aqueduct subsidiary by eminent domain. In April 2003, the Town
notified our Company in writing of the Towns desire to acquire the assets. Our Company responded
that it did not wish to sell the assets. Thereafter, no further action was taken by the Town until
March 2005, when the Town voted to appropriate $60,000 to the eminent domain process. On March 22,
2005, our Company received a letter from the Town reiterating the Towns desire to acquire the
assets of our Companys Pittsfield Aqueduct subsidiary, and by letter dated May 10, 2005, our
Company responded that it did not wish to sell them. Our Company does not have a basis to evaluate
whether the Town will actively pursue the acquisition of our Companys Pittsfield Aqueduct assets
by eminent domain, but since the date of the Towns letter to our Company, the Town has not taken
any additional steps required under NHRSA Ch. 38 to pursue eminent domain.
The Town of Bedford, New Hampshire voted at its town meeting in March 2005 to take by eminent
domain our assets within Bedford for purposes of establishing a water utility, and, by letter dated
April 4, 2005, inquired whether our Company, and any relevant wholly-owned subsidiary of our
Company, was willing to sell its assets to Bedford. We responded by informing the Town that we did
not wish to sell those assets located in Bedford that are owned by any of our subsidiaries. We
have not received a response to our letter, and since the date of the Towns letter to us, the Town
has taken no further legal steps required to pursue eminent domain under NHRSA Ch. 38. During the
NHPUC hearing regarding the proposed eminent domain taking by the City of Nashua, the witness for
the Town of Bedford testified that the Towns interest in a possible taking of assets of our
Company related to a situation in which the City might acquire less than all of our Companys
assets, leaving the system in Bedford as part of a significantly smaller utility.
Our Company cannot predict the ultimate outcome of these matters.
Note 5 Business Segment Reporting
Our operating activities are currently grouped into the following two primary business
segments.
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| Regulated water utility operations Includes the collection, treatment and
distribution of potable water for domestic, industrial, commercial and fire protection
service in the City of Nashua and 29 other communities throughout New Hampshire. Our
regulated water utility subsidiaries consist of Pennichuck Water, Pennichuck East and
Pittsfield Aqueduct. |
||
| Water management services Includes the contract operations and maintenance
activities of Service Corporation. |
The line titled Other is not a reportable segment and is shown only to reconcile to the
total amounts shown in our condensed consolidated financial statements. The following table
presents information about our primary business segments:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Operating revenues: |
||||||||||||||||
Regulated water utility operations |
$ | 11,213 | $ | 11,118 | $ | 28,208 | $ | 26,442 | ||||||||
Water management services |
685 | 644 | 1,999 | 1,845 | ||||||||||||
Other |
3 | 3 | 7 | 7 | ||||||||||||
Total operating revenues |
$ | 11,901 | $ | 11,765 | $ | 30,214 | $ | 28,294 | ||||||||
Net income (loss): |
||||||||||||||||
Regulated water utility operations |
$ | 2,396 | $ | 2,300 | $ | 4,279 | $ | 3,485 | ||||||||
Water management services |
65 | 64 | 134 | 106 | ||||||||||||
Other |
(84 | ) | (91 | ) | (447 | ) | (247 | ) | ||||||||
Total net income (loss) |
$ | 2,377 | $ | 2,273 | $ | 3,966 | $ | 3,344 | ||||||||
As of | ||||||||
September 30, | December 31, | |||||||
(in thousands) | 2011 | 2010 | ||||||
Total assets: |
||||||||
Regulated water utility operations |
$ | 177,720 | $ | 176,098 | ||||
Water management services |
165 | 127 | ||||||
Other |
6,927 | 5,376 | ||||||
Total assets |
$ | 184,812 | $ | 181,601 | ||||
Note 6 Financial Measurement and Fair Value of Financial Instruments
We use a fair value hierarchy that 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.
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An asset or liabilitys level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
For assets and liabilities measured at fair value on a recurring basis, the fair value
measurement by levels within the fair value hierarchy used as of September 30, 2011 and December
31, 2010 was as follows:
(in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
September 30, 2011: |
||||||||||||||||
Interest rate swap |
$ | (820 | ) | $ | | $ | (820 | ) | $ | | ||||||
December 31, 2010: |
||||||||||||||||
Interest rate swap |
$ | (314 | ) | $ | | $ | (314 | ) | $ | | ||||||
The carrying value of certain financial instruments included in the accompanying
condensed consolidated balance sheet, along with the related fair value, as of September 30, 2011
and December 31, 2010 was as follows:
September 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(in thousands) | Value | Value | Value | Value | ||||||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
$ | (60,189 | ) | $ | (53,360 | ) | $ | (60,719 | ) | $ | (56,401 | ) | ||||
Interest rate swap liability |
$ | (820 | ) | $ | (820 | ) | $ | (314 | ) | $ | (314 | ) | ||||
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 our interest rate swap represents the
estimated cost to terminate this agreement as of September 30, 2011 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.
Note 7 Equity Investment in Unconsolidated Company
As of September 30, 2011 and December 31, 2010, Southwood held a 50 percent ownership interest
in a limited liability company known as HECOP IV. HECOP IV, whose assets and liabilities are not
included in the accompanying condensed consolidated balance sheets, owns approximately nine acres
of undeveloped land in Merrimack, New Hampshire. The remaining ownership interest in HECOP IV is
held by John P. Stabile II, principal owner of H. J. Stabile & Son, Inc. The short-term cash needs
of HECOP IV are expected to be funded by its partners on an on-going basis and are not expected to
be significant.
Southwood uses the equity method of accounting for its investment in HECOP IV and accordingly,
its investment is adjusted for its share of losses. Southwoods share of losses is included under
Net Loss from Investment Accounted for Under the Equity Method in the accompanying condensed
consolidated statements of income.
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Note 8Income Taxes
Income taxes are recorded using the accrual method. The provision for federal and state
income taxes is based on income reported in our condensed consolidated financial statements as
adjusted for items recognized differently for income tax purposes.
In determining the income reported in our condensed consolidated financial statements, all
merger-related costs, which totaled approximately $741,000 in the aggregate as of September 30,
2011, have been expensed as incurred. Furthermore, based upon the nature and timing of such costs
and without assuming that the planned merger will be completed, we have elected to treat such costs
as timing differences in determining the provision for income taxes in our condensed consolidated
financial statements. Accordingly, we have recorded an income tax expense benefit for such costs
in the same periods in which such costs have been incurred and recorded. If and when the proposed
merger actually closes, these costs may no longer be deductible in determining the income tax
provision and would be capitalized as part of the merger consideration.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Introduction
The terms we, our, the Company, our Company, and us refer, unless the context
suggests otherwise, to Pennichuck Corporation and its subsidiaries, Pennichuck Water Works, Inc.
(Pennichuck Water), Pennichuck East Utility, Inc. (Pennichuck East), Pittsfield Aqueduct
Company, Inc. (Pittsfield Aqueduct), Pennichuck Water Service Corporation (Service Corporation)
and The Southwood Corporation (Southwood).
Pennichuck Corporation is a non-operating holding company whose income is derived from the
earnings of its five wholly-owned subsidiaries. We are engaged primarily in the collection,
storage, treatment and distribution of potable water for domestic, industrial, commercial and fire
protection service in New Hampshire through our three utility subsidiaries: Pennichuck Water,
Pennichuck East and Pittsfield Aqueduct.
The percentage of our operating revenues generated by our regulated water utility subsidiaries
as a group, and by Pennichuck Water separately, for the three and nine months ended September 30,
2011 and 2010 was as follows.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
All regulated water utility subsidiaries |
94 | % | 95 | % | 93 | % | 93 | % | ||||||||
Pennichuck Water |
77 | % | 76 | % | 76 | % | 74 | % |
Pennichuck Waters franchise area presently includes the City of Nashua, New Hampshire
and 10 surrounding municipalities.
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Our Companys regulated water utility subsidiaries are regulated by the New Hampshire Public
Utilities Commission (the NHPUC) with respect to their water rates, financings and provision of
service. We must obtain NHPUC approval to increase our Companys regulated water subsidiaries
water rates in order to recover increases in operating expenses and to obtain the opportunity to
earn a return on investments in plant and equipment. New Hampshire law provides that utilities are
entitled to charge rates which permit them to earn a reasonable return on the cost of the property
employed in serving their customers, less accrued depreciation, contributed capital and deferred
income taxes (Rate Base). The cost of capital permanently employed by a utility in its regulated
business marks the rate of return that it is lawfully entitled to earn on its Rate Base. Capital
expenditures associated with complying with federal and state water quality standards have
historically been recognized and approved by the NHPUC for inclusion in our water rates, though
there can be no assurance that the NHPUC will approve future rate increases in a timely or
sufficient manner to cover our capital expenditures.
Service Corporation provides various non-regulated water-related monitoring, maintenance,
testing and compliance reporting services for water systems for various towns, businesses and
residential communities in New Hampshire and Massachusetts. Its most significant contracts are
with the Town of Hudson, New Hampshire and the Town of Salisbury, Massachusetts.
Southwood is engaged in real estate management and commercialization activities.
Historically, most of Southwoods activities were conducted through real estate joint ventures.
Over the past 10 years, Southwood has participated in four joint ventures with John P. Stabile II,
a local developer. Southwoods earnings have from time to time during that period contributed a
significant percentage of our net income, including for the year ended December 31, 2008 (i.e., the
January 2008 sale of the three commercial office buildings that comprised substantially all of the
assets of HECOPs I, II and III). Southwoods contributions to our earnings from the sale of real
estate have increased the fluctuations in our net income during the 10-year period. Looking ahead,
we expect real estate commercialization to contribute a smaller proportion of our revenues and
earnings over the next several years. Furthermore, during the term of our Merger Agreement
(defined below) with the City of Nashua (the City), our ability to commercialize additional
undeveloped landholdings shall generally be subject to the advance written consent of the City.
The eminent domain dispute with the City that is described in more detail below and elsewhere
in this report has had a material adverse effect on our results of operations in recent years.
This dispute was resolved with the signing of a definitive merger agreement (Merger Agreement) on
November 11, 2010 with the City pursuant to which the City will, subject to a number of conditions
precedent and contingencies, purchase all of the outstanding common stock and common stock
equivalents of Pennichuck Corporation for $29.00 per share, or approximately
$138 million, in cash. After taking into account our outstanding debt, the transaction
represents a total enterprise value of approximately $200 million.
As you read Managements Discussion and Analysis, refer to our Condensed Consolidated
Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements in
Part I, Item 1, in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, including certain statements in
Managements Discussion and Analysis, are forward-looking statements intended to qualify for safe
harbors from liability under the Private Securities Litigation Reform Act of 1995, as amended (and
codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). The statements are made based upon, among other things, our current assumptions,
expectations and beliefs concerning future developments and their potential effect on us. These
forward-looking statements involve risks, uncertainties and other factors, many of which are
outside our control and which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements expressed or implied by
these forward-looking statements. In some cases you can identify forward-looking statements where
statements are preceded by, followed by, or include the words in the future, believes,
expects, anticipates, plans or similar expressions, or the negative thereof.
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Forward-looking statements involve risks and uncertainties, and there are important factors
that could cause actual results to differ materially from those expressed or implied by these
forward-looking statements. Such factors include, but are not limited to, the timing and outcome
of the merger-related NHPUC hearing and approval process, a future judicial or regulatory
determination that events prior to the November 11, 2010 effective date of our Merger Agreement
with the City of Nashua constituted a final determination of the price to be paid under RSA 38:13
and triggered the statutory 90-day period within which the City was required to decide whether to
take, by eminent domain, the assets of our Pennichuck Water subsidiary; the expiration of said
90-day period without the City having made any such decision; whether the merger transaction with
the City of Nashua is ultimately completed; the success of applications for rate relief; changes in
governmental regulations; changes in the economic and business environment that may impact demand
for our water, services and real estate products; changes in capital requirements that may affect
our level of capital expenditures; changes in business strategy or plans; and fluctuations in
weather conditions that impact water consumption. For a complete discussion of our risk factors,
see Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December
31, 2010. We undertake no obligation to publicly update or revise any forward-looking statement,
whether as a result of new information, future events or otherwise.
The Merger Agreement and Eminent Domain Settlement
The City has been engaged in an on-going effort that began in 2002 to acquire all or a
significant portion of the assets of Pennichuck Water, our largest utility subsidiary, through an
eminent domain proceeding under NHRSA Chapter 38. This dispute was resolved on November 11, 2010
when the City and the Company entered into a Merger Agreement pursuant to which the City will,
subject to a number of conditions precedent and contingencies, purchase all of the outstanding
common stock and common stock equivalents of Pennichuck Corporation for $29.00 per share, or
approximately $138 million, in cash.
The shareholders of the Company approved the Merger Agreement at a Special Shareholder Meeting
held on June 15, 2011.
The consummation of the merger is also subject to approval by the NHPUC. If the NHPUC
approves the merger, the Citys obligation to complete the transaction is subject to, (i) there
being no burdensome conditions imposed by the NHPUC that would materially adversely affect the
Citys expected economic benefits from the transaction, and (ii) the Citys ability to obtain
appropriate financing after all the conditions precedent (including those specified above and other
customary closing conditions) have been met.
Relating to the NHPUC approval of the proposed merger with the City, on October 18, 2011, the
Company, the City, the NHPUC Staff and certain other parties entered into and filed with the NHPUC
the 2011 Settlement Agreement in which they recommended that the NHPUC approve the merger. The
final hearing before the NHPUC was held on October 25, 2011 and all parties are now awaiting the
ruling of the NHPUC. The NHPUCs ruling is subject to appeal during the 30-day period following
its issuance; thereafter, if no appeal is filed, it becomes final.
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Additionally, under the terms of the Merger Agreement, the City, in effect, has 90 days after
the NHPUC ruling becomes final to complete the financing. Therefore, while the merger could
possibly be completed by December 31, 2011, we believe that if the NHPUC approves the merger, it is
more likely to be completed in the first quarter of 2012.
See Part I, Item 1, Business and Part I, Item 1A, Risk Factors, in our Annual Report on
Form 10-K for the year ended December 31, 2010 for a discussion of the background of the eminent
domain proceeding and the settlement of the dispute in connection with the Merger Agreement, which
discussion is incorporated herein by reference.
Critical Accounting Policies, Significant Estimates and Judgments
We have identified the accounting policies below as those policies critical to our business
operations and an understanding of our results of operations. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances. Changes
in the estimates or other judgments reflected in these accounting policies could result in
significant changes to the condensed consolidated financial statements. Our critical accounting
policies are as follows:
Regulatory Accounting. Accounting Standards Codification Topic 980 Regulated Operations
prescribes generally accepted accounting principles for companies whose rates are established by or
are subject to approval by an independent third-party regulator such as the NHPUC. Accordingly, we
defer costs and credits on the condensed consolidated balance sheets as regulatory assets and
liabilities when it is probable that these costs and credits will be recognized in the rate-making
process in a period different from when the costs and credits are incurred. These deferred
amounts, both assets and liabilities, are then recognized in the condensed consolidated statements
of income in the same period that they are reflected in rates charged to our water utility
subsidiaries customers. In the event that the inclusion in the rate-making process is disallowed,
the associated regulatory asset or liability would be adjusted to reflect the change in our
assessment or change in regulatory approval.
We have not deferred costs incurred to defend against the Citys eminent domain proceeding
against our Pennichuck Water subsidiary or in connection with the proposed merger.
We have, however, asked for recovery of a portion of these costs in rate relief filed with the
NHPUC in May 2010. Our request has been stayed pending the outcome of the proposed acquisition by
the City.
Revenue Recognition. The revenues of our regulated water utility subsidiaries are based on
authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to
customers but not yet billed are accrued at the end of each accounting period. We read our
customer meters on a monthly basis and record revenues based on those readings. Unbilled revenues
from the last meter-reading date to the end of the accounting period are estimated based on
historical usage and applicable water rates. Actual results could differ from those estimates.
Accrued unbilled revenues recorded in the accompanying condensed consolidated financial statements
as of September 30, 2011 and December 31, 2010 were $4.3 million and $2.4 million, respectively.
At September 30, 2011, unbilled revenues included $1.3 million of recoupment revenue recognized in
the second quarter of 2011 that resulted from permanent rate increase orders for Pennichuck Water
and Pittsfield Aqueduct that will be billed pro-rata over a 12 month period commencing in November
2011.
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Our non-utility revenues are recognized when services are rendered. Revenues are based, for
the most part, on long-term contractual rates.
Pension and Other Post-retirement Benefits. Our pension and other post-retirement benefit
costs are dependent upon several factors and assumptions, such as employee demographics, plan
design, the level of cash contributions made into the plans, earnings on the plans assets, the
discount rate applied to estimated future payment obligations, the expected long-term rate of
return on plan assets, and health care cost trends.
Changes in pension and other post-retirement benefit obligations associated with these factors
may not be immediately recognized as costs in the condensed consolidated statements of income, but
generally are recognized in future years over the remaining average service period of the plan
participants.
In determining pension obligation and expense amounts, the factors and assumptions described
above may change from period to period, and such changes could result in material changes to
recorded pension and other post-retirement benefit costs and funding requirements. Further, the
value of our pension plan assets are subject to fluctuations in market returns that may result in
increased or decreased pension expense in future periods.
Our pension plan currently meets the minimum funding requirements of the Employee Retirement
Income Security Act of 1974. We currently anticipate that we will contribute approximately $1.0
million to the plan during 2011.
Results of Operations General
In this section, we discuss our results of operations for the three and nine months ended
September 30, 2011 and 2010 and the factors affecting them. Our operating activities are discussed
in Note 5, Business Segment Reporting in Part I, Item I, in this Quarterly Report on Form 10-Q.
Results of Operations Three Months Ended September 30, 2011
Compared to Three Months Ended September 30, 2010
Compared to Three Months Ended September 30, 2010
Overview
Our revenues, and consequently our net income, can be significantly affected by economic and
weather conditions as well as customer conservation efforts, and in past years, our net income has
been significantly affected by periodic sales of significant real estate assets. Water revenues
are typically at their lowest point during the first and fourth quarters of the calendar year.
Water revenues in the second and third quarters tend to be greater because of increased water
consumption for non-essential usage by our customers during the late spring and summer months.
For the three months ended September 30, 2011, our net income was $2.4 million, compared to
net income of $2.3 million for the three months ended September 30, 2010. On a per share basis
(diluted), net income for the three months ended September 30, 2011 was $0.50 as compared to net
income of $0.48 for the three months ended September 30, 2010.
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Regulated Water Utility Operations
Our regulated water utility operations include the activities of Pennichuck Water, Pennichuck
East and Pittsfield Aqueduct, each of which is regulated by the NHPUC.
For the three months ended September 30, 2011, our utility operating revenues were $11.2
million as compared to $11.1 million for the three months ended September 30, 2010, an increase of
$94,000 or 0.8%. This slight increase was the net result of higher water rates in this years
third quarter being applied to comparatively lower water usage volumes. Pennichuck Water was
granted an 11.95% permanent rate increase in June 2011. However, the effect of this rate increase
on revenues for this years third quarter was largely offset by an approximate 15% decline in water
usage volumes, as weather conditions for the third quarter of 2010 were unusually dry and warm.
For the three months ended September 30, 2011, 67% of our billed regulated water utility usage
was to residential customers, and 28% to commercial and industrial customers, with the balance
being principally from billings to municipalities.
We believe our customer usage is impacted by the weather, the economy and conservation efforts
in response to rate increases, as well as general customer response to various conservation focused
communications and the continuing installation of more water efficient appliances.
For the three months ended September 30, 2011, our total utility operating expenses decreased
by approximately 0.5% over the three months ended September 30, 2010 as shown in the table below.
Three Months Ended September 30, | ||||||||||||
(in thousands) | 2011 | 2010 | Change | |||||||||
Operations & maintenance |
$ | 4,295 | $ | 4,423 | $ | (128 | ) | |||||
Depreciation & amortization |
1,049 | 1,046 | 3 | |||||||||
Taxes other than income taxes |
1,065 | 974 | 91 | |||||||||
Total Utility Operating Expenses |
$ | 6,409 | $ | 6,443 | $ | (34 | ) | |||||
The operations and maintenance expenses of our regulated water utility business include
such categories as:
| Water supply, treatment, purification and pumping; |
||
| Transmission and distribution system functions, including repairs and maintenance
and meter reading; and |
||
| Engineering, customer service and general and administrative functions. |
The $34,000 decrease in our utilities operating expenses versus the same period in 2010 was
the result of numerous variations, including the following:
| Decreased production costs of $202,000 primarily related to decreased
production fuel and power costs; offset by |
||
| Increased taxes other than income taxes of $91,000 principally related to
increased real estate taxes resulting from capital additions and increased
assessed values on our water system properties; and |
||
| Increased general and administrative costs of approximately $47,000
principally due to an increase in the cost of healthcare and other employee
benefits. |
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As a result of the above changes in operating revenues and expenses, regulated water utility
operating income increased by $128,000, or 2.7%, for the three months ended September 30, 2011 over
the three months ended September 30, 2010.
Water Management Services
The operating revenues of our water management services segment increased to $685,000 for the
three months ended September 30, 2011 from $644,000 for the three months ended September 30, 2010,
resulting in an increase of $41,000, or 6.5%, primarily as a result of increased unplanned
maintenance work under certain service contracts. The net income of our water management services
segment for the three months ended September 30, 2011 remained essentially unchanged from the three
months ended September 30, 2010. We expect that net income for the remainder of 2011 will be
consistent with the fourth quarter of 2010.
Eminent domain and merger-related costs
Our eminent domain and merger-related costs were $99,000 for the three months ended September
30, 2011 as compared to $159,000 for the three months ended September 30, 2010, a decrease of
$60,000. The 2011 and 2010 eminent domain and merger-related costs were primarily attributable to
legal fees associated with the NHPUC proceedings and related activities.
Provision for Income Taxes
For the three months ended September 30, 2011, we recorded an income tax expense of $1.6
million compared to $1.5 million for the three months ended September 30, 2010. The effective
income tax rate for both periods was 39.6%.
Results of Operations Nine Months Ended September 30, 2011
Compared to Nine Months Ended September 30, 2010
Compared to Nine Months Ended September 30, 2010
Overview
Our revenues, and consequently our net income, can be significantly affected by economic and
weather conditions as well as customer conservation efforts, and in past years, our net income has
been significantly affected by periodic sales of major real estate assets. Water revenues are
typically at their lowest point during the first and fourth quarters of the calendar year. Water
revenues in the second and third quarters tend to be greater because of increased water consumption
for non-essential usage by our customers during the late spring and summer months.
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For the nine months ended September 30, 2011, our net income was $4.0 million, compared to net
income of $3.3 million for the nine months ended September 30, 2010. On a per share basis
(diluted), net income for the nine months ended September 30, 2011 was $0.83 as compared to net
income of $0.71 for the nine months ended September 30, 2010. The principal factors that affected
current period net income, relative to the comparable prior period, were the following:
| An increase in regulated water utility operating income of $1.2 million; |
||
| A decrease in interest expense of $79,000; partially offset by |
||
| An increase in eminent domain and merger-related costs of $280,000; and |
||
| An increase in income tax expense of $408,000. |
Regulated Water Utility Operations
Our regulated water utility operations include the activities of Pennichuck Water, Pennichuck
East and Pittsfield Aqueduct, each of which is regulated by the NHPUC.
For the nine months ended September 30, 2011, our utility operating revenues increased to
$28.2 million compared to $26.4 million for the nine months ended September 30, 2010, an increase
of approximately $1.8 million or 6.7%. The increase in revenues was principally due to a 10.8%
temporary rate increase granted to Pennichuck Water in October 2010 which was replaced by an 11.95%
permanent rate increase granted to Pennichuck Water in June 2011. Operating revenues for the nine
months ended September 30, 2011 also include approximately
$1.2 million of recoupment revenue resulting from a permanent rate increase granted to
Pennichuck Water on June 9, 2011. The recoupment revenue is the result of applying the permanent
rates to service rendered from June 16, 2010, the date customers were notified of the rate increase
filing, to the June 9, 2011 date of the permanent rate order. We also recorded a $209,000 negative
adjustment to revenues to reflect a provision in the rate order requiring a sharing of gains on
certain cell tower revenues recorded in prior years. This amount was recorded as a deferred credit
on our balance sheet and is being amortized over four years retroactive to June 16, 2010.
The increase in revenues was partially offset by an 11% lower billed sales volume in 2011
compared to 2010 resulting from a combination of increased conservation and comparatively wetter
and cooler weather in this years third quarter.
For the nine months ended September 30, 2011, 68% of our billed regulated water utility usage
was to residential customers, and 28% to commercial and industrial customers, with the balance
being principally from billings to municipalities.
We believe our customer usage is impacted by the weather, the economy, and conservation
efforts in response to rate increases, as well as general customer response to various conservation
focused communications and the continuing installation of more water efficient appliances.
For the nine months ended September 30, 2011, our total utility operating expenses increased
by approximately 3.0% over the nine months ended September 30, 2010 as shown in the table below.
Nine Months Ended September 30, | ||||||||||||
(in thousands) | 2011 | 2010 | Change | |||||||||
Operations & maintenance |
$ | 12,167 | $ | 12,055 | $ | 112 | ||||||
Depreciation & amortization |
3,147 | 3,145 | 2 | |||||||||
Taxes other than income taxes |
3,304 | 2,876 | 428 | |||||||||
Total Utility Operating Expenses |
$ | 18,618 | $ | 18,076 | $ | 542 | ||||||
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The operations and maintenance expenses of our regulated water utility business include
such categories as:
| Water supply, treatment, purification and pumping; |
||
| Transmission and distribution system functions, including repairs and maintenance
and meter reading; and |
||
| Engineering, customer service and general and administrative functions. |
The $542,000 increase in our utilities operating expenses over the same period in 2010 was
primarily the result of the following:
| Increased taxes other than income taxes of $428,000 principally related to
increased real estate taxes resulting from capital additions and increased
assessed values on our water system properties; |
||
| Increased transmission and distribution costs of $149,000 primarily
relating to routine and periodic maintenance costs, including snow removal; |
||
| Increased depreciation and amortization of $2,000 due to increased
depreciation from property and plant additions during 2010 and the first
three quarters of 2011 partly offset by amortization of a deferred credit
ordered by the NHPUC from June 16, 2010 through June 30, 2011 in the amount
of approximately $67,000 (as discussed previously); offset by |
||
| Decreased production costs of $62,000 primarily related to decreased
production fuel and power costs, offset partially by increased purchased
water costs in some of our small community water systems; and |
||
| Lower general and administrative costs of approximately $17,000 due
principally to an increase in the cost of healthcare and other employee
benefits, partly offset by reduced non-cash compensation expense from
employee stock options. |
As a result of the above changes in operating revenues and expenses, regulated water utility
operating income increased by $1.2 million, or 14.6%, for the nine months ended September 30, 2011
over the nine months ended September 30, 2010.
Pennichuck Water had filed for rate relief with the NHPUC on May 7, 2010 seeking a permanent
annual increase in revenues of $3.9 million, or 16.23%, plus a step increase of $0.9 million, or
3.68%. The rate relief request also included a request to recover certain amounts expended by us
in connection with the eminent domain proceeding. On October 8, 2010, the NHPUC issued an order
approving a temporary rate increase which equates to an annualized increase in revenues of
approximately $2.6 million, or 10.8%, effective for bills rendered from and after October 8, 2010.
On June 9, 2011, the NHPUC issued an order approving a permanent rate increase which equates to an
annualized increase in revenues of approximately $2.9 million, or 11.95%, effective for service
rendered from June 2010. The permanent rate increase replaced the temporary rate increase granted
in October 2010.
A one-time recoupment of revenues, as discussed previously, was recorded in the second quarter
of 2011 in the amount of approximately $1.2 million. Our request to recover approximately $5.4
million in eminent domain defense costs as part of the above rate case has been stayed pending the
completion of the acquisition of our business by the City of Nashua.
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In the order, the NHPUC also approved a pilot Water Infrastructure and Conservation Adjustment
(WICA) mechanism that will allow Pennichuck Water to recover, through a rate surcharge between
rate cases, certain costs of replacing and rehabilitating aging water infrastructure assets as such
assets are placed into service. The WICA charge will allow Pennichuck Water to increase its rates,
based on approved in-service projects, up to a maximum of 2% per year and 7.5% in total between
rate cases.
Our utilities expect to periodically seek rate relief, as necessary, to recover increased
operating costs and to obtain recovery of and a return on capital additions as they are made over
time as well as to adjust for the impact of reduced consumption related to conservation and
economic conditions.
Water Management Services
The operating revenues of our water management services segment increased to $2.0 million for
the nine months ended September 30, 2011 from $1.8 million for the nine months ended September 30,
2010, resulting in an increase of $155,000, or 8.4%, primarily as a result of increased unplanned
maintenance work under certain service contracts. The net income of our water management services
segment increased by $28,000 to $134,000 for the nine months ended September 30, 2011 from $106,000
for the nine months ended September 30, 2010. We expect that net income for the remainder of 2011
will be consistent with the fourth quarter of 2010.
Eminent domain and merger-related costs
Our eminent domain and merger-related costs were $672,000 for the nine months ended September
30, 2011 as compared to $392,000 for the nine months ended September 30, 2010, an increase of
$280,000. The increase was largely attributable to a $250,000 fee in connection with obtaining a
fairness opinion from our merger-related financial advisors. The balance of the 2011 and the
2010 eminent domain and merger-related costs were primarily attributable to legal fees associated
with the eminent domain and merger approval proceedings.
Interest Expense
For the nine months ended September 30, 2011, interest expense was $2.4 million, compared to
$2.5 million in 2010. The decrease of $79,000 was primarily attributable to periodic reductions in
debt principal related to various sinking fund payments and a patronage distribution in the amount
of $37,000 declared and paid by a cooperative lending institution during the first quarter of 2011.
Provision for Income Taxes
For the nine months ended September 30, 2011, we recorded an income tax expense of $2.6
million compared to $2.2 million for the nine months ended September 30, 2010. The effective
income tax rate for both periods was 39.6%.
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Liquidity and Capital Resources
Overview
Our primary sources of funds are net cash flow from utility operations, cash proceeds from the
commercialization of portions of our non-utility real estate holdings, borrowings pursuant to our
bank revolving credit facilities and proceeds from the sale of long-term debt and equity
securities. Our primary uses of funds are capital expenditures associated with our continuous
utility construction programs, dividends on our common stock payable as and when declared by our
Board of Directors and repayments of principal on our outstanding debt obligations, whether
pursuant to scheduled sinking fund payments or final maturities.
For the past several years, cash flows have fluctuated largely based on four factors: (i)
weather, (ii) amount and timing of rate increases, (iii) gain(s) recognized on the sale of
non-utility real estate and cell tower leases, and (iv) costs associated with the City of Nashuas
eminent domain proceeding and the Merger Agreement. We expect that weather and the amount and
timing of rate increases will continue to impact liquidity and that gains from the sale of
non-utility real estate will occur relatively infrequently. We expect that additional costs will
be
incurred throughout most of 2011 primarily related to seeking NHPUC approval in connection
with the proposed merger.
We utilize our revolving credit facility to a greater or lesser extent in response to
variations in cash flow from the factors discussed above. Our Company has been able to obtain
long-term financing as needed in the current economic environment.
Capital Expenditures Program
We are engaged in construction programs at our utility subsidiaries primarily for water
distribution system repair, rehabilitation and replacement, water storage facility maintenance and
additions, and water supply security. We expect our capital expenditures to be approximately $5.6
million $9.2 million and $6.9 million for the years ending December 31, 2011, 2012 and 2013,
respectively. The timing of these projects may be impacted by weather, availability of contractors
and equipment, coordination with other utilities and municipalities in order to reduce digging and
paving costs and the availability and cost of financing.
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Significant Financial Covenants
Our $16.0 million revolving credit loan agreement with Bank of America was amended in June
2011 to reduce the line to $12 million and to extend the expiration date to February 28, 2012. The
reduction in the revolving credit facility was made to reflect our reduced borrowing needs in light
of the completion of our water treatment plant last year. This loan agreement contains three
financial maintenance tests which must be met on a quarterly basis. The capitalized terms below
are used herein as defined in the revolving credit loan agreement. These maintenance tests, and
our actual performance against these tests as of the dates specified, are as follows:
(1) | our Fixed Charge Coverage Ratio must exceed 1.2x (2.76x as of September 30,
2011); |
||
(2) | our Tangible Net Worth must exceed $46.3 million ($57.5 million as of
September 30, 2011); and |
||
(3) | our Funded Debt (less certain cash and short-term investment balances, if
any) must not exceed 65% of our Total Capitalization (49.4% as of September 30, 2011). |
Also, various Pennichuck Water and Pennichuck East loan agreements contain tests that govern
the issuance of additional indebtedness. The capitalized terms below are used herein as defined in
the revolving credit loan agreement. These issuance tests are as follows:
(1) | to issue Short-Term Debt, the sum of our Short-Term Debt and our Funded Debt
may not exceed 65% of the sum of our Short-Term Debt, our Funded Debt and our capital
stock and all surplus accounts (unless the new Short-Term Debt is subordinated to our
existing debt); |
||
(2) | to issue long-term debt, our Funded Debt generally may not exceed 60% of our
Net Amount of Capital Property Additions; and |
||
(3) | to issue long-term debt, our Earnings Available for Interest divided by our
Interest Expense must exceed 1.5x. |
Several of Pennichuck Waters 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 September 30, 2011, Pennichuck Waters net worth was $54.9
million. One of Pennichuck Easts loan agreements contains a covenant that prevents Pennichuck
East from declaring dividends if Pennichuck East does not maintain a minimum net worth of $1.5
million. As of September 30, 2011, Pennichuck Easts net worth was $6.7 million.
As of September 30, 2011, we complied with all of our financial covenants. Our ability to
continue to satisfy these covenants depends on, among other factors, receipt of timely and adequate
rate relief.
Quarterly Dividends
One of our primary uses of funds is dividends on our common stock, payable as and when
declared by our Board of Directors. We have paid dividends on our common stock each year since
1856. On November 7, 2011, the Board of Directors declared a fourth quarter common stock dividend
of $0.185 per share payable December 1, 2011 to shareholders of record as of November 18, 2011.
The third quarter dividend amount results in an indicated annual rate of $0.74 per share. During
the term of the Merger Agreement, we are restricted from increasing our dividend rate above the
current rate although we are allowed to continue to pay dividends consistent with past practice.
Accordingly, we expect to continue to pay comparable cash dividends in the future, subject to the
terms of our debt agreements and the Merger Agreement, as more fully discussed above.
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Off-Balance Sheet Arrangements
On August 24, 2006, Pennichuck Water implemented a legal defeasance transaction for its
outstanding $780,000 New Hampshire Industrial Development Authority 7.5% 1988 Series tax-exempt
bonds (1988 Series Bonds). Pennichuck Water placed U.S. treasury securities in an irrevocable
escrow account with The Bank of New York, the Bond Trustee, in an aggregate amount sufficient to
provide for all remaining scheduled principal and interest payments on the 1988 Series Bonds. This
defeasance transaction discharged all future Pennichuck Water obligations with respect to the 1988
Series Bonds, and Pennichuck Water no longer records the debt in its condensed consolidated
financial statements.
In October 2005, Pennichuck Water completed a $49.5 million tax-exempt debt financing with the
New Hampshire Bond Finance Authority (BFA). The BFA acts solely as a passive conduit to the
tax-exempt bond markets with us acting as the obligor for the associated tax-exempt debt. We
borrowed $38.1 million of the $49.5 million offering. The remaining $11.4 million which had been
in escrow for the sole benefit of bondholders with no recourse to us was allowed to expire in July
2010 as a result of the completion of our $40 million water treatment plant upgrade and the
December 2009 issuance of approximately $7.5 million of equity capital, net of expense.
We have one interest rate financial instrument, an interest rate swap, described in detail in
Part I, Item 3, Quantitative and Qualitative Disclosures about Market Risk, in our Quarterly
Report on Form 10-Q for the period ended September 30, 2010.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
In addition to the other information set forth in Note 6, Financial Measurement and Fair
Value of Financial Instruments in Part I, Item I, in this Quarterly Report on Form 10-Q, you
should carefully consider the disclosures about market risk discussed in Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk and Note 9 in Part II, Item 8, Debt,
in our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 4. | CONTROLS AND PROCEDURES |
We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934
under the supervision and with the participation of our management, including the principal
executive officer and the principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this Report.
Disclosure controls and procedures are designed with the objective of ensuring that (i)
information required to be disclosed in our Companys reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms and (ii) information is accumulated and
communicated to management, including the principal executive officer and the principal financial
officer, as appropriate to allow timely decisions regarding required disclosures.
Based on their evaluation, the principal executive officer and the principal financial officer
have concluded that our disclosure controls and procedures are effective as of the end of the
period covered by this Report on Form 10-Q to provide assurance that (i) information relating to
our Company (including our consolidated subsidiaries) required to be included in our reports filed
or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in applicable Securities and Exchange Commissions rules
and forms and (ii) information is accumulated and communicated to management, including the
principal executive officer and the principal financial officer, as appropriate to allow timely
decisions regarding required disclosures.
There were no changes in our internal control over financial reporting that occurred during
the most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
The City of Nashua, New Hampshire (the City) has been engaged in an effort that began in
2002 to acquire all or a significant portion of the assets of Pennichuck Water, our largest utility
subsidiary, through an eminent domain proceeding under NHRSA Chapter 38, and to acquire the assets
of our Pennichuck East and Pittsfield Aqueduct regulated utilities. As previously disclosed in a
Form 8-K filed November 12, 2010 and in connection with the Merger Agreement, on November 11, 2010
our Company entered into an agreement with the City pursuant to which the pending eminent domain
proceeding by the City against the Company (docketed by the NHPUC as DW 04-048) will be terminated
as of the end of the term of the Merger Agreement even if the merger is not completed.
See Part I, Item 1A, Risk Factors for a discussion of various risks and uncertainties
associated with this proceeding.
Giardia Litigation
In August 2010, two claims were filed against our Company and Pittsfield Aqueduct relating to
a single outbreak of Giardia contamination that occurred in the water supply for the Birch Hill
community water system in North Conway, New Hampshire during September 2007. The Center for
Disease Control characterizes giardiasis as a common cause of waterborne disease in humans in the
United States resulting from ingesting Giardia cysts. Healthy people normally recover within 2-6
weeks without medicine and more quickly with medicine. There were 16 confirmed cases of giardiasis
at Birch Hill in September 2007, two of which resulted in some prolonged physical effects. The
3-year statute of limitations has now run out on filing any new claims relating to this outbreak.
Therefore, these are the only cases we expect to have filed with respect to this incident.
Water utilities are not required by federal or state water quality standards to test for
Giardia. To our knowledge, this is the only known outbreak of Giardia at Birch Hill. The water
quality of the wells servicing the Birch Hill community was determined to meet all state/federal
water quality standards when we purchased the system in 2006, and we believe that we continued to
operate them in accordance with those standards. To date, the source and means by which Giardia
cysts might have infected the well remains unknown. Normally, if there is an outbreak of Giardia,
it usually occurs in surface water or in a shallow gravel-packed well close to surface water. It
is highly unusual for a bedrock well, such as the one in question at Birch Hill, to become infected
with Giardia cysts. Even though the presence of Giardia cysts was not confirmed in the well in
question, as a precaution, the well was immediately shut-down and abandoned in September 2007.
Since then, the Birch Hill water system has been interconnected to the North Conway Water District
water system. We expect that both of these claims will be covered by our Companys primary and/or
umbrella insurance policies and that there will not be any material impact on our Company.
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Both of these cases are currently in the discovery phase and are scheduled for mediation in
November 2011. If such mediations are unsuccessful, each case is expected to be tried in the third
quarter of 2012. With respect to one of these cases, based upon the limitation of liability
provisions specified in Pittsfield Aqueducts tariff for the water services it provided at Birch
Hill, the New Hampshire Superior Court dismissed all claims based on any theories other than
negligence. The plaintiff in that case filed a motion for rehearing but the Court denied such
motion on August 18, 2011.
ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors disclosed in Part I, Item 1A, Risk
Factors, in our Annual Report on Form 10-K for the year ended December 31, 2010. See also
discussion under The Merger Agreement and Eminent Domain Settlement included in Part I, Item 2,
in this Quarterly Report on Form 10-Q.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | RESERVED |
ITEM 5. | OTHER INFORMATION |
On November 7, 2011, we issued a press release announcing our financial results for the three
and nine months ended September 30, 2011. A copy of the press release is attached as Exhibit 99.1
to this Quarterly Report on Form 10-Q. The information contained in Exhibit 99.1 shall not be
deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be
deemed incorporated by reference in any filing with the SEC under the Exchange Act of 1934 or the
Securities Act of 1933, except as expressly set forth by specific reference in such a filing.
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Table of Contents
ITEM 6. | EXHIBITS |
Exhibit | ||||
Number | Exhibit Description | |||
3.1 | Restated Articles of Incorporation of Pennichuck Corporation
(filed as Exhibit 3.1 to the Companys 2007 Annual Report on Form
10-K and incorporated herein by reference) |
|||
3.2 | Bylaws of Pennichuck Corporation (filed as Exhibit 3.2 to the
Companys third quarter 2008 Quarterly Report on Form 10-Q and
incorporated herein by reference) |
|||
4.1 | Rights Agreement dated as of April 20, 2000 between Pennichuck
Corporation and Fleet National Bank, as Rights Agent (filed as
Exhibit 4.1 to the Companys Registration Statement on Form
8-A12G, filed on April 21, 2000 and incorporated herein by
reference) |
|||
4.2 | Amendment to Rights Agreement dated October 10, 2001, by and
between Pennichuck Corporation and Fleet National Bank (filed as
Exhibit 4.1 to the Companys Registration Statement on Form
8-A12G/A, filed on April 30, 2002 and incorporated herein by
reference) |
|||
4.3 | Second Amendment to Rights Agreement dated January 14, 2002, by
and between Pennichuck Corporation and EquiServe Trust Company,
N.A. (filed as Exhibit 4.2 to the Companys Registration Statement
on Form 8-A12G/A, filed on April 30, 2002 and incorporated herein
by reference) |
|||
4.4 | Agreement of Substitution and Amendment of Common Shares Rights
Agreement dated January 15, 2002, by and between Pennichuck
Corporation and American Stock Transfer & Trust Company (filed as
Exhibit 4.3 to the Companys Registration Statement on Form
8-A12G/A, filed on April 30, 2002 and incorporated herein by
reference) |
|||
4.5 | Amendment to Rights Agreement dated April 29, 2002, by and between
Pennichuck Corporation and American Stock Transfer & Trust Company
(filed as Exhibit 99.2 to the Companys Current Report on Form 8-K
filed on April 29, 2002 and incorporated herein by reference) |
|||
4.6 | Dividend Reinvestment and Common Stock Purchase Plan, as amended
(included in the prospectus in the Companys Registration
Statement on Form S-3/A, filed on April 8, 2009 and incorporated
herein by reference) |
|||
4.7 | Amendment to Rights Agreement, effective as of August 15, 2006, by
and between Pennichuck Corporation and American Stock Transfer &
Trust Company (filed as Exhibit 4.1 to the Companys Registration
Statement on Form 8-A12G/A, filed on September 25, 2006 and
incorporated herein by reference) |
|||
4.8 | Sixth Amendment to Rights Agreement, effective as of March 2,
2009, by and between Pennichuck Corporation and American Stock
Transfer & Trust Company (filed as Exhibit 4.8 to the Companys
Registration Statement on Form 8-A12G/A filed on March 5, 2009 and
incorporated herein by reference) |
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Table of Contents
Exhibit | ||||
Number | Exhibit Description | |||
4.9 | Letter agreement, effective as of March 18, 2009, by and between
Pennichuck Corporation and GAMCO Investors, Inc. and its
affiliated entities (filed as Exhibit 4.1 to the Companys Current
Report on Form 8-K, filed on March 19, 2009 and incorporated
herein by reference) |
|||
4.10 | Seventh Amendment to Rights Agreement, effective as of March 24,
2010, by and between Pennichuck Corporation and American Stock
Transfer & Trust Company, LLC (filed as Exhibit 4.10 to the
Companys Registration Statement on Form 8-A12G/A filed on March
26, 2010 and incorporated herein by reference) |
|||
4.11 | Eighth Amendment to Rights Agreement, effective as of October 29,
2010, by and between Pennichuck Corporation and American Stock
Transfer & Trust Company, LLC (filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed on November 1, 2010
and incorporated herein by reference) |
|||
4.12 | Ninth Amendment to Rights Agreement, effective as of November 11,
2010, by and between Pennichuck Corporation and American Stock
Transfer & Trust Company, LLC (filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed on November 12, 2010
and incorporated herein by reference) |
|||
31.1 | Certification |
|||
31.2 | Certification |
|||
32.1 | Section 1350 Certification of Chief Executive Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002 |
|||
32.2 | Section 1350 Certification of Chief Financial Officer of the
Company in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002 |
|||
99.1 | Press Release Pennichuck Corporation Announces Third Quarter
2011 Earnings dated November 7, 2011 |
|||
101.INS | XBRL Instance Document |
|||
101.SCH | XBRL Taxonomy Extension Schema Document |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pennichuck Corporation (Registrant) |
||||
Date: November 7, 2011 | By: | /s/ Duane C. Montopoli | ||
Duane C. Montopoli | ||||
President and Chief Executive Officer | ||||
Date: November 7, 2011 | By: | /s/ Thomas C. Leonard | ||
Thomas C. Leonard | ||||
Senior Vice President, Treasurer and Chief Financial Officer | ||||
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Table of Contents
EXHIBIT INDEX
Exhibit | ||||
No. | Description | |||
31.1 | Certification |
|||
31.2 | Certification |
|||
32.1 | Section 1350 Certification of Chief Executive Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002 |
|||
32.2 | Section 1350 Certification of Chief Financial Officer of
the Company in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002 |
|||
99.1 | Press Release Pennichuck Corporation Announces Third
Quarter 2011 Earnings dated November 7, 2011 |
|||
101.INS | XBRL Instance Document |
|||
101.SCH | XBRL Taxonomy Extension Schema Document |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
|||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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