UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For The Fiscal Year Ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 0-18552
PENNICHUCK CORPORATION
(Exact name of registrant as specified in its charter)
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New Hampshire
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02-0177370
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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25 Manchester Street
Merrimack, New Hampshire 03054
(603) 882-5191
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par value $1.00 per
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The Nasdaq Stock Market LLC
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share (and Preferred Stock Purchase
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Rights associated therewith)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes
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No
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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.
Yes
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No
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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).
Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K.
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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.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes
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No
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The aggregate market value of the common stock held by non-affiliates of the registrant, based on
the closing sale price of the Companys common stock on June 30, 2010, as reported on the Nasdaq
Global Market was $101,892,433. For purposes of this calculation, the affiliates of the
registrant include its directors and executive officers. This determination of affiliate status is
not necessarily a conclusive determination for any other purpose.
The number of shares of the registrants common stock, $1 par value, outstanding as of March
01, 2011 was 4,679,927.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated herein by
reference to the registrants definitive proxy statement for its 2011 annual meeting of
shareholders (the Proxy Statement), which the registrant intends to file with the Commission
within 120 days after the end of the registrants fiscal year ended December 31, 2010.
PENNICHUCK CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
December 31, 2010
TABLE OF CONTENTS
1
PART I
The terms we, our, our company, and us refer, unless the context suggests otherwise,
to Pennichuck Corporation (the Company) 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).
Overview
We are engaged primarily in the collection, storage, treatment and distribution of potable
water in New Hampshire. We have two reportable business segments: regulated water utility
operations and non-regulated water management services. Regulated water utility revenues
constituted 93% of our revenues in 2010. We are headquartered in Merrimack, New Hampshire, which
is located approximately 45 miles north of Boston, Massachusetts. Our Company, which was
incorporated in New Hampshire in 1852, became a utility holding company in 1983. Total
consolidated assets as of December 31, 2010 were approximately $182 million.
Our Company is subject to the informational requirements of the Securities Exchange Act of
1934 (the Exchange Act), and files annual, quarterly and special reports, proxy statements and
other information with the U.S. Securities and Exchange Commission (the SEC). You may read and
copy any reports, statements or other information filed by our Company with the SEC at its public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference room. Our Companys filings are also
available at the website maintained by the SEC at http://www.sec.gov. We also make available free
of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and any amendments to those reports, filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. The address of our website is
www.pennichuck.com.
The City of Nashua, New Hampshire (the City) began an effort in 2002 to acquire through an
eminent domain proceeding, all or a significant portion of Pennichuck Waters assets, as well as
the assets of Pennichuck East and Pittsfield Aqueduct. Effective as of November 11, 2010, we
entered into a definitive merger agreement (the Merger Agreement) with the City pursuant to which
the City will, subject to a number of conditions precedent, purchase all the outstanding common
stock and common stock equivalents of Pennichuck Corporation for $29.00 per share in cash.
Pursuant to the terms of a settlement agreement, entered into contemporaneously with the Merger
Agreement (the Settlement Agreement), the Company and the City have agreed that execution of the
Merger Agreement constitutes full settlement of their eminent domain dispute whether or not the
acquisition is consummated pursuant to the terms of the Merger Agreement.
The acquisition of the Company and the Eminent Domain Proceeding are described elsewhere in
this Annual Report on Form 10-K (see Part I, Item 1, Business under the heading Acquisition of
the Company and Eminent Domain Proceeding by the City of Nashua; Part I, Item 3, Legal
Proceedings and Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, and Note 4 of Part II, Item 8, Commitments and Contingencies).
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Our Strategy
Our mission is to be a leading supplier of clean, safe and reliable drinking water and quality
water-related services in New England and to achieve sustainable growth in our revenues and
earnings. Subject to the limitations in the Merger Agreement noted below, our strategy to
accomplish those objectives is as follows:
Investing in our regulated water utilities to maintain reliable, high quality service
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To
maintain our position as a respected water supplier, we will make ongoing capital investments in
our water systems to meet or exceed applicable regulatory requirements and to maintain our
infrastructure.
Acquiring additional small and mid-size water systems in New Hampshire and nearby portions of
Maine, Massachusetts and Vermont.
We believe there remain significant opportunities to grow our
customer base in New Hampshire and nearby portions of Maine, Massachusetts and Vermont. We expect
that increasingly stringent regulation, the resulting increase in capital requirements and the need
for skilled operators will continue to cause system owners to consider selling their water systems
or outsourcing the management of such systems.
See note below regarding the effect of the Merger
Agreement.
Pursuing acquisitions of relatively large water systems to expand into new geographic markets
in the northeastern United States.
Another important element of our strategy is to seek to expand
into new geographic markets in the northeastern United States by acquiring one or more relatively
large water systems. We expect that any such acquisitions would be of systems that have sufficient
scale to warrant establishing and maintaining a management presence in a new market. These systems
would likely be significantly larger than the water systems we are targeting nearby our existing
service areas. We do not expect, however, that these larger systems will be substantially larger
than Pennichuck Water. We believe there are a number of such large water systems in the
northeastern United States that are potentially attractive acquisition opportunities. We
anticipate that the large water system market within the U.S. water utility industry will continue
to consolidate, as system owners, whether investor-owned utilities or municipalities, facing
increasingly stringent regulation and the resulting increase in capital requirements, consider
acquisitions by other companies. The pace at which acquisition opportunities will arise is, of
course, unpredictable.
See note below regarding the effect of the Merger Agreement.
Expanding our water management business with a focus on servicing small and mid-size water
systems, where we believe we can leverage our capital resources as well as our operating and
technical expertise.
Service Corporations strategy calls for a focus on markets in which it can
provide high quality service in a cost effective manner. These markets include small and mid-size
municipal utilities, small systems such as community water systems and non-transient, non-community
water systems.
See note below regarding the effect of the Merger Agreement.
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Commercializing our undeveloped land portfolio thats owned outside of our regulated
utilities.
Our Company, principally through our Southwood subsidiary, owns several parcels of
undeveloped non-utility land primarily in Merrimack, New Hampshire, totaling approximately 450
acres. As opportunities arise, we expect to pursue the environmentally responsible
commercialization of this
land portfolio in order to enhance shareholder value. This land is owned outside of our
regulated utilities.
See note below regarding the effect of the Merger Agreement.
Note: During the term of the Merger Agreement, we cannot, (i) acquire businesses, including water
systems, of a size generally larger than our past practice, (ii) enter into Material Contracts (as
defined in the Merger Agreement), and (iii) sell our undeveloped land, in each case without the
prior written consent of the City. Further information regarding the Merger Agreement is contained
elsewhere in this Annual Report on Form 10-K (see Part I, Item 1, Business under the heading
Acquisition of the Company and Eminent Domain Proceeding by the City of Nashua; part I, item 3,
Legal Proceedings and part II, item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, and note 4 of part II, item 8, Commitments and
Contingencies).
Regulated Water Utilities
Overview
Three of our subsidiaries are water utilities engaged in the collection, storage, treatment,
distribution and sale of potable water in southern and central New Hampshire, subject to the
jurisdiction of the New Hampshire Public Utilities Commission (the NHPUC):
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Pennichuck Water Works, our principal subsidiary, was established in 1852
and serves the City of Nashua, New Hampshire and 10 surrounding New Hampshire
municipalities located in southern New Hampshire with an estimated total
population of 110,000, almost 10% of the population of the State of New
Hampshire;
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Pennichuck East was organized in 1998 and serves 19 communities most of
which are located in southern and central New Hampshire; and
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Pittsfield Aqueduct, which we acquired in 1998, serves customers in the
Town of Pittsfield, New Hampshire.
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Water revenues are typically lowest during the first and fourth quarters of each calendar
year. Water revenues in the second and third quarters tend to be greater because of increased
water consumption for nonessential usage by our customers during the late spring and summer months.
Total regulated water utility assets as of December 31, 2010 were approximately $176.1 million.
Service Areas
Pennichuck Water is franchised by the NHPUC to distribute water in the City of Nashua, New
Hampshire and in portions of the towns of Amherst, Bedford, Derry, Epping, Hollis, Merrimack,
Milford, Newmarket, Plaistow and Salem, New Hampshire. Pennichuck Waters transmission mains
extend from Nashua into portions of the surrounding towns of Amherst, Hudson, Merrimack, Hollis and
Milford. Its franchises in the remaining towns consist of stand-alone satellite water systems.
Pennichuck Water has no competition in its core franchise area, other than from customers using
their own wells. As of December 31, 2010, Pennichuck Water served approximately 26,300 customers,
and its 2010 operating revenues totaled approximately $27.0 million.
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Pennichuck East serves customers in the towns of Atkinson, Barnstead, Bow, Chester, Conway,
Derry, Exeter, Hooksett, Lee, Litchfield, Londonderry, Middleton, Pelham, Plaistow, Raymond,
Sandown, Tilton, Weare and Windham, New Hampshire. Pennichuck East has no competition in its
core franchise area, other than from customers using their own wells. The water utility assets
owned by Pennichuck East consist principally of water transmission and distribution mains,
hydrants, wells, pump stations and pumping equipment, water services and meters, easements and
certain tracts of land. As of December 31, 2010, Pennichuck East served approximately 6,800
customers, and its 2010 operating revenues totaled approximately $6.4 million.
Pittsfield Aqueduct was acquired in 1998 and serves customers in the town of Pittsfield, New
Hampshire, which is located in the central portion of the state. Pittsfield Aqueduct has no
competition in its core franchise area, other than from customers using their own wells. The water
utility assets owned by Pittsfield Aqueduct consist principally of water transmission and
distribution mains, hydrants, water treatment facilities, water services and meters, easements and
certain tracts of land. As of December 31, 2010, Pittsfield Aqueduct served approximately 650
customers, and its 2010 operating revenues totaled approximately $600,000.
Water Supply Facilities
Pennichuck Waters principal properties are located in Nashua, New Hampshire, except for
portions of our watershed and buffer land which are located in the neighboring towns of Amherst,
Merrimack and Hollis, New Hampshire. In addition, Pennichuck Water owns four impounding dams which
are situated on the Nashua and Merrimack border.
The primary source of potable water for our core Pennichuck Water system is the Pennichuck
Brook, Holt Pond, Bowers Pond, Harris Pond and Supply Pond in the Nashua area that together can
hold up to 500 million gallons of water. We supplement that source during the summer months by
pumping water from the nearby Merrimack River. This supplemental water supply provides an
additional source of water during summer periods and will provide a long-term supply for Pennichuck
Waters service area. A permit from the Army Corps of Engineers that has been extended through
December 31, 2019 allows us to divert water from the Merrimack River. We may divert between 12.0
million and 30.0 million gallons per day (mgd) dependent upon the river elevation and flow. In
2009, we installed three new pumps that increased our pumping capacity to 21.0 mgd.
We own a water treatment plant in Nashua that uses a combination of physical and chemical
removal of suspended solids and sand and carbon filtration to treat the water that Pennichuck Water
supplies. The plant has a rated capacity of 35.0 mgd. Pennichuck Water can deliver up to 31.2 mgd
into the distribution system. By comparison, Pennichuck Water had an average daily demand of 21.2
mgd during its peak month, which occurred in June 1999.
Our Pennichuck Water utility subsidiary also owns approximately 650 acres of land located in
Nashua and Merrimack, New Hampshire that are held for watershed and reservoir purposes. This land
is separate and apart from the undeveloped land held principally by Southwood.
We own 14 water storage reservoirs having a total storage capacity of 22.3 million gallons:
six in Nashua, two in Amherst, and one in each of Bedford, Derry, Litchfield, Pelham, Barnstead and
Hollis, New Hampshire.
We own a 900,000 gallon per day gravel-packed well located in Amherst, New Hampshire.
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The sources of supply for Pennichuck East consist of purchased water from Manchester Water
Works, Hooksett Village Water Precinct, the Town of Derry, the Town of Raymond, a well system owned
by the Town of Hudson, in Litchfield, New Hampshire and individual bedrock wells. Pennichuck East
has entered into long-term water supply agreements to obtain water from Manchester Water Works and
Hudson. We have an agreement with the Town of Hudson that expires in 2017, allowing us to pump up
to 283,500 gallons per day or 15% of the annual pumpage from the Hudson wells, whichever is less,
at a cost equal to the variable cost of production or operation associated with the system as a
whole or any of its components and may also include the embedded cost of capital such as debt
service or depreciation. Hudson will charge us a higher rate for water pumped in excess of the
283,500 gallons allowed per day, as detailed above. Pennichuck East supplies its Locke Lake and
Sunrise Estates water systems from individual bedrock wells. The Birch Hill water system acquires
its water from the North Conway Water Precinct.
Pittsfield Aqueducts source of water supply for the Town of Pittsfield, New Hampshire is
Berry Pond, which holds approximately 97.8 million gallons. Pittsfield Aqueduct owns the land
surrounding Berry Pond and it treats the water from this pond through a 0.5 mgd water filtration
plant located in the Town of Pittsfield, New Hampshire.
Water Distribution Facilities
As of December 31, 2010, the distribution facilities of our Companys regulated water
companies consisted of, among other assets, approximately 612 miles of transmission and
distribution mains and approximately 33,800 service connections.
Capital Expenditures
The water utility industry is capital intensive. We typically spend significant sums each
year for additions to or replacement of property, plant and equipment. We estimate that our
projected capital expenditures during the 2011 through 2013 period will total approximately $24.2
million. By comparison, for the three year period 2008 through 2010, our capital expenditures were
$31.0 million. These figures are exclusive of allowance for funds used during construction.
Regulation
New Hampshire Public Utilities Commission
Our Companys water utility subsidiaries are regulated by the NHPUC with respect to their
water rates, financings and provision of service. We must obtain NHPUC approval to increase our
Companys water utility subsidiaries water rates 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 determines 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.
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In May 2010, Pennichuck Water filed for rate relief with the NHPUC to recover increased
operating expenses and to obtain recovery of and return on capital improvements of approximately
$15 million since its last rate case, including the last $4 million to complete the upgrade of its
water treatment plant in Nashua, New Hampshire. The rate request seeks a permanent annual increase
in revenues of $3.9 million, or 16.2%, plus a step increase of $887,000 or 3.7%. In October, 2010,
the NHPUC issued an order approving temporary annualized rate relief of approximately $2.6 million
for Pennichuck Water effective for bills rendered on or after October 8, 2010. Final hearings on
the merits of the case are scheduled for May 2011. We expect an order in the third quarter of
2011. Any difference between the temporary rate relief granted and the permanent rates ultimately
approved by the NHPUC for service rendered on or after June 16, 2010 will be reconciled upon the
approval of such permanent rates.
In May 2010, Pittsfield Aqueduct filed for approximately $150,000 in rate relief with the
NHPUC primarily to recover higher property taxes and insurance costs. In October 2010, the NHPUC
issued an order approving annualized temporary rate relief of approximately $61,000 for Pittsfield
Aqueduct effective for bills rendered on or after October 8, 2010. Final hearings on the merits of
the case are scheduled for April 2011. We expect an order in the third quarter of 2011. Any
difference between the temporary rate relief granted and the permanent rates ultimately approved by
the NHPUC for service rendered on or after June 16, 2010 will be reconciled upon the approval of
such permanent rates.
Water Quality Regulation
Our Companys water utilities are subject to the water quality regulations issued by the
United States Environmental Protection Agency (EPA) and the New Hampshire Department of
Environmental Services (DES). The EPA is required to periodically set new maximum contaminant
levels for certain chemicals as required by the federal Safe Drinking Water Act. The quality of
our Companys water utilities treated water currently meets or exceeds all current standards set
by the EPA and the DES.
Pennichuck Waters treatment plant in Nashua is subject to the Interim Enhanced Surface Water
Treatment Rule, which established a turbidity standard of 0.3 Nephelometric Turbidity Units or NTU.
Turbidity is a measure of sediment or foreign particles that are suspended in the water.
Pennichuck Water completed its evaluation of alternatives to meet the new turbidity standard in
2004, resulting in approximately $40 million of upgrades to its existing treatment and storage
facilities that were completed in 2009.
Water Management Services
Through Service Corporation, we complement our regulated water utility business by providing
contract operation and maintenance services, including monitoring water quality, testing,
maintenance and compliance reporting services for water systems for various towns, businesses and
residential communities primarily in southern and central New Hampshire. Service Corporation is
not subject to NHPUC regulation.
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Municipalities
Service Corporation has long-term agreements with the Towns of Salisbury, Massachusetts and
Hudson, New Hampshire to provide operations and maintenance contract services and with the Town of
Amesbury, Massachusetts to provide water billing and collection services. These agreements expire
in 2012, 2015 and 2014, respectively.
Non-transient, non-community water systems
The DES has mandated water quality standards for non-transient, non-community water systems
(defined as public facilities such as schools, apartment and office buildings accommodating more
than 25 persons and served by a community well). There are an estimated 600 such systems in New
Hampshire which require the services of a certified water operator, such as Service Corporation, in
order to meet the mandates of the DES. Accordingly, Service Corporation is actively pursuing new
contracts under which it would serve as the certified water operator and provide various
water-related monitoring, maintenance, testing and compliance reporting services for these systems
in New Hampshire.
Competition
In marketing its services to municipalities, Service Corporation must address competition from
incumbent service providers and reluctance by municipalities to outsource water management to an
investor-owned company. For contracts with non-transient, non-community water systems, Service
Corporation competes primarily with well drillers, laboratories, pump equipment vendors and small
contract operators who provide various services to these systems.
Financial Information about Industry Segments
Our business segment data for the latest three years is presented in Note 5, Business Segment
Reporting in Part II, Item 8 in this Annual Report on Form 10-K.
Employees
At December 31, 2010, we employed 101 full-time employees, all of whom are Pennichuck Water
employees. Of these, there are 53 management and clerical employees who are non-union. The
remaining 48 employees are members of the United Steelworkers Union. Our Companys union contract
expires in February 2013. We believe that our employee relations are good.
Acquisition of the Company and Eminent Domain Proceeding by the City of Nashua
Overview
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 Pennichuck East and Pittsfield
Aqueduct. In March 2004, the City filed a petition with the NHPUC formally seeking authority to
take those assets by eminent domain. In full settlement of the matter, effective as of November
11, 2010, we entered into the Merger Agreement with the City pursuant to which the City will,
subject to a number of conditions precedent to closing, purchase all 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 an enterprise value of
approximately $200 million. Pursuant to the terms of the Settlement Agreement, 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.
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The transaction is subject to approval by the holders of not less than two-thirds of our
outstanding shares of common stock and regulatory approval by the NHPUC. The Citys obligation to
complete the transaction is subject to there being no approval conditions imposed by the NHPUC that
would materially adversely affect the Citys expected economic benefits from the transaction, and
to the Citys ability to obtain appropriate financing after all the conditions precedent (including
those specified above and other customary closing conditions) have been met.
History of the City of Nashuas Eminent Domain
Proceedings
We entered into an agreement in April 2002 to be acquired by merger with Aqua America, Inc.
(formerly Philadelphia Suburban Corporation). The merger was subject to several conditions,
including approval by our shareholders and the NHPUC. In February 2003, before we submitted the
merger to our shareholders, we and Aqua America agreed to abandon the proposed transaction because
of actions taken by the City to acquire our assets by eminent domain.
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 the
City and others. In January 2003, the City of Nashua residents approved the referendum.
In November 2003, the City made a proposal to purchase all of our assets for a purchase price
of $121 million. The offer was subject to various conditions, including the Citys completion of a
municipal bond offering to fund the purchase price. The City claimed that its proposal exceeded by
$15 million the approximate value that our shareholders would have received under the proposed Aqua
America merger measured at the time that transaction was first announced. The City asserted that
the difference would offset the corporate-level income taxes that we would incur in a sale of
assets to the City. In December 2003, our Board of Directors unanimously rejected the Citys
proposal. At that time, we publicly stated that our board had concluded that the Citys proposal
was inadequate and not in the best interests of our shareholders, significantly underestimated the
value of our assets and failed to recognize both the underlying value of our shares and the
potential tax liabilities that would result from the proposed transaction. We also stated that we
believed that the Citys proposal failed to make allowances for assuming our long-term debt and
other liabilities.
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.
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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 pay
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. Both
Pennichuck Corporation and the City filed motions for rehearing or reconsideration before the NHPUC
which were denied in an order dated March 16, 2009.
Subsequently, both the Company and the City filed appeals with the 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, rendering the NHPUCs
July 25, 2008 order effective.
Separately, under RSA 38:13, the City has 90 days from the date of the final determination of
the price to be paid for the assets of Pennichuck Water to decide whether or not to issue the debt
necessary to fund the taking of the Pennichuck Water assets upon the terms set forth in the NHPUCs
July 25, 2008 order. On June 30, 2010, our Company and the City jointly filed a motion with the
NHPUC requesting a scheduling order for the purpose of establishing a process by which the eminent
domain valuation of the plant and property of Pennichuck Water would be updated and to make a final
determination of the price to be paid for such property and equipment. The Company and the City
agreed that the final valuation should be determined by adjusting the preliminary $203 million
purchase price set forth in the NHPUCs Order by an amount equal to the additions and retirements
and accumulated depreciation reserves with respect to assets placed in service, or retired from
service, after December 31, 2008, consistent with the asset updating approach used by the NHPUC.
The joint motion further indicated that the Company and the City remained interested in reaching a
negotiated resolution of the proceeding, which could include a possible sale of the stock of
Pennichuck Corporation to the City, in which case, the negotiated transaction would be submitted to
the NHPUC and the price agreed to would constitute the final determination of price. A final
determination of the price triggers a 90 day statutory period, established pursuant to RSA 38:13,
for the City to decide whether or not to issue the debt necessary to fund the taking of the
Pennichuck Water assets.
On November 11, 2010, the City and the Company signed 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 the Company for $29.00 per share, or
approximately $138 million, in cash. After taking into account the Companys outstanding debt, the
transaction represents an enterprise value of approximately $200 million. On January, 11, 2011,
the Citys Board of Aldermen voted 14 -1 to approve and ratify the Merger Agreement and authorize
the related financing.
The merger is subject to approval by the holders of not less than two-thirds of our
outstanding shares of common stock and also regulatory approval by the NHPUC. The Citys
obligation to complete the transaction is subject to there being no burdensome approval conditions
imposed by the NHPUC that would materially adversely affect the Citys expected economic benefits
from the transaction as well the Citys ability to obtain appropriate financing after all the
conditions precedent (including those specified above and other customary closing conditions) have
been met.
10
The initial scheduling hearing of the NHPUC occurred on February 24, 2011. Final hearings on
the matter are scheduled for July 27 through July 29, 2011. We are unable to predict if, or when,
the closing will occur but we believe it is not likely to occur prior to the fourth quarter of
2011.
The Acquisition of the Company and the Eminent Domain Proceeding are described elsewhere in
this Annual Report on Form 10-K (see Part I, Item 1, Business under the heading Eminent Domain
Proceeding and the Acquisition of the Company by the City; Part I, Item 3, Legal Proceedings and
Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, and Note 4 of Part II, Item 8, Commitments and Contingencies).
Town of Pittsfield Eminent Domain Actions
The Town of Pittsfield voted at its 2003 town meeting to acquire the assets of our Pittsfield
Aqueduct subsidiary by eminent domain. In April 2003, the Town notified us in writing of the
Towns desire to acquire the assets. We responded that we did not wish to sell the assets.
Thereafter, no further action was taken by the Town until March 2005, when the Town again voted to
take the assets of our Pittsfield Aqueduct subsidiary and also to appropriate $60,000 for the
eminent domain process. On March 22, 2005, we received a letter from the Town reiterating the
Towns desire to acquire the assets of our Pittsfield Aqueduct subsidiary. We do not have a basis
to evaluate whether the Town will actively pursue the acquisition of our Pittsfield Aqueduct assets
by eminent domain, but since the date of the Towns letter to us, the Town has taken no further
legal steps required to pursue eminent domain under New Hampshire RSA Chapter 38.
Town of Bedford Eminent Domain Actions
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 the
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 New Hampshire RSA Chapter
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.
There are various risks involved in investing in our Company, some of which are described
below. Investors should carefully consider each of the following factors and all of the other
information in this Annual Report on Form 10-K, including information that is incorporated in this
Annual Report on Form 10-K by reference.
11
Risks Related to our Merger Agreement with the City of Nashua
Consummation of the merger with the City is subject to the satisfaction of various closing
conditions which may or may not occur. As a result, there can be no assurance that the closing
conditions will be satisfied or that the Merger will be successfully completed.
As discussed previously, the Merger Agreement contains various conditions precedent and
contingencies which could cause the merger not to be completed, including, among others, approval
of the Merger by holders of not less than two-thirds of our Companys outstanding shares of common
stock and approval by the NHPUC of the transaction as being in the public interest. The Citys
obligation to complete the transaction is also subject to, (i) there being no burdensome conditions
imposed by the NHPUC in approving the merger transaction that would materially adversely affect the
Citys expected economic benefits from the transaction, (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, and (iii) there being no occurrence of any events that
would have a material adverse effect on our financial condition. The financing contingency shall
be deemed waived by the City if it could reasonably have raised $160 million through the issuance
of 30-year general obligation bonds, with optional redemption after ten years, and a true taxable
interest rate no greater than 6.50%.
Furthermore, whether or not the merger is completed:
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Managements attention to ongoing business concerns may be diverted;
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We may experience difficulties in employee retention or customer relationships;
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We will incur significant additional costs and fees related to the pending merger; and
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Acquisitions and other operational plans and initiatives that we would have undertaken
in the absence of the pending merger may be delayed.
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In addition, the current market price of our common stock reflects a market expectation that
the Merger will occur, and the failure to complete the merger would likely result in a significant
decline in the market price of our common stock.
With respect to the joint motion filed by the Company and the City requesting NHPUC approval of the
proposed merger, a finding that the final determination of the price to be paid for the plant and
property occurred (in accordance with New Hampshire utility municipalization statute RSA 38,
Section 38:13) as of the effective date of the New Hampshire Supreme Court decision affirming the
NHPUC Order or as of some other date prior to the November 11, 2010 effective date of the Merger
Agreement, could by operation of law, cause a two-year delay in any consensual settlement process
between the parties. Such a two-year delay could make it difficult to restart the settlement
process, possibly to the point of permanent impairment.
RSA 38:13 provides that within 90 days of the
final determination of the price to be paid
(emphasis added) for the plant and property to be acquired under the provisions of RSA 38:8 [agreed
sale under threat of condemnation]...or 38:10 [condemnation taking]...the municipality shall decide
whether or not to acquire the plant and property... by a vote to issue bonds... RSA 38:13 further
provides that If the ratifying vote...shall be in the negative, no other action under this chapter
shall be had during the
ensuing period of 2 years. It is the contention of the Company and the City that with
respect to events occurring prior to the November 11, 2010 effective date of the Merger Agreement,
including the March 2010 decision of the New Hampshire Supreme Court affirming the NHPUCs July 25,
2008 order, there was no final determination of the price and, therefore, the 90-day period was not
triggered. If this is ultimately determined to be incorrect, the Company and the City may be
precluded, by operation of state law, from entering into a consensual settlement agreement for a
period of two years and then only after obtaining a new majority public vote.
12
Risks Related to Our Water Utilities
We are subject to federal, state and local regulations that may impose significant limitations and
restrictions on the way we do business.
Various federal, state and local authorities regulate many aspects of our business. Among the
most important of these regulations are those relating to the quality of water we supply our
customers. These laws require us to obtain various environmental permits from environmental
regulatory agencies for our operations and to perform water quality tests that are monitored by the
U.S. Environmental Protection Agency, or EPA, and the New Hampshire Department of Environmental
Services, or DES, for the detection of certain chemicals and compounds in our water. We could be
fined or otherwise sanctioned by regulators for non-compliance with these laws, regulations and
permits. In addition, government authorities continually review these regulations, particularly
the drinking water quality regulations and may propose new or more restrictive requirements in the
future. If new or more restrictive limitations on permissible levels of substances and
contaminants in our water are imposed, we may not be able to adequately predict the costs necessary
to meet regulatory standards. If we are unable to recover the cost of implementing new water
treatment procedures in response to more restrictive water quality regulations through the rates we
charge our customers, or if we fail to comply with such regulations, it could have a material
adverse effect on our financial condition and operating results.
An important element of our growth strategy is the acquisition of water systems. Any pending or
future acquisition we decide to undertake will involve risks.
The terms of the Merger Agreement provide that we may not invest in any new acquisition
without the Citys prior written approval. If the Merger Agreement is terminated, we expect that
the acquisition and integration of water systems would be an important element in our growth
strategy. This strategy depends on identifying suitable acquisition opportunities and reaching
mutually agreeable terms with acquisition candidates. The negotiation of potential acquisitions as
well as the integration of acquired businesses could require us to expend significant resources.
Further, acquisitions may result in our incurrence of debt and contingent liabilities, and
fluctuations in quarterly results. In addition, the businesses and other assets we acquire may not
achieve the financial results that we expected.
The current concentration of our business in southern and central New Hampshire makes us
susceptible to any adverse development in local regulatory, economic, demographic, competitive and
weather conditions.
Our core service area comprises Pennichuck Waters franchise in the City of Nashua, New
Hampshire and portions of the surrounding towns of Amherst, Hollis and Merrimack. Pennichuck East
serves a similar area in southern and central New Hampshire, east of the Merrimack River and
Pennichuck Waters core service area. Our revenues and operating results are therefore subject to
local regulatory, economic, demographic, competitive and weather conditions in these areas. A
change in any of these conditions could make it more costly or difficult for us to conduct our
business. In addition, any such change would have a disproportionate effect on us, compared to
water utility companies that do not have such a geographic concentration.
13
The loss of a significant commercial or industrial customer could adversely affect our operating
results and cash flows.
Our revenues will decrease, and such decrease may be material, if one or more significant
commercial or industrial customers terminate, or materially reduce, their use of our water. If any
large commercial or industrial customer reduces or ceases its consumption of our water, we may seek
NHPUC approval to increase the rates of our remaining customers to recover any lost revenues.
There can be no assurance, however, that the NHPUC would approve such a rate relief request, and
even if it did approve such a request, it would not apply retroactively to the date of the
reduction in consumption. The delay between such date and the effective date of the rate relief
may be significant and adversely affect our operating results and cash flows.
Weather conditions and overuse may interfere with our sources of water, demand for water services
and our ability to supply water to our customers.
We depend primarily on surface water from the Pennichuck Brook and, to a lesser extent, the
Merrimack River in Nashua, New Hampshire to meet the present and future water demands of our
customers. Unexpected conditions may interfere with our water supply sources. Drought and overuse
may limit the availability of surface water. These factors might adversely affect our ability to
supply water in sufficient quantities to our customers and our revenues and operating results may
be adversely affected. Additionally, cool and wet weather, as well as drought restrictions and our
customers conservation efforts, may reduce consumption demand, also adversely affecting our
revenues and operating results. Furthermore, freezing weather may also contribute to water
transmission interruptions caused by pipe and main breakage. If we experience an interruption in
our water supply, it could have a material adverse effect on our operating results, financial
condition and cash flows.
Contamination of our water supply may cause disruption in our services and adversely affect our
operating results, financial condition and cash flows.
Our water supply is subject to contamination from the migration of naturally occurring
substances in groundwater and surface systems, as well as pollution resulting from man-made
sources. In the event that our water supply is contaminated, we may have to interrupt the use of
that water supply until we are able to substitute the flow of water from an uncontaminated water
source through our interconnected transmission and distribution facilities. In addition, we may
incur significant costs in order to treat the contaminated source through expansion of our current
treatment facilities or development of new treatment methods. Our inability to substitute water
supply from an uncontaminated water source, or to adequately treat the contaminated water source in
a cost effective or timely manner, may have an adverse effect on our operating results, financial
condition and cash flows.
14
Non-performance by our commodity suppliers including water treatment chemicals and electricity,
could cause disruption in our services and adversely affect our operating results, financial
condition and cash flows.
To the extent these suppliers are sole source suppliers (electricity) or are one of a limited
number of suppliers (certain chemicals certified for use in the production of potable drinking
water under the Safe Drinking Water Act), we could be unable to produce water or appropriate
quantities of water in compliance with the federal Safe Drinking Water Act or we could experience
unfavorable cost increases related to the direct costs of producing potable water. The result of
any non-performance or unfavorable cost increases by these suppliers would result in reduced net
operating income and cash from operations and eventually could adversely affect our overall
financial position.
The necessity for increased security has and may continue to result in increased operating costs.
In the wake of the September 11, 2001 terrorist attacks and the ensuing attention to threats
to the nations health and security, we have expended resources to increase security measures at
our facilities and heighten employee awareness of threats to our water supply. We have also
incurred expenses to tighten our security measures regarding the delivery and handling of certain
chemicals used in our business. We will continue to bear increased costs for security precautions
to protect our facilities, operations and supplies. We are not aware of any specific threats to
our facilities, operations or supplies. However, it is possible that we would not be in a position
to control the outcome of such events should they occur.
Damage to any of our dams may adversely affect our financial condition, revenues, operating results
and cash flows.
Pennichuck Water owns seven dams, including four impounding dams which are situated on the
Nashua and Merrimack border. While we regularly inspect and maintain the dams to comply with
existing standards, a failure of any of those dams could result in injuries and property damage
downstream for which we may be liable above our insurance limits and which may adversely affect our
financial condition, revenues and operating results. The failure of a dam would also adversely
affect our ability to supply water in sufficient quantities to our customers and could adversely
affect our financial condition, revenues, operating results and cash flows.
We may not be able to maintain our existing indebtedness or to incur additional indebtedness under
our existing long-term and revolving debt facilities, if our future credit ratios do not satisfy
the requirements under those facilities.
Our ability to issue long-term debt is subject to us satisfying certain financial ratios at
the time of such borrowing (
i.e.
, debt incurrence tests) and is subject to obtaining prior written
approval from the City. Similarly, our ability to access funds under our revolving credit
facilities is subject to maintaining certain financial ratios (
i.e.
, maintenance tests). These
ratios limit the amount of long-term debt relative to net plant and the amount of total debt to
total capitalization and also specify minimum amounts of earnings and cash flow available to pay
interest and fixed charges as a percentage of such interest and fixed charge amounts. We were in
compliance with such tests as of December 31, 2010. Our ability to
incur additional long-term debt and to continue to satisfy these tests depends, among other
factors, on receipt of timely and adequate rate relief.
15
Should we be unable to issue long-term debt, to borrow under our revolving credit facilities
or otherwise to access traditional sources of funds at reasonable costs and terms, our ability to
finance our future capital expenditures program on a timely basis could be materially impaired. In
such event, we might need to seek other forms of capital at less favorable costs and terms or defer
or reduce some of our capital expenditures. Any delay in implementing or completing capital
improvements could adversely affect our ability to request and receive rate relief from the NHPUC
relating to capital expenditures incurred by us and could give rise to contractual penalties.
If we are unable to pay the principal and interest on our indebtedness as it comes due or we
default under certain other provisions of our loan documents, our indebtedness could be accelerated
and our operating results, financial condition and cash flows could be adversely affected.
Our ability to pay the principal and interest on our indebtedness as it comes due will depend
upon our current and future performance. Our performance is affected by many factors, some of
which are beyond our control. We believe that our cash flow from operations and, if necessary,
borrowings under our existing revolving credit facilities, will be sufficient to enable us to make
our debt payments as they become due. If, however, we do not generate sufficient cash, we may be
required to refinance our obligations or sell additional equity, which may be on terms that are not
favorable to us. No assurance can be given that any refinancing or sale of equity will be possible
when needed or that we will be able to negotiate acceptable terms. In addition, our failure to
comply with certain provisions contained in our trust indentures and loan agreements relating to
our outstanding indebtedness could lead to a default under these documents, which could result in
an acceleration of our indebtedness.
We may be restricted by one or more debt agreements from paying dividends in amounts similar to
dividends that our Company has paid in recent periods, or, in more unlikely circumstances, from
continuing to pay any dividend.
There can be no assurance that we will continue to pay dividends in the future or, if
dividends are paid, that they will be in amounts similar to dividends that our Company has paid in
recent periods. It is our current intention, however, to continue to pay comparable cash dividends
in the future, subject to the terms of our Companys debt agreements and the terms of the Merger
Agreement with the City. Certain bond and note agreements as well as our revolving credit
facilities impose restrictions on the payment or declaration of dividends under certain
circumstances.
16
The success of our business strategies depends significantly on the services of the members of our
senior management team and the departure of any of those persons could cause our operating results
to suffer.
The success of our business strategies depends significantly on the continued individual and
collective contributions of our senior management team. If we lose the services of any member of
our senior management or are unable to hire and retain experienced management personnel, it could
harm our operating results.
Risks Related to Our Water Service Business
Our water service subsidiarys revenue growth depends on its ability to enter into new operating
contracts and maintain its existing contracts with municipalities, communities and non-transient,
non-community water systems.
In our target market of New Hampshire and nearby portions of Maine, Massachusetts and Vermont,
municipalities and communities own and operate the majority of water systems. A significant
portion of Service Corporations marketing and sales efforts is spent demonstrating the benefits of
contract operations to elected officials and municipal authorities. Employee unions and certain
public interest groups generally oppose the principle of outsourcing these services to companies
like us and are active opponents in this process. The political environment means that decisions
are made based on many factors, not just economic factors. There can be no assurance that we can
maintain or expand our water service business.
Our water management subsidiarys business depends on trained, qualified employees.
State regulations set the staff training, experience and staff qualification standards
required for Service Corporations employees to operate specific water facilities. We must
recruit, retain and develop qualified employees, maintain training programs and support employee
advancement. We must provide the proper management and operational staff of state-certified and
qualified employees to support the operation of water facilities. Failure to do so could put us at
risk for, among other things, operational errors at the facilities, which could have an adverse
effect on our water management business.
Our water management subsidiarys business is subject to environmental and water quality risks.
Clients of Service Corporation are owners of the facilities that we operate under contract.
The facilities must be operated in accordance with various federal and state water quality
standards. We also handle certain hazardous materials at these facilities, for example, sodium
hydroxide. Any failure of our operation of the facilities, including noncompliance with water
quality standards, hazardous material leaks and spills, and similar events, could expose us to
environmental liabilities, claims and litigation costs. There can be no assurance that we will
successfully manage these issues, and failure to do so could have a material adverse effect on our
future results of operations.
17
Other Risks
There is a limited trading market for our common stock; you may not be able to resell your shares
at or above the price you pay for them.
Although our common stock is listed for trading on the NASDAQ Global Market, the trading in
our common stock has substantially less liquidity than many other companies quoted on the NASDAQ
Global Market. A public trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence in the market of willing buyers and sellers of our common stock
at any given time. This presence in turn depends on the individual decisions of investors and
general economic and market conditions over which we have no control. As a consequence of the
limited volume of trading in our common stock, a sale of a significant number of shares of our
common stock in the open market could cause our stock price to decline.
We are subject to anti-takeover measures that may be used by existing management to discourage,
delay or prevent changes of control that might benefit non-management shareholders.
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Classified Board of Directors
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We have a classified Board of Directors, which means only three or four of our eleven total
directors are elected each year. A classified board can make it harder for an acquirer to gain
control by voting its candidates onto the Board of Directors and may also deter merger proposals
and tender offers. At least two annual meetings of shareholders, instead of one, would
generally be required to effect a change in a majority of the board.
Our Articles of Incorporation authorize the issuance of 11,500,000 shares of common stock
and 115,000 shares of preferred stock. The shares of common stock and preferred stock were
authorized in an amount greater than intended to be issued to provide our Board of Directors
with flexibility to effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock option grants. However, these additional authorized shares may
also be used by the Board of Directors to deter future attempts to gain control of our Company.
The Board of Directors has sole authority to determine the terms of any one or more series of
preferred stock, including voting rights, conversion rates and liquidation preferences. As a
result of the ability to fix voting rights for a series of preferred stock, the board has the
power to issue a series of preferred stock that would have the effect of discouraging or
blocking a post-tender offer merger or other transaction by a third party.
Notwithstanding these rights, pursuant to the terms of the Merger Agreement, we are prohibited
from issuing any additional shares of stock or stock options while the Merger Agreement is in
effect.
18
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Shareholder Rights Plan
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Our Board of Directors has adopted a shareholder rights plan. Any rights under this plan
will expire on May 5, 2011 unless previously redeemed or extended. The rights plan is intended
to improve the bargaining position of our Board of Directors in the event of an unsolicited
offer to acquire our Companys outstanding common stock. Under the terms of the rights plan, a
preferred stock purchase right is attached to each share of our common stock that is currently
outstanding or becomes outstanding before the rights become exercisable, are redeemed or expire.
The rights will become exercisable only if an individual or group has acquired or obtained the
right to acquire or announced a tender or exchange offer that if consummated would result in
such individual or group acquiring, beneficial ownership of more than 15% (or up to 20% with the
prior approval of the Board of Directors) of our outstanding common stock. Upon the occurrence
of a triggering event, the rights will entitle every holder of our common stock, other than the
acquirer, to purchase our stock or stock of our successor on terms that would likely be
economically dilutive to the acquirer. Our Board of Directors, however, has the power to amend
the rights plan so that it does not apply to a particular acquisition proposal or to redeem the
rights for a nominal amount before they become exercisable.
Effective March 18, 2009, our Company and its largest shareholder GAMCO Investors, Inc.
(GAMCO), and the other affiliated Gabelli group of companies and funds (collectively the
Gabelli Group), entered into a letter agreement, pursuant to which GAMCO and the Gabelli Group
have been granted an exemption to collectively purchase up to, but less than, 20% of our
Companys outstanding shares of common stock, subject to terms set forth in the letter
agreement.
Effective November 11, 2010, we amended the rights plan pursuant to which the execution and
delivery of the Merger Agreement, the consummation of the merger, and the consummation of any
other transaction contemplated in the Merger Agreement will be deemed not to result in events
that authorize the exercise of the rights under the rights plan.
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Supermajority Shareholder Approval May be Required for Fundamental Transactions with an
Interested Shareholder
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Our Articles of Incorporation require that certain fundamental transactions must be
approved by the holders of two-thirds of each class of stock entitled to vote and two-thirds of
the total number of shares entitled to vote, unless a majority of disinterested directors has
approved the transaction and other specified conditions are satisfied, in which case the
required shareholder approval will be the minimum approval required by applicable law. The
transactions that are subject to this provision are various fundamental transactions between us
and an interested shareholder or an affiliate of that shareholder. These transactions include
certain sales or other dispositions of our assets, certain issuances of our capital stock,
certain transactions involving our merger, consolidation, division, reorganization, dissolution,
liquidation or winding up or certain amendments of our Articles of Incorporation or bylaws. We
believe that the interested shareholder provision will likely encourage an acquirer to negotiate
with the Board of Directors before commencing a tender offer.
Approval by the NHPUC would be required for any acquisition of the Company and the NHPUC would
consider factors other than what is in the best interest of our shareholders.
Our water utility subsidiaries are regulated by the NHPUC. The NHPUC takes the position that
under New Hampshire law, water utility holding companies may not be acquired unless and until there
is an order of the NHPUC approving the acquisition. In practice, companies acquiring water utility
holding companies in New Hampshire have typically sought NHPUC approval as a condition of any
transaction. The NHPUC may approve an acquisition only if it determines that the acquisition will
not result in net harm to customers and is lawful, proper and in the public interest.
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Item 1B.
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UNRESOLVED STAFF COMMENTS
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None.
Pennichuck Water owns a building in Nashua that serves as an operations center and storage
facility for our construction and maintenance activities.
Pennichuck Water leases approximately 20,000 square feet of office space located in Merrimack,
New Hampshire. This office space serves as Pennichuck Corporations headquarters. The lease
expires in July 2013.
The properties used in our regulated water utility business are described in Part I, Item 1,
Business under the heading Regulated Water Utilities in this Annual Report on Form 10-K, which
is incorporated herein by reference.
Except as discussed in Note 9, Debt in Part II, Item 8 in this Annual Report on Form 10-K,
there are no mortgages or encumbrances on our properties.
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Item 3.
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LEGAL PROCEEDINGS
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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 a settlement agreement (the Settlement Agreement) with the City.
Pursuant to its terms, the Settlement Agreement provides that the pending eminent domain proceeding
by the City against the Company (docketed by the NHPUC as DW 04-048), will be terminated if the
merger is not completed for any reason, including as a result of the City not obtaining either a
timely positive vote of its Board of Aldermen or the financing required for the merger.
See Part I, Item 1A, Risk Factors for a discussion of various risks and uncertainties
associated with this proceeding.
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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.
Both of these cases are currently scheduled to be tried in the first quarter of calendar year
2012.
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Item 4.
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REMOVED AND RESERVED
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21
PART II
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Item 5.
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Our common stock is listed on the NASDAQ Global Market and trades under the symbol PNNW. On
March 1, 2011, there were 558 holders of record of the 4,679,927 shares of our common stock
outstanding. The closing price per share of our common stock on March 1, 2011 was $28.11. The
following table sets forth the comparative market prices per share of our common stock based on the
high and low sale prices as reported on the NASDAQ Global Market during the applicable periods and
the cash dividends declared per share by our Company during those periods. Our stock price
increased following the November 12, 2010 announcement of the signing of the Merger Agreement with
the City of Nashua.
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Dividends
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Period
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High
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Low
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Declared
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2010
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Fourth Quarter
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$
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28.39
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$
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22.81
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$
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.185
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Third Quarter
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23.89
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21.56
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.180
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Second Quarter
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24.41
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20.77
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.180
|
|
First Quarter
|
|
|
23.51
|
|
|
|
19.00
|
|
|
|
.180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
24.50
|
|
|
$
|
20.44
|
|
|
$
|
.175
|
|
Third Quarter
|
|
|
24.80
|
|
|
|
21.01
|
|
|
|
.175
|
|
Second Quarter
|
|
|
23.24
|
|
|
|
19.69
|
|
|
|
.175
|
|
First Quarter
|
|
|
21.90
|
|
|
|
16.56
|
|
|
|
.175
|
|
We expect to continue to pay comparable cash dividends in the future, subject to the terms of
our debt agreements. During the term of the Merger Agreement, we may continue to pay dividends in
accordance with past practice but may not increase the dividend rate above the current rate.
Certain covenants in Pennichuck Waters and Pennichuck Easts loan agreements, as well as our
revolving credit loan agreements, effectively restrict our ability to upstream dividends from
Pennichuck Water and Pennichuck East, as well as to pay dividends to our shareholders, under
certain circumstances.
Several of Pennichuck Waters loan agreements contain a covenant that requires it to maintain
a minimum net worth of $4.5 million. As of December 31, 2010, Pennichuck Waters net worth was
$53.1 million. One of Pennichuck Easts loan agreements contains a covenant that requires it to
maintain a minimum net worth of $1.5 million. As of December 31, 2010, Pennichuck Easts net worth
was $7.0 million. Additionally, our Bank of America revolving credit loan agreement contains a
covenant that requires we maintain a minimum consolidated tangible net worth of $46.0 million
($37.0 million plus the amount of equity proceeds subsequent to December 31, 2007). As of December
31, 2010, our consolidated tangible net worth was $56.2 million. See Note 9, Debt in Part II,
Item 8 in this Annual Report on Form 10-K for further discussion regarding these and other debt
covenants.
22
The following graph provides a comparison of the yearly cumulative total shareholder return on
the common stock of our Company for the last five years with the yearly cumulative total return of
the Russell 2000 Index and the average yearly cumulative total return of an industry peer group
over the same period, assuming a $100 investment on December 31, 2005. All of these cumulative
returns are computed assuming the reinvestment of dividends at the frequency with which dividends
were paid during applicable years. Historical stock performance during this period may not be
indicative of future stock performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name / Index
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
|
12/31/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennichuck Corporation
|
|
|
100
|
|
|
|
102.16
|
|
|
|
138.51
|
|
|
|
109.61
|
|
|
|
116.53
|
|
|
|
155.72
|
|
Russell 2000 Index
|
|
|
100
|
|
|
|
118.37
|
|
|
|
116.51
|
|
|
|
77.15
|
|
|
|
98.11
|
|
|
|
124.46
|
|
Peer Group
(1)
|
|
|
100
|
|
|
|
104.50
|
|
|
|
104.70
|
|
|
|
96.84
|
|
|
|
110.05
|
|
|
|
125.83
|
|
|
|
|
(1)
|
|
The peer group companies consist of Artesian Resources
Corporation, Connecticut Water Service Inc., Middlesex Water Company, and The York Water Company.
|
It should be noted that this graph represents historical stock performance and is not
necessarily indicative of any future stock price performance.
Information on equity compensation plans required by Item 5 is incorporated by reference
herein from the section in our Proxy Statement entitled Equity Compensation Plan Information.
23
|
|
|
Item 6.
|
|
SELECTED FINANCIAL DATA
|
We have derived the selected historical financial data as of and for each of the years
presented from our audited financial statements. You should read the information below in
conjunction with our historical financial statements and related notes appearing in Part II, Item 8
in this Annual Report on Form 10-K and our Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing in Part II, Item 7 in this Annual Report on Form
10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share
|
|
For the Year Ended December 31,
|
|
and per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
36,492
|
|
|
$
|
32,772
|
|
|
$
|
30,979
|
|
|
$
|
29,535
|
|
|
$
|
24,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
18,131
|
|
|
|
17,108
|
|
|
|
16,702
|
|
|
|
16,019
|
|
|
|
15,388
|
|
Depreciation and amortization
|
|
|
4,237
|
|
|
|
4,087
|
|
|
|
4,001
|
|
|
|
3,482
|
|
|
|
3,200
|
|
Taxes other than income taxes
|
|
|
4,028
|
|
|
|
3,585
|
|
|
|
2,866
|
|
|
|
2,368
|
|
|
|
2,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,396
|
|
|
|
24,780
|
|
|
|
23,569
|
|
|
|
21,869
|
|
|
|
20,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,096
|
|
|
|
7,992
|
|
|
|
7,410
|
|
|
|
7,666
|
|
|
|
3,653
|
|
Eminent domain and
merger-related costs, net
|
|
|
(514
|
)
|
|
|
(499
|
)
|
|
|
(217
|
)
|
|
|
(897
|
)
|
|
|
(2,355
|
)
|
Net (loss) earnings from
investments accounted for under
the equity method
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
3,390
|
|
|
|
60
|
|
|
|
(34
|
)
|
Other (expense) income, net
|
|
|
(44
|
)
|
|
|
(36
|
)
|
|
|
(110
|
)
|
|
|
1,255
|
|
|
|
713
|
|
Allowance for funds used during
construction
|
|
|
16
|
|
|
|
149
|
|
|
|
453
|
|
|
|
517
|
|
|
|
1,015
|
|
Interest income
|
|
|
2
|
|
|
|
1
|
|
|
|
187
|
|
|
|
166
|
|
|
|
428
|
|
Interest expense
|
|
|
(3,369
|
)
|
|
|
(3,658
|
)
|
|
|
(3,649
|
)
|
|
|
(2,875
|
)
|
|
|
(2,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
|
6,180
|
|
|
|
3,945
|
|
|
|
7,464
|
|
|
|
5,892
|
|
|
|
919
|
|
Provision for income taxes
|
|
|
2,399
|
|
|
|
1,563
|
|
|
|
2,743
|
|
|
|
2,311
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
$
|
3,581
|
|
|
$
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
(diluted)
|
|
$
|
0.80
|
|
|
$
|
0.55
|
|
|
$
|
1.11
|
|
|
$
|
0.84
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (diluted)
|
|
|
4,697,221
|
|
|
|
4,294,013
|
|
|
|
4,266,129
|
|
|
|
4,269,241
|
|
|
|
4,215,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per
common share
|
|
$
|
0.725
|
|
|
$
|
0.70
|
|
|
$
|
0.66
|
|
|
$
|
0.66
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment,
net
|
|
$
|
158,796
|
|
|
$
|
154,803
|
|
|
$
|
151,319
|
|
|
$
|
140,326
|
|
|
$
|
124,160
|
|
Total assets
|
|
|
181,601
|
|
|
|
177,605
|
|
|
|
174,954
|
|
|
|
168,588
|
|
|
|
144,905
|
|
Line of credit
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
1,053
|
|
|
|
5,897
|
|
|
|
5,199
|
|
|
|
6,675
|
|
|
|
474
|
|
Long-term debt including current
portion
|
|
|
60,719
|
|
|
|
60,176
|
|
|
|
64,785
|
|
|
|
64,672
|
|
|
|
48,170
|
|
Shareholders equity
|
|
|
56,150
|
|
|
|
55,219
|
|
|
|
47,780
|
|
|
|
45,565
|
|
|
|
44,550
|
|
Total capitalization including
line of credit
|
|
|
116,869
|
|
|
|
115,395
|
|
|
|
114,030
|
|
|
|
110,237
|
|
|
|
92,720
|
|
24
|
|
|
Item 7.
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Introduction
The terms we, our, our Company, and us refer, unless the context suggests otherwise,
to Pennichuck Corporation (the Company) 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. Our regulated water utility revenues constituted 93.2%,
91.5% and 91.4% of our revenues in 2010, 2009 and 2008, respectively. Pennichuck Water, our
principal subsidiary which was established in 1852, accounted for 74.0%, 71.4% and 71.3% of our
2010, 2009 and 2008 revenues, respectively. Pennichuck Waters franchise area presently includes
the City of Nashua, New Hampshire and 10 surrounding municipalities.
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 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 in 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 as more fully described in Note 7, Equity Investments in
Unconsolidated Companies in Part II, Item 8, in this Annual Report on Form 10-K). Southwoods
contributions 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 the Merger Agreement (defined below) with the City of Nashua (the City), our entry into new
sales contracts covering any of our remaining 450 acres of undeveloped land are subject to advance
written approval by the City.
25
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. The
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 the Managements Discussion and Analysis, refer to our Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial Statements in Item 8 in this Annual
Report on Form 10-K.
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K, 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 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.
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, a future judicial or
regulatory determination that events prior to the November 11, 2010 effective date of the Merger
Agreement 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 is approved by our
shareholders and the NHPUC; whether the merger transaction is ultimately consummated; 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.
These risks and others are described elsewhere in this Annual Report on Form 10-K, including
particularly under Part I, Item 1A, Risk Factors. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new information, future events or
otherwise.
26
Events Significantly Affecting Our Earnings During Recent Years
Overview
Our earnings during the five-year period ended December 31, 2010 were significantly affected
by the following events that occurred during one or more of the years in that period:
|
|
|
Sale of land and building owned by HECOPs I, II and III in January 2008;
|
|
|
|
Sale of one cell tower lease in 2006 and eight cell tower leases in 2007;
|
|
|
|
Rate relief granted by the NHPUC to our regulated water utilities;
|
|
|
|
Increased recorded amounts of allowance for funds used during construction
as a result of the upgrade of our water treatment plant; and
|
|
|
|
Costs associated with our actions to oppose efforts by the City of Nashua to
acquire all or a significant portion of the assets of our regulated water
utility subsidiaries through an eminent domain proceeding under New Hampshire
law.
|
The Merger Agreement and Eminent Domain Settlement
The City has been engaged in an ongoing 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. The matter 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 transaction, which we sometimes refer in this Annual Report as the merger, is subject to
approval by holders of not less than two-thirds of our Companys outstanding shares of common stock
and regulatory approval by the NHPUC. The Citys obligation to complete the merger is subject to,
(i) there being no burdensome conditions imposed by the NHPUC in approving the merger 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.
See Part I, Item 1, Business and Part I, Item 1A, Risk Factors in this Annual Report on
Form 10-K 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.
Our annual eminent domain and merger-related costs in 2010 through 2006 were $514,000,
$499,000, $217,000, $897,000 and $2.4 million, respectively.
27
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 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 consolidated balance sheet 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 consolidated statements of income in the same period
that they are reflected in rates charged to our water utilities 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 merger.
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 the effective water rates. Actual results could differ from those estimates.
Accrued unbilled revenues recorded in the accompanying consolidated financial statements as of
December 31, 2010 and 2009 were approximately $2.4 million and $2.3 million, respectively.
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 Postretirement Benefits.
Our pension and other postretirement 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 postretirement benefit obligations associated with these factors
may not be immediately recognized as costs in the 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 postretirement benefit costs and funding requirements (See Note 2 of
Part II, Item 8, Postretirement Benefit Plans). Further, the value of our pension plan assets
are subject to fluctuations in market returns which may result in increased or decreased pension
expense in future periods.
28
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 $1.1
million to the plan during 2011 as compared to $514,000 in 2010.
Results of OperationsGeneral
In this section, we discuss our 2010, 2009 and 2008 results of operations and the material
factors affecting them. Our operating activities are discussed in greater detail in Note 5,
Business Segment Reporting in Part II, Item 8 in this Annual Report on Form 10-K.
Results of Operations2010 Compared to 2009
Overview
Our revenue, and consequently our net income, can be significantly affected by economic and
weather conditions as well as customer conservation efforts. Water revenue is typically at its
lowest point during the first and fourth quarters of the calendar year. Water revenue in the
second and third quarters tends to be greater because of increased water consumption for
non-essential usage by our customers during the late spring and summer months.
For the year ended December 31, 2010, our net income was $3.8 million, compared to $2.4
million for the year ended December 31, 2009. On a per share basis (diluted), net income for the
year ended December 31, 2010 was $0.80 as compared to $0.55 for the year ended December 31, 2009.
The principal factors that affected current period net income, relative to the prior period,
included the following:
|
|
|
An increase in regulated water utility operating income of $2.1 million;
|
|
|
|
A decrease in interest expense of $289,000; partially offset by
|
|
|
|
A decrease in allowance for funds used during construction (AFUDC) of
$133,000;
|
|
|
|
A decrease in water management service operating income of $76,000; and
|
|
|
|
An increase in income tax expense of $836,000.
|
Our net income per share was affected by our issuance of 387,000 shares of common stock in
December 2009, raising approximately $7.5 million of net proceeds.
29
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 year ended December 31, 2010, our regulated water utility operating revenue increased
to $34.0 million compared to $30.0 million for the year ended December 31, 2009, an increase of
approximately $4.0 million or 13%. The increase in revenue was principally due to an increase in
water usage volumes due to dry weather experienced in the third quarter of 2010 and, to a lesser
extent, the temporary rate increase granted to Pennichuck Water in October 2010. For the year
ended December 31, 2010, 67% of our billed regulated water utility usage was to residential
customers, and 26% to commercial and industrial customers, with the balance being principally from
billings to municipalities.
We believe customer usage will continue to be impacted by the economy, weather, and
conservation efforts as a result of the continuing installation of more water efficient appliances
as well as general customer response to various conservation focused communications and rate
increases.
For the year ended December 31, 2010, our total utility operating expenses increased by
approximately 8% over the year ended December 31, 2009 as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations & maintenance
|
|
$
|
15,797
|
|
|
$
|
14,515
|
|
|
$
|
1,282
|
|
Depreciation & amortization
|
|
|
4,232
|
|
|
|
4,078
|
|
|
|
154
|
|
Taxes other than income taxes
|
|
|
4,026
|
|
|
|
3,587
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
Total Utility Operating Expenses
|
|
$
|
24,055
|
|
|
$
|
22,180
|
|
|
$
|
1,875
|
|
|
|
|
|
|
|
|
|
|
|
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 $1.9 million increase in our utilities operating expenses over the same period in 2009
was primarily the result of the following:
|
|
|
Increased production costs of $582,000 related to increased chemical, power
and purchased water costs associated with higher water usage levels;
|
|
|
|
Increased taxes other than income taxes of $439,000, principally related to
increased real estate taxes resulting from capital additions as well as
increased assessed values in our core Pennichuck Water system;
|
|
|
|
Increased general and administrative costs of $323,000 primarily relating
to the combined effects of, (i) increased compensation expense accrued in
accordance with our management incentive plans, increased non-cash
compensation expense recorded for employee stock options granted during the
first quarter of 2010 and annual wage increases (ii) increased health benefit
costs and (iii) an increase in supplemental executive retirement plan costs,
partially offset by (iv) a decrease in defined benefit and postretirement
medical plan costs;
|
30
|
|
|
Increased transmission and distribution costs of $287,000 primarily
relating to increased fuel costs, flushing activities and system maintenance
costs; and
|
|
|
|
Increased depreciation and amortization of $154,000 principally due to
increased depreciation attributable to the completion of the water treatment
plant upgrade at Pennichuck Water in 2009.
|
As a result of the above changes in operating revenue and operating expenses, regulated water
utility operating income increased to $9.9 million from $7.8 million, an increase of approximately
$2.1 million or 28%, for the year ended December 31, 2010 compared to the year ended December 31,
2009.
Pennichuck Water filed for rate relief with the NHPUC on May 7, 2010 seeking a permanent
annual increase in revenue of approximately $3.9 million, or 16.2%, plus a step increase of
approximately $887,000, or 3.7%. Additionally, our rate relief filing includes a request to
recover certain amounts expended by us in connection with the eminent domain proceedings. On
October 8, 2010, the NHPUC issued an order approving an annualized temporary increase in rates of
approximately $2.6 million, or 10.8%, effective for bills rendered on or after October 8, 2010.
Any difference between the temporary rate relief granted and the permanent rates ultimately
approved by the NHPUC for service rendered on and after June 16, 2010 will be reconciled upon the
approval of such permanent rates.
Water Management Services
The operating revenue of our water management services segment decreased to $2.5 million for
the year ended December 31, 2010 from $2.8 million for the year ended December 31, 2009, which is a
decrease of approximately $309,000, or 11%.
Service Corporations contracts with two municipalities ended on June 30, 2009 and July 31,
2009 and have not been renewed by the municipalities. The operating revenue earned from these two
contracts was $136,000 for the year ended December 31, 2009. Operating revenue earned from
unscheduled work on continuing contracts decreased to $804,000 for the year ended December 31, 2010
from $979,000 for the year ended December 31, 2009, a decrease of approximately $175,000, or 18%.
The net income of our water management services segment decreased to $125,000 for the year
ended December 31, 2010 from $191,000 for the year ended December 31, 2009, which is a decrease of
approximately $66,000, or 35%.
Eminent Domain and Merger-related Costs
Our eminent domain expenses were $514,000 for the year ended December 31, 2010 and $499,000
for the year ended December 31, 2009. The 2010 and 2009 eminent domain expenses included
the legal fees associated with the Supreme Court proceedings and, in 2010, also included legal
costs in connection with the Merger Agreement.
Allowance for Funds Used During Construction (AFUDC)
For the year ended December 31, 2010 and 2009, we recorded AFUDC of $16,000 and $149,000,
respectively. The approximately $133,000 decrease was attributable to the completion in 2009 of
certain large projects (
e.g.,
the multi-year upgrade to Pennichuck Waters water treatment plant).
We do not expect to incur a significant amount of AFUDC in 2011.
31
Interest Expense
For the year ended December 31, 2010, our interest expense was $3.4 million, compared to $3.7
million in 2009. The decrease of approximately $289,000 was primarily attributable to the payoff
at maturity of a 5% $5 million note on March 1, 2010.
Provision for Income Taxes
For the year ended December 31, 2010, we recorded income tax expense of $2.4 million compared
to $1.6 million for the year ended December 31, 2009. The effective income tax rate was
approximately 38.8% and 39.6% for the respective periods. The effective rate for the year ended
December 31, 2009 was approximately the same as the statutory rate. The decrease in the effective
income tax rate from 2009 to 2010 includes an adjustment for the recognition of certain state tax
credits previously not expected to be utilized.
Results of Operations2009 Compared to 2008
Overview
For the year ended December 31, 2009, our net income was $2.4 million, compared to net income
of $4.7 million for the year ended December 31, 2008. On a per share basis, the fully diluted
income per share for the year ended December 31, 2009 was $0.55, compared to fully diluted income
per share of $1.11 for the year ended December 31, 2008. The principal factors that affected
current period net income, relative to prior period net income, included the following:
|
|
|
A 2008 non-operating, after-tax gain of approximately $2.3 million ($3.4
million before federal income taxes) from the sale of three commercial office
properties by three of our HECOP joint ventures;
|
|
|
|
An increase in 2009 regulated water utility operating income of $679,000;
|
|
|
|
An increase in 2009 eminent domain-related costs of $282,000;
|
|
|
|
A decrease in interest income of $186,000;
|
|
|
|
A decrease in allowance for funds used during construction of $304,000; and
|
|
|
|
A decrease in the 2009 provision for income taxes of $1.2 million.
|
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.
32
Our utility operating revenues increased to approximately $30.0 million in 2009, an increase
of $1.7 million, or 6.0%, over 2008, as shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennichuck Water
|
|
$
|
23,403
|
|
|
|
78
|
%
|
|
$
|
22,097
|
|
|
|
78
|
%
|
|
$
|
1,306
|
|
Pennichuck East
|
|
|
5,038
|
|
|
|
17
|
%
|
|
|
5,088
|
|
|
|
18
|
%
|
|
|
(50
|
)
|
Pittsfield Aqueduct
|
|
|
1,552
|
|
|
|
5
|
%
|
|
|
1,118
|
|
|
|
4
|
%
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,993
|
|
|
|
100
|
%
|
|
$
|
28,303
|
|
|
|
100
|
%
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues was primarily the result of the full year impact in 2009 of
temporary rate increases granted to Pennichuck Water and Pittsfield Aqueduct in 2008 and a partial
year effect of the permanent rate increases granted to those subsidiaries in 2009 offset, in part,
by an approximately $1.7 million revenue decrease associated with reduced customer usage.
For the year ended December 31, 2009, approximately 66% of our billed water utility usage was
to residential customers and approximately 29% to commercial and industrial customers, with the
balance being principally from billings to municipalities. Company-wide usage for the year ended
December 31, 2009 declined by approximately 6.8%, approximately half of which was the result of
energy conservation programs implemented by our largest industrial customer beginning in the third
quarter of 2008. The revenue impact of these conservation programs was substantially offset in
2009 by a make-whole provision contained in the customers contract.
We believe that the then prevailing adverse economic conditions and customer conservation
efforts, as well as cool and wet weather patterns in June and July of 2009, were the primary cause
of the reduction in consumption among our residential, commercial and industrial customers (aside
from the effects of the energy conservation programs implemented by the industrial customer
discussed above).
For the year ended December 31, 2009, utility operating expenses increased by approximately
$1.0 million, or approximately 4.8%, to approximately $22.2 million as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations & maintenance
|
|
$
|
14,515
|
|
|
$
|
14,312
|
|
|
$
|
203
|
|
Depreciation & amortization
|
|
|
4,078
|
|
|
|
3,990
|
|
|
|
88
|
|
Taxes other than income taxes
|
|
|
3,587
|
|
|
|
2,867
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,180
|
|
|
$
|
21,169
|
|
|
$
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
33
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 $1.0 million increase in our utilities operating expenses over the same period in 2008
was primarily the result of the following:
|
|
|
Increased taxes other than income taxes of $720,000, principally related to
increased real estate taxes resulting from capital additions in our core
Pennichuck Water system, as well as increased assessed values;
|
|
|
|
Increased general and administrative costs of $343,000 primarily relating
to increased pension and postretirement expense of $261,000;
|
|
|
|
Increased customer accounting expenses of $112,000, primarily associated
with the additional costs of billing customers on a monthly rather than a
quarterly basis;
|
|
|
|
Increased depreciation and amortization of $88,000 principally due to
increased depreciation attributable to completed portions of the water
treatment plant upgrade for Pennichuck Water; and
|
|
|
|
Increased transmission and distribution costs of $90,000 relating to repair
or replacement of gates, mains, meters, services and hydrants; partially
offset by
|
|
|
|
Decreased production costs of $356,000 related to lower consumption levels
and lower power rates.
|
As a result of the above changes in operating revenue and operating expenses, regulated water
utility operating income increased to $7.8 million from $7.1 million, or 9.5%, for the year ended
December 31, 2009 compared to the year ended December 31, 2008.
Water Management Services
The operating income of our water management services business was $325,000 and $375,000 for
the year ended December 31, 2009 and December 31, 2008, respectively. Service Corporations
contracts with two municipalities ended on June 30, 2009 and July 31, 2009, and were not been
renewed by the municipalities. The operating revenue earned from these two contracts was 5% and
10% of Service Corporations total revenue for the year ended December 31, 2009 and 2008,
respectively. These two contracts contributed approximately $75,000 and $164,000 in operating
income for the years ended December 31, 2009 and 2008, respectively. The decrease in operating
income associated with these two contracts of $89,000 was the primary cause for the overall
decrease in operating income of $50,000 for the year ended December 31, 2009 compared to December
31, 2008.
Eminent Domain Expenses
Our eminent domain expenses were $499,000 for the year ended December 31, 2009 as compared to
$217,000 for the year ended December 31, 2008. The 2009 eminent domain expenses were primarily
attributable to legal fees in connection with our appeal to the New Hampshire Supreme Court
and, to a lesser extent, our retention of an investment banking firm in January 2009.
34
Allowance for Funds Used During Construction (AFUDC)
For the year ended December 31, 2009 and 2008, we recorded AFUDC of approximately $149,000 and
$453,000, respectively. The $304,000 decrease was attributable to the completion of certain large
projects qualifying for AFUDC during the reported periods.
Interest Income
For the years ended December 31, 2009 and 2008, we recorded interest income of approximately
$1,000 and $187,000, respectively. The decrease of $186,000 was primarily attributable to lower
balances in our bank and money market accounts throughout 2009, as well as lower earned rates on
these balances.
Provision for Income Taxes
For the years ended December 31, 2009 and 2008, we recorded an income tax provision of $1.6
million and $2.7 million, respectively. The decrease was largely due to federal income taxes on
the January 2008 gain on the sale of the real estate held by HECOP I, II, and III joint ventures.
The effective income tax rate was 39.6% and 36.7%, respectively.
The State of New Hampshire income tax liability on income attributable to our Companys four
joint ventures is imposed at the Limited Liability Company level, and not at the Pennichuck
Corporation level (in contrast to federal income taxes). Therefore, State of New Hampshire income
taxes for the joint ventures are included in Net (loss) earnings from investments accounted for
under the equity method in the accompanying consolidated statements of income and comprehensive
income. The amount of such state income taxes in 2008 was approximately $217,000. This is the
principal reason why the Provision for Income Taxes for 2008, as a percentage of Income Before
Provision for Income Taxes, was lower in 2008 than the statutory rate of 39.6%.
Liquidity and Capital Resources
Overview
Our primary sources of funds are 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 primarily based on four factors: (i)
weather, (ii) amount and timing of rate increases, (iii) gains 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 its liquidity and that gains from the sale of
non-utility real estate will occur relatively infrequently.
We expect that costs will be incurred throughout most of 2011 primarily related to seeking
shareholder and NHPUC approvals in connection with the proposed merger.
35
We expect to utilize our Bank of America revolving credit facility in response to variations
in cash flow from the factors described above. This $16 million revolving credit facility expires
on June 30, 2011 and is expected to be renewed at a lower maximum borrowing amount, reflecting our
reduced capital expenditure plans after the completion of the $40 million water treatment plant
upgrade in 2009.
During the period from 2008 through 2010, in addition to cash flow from operations, we
generated $29.3 million of proceeds from long-term borrowings. We also generated an aggregate $8.6
million during the same period through a public offering of common stock, our Dividend Reinvestment
and Common Stock Purchase Plan and the exercise of stock options. The proceeds from the long term
debt and equity offerings were invested primarily in capital additions including specifically the
$40 million water treatment plant upgrade.
We borrowed $4.5 million on March 1, 2010 pursuant to a 20-year amortizing loan at the London
Interbank Offered Rate (LIBOR) plus 1.75%. We also entered into an interest rate swap to
effectively fix the interest rate on the outstanding loan amount at 5.95%.
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 $8.1
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.
2011-2013 External Financing Requirements
We will continue to apply for long-term debt funds directly from the State of New Hampshire
Revolving Fund (SRF) program as needed. We currently have one outstanding SRF loan request in
the amount of $300,000. Funds provided under SRF loans carry long-term fixed interest rates set
with reference to various Municipal Bond Indices, which rates are generally below the rates for
comparable U.S. Treasury securities of like maturity. As of December 31, 2010, we had thirteen
outstanding SRF loans, five of which also included partial funding through American Recovery and
Reinvestment Act of 2009, with aggregate principal balances outstanding of approximately $8.6
million. Included in the thirteen loans are three loans which were not fully drawn as of December
31, 2010. These three loans, totaling approximately $3.0 million, had approximately $1.4 million
drawn as of December 31, 2010 with a balance left to draw of approximately $1.6 million. We expect
to borrow approximately $800,000 on these three loans in 2011. The balance of approximately
$800,000 is not expected to be utilized. The construction associated with the available loans will
not be completed until mid-2011.
36
We expect that the majority of the remainder of our 2011-2013 funding requirements will be
provided by cash flow from our operations (after payment of dividends on common stock but before
repayment of current principal due on long-term debt) and short term borrowings. During the term
of the Merger Agreement, aside from continuing to utilize our revolving credit facilities in the
normal course of business, we cannot enter into new borrowings without the prior written consent of
the City. The Merger Agreement also prohibits us from issuing any stock (other than upon the
exercise of existing stock options) during its term.
In addition to the specific restrictions in the Merger Agreement regarding future debt or
equity financings, our timing and mix of future debt and equity financing is subject to a number of
factors including, but not limited to, (i) debt and equity market conditions; (ii) the need to
maintain a balanced capital structure in order to preserve financial flexibility and to manage our
overall cost of capital; and (iii) certain debt issuance covenants as contained in our outstanding
loan agreements, which are discussed above. Other than the renewal of our Bank of America short
term revolving line of credit which expires on June 30, 2011 and SRF funding that becomes available
for specific projects, we do not expect to require any new debt financings in 2011.
The receipt of timely and adequate rate relief is also critically important in providing us
cash flow from operations and the ability to access the credit and equity markets, at reasonable
costs and terms. We are unable, however, to predict the outcome of our future rate relief filings.
Significant Financial Covenants
Our $16.0 million revolving credit loan agreement with Bank of America currently is scheduled
to expire on June 30, 2011. 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 (2.3x as of December 31,
2010);
|
|
2.
|
|
Our Tangible Net Worth must exceed $46.0 million ($56.2 million as of December
31, 2010); and
|
|
3.
|
|
Our Funded Debt (less certain cash and short-term investment balances, if any)
must not exceed 65% of our Total Capitalization (51.1% as of December 31, 2010).
|
37
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 December 31, 2010, Pennichuck Waters net worth was $53.1 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 December
31, 2010, Pennichuck Easts net worth was $7.0 million.
As of December 31, 2010, we were in compliance with all of our financial covenants.
Our ability to continue to satisfy these covenants depends, among other factors, on 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 January 26, 2011, the Board of Directors declared a first quarter common stock dividend
of $0.185 per share payable March 1, 2011 to shareholders of record as of February
15,
2011. The first 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, as discussed above.
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 7.50% 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 we no longer record the debt in our consolidated financial statements.
38
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 with the remaining $11.4 million placed in escrow
for the sole benefit of bondholders with no recourse to us. As a result of the recent 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 allowed the $11.4 million to expire when the
escrow matured on July 1, 2010.
We have one interest rate financial instrument, an interest rate swap, described in detail in
Note 9, Debt in Part II, Item 8 in this Annual Report on Form 10-K.
Contractual Obligations
The following table discloses aggregate information about our contractual obligations as of
December 31, 2010 and the periods in which payments are due:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
Than
|
|
(in thousands)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
(1)
|
|
$
|
61,019
|
|
|
$
|
1,053
|
|
|
$
|
2,212
|
|
|
$
|
2,274
|
|
|
$
|
55,480
|
|
Estimated interest on long-term debt
|
|
|
50,009
|
|
|
|
3,001
|
|
|
|
6,106
|
|
|
|
5,836
|
|
|
|
35,066
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
793
|
|
|
|
320
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
Pension and retiree medical costs
(2)
|
|
|
6,371
|
|
|
|
1,165
|
|
|
|
1,323
|
|
|
|
1,355
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,192
|
|
|
$
|
5,539
|
|
|
$
|
10,114
|
|
|
$
|
9,465
|
|
|
$
|
93,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents debt maturities including current maturities.
|
|
(2)
|
|
Pension and retiree medical costs beyond 2010 are estimated as they may be impacted
by such factors as return on pension assets, changes in the number of plan participants and future salary increases.
|
In July 2010, Pennichuck Water renegotiated its lease arrangement for approximately
20,000 square feet of office space located in Merrimack, New Hampshire. This office space serves
as Pennichuck Corporations headquarters. The renegotiated lease expires in July 2013.
Pension Plan.
We maintain a defined benefit pension plan covering substantially all of our
employees. We estimate annual pension expense based on assumptions regarding (i) the discount rate
applied to the projected benefit obligation, (ii) the long-term rate of return on plan assets and
(iii) the long-term rate of future increases in compensation. A lower discount rate increases the
present value of our pension obligation and our annual pension funding. Our expected long-term
rate of return on pension plan assets is based on the plans expected asset allocation, expected
returns on various classes of plan assets, and historical returns.
39
Certain key assumptions used to value benefit obligations and calculate net periodic benefit
cost for our defined benefit pension plan include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Discount rate for benefit obligations, end of
year
(a)
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets for the year
(net of investment expenses)
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
Rate of compensation increase, beginning of year
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
(a)
|
|
an increase or decrease in the discount rate of 0.5%, would result in a change in the
funded status as of December 31, 2010, for the DB Plan and the OPEB Plans, of approximately $1.0 million and
$200,000, respectively, as discussed in Note 2 of Part II, Item 8, Postretirement Benefit Plans.
|
These key assumptions are reviewed annually and are updated periodically to reflect the
plans experience. Actual results in any given year will often differ from our actuarial
assumptions because of economic and other conditions and may impact the amount of funding we
contribute into the plan.
Dividend Reinvestment and Common Stock Purchase Plan
Prior to November 11, 2010 effective date of the Merger Agreement, we offered a Dividend
Reinvestment and Common Stock Purchase program. Under this program, our shareholders, employees
and customers could reinvest all or a portion of their common stock dividends into shares of common
stock at prevailing market prices. We also accepted optional cash payments to purchase additional
shares at 100% of the prevailing market prices. This program has provided us with additional
common equity of $143,000 in 2010 and $130,000 in 2009. The program was suspended on November 11,
2010 in accordance with the terms of the Merger Agreement.
Environmental Matters
Our regulated water utility subsidiaries are subject to the water quality regulations set
forth by the Environmental Protection Agency (EPA) and the New Hampshire Department of
Environmental Services (DES). The EPA is required to periodically set new maximum contaminant
levels for certain chemicals as required by the federal Safe Drinking Water Act. The quality of
our treated water currently meets or exceeds all standards set by the EPA and the DES. However,
increased monitoring and reporting standards have led to additional operating costs for us. Any
additional monitoring and testing costs arising from future EPA and DES mandates should eventually
be recovered through water rates in our utilities future rate filings.
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 such capital expenditures.
40
|
|
|
Item 7A.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Information regarding market risk of our Company and our subsidiaries is presented in Note 6,
Financial Measurement and Fair Value of Financial Instruments and Note 9, Debt in Part II, Item
8 in this Annual Report on Form 10-K.
We do not engage in trading market risk sensitive instruments or purchasing hedging
instruments or other than trading instruments that are likely to expose us to significant market
risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. As
described below, we have one interest rate financial instrument, an interest rate swap, which
qualifies as a derivative, as described in Note 9, Debt in Part II, Item 8 in this Annual Report
on Form 10-K.
We are subject to commodity price risks associated with price increases for chemicals,
electricity and other commodities. These risks are reduced through contracts and the ability to
recover price increases through rates. Non-performance by our commodity suppliers can have a
material adverse impact on our results of operations, cash flows and financial position.
Our exposure to financial market risk results primarily from fluctuations in interest rates.
We are exposed to changes in interest rates primarily from our Bank of America revolving credit
facility. This revolving credit facility, which includes a total borrowing capacity of $16.0
million, permits us to borrow, re-pay and re-borrow, in varying amounts and from time to time at
our discretion through June 30, 2011. We had no borrowings under this revolving credit facility as
of December 31, 2010. Borrowings under this credit facility bear interest rates at prime or LIBOR
plus 1.2% to 1.7% (based on the results of various financial ratios). The applicable margin as of
December 31, 2010 was 1.45%. During 2011, we may utilize a portion of this facility from time to
time to fund our short-term cash requirements.
41
|
|
|
Item 8.
|
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
42
Pennichuck Corporation and Subsidiaries
Managements Report on Internal Control Over Financial Reporting
Management of Pennichuck Corporation (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that
|
(1)
|
|
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
|
|
(2)
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and the Board of Directors of the Company; and
|
|
(3)
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Companys
assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In assessing the effectiveness of internal control over financial reporting, management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. As a result of managements assessment and
based on the criteria in the framework, management has concluded that, as of December 31, 2010, the
Companys internal control over financial reporting was effective.
The Companys independent registered public accounting firm, ParenteBeard LLC, has issued an
attestation report on the effectiveness of the Companys internal control over financial reporting.
Their report appears on the following page.
|
|
|
/s/ Duane C. Montopoli
|
|
/s/ Thomas C. Leonard
|
|
|
|
Duane C. Montopoli
|
|
Thomas C. Leonard
|
President and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer
|
March 4, 2011
43
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Pennichuck Corporation
We have audited Pennichuck Corporations (the Company) internal control over financial
reporting as of December 31, 2010, based on criteria established in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Pennichuck Corporations management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
An entitys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. An entitys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the entity are being made only in accordance with
authorizations of management and directors of the entity; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
entitys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pennichuck Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related statements of
income, shareholders equity, comprehensive income, and cash flows of Pennichuck Corporation, as
well as the financial statement schedules listed in the accompanying index, and our report dated
March 4, 2011 expressed an unqualified opinion
.
Reading, Pennsylvania
March 4, 2011
44
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Pennichuck Corporation
We have audited the accompanying consolidated balance sheets of Pennichuck Corporation (the
Company) as of December 31, 2010 and 2009, and the related consolidated statements of income,
shareholders equity, comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2010. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules listed in the accompanying
index. These consolidated financial statements and financial statement schedules are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pennichuck Corporation as of December 31, 2010 and
2009, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2010, in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pennichuck Corporations internal control over financial reporting
as of December 31, 2010, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 4, 2011 expressed an unqualified opinion.
Reading, Pennsylvania
March 4, 2011
45
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
$
|
158,796
|
|
|
$
|
154,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,383
|
|
|
|
1,570
|
|
Accounts receivable, net of allowance of
$54 and $53 in 2010 and 2009, respectively
|
|
|
2,153
|
|
|
|
2,064
|
|
Unbilled revenue
|
|
|
2,389
|
|
|
|
2,287
|
|
Materials and supplies
|
|
|
743
|
|
|
|
727
|
|
Deferred and refundable income taxes
|
|
|
717
|
|
|
|
1,636
|
|
Prepaid expenses
|
|
|
1,307
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
9,692
|
|
|
|
9,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Deferred land costs
|
|
|
2,497
|
|
|
|
2,474
|
|
Deferred charges and other assets
|
|
|
10,502
|
|
|
|
10,760
|
|
Investment in real estate partnership
|
|
|
114
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
13,113
|
|
|
|
13,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
181,601
|
|
|
$
|
177,605
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
46
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS CONTINUED
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
SHAREHOLDERS EQUITY AND LIABILITIES
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock$1 par value
Authorized11,500,000 shares in 2010 and 2009
Issued 4,677,105 and 4,652,260 shares, respectively
Outstanding 4,675,903 and 4,651,058 shares, respectively
|
|
$
|
4,677
|
|
|
$
|
4,652
|
|
Additional paid in capital
|
|
|
41,312
|
|
|
|
40,619
|
|
Retained earnings
|
|
|
10,488
|
|
|
|
10,086
|
|
Accumulated other comprehensive loss
|
|
|
(189
|
)
|
|
|
|
|
Treasury stock, at cost; 1,202 shares in 2010 and 2009
|
|
|
(138
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
56,150
|
|
|
|
55,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $100 par value, 15,000 shares authorized; and,
no par value, 100,000 shares authorized, no shares issued in
2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt, Less Current Portion
|
|
|
59,666
|
|
|
|
54,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
1,053
|
|
|
|
5,897
|
|
Accounts payable
|
|
|
1,972
|
|
|
|
1,104
|
|
Accrued interest payable
|
|
|
701
|
|
|
|
721
|
|
Accrued wages and payroll withholding
|
|
|
565
|
|
|
|
269
|
|
Accrued liability retainage
|
|
|
178
|
|
|
|
480
|
|
Other current liabilities
|
|
|
406
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,875
|
|
|
|
8,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Credits and Other Reserves:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
19,180
|
|
|
|
18,776
|
|
Deferred investment tax credits
|
|
|
735
|
|
|
|
768
|
|
Regulatory liability
|
|
|
890
|
|
|
|
839
|
|
Postretirement health benefit obligation
|
|
|
1,708
|
|
|
|
1,656
|
|
Accrued pension liability
|
|
|
4,623
|
|
|
|
4,031
|
|
Other liabilities
|
|
|
1,890
|
|
|
|
1,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Credits and Other Reserves
|
|
|
29,026
|
|
|
|
27,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions in Aid of Construction
|
|
|
31,884
|
|
|
|
31,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY AND LIABILITIES
|
|
$
|
181,601
|
|
|
$
|
177,605
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
47
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Operating Revenues
|
|
$
|
36,492
|
|
|
$
|
32,772
|
|
|
$
|
30,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance
|
|
|
18,131
|
|
|
|
17,108
|
|
|
|
16,702
|
|
Depreciation and amortization
|
|
|
4,237
|
|
|
|
4,087
|
|
|
|
4,001
|
|
Taxes other than income taxes
|
|
|
4,028
|
|
|
|
3,585
|
|
|
|
2,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
26,396
|
|
|
|
24,780
|
|
|
|
23,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
10,096
|
|
|
|
7,992
|
|
|
|
7,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eminent domain and merger-related costs
|
|
|
(514
|
)
|
|
|
(499
|
)
|
|
|
(217
|
)
|
Net (loss) earnings from investments
accounted for under the equity method
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
3,390
|
|
Other expense, net
|
|
|
(44
|
)
|
|
|
(36
|
)
|
|
|
(110
|
)
|
Allowance for funds used during construction
|
|
|
16
|
|
|
|
149
|
|
|
|
453
|
|
Interest income
|
|
|
2
|
|
|
|
1
|
|
|
|
187
|
|
Interest expense
|
|
|
(3,369
|
)
|
|
|
(3,658
|
)
|
|
|
(3,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes
|
|
|
6,180
|
|
|
|
3,945
|
|
|
|
7,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
2,399
|
|
|
|
1,563
|
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.81
|
|
|
$
|
0.56
|
|
|
$
|
1.11
|
|
Diluted
|
|
$
|
0.80
|
|
|
$
|
0.55
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,660,456
|
|
|
|
4,274,174
|
|
|
|
4,240,410
|
|
Diluted
|
|
|
4,697,221
|
|
|
|
4,294,013
|
|
|
|
4,266,129
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
Balances as of December 31, 2007
|
|
|
4,227,037
|
|
|
$
|
4,227
|
|
|
$
|
32,772
|
|
|
$
|
8,761
|
|
|
$
|
(57
|
)
|
|
$
|
(138
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan
|
|
|
7,073
|
|
|
|
7
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared$.66 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
19,288
|
|
|
|
19
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives, net of
tax benefit of $(70)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
)
|
|
|
|
|
Reclassification adjustment for net loss
realized in net income, net of tax
benefit of $34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2008
|
|
|
4,253,398
|
|
|
|
4,253
|
|
|
|
33,092
|
|
|
|
10,684
|
|
|
|
(111
|
)
|
|
|
(138
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
Common stock offering
|
|
|
387,000
|
|
|
|
387
|
|
|
|
7,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan
|
|
|
5,793
|
|
|
|
6
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared$.70 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,980
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
6,069
|
|
|
|
6
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of disqualifying dispositions
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives, net of
tax benefit of $(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
Reclassification adjustment for net loss
realized in net income, net of tax
benefit of $80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009
|
|
|
4,652,260
|
|
|
$
|
4,652
|
|
|
$
|
40,619
|
|
|
$
|
10,086
|
|
|
$
|
|
|
|
$
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY CONTINUED
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
Balances as of December 31, 2009
|
|
|
4,652,260
|
|
|
$
|
4,652
|
|
|
$
|
40,619
|
|
|
$
|
10,086
|
|
|
$
|
|
|
|
$
|
(138
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,781
|
|
|
|
|
|
|
|
|
|
Common stock offering
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan
|
|
|
6,521
|
|
|
|
7
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common dividends declared$.725
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,379
|
)
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
18,324
|
|
|
|
18
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of disqualifying
dispositions
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives,
net of tax benefit of $(183)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(276
|
)
|
|
|
|
|
Reclassification adjustment for
net loss realized in net income,
net of tax benefit of $58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2010
|
|
|
4,677,105
|
|
|
$
|
4,677
|
|
|
$
|
41,312
|
|
|
$
|
10,488
|
|
|
$
|
(189
|
)
|
|
$
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
50
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Net income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives
|
|
|
(459
|
)
|
|
|
(15
|
)
|
|
|
(175
|
)
|
Reclassification of net loss realized in net income
|
|
|
145
|
|
|
|
200
|
|
|
|
85
|
|
Income tax benefit (expense) relating to other
comprehensive (loss) income
|
|
|
125
|
|
|
|
(74
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(189
|
)
|
|
|
111
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,592
|
|
|
$
|
2,493
|
|
|
$
|
4,667
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
51
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,459
|
|
|
|
4,286
|
|
|
|
4,201
|
|
Amortization of original issue discount
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
Amortization of deferred investment tax
credits
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Provision for deferred income taxes
|
|
|
2,085
|
|
|
|
2,012
|
|
|
|
2,100
|
|
Equity component of allowance for funds used
during construction
|
|
|
(8
|
)
|
|
|
(65
|
)
|
|
|
(190
|
)
|
Undistributed loss in real estate partnership
|
|
|
7
|
|
|
|
4
|
|
|
|
6
|
|
Stock-based compensation expense
|
|
|
239
|
|
|
|
74
|
|
|
|
65
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
and unbilled revenue
|
|
|
(191
|
)
|
|
|
732
|
|
|
|
(421
|
)
|
(Increase) decrease in refundable income
taxes
|
|
|
(643
|
)
|
|
|
586
|
|
|
|
(972
|
)
|
(Increase) decrease in materials and supplies
|
|
|
(16
|
)
|
|
|
162
|
|
|
|
259
|
|
Increase in prepaid expenses
|
|
|
(137
|
)
|
|
|
(36
|
)
|
|
|
(223
|
)
|
Decrease (increase) in deferred charges and
other assets
|
|
|
286
|
|
|
|
1,829
|
|
|
|
(1,940
|
)
|
Increase (decrease) in accounts payable
|
|
|
868
|
|
|
|
(222
|
)
|
|
|
(1,841
|
)
|
(Decrease) increase in accrued interest
payable
|
|
|
(20
|
)
|
|
|
(83
|
)
|
|
|
190
|
|
Increase (decrease) in other
|
|
|
775
|
|
|
|
(1,494
|
)
|
|
|
2,152
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,464
|
|
|
|
10,146
|
|
|
|
8,086
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment,
including debt component of allowance for funds
used during construction
|
|
|
(8,507
|
)
|
|
|
(8,168
|
)
|
|
|
(14,688
|
)
|
Proceeds from sales of property, plant and
equipment
|
|
|
50
|
|
|
|
113
|
|
|
|
|
|
Increase in investment in real estate
partnership and deferred land costs
|
|
|
(30
|
)
|
|
|
(21
|
)
|
|
|
(23
|
)
|
Distributions in excess of earnings in
investment in real estate partnerships
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(8,487
|
)
|
|
$
|
(8,076
|
)
|
|
$
|
(14,297
|
)
|
|
|
|
|
|
|
|
|
|
|
52
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in line of credit, net
|
|
$
|
|
|
|
$
|
(1,465
|
)
|
|
$
|
1,465
|
|
Payments on long-term debt
|
|
|
(6,302
|
)
|
|
|
(5,309
|
)
|
|
|
(21,685
|
)
|
Contributions in aid of construction
|
|
|
259
|
|
|
|
41
|
|
|
|
118
|
|
Proceeds from long-term borrowings
|
|
|
6,833
|
|
|
|
687
|
|
|
|
21,780
|
|
Debt issuance costs
|
|
|
(54
|
)
|
|
|
(422
|
)
|
|
|
(889
|
)
|
Proceeds from issuance of common stock and
dividend reinvestment plan
|
|
|
479
|
|
|
|
7,852
|
|
|
|
281
|
|
Dividends paid
|
|
|
(3,379
|
)
|
|
|
(2,980
|
)
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,164
|
)
|
|
|
(1,596
|
)
|
|
|
(1,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
813
|
|
|
|
474
|
|
|
|
(7,939
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,570
|
|
|
|
1,096
|
|
|
|
9,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,383
|
|
|
$
|
1,570
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure on cash flow and non-cash items for the three years ended December 31,
2010, 2009 and 2008 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (refunded) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,156
|
|
|
$
|
3,530
|
|
|
$
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
746
|
|
|
$
|
(1,084
|
)
|
|
$
|
1,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions in aid of construction
|
|
$
|
680
|
|
|
$
|
346
|
|
|
$
|
943
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
53
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1Description of Business, Acquisition of Company and Summary of Significant Accounting
Policies
The terms we, our, our Company, and us refer, unless the context suggests otherwise,
to Pennichuck Corporation (the Company) 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).
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 33,800 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 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 the Settlement Agreement that was entered into contemporaneously with the Merger
Agreement, the Company and the City have agreed that the eminent domain proceeding between them
shall be dismissed in its entirety upon any termination of the Merger Agreement.
The merger is subject to approval by, (i) the holders of not less than two-thirds of our
outstanding shares of common stock and, (ii) the NHPUC. The Citys obligation to complete the
transaction is subject to (a) there being no approval conditions imposed by the NHPUC in approving
the merger 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.
The initial scheduling hearing of the NHPUC occurred on February 24, 2011. Final hearings on
the matter are scheduled for July 27 through July 29, 2011. We are unable to predict if, or when,
the closing will occur but we believe it is not likely to occur prior to the fourth quarter of
2011.
54
Summary of Significant Accounting Policies
:
(a) Basis of Presentation
The accompanying 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.
(c) Property, Plant and Equipment
Property, plant and equipment, which includes principally the water utility assets of our
Companys utility subsidiaries, is recorded at cost plus an allowance for funds used during
construction on major, long-term projects and includes property funded with contributions in aid of
construction. The provision for depreciation is computed on the straight-line method over the
estimated useful lives of the assets which range from 5 to 91 years. The average composite
depreciation rate was 2.5% in 2010 and 2009 and 2.6% in 2008. The components of property, plant
and equipment as of December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
|
|
|
|
|
|
|
|
|
(in
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility Property:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land rights
|
|
$
|
2,994
|
|
|
$
|
1,745
|
|
|
|
|
|
Source of supply
|
|
|
49,304
|
|
|
|
48,172
|
|
|
|
3475
|
|
Pumping & purification
|
|
|
28,072
|
|
|
|
27,617
|
|
|
|
1535
|
|
Transmission & distribution, including
services, meters and hydrants
|
|
|
109,817
|
|
|
|
104,664
|
|
|
|
4091
|
|
General and other equipment
|
|
|
9,496
|
|
|
|
9,029
|
|
|
|
775
|
|
Intangible plant
|
|
|
747
|
|
|
|
720
|
|
|
|
20
|
|
Construction work in progress
|
|
|
684
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total utility property
|
|
|
201,114
|
|
|
|
192,515
|
|
|
|
|
|
Total non-utility property
|
|
|
5
|
|
|
|
101
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant & equipment
|
|
|
201,119
|
|
|
|
192,616
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(42,323
|
)
|
|
|
(37,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
158,796
|
|
|
$
|
154,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance, repairs and minor improvements are charged to expense as incurred. Improvements
which significantly increase the value of property, plant and equipment are capitalized.
55
(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 in a money market fund consisting of
government-backed securities and a financial institution insured by the Federal Deposit Insurance
Corporation (FDIC). Occasionally, our cash balance with this financial institution may exceed
FDIC limits. 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.
(f) Accounts receivable
Accounts receivable are recorded at the invoiced amounts. The allowance for doubtful accounts
is our best estimate of the amount of probable credit losses in our existing accounts receivable,
and is determined based on historical write-off experience and the aging of account balances. We
review the allowance for doubtful accounts quarterly. Account balances are written off against the
allowance when it is probable the receivable will not be recovered.
(g) Unbilled Revenue
We read our customer meters on a monthly basis and record revenues based on meter reading
results. Information from the last meter reading date is used to estimate the value of unbilled
revenues through the end of the accounting period. Estimates of water utility revenues for water
delivered to customers but not yet billed are accrued at the end of each accounting period. Actual
results could differ from those estimates.
(h) Materials and Supplies
Inventory is stated at the lower of cost, using the average cost method, or market.
(i) Deferred Land Costs
Included in deferred land costs is our Companys original basis in its remaining undeveloped
landholdings and any land improvement costs, which are stated at the lower of cost or market. All
costs associated with real estate and land projects are capitalized and allocated to the project to
which the costs relate. Administrative labor and the related fringe benefit costs attributable to
the acquisition, active development and construction of land parcels are capitalized as Deferred
Land Costs. No labor and benefits were capitalized for the years ended December 31, 2010 and 2009.
56
(j) 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 4 to 25 years. Deferred charges
and other assets as of December 31, 2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Source development charges
|
|
$
|
932
|
|
|
$
|
729
|
|
|
|
525
|
|
Miscellaneous studies
|
|
|
681
|
|
|
|
860
|
|
|
|
425
|
|
Sarbanes-Oxley costs
|
|
|
244
|
|
|
|
440
|
|
|
|
5
|
|
Unrecovered pension and postretirement
benefits expense
|
|
|
3,960
|
|
|
|
3,867
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total regulatory assets
|
|
|
5,817
|
|
|
|
5,896
|
|
|
|
|
|
Franchise fees and other
|
|
|
7
|
|
|
|
25
|
|
|
|
|
|
Supplemental executive retirement plan asset
|
|
|
636
|
|
|
|
579
|
|
|
|
|
|
Deferred financing costs
|
|
|
4,042
|
|
|
|
4,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred charges and other assets
|
|
$
|
10,502
|
|
|
$
|
10,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We expect to recover the deferred pension and other
postretirement amounts consistent with the anticipated expense recognition of the pension and other postretirement costs.
|
|
(k)
|
|
Treasury Stock
|
Treasury stock held by our Company represents shares that were tendered by employees as
payment for existing outstanding options. Treasury stock received is recorded at its fair market
value when tendered.
(l) Contributions in Aid of Construction (CIAC)
Under construction contracts with real estate developers and others, our Companys utility
subsidiaries may receive non-refundable advances for the cost of installing new water mains. These
advances are recorded as CIAC. The utility subsidiaries also record to Plant and CIAC the fair
market value of developer installed mains and any excess of fair market value over the cost of
community water systems purchased from developers. The CIAC account is amortized over the life of
the property.
(m) Revenue
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 are based on rates approved by the NHPUC. Estimates of unbilled service revenues are
recorded in the period the services are provided. Provision is made in the financial
statements for estimated uncollectible accounts.
57
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. Revenue from unplanned additional work is 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.
(n) Investment in Joint Venture
Southwood uses the equity method of accounting for its investments in joint ventures in which
it does not have a controlling interest. Under this method, Southwood records its proportionate
share of earnings or losses which are included under Net (loss) earnings from investments
accounted for under the equity method with a corresponding increase or decrease in the carrying
value of the investment. The investment is reduced as cash distributions are received from the
joint ventures. See Note 7, Equity Investments in Unconsolidated Companies for further
discussion of Southwoods equity investments.
(o) Allowance for Funds Used During Construction
(AFUDC)
AFUDC represents the estimated debt and equity costs of capital necessary to finance the
construction of new regulated facilities. AFUDC consists of an interest component and an equity
component. AFUDC is capitalized as a component of property, plant and equipment and has been
reported separately in the consolidated statements of income. The AFUDC rate was 7.38% in 2010 and
8% in 2009 and 2008. The total amounts of AFUDC recorded for the years ended December 31, 2010,
2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (interest) component
|
|
$
|
8
|
|
|
$
|
84
|
|
|
$
|
263
|
|
Equity component
|
|
|
8
|
|
|
|
65
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
Total AFUDC
|
|
$
|
16
|
|
|
$
|
149
|
|
|
$
|
453
|
|
|
|
|
|
|
|
|
|
|
|
(p) Income Taxes
Income taxes are recorded using the accrual method and the provision for federal and state
income taxes is based on income reported in the consolidated financial statements, adjusted for
items not recognized for income tax purposes. Provisions for deferred income taxes are recognized
for accelerated depreciation and other temporary differences. A valuation allowance is provided to
offset any net deferred tax assets if, based upon available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. Investment tax credits
previously realized for income tax
purposes are amortized for financial statement purposes over the life of the property, giving
rise to the credit.
58
(q) 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 years
ended December 31, 2010, 2009 and 2008, dilutive potential common shares consisted of outstanding
stock options.
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 years ended December 31, 2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except share and per share data)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.81
|
|
|
$
|
0.56
|
|
|
$
|
1.11
|
|
Dilutive effect of unexercised stock options
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.80
|
|
|
$
|
0.55
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
outstanding
|
|
|
4,660,456
|
|
|
|
4,274,174
|
|
|
|
4,240,410
|
|
Dilutive effect of unexercised stock options
|
|
|
36,765
|
|
|
|
19,839
|
|
|
|
25,719
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
outstanding
|
|
|
4,697,221
|
|
|
|
4,294,013
|
|
|
|
4,266,129
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 31,
2010, 2009 and 2008 because their effect would have been antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options to purchase shares of common
stock excluded from the computation of diluted
earnings per share
|
|
|
|
|
|
|
34,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(r) Recently Issued Accounting Standards
We do not expect the adoption of any recently issued accounting pronouncements to have a
material impact on our financial condition or results of operations.
59
(s) Reclassifications
Certain Consolidated Balance Sheet amounts as of December 31, 2009 have been reclassified to
conform to the December 31, 2010 Consolidated Balance Sheet presentation. These reclassifications
had no effect on total current liabilities and relate to the reclassification of accrued wages and
payroll withholding.
Note 2Postretirement Benefit Plans
Pension Plan and Other Postretirement Benefits
We have a non-contributory, defined benefit pension plan (the DB Plan) that covers
substantially all employees. The benefits are formula-based, giving consideration to 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 postretirement 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 postretirement medical 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 postemployment 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.
Upon retirement, if a qualifying employee elects to receive medical benefits under one of our
OPEB plans, we pay his or her monthly premium, up to a maximum allowable benefit based on
eligibility and years of service. The current maximum monthly benefit is $285. Upon request, the
spouse of the covered former employee may also remain on our group medical plan provided that
persons entire monthly premium is reimbursed to us.
60
The following table sets forth the funded status of our DB Plan and our OPEB Plans as of
December 31, 2010 and 2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
|
|
|
OPEB Plans
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
10,465
|
|
|
$
|
9,675
|
|
|
$
|
2,348
|
|
|
$
|
2,408
|
|
Service cost
|
|
|
627
|
|
|
|
647
|
|
|
|
116
|
|
|
|
145
|
|
Interest cost
|
|
|
606
|
|
|
|
560
|
|
|
|
130
|
|
|
|
138
|
|
Actuarial loss/(gain)
|
|
|
680
|
|
|
|
(190
|
)
|
|
|
(70
|
)
|
|
|
(302
|
)
|
Benefits paid, excluding expenses
|
|
|
(227
|
)
|
|
|
(227
|
)
|
|
|
(42
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
12,151
|
|
|
$
|
10,465
|
|
|
$
|
2,482
|
|
|
$
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
6,434
|
|
|
$
|
5,074
|
|
|
$
|
651
|
|
|
$
|
558
|
|
Actual return on plan assets, net
|
|
|
807
|
|
|
|
913
|
|
|
|
83
|
|
|
|
93
|
|
Employer contribution
|
|
|
514
|
|
|
|
674
|
|
|
|
42
|
|
|
|
41
|
|
Benefits paid, excluding expenses
|
|
|
(227
|
)
|
|
|
(227
|
)
|
|
|
(42
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
7,528
|
|
|
$
|
6,434
|
|
|
$
|
734
|
|
|
$
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(4,623
|
)
|
|
$
|
(4,031
|
)
|
|
$
|
(1,748
|
)
|
|
$
|
(1,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance
sheets as of
December 31, 2010 and 2009 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(40
|
)
|
|
$
|
(41
|
)
|
Non-current liability
|
|
|
(4,623
|
)
|
|
|
(4,031
|
)
|
|
|
(1,708
|
)
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,623
|
)
|
|
$
|
(4,031
|
)
|
|
$
|
(1,748
|
)
|
|
$
|
(1,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in regulatory assets, for the years
ended December 31, 2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
|
|
|
OPEB Plans
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory asset balance, beginning of year
|
|
$
|
3,799
|
|
|
$
|
4,724
|
|
|
$
|
68
|
|
|
$
|
447
|
|
Net actuarial loss/(gain) incurred during the
year
|
|
|
367
|
|
|
|
(701
|
)
|
|
|
(106
|
)
|
|
|
(354
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
(22
|
)
|
Recognized net actuarial losses
|
|
|
(155
|
)
|
|
|
(224
|
)
|
|
|
9
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory asset/(liability) balance, end of year
|
|
$
|
4,011
|
|
|
$
|
3,799
|
|
|
$
|
(51
|
)
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Amounts recognized in regulatory assets for the DB and OPEB Plans that have not yet been
recognized as components of net periodic benefit cost of the following at December 31, 2010 and
2009, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
|
|
|
OPEB Plans
|
|
|
|
as of December 31,
|
|
|
as of December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
Net actuarial (gain)/loss
|
|
$
|
4,011
|
|
|
$
|
3,799
|
|
|
$
|
(251
|
)
|
|
$
|
(154
|
)
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory asset
|
|
$
|
4,011
|
|
|
$
|
3,799
|
|
|
|
(51
|
)
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The key assumptions used to value benefit obligations and calculate net periodic benefit
cost for our DB and OPEB Plans include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Discount rate for net periodic benefit cost,
beginning of year
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Discount rate for benefit obligations, end of
year
(a)
|
|
|
5.50
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets for the year
(net of investment expenses)
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
Rate of compensation increase, beginning of year
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Healthcare cost trend rate
(b)
|
|
|
11.00
|
%
|
|
|
11.50
|
%
|
|
|
12.00
|
%
|
|
|
|
(a)
|
|
an increase or decrease in the discount rate of 0.5%, would result in a change in the
funded status as of December 31, 2010, for the DB Plan and the OPEB Plans, of approximately $1.0 million and
$200,000, respectively
|
|
(b)
|
|
applicable only to the OPEB Plans
|
62
The components of net DB Plan costs and OPEB Plan costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
|
|
|
OPEB Plans
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost, benefits
earned during the period
|
|
$
|
627
|
|
|
$
|
647
|
|
|
$
|
625
|
|
|
$
|
116
|
|
|
$
|
145
|
|
|
$
|
129
|
|
Interest cost on projected
benefit obligation
|
|
|
606
|
|
|
|
560
|
|
|
|
497
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Interest cost on accumulated
postretirement and postemployment
benefit obligation
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
130
|
|
|
|
138
|
|
|
|
124
|
|
Expected return on plan assets
|
|
|
(493
|
)
|
|
|
(401
|
)
|
|
|
(464
|
)
|
|
|
(49
|
)
|
|
|
(42
|
)
|
|
|
(44
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
Recognized net actuarial loss
(gain)
|
|
|
155
|
|
|
|
224
|
|
|
|
123
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
895
|
|
|
$
|
1,030
|
|
|
$
|
782
|
|
|
$
|
210
|
|
|
$
|
266
|
|
|
$
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss and prior service cost for our DB Plan that will be
amortized in 2011 from the regulatory assets into net periodic benefit costs are $176,000 and $0,
respectively.
The estimated net actuarial gain and prior service cost for our OPEB Plans that will be
amortized in 2011 from the regulatory assets into net periodic benefit costs is $13,000 and
$22,000, respectively.
The projected benefit obligation, the accumulated benefit obligation and the fair value of
plan assets for the DB Plan as of December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
12,151
|
|
|
$
|
10,465
|
|
Accumulated benefit obligation
|
|
|
10,728
|
|
|
|
8,953
|
|
Fair value of plan assets
|
|
|
7,528
|
|
|
|
6,434
|
|
In establishing its investment policy, our Company has considered the fact that the DB Plan is
a major retirement vehicle for its employees and the basic goal underlying the establishment of the
policy is to provide that the assets of the Plan are invested in accordance with the asset
allocation range targets to achieve our expected return on Plan assets. Our Companys investment
strategy applies to its OPEB Plans as well as the DB Plan. Our expected long-term rate of return
on DB Plan and OPEB Plan assets is based on the Plans expected asset allocation, expected returns
on various classes of Plan assets as well as historical returns.
A one percent change in the assumed health care cost trend rate would not have had a material
effect on the Post-65 Plan cost or the accumulated Post-65 Plan benefit obligation in 2010.
63
The assets of our Post-65 Plan are held in two separate Voluntary Employee Beneficiary
Association (VEBA) trusts. We maintain our VEBA plan assets in directed trust accounts at a
commercial bank.
The investment strategy for our DB Plan and our OPEB Plans utilizes several different asset
classes with varying risk/return characteristics. The following table indicates the asset
allocation percentages of the fair value of the DB Plan and OPEB Plans assets for each major type
of plan asset as of December 31, 2010 and 2009, as well as the targeted allocation range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
|
|
OPEB Plans
|
|
|
|
|
|
|
|
|
|
|
Asset Allocation
|
|
|
|
|
|
|
|
|
|
Asset Allocation
|
|
|
2010
|
|
|
2009
|
|
|
Range
|
|
2010
|
|
|
2009
|
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
75
|
%
|
|
|
73
|
%
|
|
30% 90%
|
|
|
58
|
%
|
|
|
57
|
%
|
|
30% 90%
|
Fixed income
|
|
|
25
|
%
|
|
|
27
|
%
|
|
25% 65%
|
|
|
42
|
%
|
|
|
43
|
%
|
|
10% 40%
|
Cash and cash equivalents
|
|
|
0
|
%
|
|
|
0
|
%
|
|
0% 15%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
0% 15%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The DB Plan held 21,000 shares of Pennichuck Corporation common stock (PNNW) as of December
31, 2010 and 2009, which is included in Equities in the table above. The fair value of this stock
as of December 31, 2010 and 2009 was $575,000 and $444,000, respectively. Pennichuck Corporation
stock held in the Plan represents 7.6% and 6.9% of the total DB Plan assets as of December 31, 2010
and 2009, respectively.
Management uses its best judgment in estimating the fair value of its financial instruments.
However, there are inherent weaknesses in any estimation technique. Therefore, for substantially
all financial instruments, the fair value estimates herein are not necessarily indicative of the
amounts that we could have realized in a sales transaction for these instruments. The estimated
fair value amounts have been measured as of year end and have not been reevaluated or updated for
purposes of these financial statements subsequent to those respective dates.
Investments in PNNW common stock and mutual funds are stated at fair value by reference to
quoted market prices. Money market funds are valued utilizing the Net Asset Value per unit based
on the fair value of the underlying assets as determined by the directed trustee.
The DB Plan also holds assets under an immediate participation guarantee group annuity
contract with a Life Insurance Company. The assets under the contract are invested in pooled
separate accounts and in a general investment account. The pooled separate accounts are valued
based on net asset value per unit of participation in the fund and have no unfunded commitments or
significant redemption restrictions at year-end. The value of these units is determined by the
trustee based on the current market values of the underlying assets of the pooled separate
accounts. Therefore, the value of the pooled separate accounts is deemed to be at estimated fair
value. A detailed description of each category of underlying assets within the pooled separate
accounts is as follows as of December 31, 2010 and 2009:
|
|
|
Growth funds accounted for $2.3 million, or 46%, of the fair value of the pooled
separate accounts at December 31, 2010 and $2.0 million, or 48%, of the fair value of the
pooled separate
accounts at December 31, 2009. Growth funds objectives are for capital appreciation and
current income. These investment accounts invest in mutual funds which have a readily available
market price.
|
64
|
|
|
Fixed income funds accounted for $811,000, or 16%, of the fair value of the pooled
separate accounts at December 31, 2010 and $613,000, or 14%, of the fair value of the
pooled separate accounts at December 31, 2009. Fixed income funds objectives are for
long-term rates of return consistent with preserving capital. These investment accounts
invest in mutual funds which have a readily available market price. One of the funds in
this category, SSGA Pass Bond H, invests in bond funds.
|
|
|
|
Value funds accounted for $2.0 million, or 38%, of the fair value of the pooled separate
accounts at December 31, 2010 and $1.6 million, or 38%, of the fair value of the pooled
separate accounts at December 31, 2009. Value funds objectives are for total return and
capital appreciation. These investment accounts invest in mutual funds which have a
readily available market price.
|
The general investment account is not actively traded and significant other observable inputs
are not available. The fair value of the general investment account is calculated by discounting
the related cash flows based on current yields of similar instruments with comparable durations.
The methods described above may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the Plans management
believes the valuation methodologies are appropriate and consistent with other market participants,
the use of different methodologies or assumptions to determine the fair value of certain
investments could result in a different fair value measurement at the reporting date.
We use a fair value hierarchy which prioritizes the inputs to valuation methods used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).
The fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy used
as of December 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Totals
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled separate accounts
|
|
$
|
5,084
|
|
|
$
|
|
|
|
$
|
5,084
|
|
|
$
|
|
|
PNNW common stock
|
|
|
575
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General investment account
|
|
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
1,850
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pension Plan
|
|
$
|
7,528
|
|
|
$
|
575
|
|
|
$
|
5,103
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB Plans
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanced/hybrid funds
|
|
$
|
162
|
|
|
$
|
162
|
|
|
$
|
|
|
|
$
|
|
|
U.S. equity securities funds
|
|
|
177
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
International equity funds
|
|
|
85
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
Fixed income funds
|
|
|
309
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Postretirement Plans
|
|
$
|
734
|
|
|
$
|
733
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
8,262
|
|
|
$
|
1,308
|
|
|
$
|
5,104
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The fair value of DB Plan and OPEB Plan assets by levels within the fair value hierarchy used
as of December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Totals
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DB Plan
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled separate accounts
|
|
$
|
4,254
|
|
|
$
|
|
|
|
$
|
4,254
|
|
|
$
|
|
|
PNNW common stock
|
|
|
444
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General investment account
|
|
|
1,733
|
|
|
|
|
|
|
|
|
|
|
|
1,733
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Pension Plan
|
|
$
|
6,434
|
|
|
$
|
444
|
|
|
$
|
4,257
|
|
|
$
|
1,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB Plans
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanced/hybrid funds
|
|
$
|
143
|
|
|
$
|
143
|
|
|
$
|
|
|
|
$
|
|
|
U.S. equity securities funds
|
|
|
152
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
International equity funds
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
Fixed income funds
|
|
|
281
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Postretirement Plans
|
|
$
|
651
|
|
|
$
|
651
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,085
|
|
|
$
|
1,095
|
|
|
$
|
4,257
|
|
|
$
|
1,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
66
The following table presents a year-end reconciliation of DB Plan assets measured and
recorded at fair value on a recurring basis, using significant unobservable inputs (level 3):
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,733
|
|
|
$
|
1,849
|
|
Plan transfers
|
|
|
161
|
|
|
|
58
|
|
Benefits paid
|
|
|
(227
|
)
|
|
|
(227
|
)
|
Return on plan assets (net of investment expenses)
|
|
|
183
|
|
|
|
53
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
1,850
|
|
|
$
|
1,733
|
|
|
|
|
|
|
|
|
In order to satisfy the minimum funding requirements of the Employee Retirement Income
Security Act of 1974, applicable to defined benefit pension plans, we anticipate that we will
contribute approximately $1.1 million to the Plan in 2011.
The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid in the years indicated:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
DB Plan
|
|
|
OPEB Plans
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
361
|
|
|
$
|
67
|
|
2012
|
|
|
387
|
|
|
|
68
|
|
2013
|
|
|
416
|
|
|
|
80
|
|
2014
|
|
|
479
|
|
|
|
87
|
|
2015
|
|
|
536
|
|
|
|
93
|
|
20162020
|
|
|
4,095
|
|
|
|
683
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,274
|
|
|
$
|
1,078
|
|
|
|
|
|
|
|
|
Because we are subject to regulation in the state in which we operate, we are required to
maintain our accounts in accordance with the regulatory authoritys rules and regulations. In
those instances, we follow the guidance of ASC 980 (Regulated Operations). Based on prior
regulatory practice, we recorded underfunded DB Plan and OPEB Plan obligations as a regulatory
asset and we expect to recover those costs in rates charged to customers.
Defined Contribution Plan
In addition to the defined benefit plan, we have a defined contribution plan covering
substantially all employees. Under this plan, our Company matches 100% of the first 3% of each
participating employees salary contributed to the plan. The matching employers contributions,
recorded as operating expenses, were approximately $178,000, $184,000 and $172,000 for 2010, 2009
and 2008, respectively.
67
Note 3Stock-based Compensation Plans
Share-based payments to employees from grants of stock options are recognized as compensation
expense in the 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 consolidated statements of income for the years
ended December 31, 2010, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
239
|
|
|
$
|
74
|
|
|
$
|
65
|
|
Income taxes
|
|
|
(96
|
)
|
|
|
(30
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation, net of tax
|
|
$
|
143
|
|
|
$
|
44
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
The total compensation cost related to non-vested stock option awards was approximately
$99,000, net of tax as of December 31, 2010. These costs are expected to be recognized during 2011
through 2013.
Our Company has periodically granted its officers and key employees incentive and
non-qualified stock options on a discretionary basis pursuant to two stock option plans, the 1995
Stock Option Plan (the 1995 Plan) and the Amended and Restated 2000 Stock Option Plan. On May 6,
2009, our shareholders approved an amendment to and restatement of the Amended and Restated 2000
Stock Option Plan to also allow for the issuance of restricted stock, but did so without
increasing the number of shares available for awards under the Plan. As amended and restated, the
plan has been renamed the 2009 Equity Incentive Plan (the 2009 Plan).
The 1995 Plan permits the granting of both incentive stock options and non-qualified stock
options to employees at a price per share equivalent to the market value at the date of the grant.
Options become exercisable immediately following the grant and expire ten years from the date of
grant. As of December 31, 2010 and 2009, no further shares were available for grant under the 1995
Plan.
The 2009 Plan provides for the granting of incentive stock options to employees and
non-qualified stock options to employees and directors at a price per share equivalent to the
market value at the date of the grant. Option grants have varying vesting schedules and expire ten
years from the date of grant. The 2009 Plan also authorizes the granting of restricted stock
awards to employees and directors. There are 500,000 shares of common stock subject to issuance
under the 2009 Plan. As of December 31, 2010 and 2009, 111,934 and 183,834 shares, respectively,
were available for future grant under the 2009 Plan. During the term of the Merger Agreement, we
are prohibited from issuing any new incentive stock options or non-qualified stock options under
the 2009 Plan.
68
The following table summarizes the activity under the stock option plans for the three-year
period ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
|
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Price per Share
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2007
|
|
|
224,015
|
|
|
$
|
6.0921.24
|
|
|
$
|
19.13
|
|
Granted
|
|
|
34,200
|
|
|
|
22.2222.51
|
|
|
|
22.36
|
|
Exercised
|
|
|
(56,371
|
)
|
|
|
11.8121.24
|
|
|
|
18.51
|
|
Canceled
|
|
|
(333
|
)
|
|
|
7.13
|
|
|
|
7.13
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2008
|
|
|
201,511
|
|
|
|
11.8122.51
|
|
|
|
19.88
|
|
Granted
|
|
|
38,000
|
|
|
|
17.64
|
|
|
|
17.64
|
|
Exercised
|
|
|
(16,016
|
)
|
|
|
15.2921.24
|
|
|
|
18.70
|
|
Canceled
|
|
|
(804
|
)
|
|
|
11.81
|
|
|
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2009
|
|
|
222,691
|
|
|
|
15.2922.51
|
|
|
|
19.61
|
|
Granted
|
|
|
71,900
|
|
|
|
20.1121.14
|
|
|
|
20.54
|
|
Exercised
|
|
|
(26,182
|
)
|
|
|
15.2922.22
|
|
|
|
19.80
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2010
|
|
|
268,409
|
|
|
$
|
15.2922.51
|
|
|
$
|
19.84
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2008
|
|
|
167,311
|
|
|
$
|
11.8121.24
|
|
|
$
|
19.37
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
161,891
|
|
|
$
|
15.2922.51
|
|
|
$
|
19.69
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2010
|
|
|
189,778
|
|
|
$
|
15.2922.51
|
|
|
$
|
19.92
|
|
|
|
|
|
|
|
|
|
|
|
69
The following table summarizes information about options outstanding and exercisable as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise
|
|
|
As of
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
Price
|
|
|
12/31/10
|
|
|
(in years)
|
|
|
Per Share
|
|
|
As of 12/31/10
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.29
|
|
|
|
6,399
|
|
|
|
.03
|
|
|
$
|
15.29
|
|
|
|
6,399
|
|
|
$
|
15.29
|
|
|
20.25
|
|
|
|
13,467
|
|
|
|
1.07
|
|
|
|
20.25
|
|
|
|
13,467
|
|
|
|
20.25
|
|
|
20.14
|
|
|
|
20,935
|
|
|
|
2.76
|
|
|
|
20.14
|
|
|
|
20,935
|
|
|
|
20.14
|
|
|
21.24
|
|
|
|
21,468
|
|
|
|
3.07
|
|
|
|
21.24
|
|
|
|
21,468
|
|
|
|
21.24
|
|
|
19.67
|
|
|
|
19,309
|
|
|
|
4.08
|
|
|
|
19.67
|
|
|
|
19,309
|
|
|
|
19.67
|
|
|
19.51
|
|
|
|
17,400
|
|
|
|
4.94
|
|
|
|
19.51
|
|
|
|
17,400
|
|
|
|
19.51
|
|
|
19.00
|
|
|
|
40,000
|
|
|
|
5.64
|
|
|
|
19.00
|
|
|
|
40,000
|
|
|
|
19.00
|
|
|
22.22
|
|
|
|
6,000
|
|
|
|
7.52
|
|
|
|
22.22
|
|
|
|
|
|
|
|
22.22
|
|
|
22.51
|
|
|
|
16,200
|
|
|
|
7.65
|
|
|
|
22.51
|
|
|
|
10,800
|
|
|
|
22.51
|
|
|
17.64
|
|
|
|
35,331
|
|
|
|
8.08
|
|
|
|
17.64
|
|
|
|
10,000
|
|
|
|
17.64
|
|
|
20.11
|
|
|
|
41,900
|
|
|
|
9.08
|
|
|
|
20.11
|
|
|
|
|
|
|
|
20.11
|
|
|
21.14
|
|
|
|
30,000
|
|
|
|
9.24
|
|
|
|
21.14
|
|
|
|
30,000
|
|
|
|
21.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,409
|
|
|
|
|
|
|
|
|
|
|
|
189,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value per share of options granted during 2010, 2009 and 2008 was
$3.69, $2.75 and $3.63, respectively. The fair value of each option grant was estimated on the
date of grant using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.58 2.81
|
%
|
|
|
1.75
|
%
|
|
|
2.77
|
%
|
Expected dividend yield
|
|
|
3.41 3.48
|
%
|
|
|
3.97
|
%
|
|
|
2.95
|
%
|
Expected lives
|
|
|
5.41 5.45
|
years
|
|
|
7
|
years
|
|
|
10
|
years
|
Expected volatility
|
|
|
25.37 25.41
|
%
|
|
|
25.18
|
%
|
|
|
18.10
|
%
|
Note 4Commitments 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, on November 11, 2010, we entered
into a definitive merger agreement (the Merger Agreement) with the City pursuant to which the
City will,
subject to a number of conditions precedent, purchase all the outstanding common stock and
common
stock equivalents of Pennichuck Corporation for $29.00 per share. Pursuant to the terms of
the Settlement Agreement, 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.
70
History of the City of Nashuas Eminent Domain Proceedings and the Merger Agreement
We entered into an agreement in April 2002 to be acquired by merger with Aqua America, Inc.
(formerly Philadelphia Suburban Corporation). The merger was subject to several conditions,
including approval by our shareholders and approval by the NHPUC. In February 2003, before we
submitted the merger to our shareholders, we and Aqua America agreed to abandon the proposed
transaction because of actions taken by the City to acquire our assets by eminent domain.
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 the
City and others. In January 2003, the City of Nashua residents approved the referendum.
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 pay
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 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 and its July 25, 2008
order became effective.
71
Separately, under RSA 38:13, the City has 90 days from the date of the final determination of
the price to be paid for the assets of Pennichuck Water to decide whether or not to issue the debt
necessary to fund the taking of the Pennichuck Water assets upon the terms set forth in the NHPUCs
July 25, 2008 order. On June 30, 2010, our Company and the City jointly filed a motion with the
NHPUC requesting a scheduling order for the purpose of establishing a process by which the eminent
domain valuation of the plant and property of Pennichuck Water would be updated and to make a final
determination of the price to be paid for such property and equipment. The Company and the City
agreed that the final valuation
should be determined by adjusting the preliminary $203 million purchase price set forth in the
NHPUCs Order by an amount equal to the additions and retirements and accumulated depreciation
reserves with respect to assets placed in service, or retired from service, after December 31,
2008, consistent with the asset updating approach used by the NHPUC. In the joint motion, the
Company and the City indicated that they remained interested in reaching a negotiated resolution of
the proceeding, which could include a possible sale of the stock of the Company to the City and
they took the position that in the case of a the negotiated transaction submitted to the NHPUC the
price agreed to would constitute the final determination of price. A final determination of the
price triggers a 90 day statutory period, established pursuant to RSA 38:13, for the City to decide
whether or not to issue the debt necessary to fund the taking of the Pennichuck Water assets.
On November 11, 2010, the City and the Company signed 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 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 price and the Merger Agreement and authorize the related financing.
The merger is subject to approval by the holders of not less than two-thirds of our
outstanding shares of common stock and also regulatory approval by the NHPUC. The Citys
obligation to complete the transaction is subject to there being no burdensome approval conditions
imposed by the NHPUC that would materially adversely affect the Citys expected economic benefits
from the transaction as well the Citys ability to obtain appropriate financing after all the
conditions precedent (including those specified above and other customary closing conditions) have
been met.
The initial scheduling hearing of the NHPUC occurred on February 24, 2011. Final hearings on
the matter are scheduled for July 27 through July 29, 2011. We are unable to predict if, or when,
the closing will occur but we believe it is not likely to occur prior to the fourth quarter of
2011.
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 New Hampshire RSA Chapter 38 to pursue eminent domain.
72
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 New Hampshire RSA Chapter 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.
Operating Leases
We lease our corporate office space as well as certain office equipment under operating lease
agreements. Total rent expense was approximately $346,000, $327,000 and $258,000 for the years
ended December 31, 2010, 2009 and 2008, respectively.
Our remaining lease commitments for our corporate office space and leased equipment as of
December 31, 2010 were as follows:
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
|
|
|
|
2011
|
|
$
|
320
|
|
2012
|
|
|
303
|
|
2013
|
|
|
170
|
|
2014
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
793
|
|
|
|
|
|
73
Note 5Business Segment Reporting
Our operating activities are currently grouped into the following two primary business
segments.
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.
In 2009, we determined that our real estate operations conducted through Southwood should no
longer be considered a reportable business segment due to the sale and dissolution of substantially
all of Southwoods joint ventures and the expectation of limited real estate activities for the
foreseeable future. Beginning in 2009, the line titled Other, which previously included
primarily parent company activity, including eminent domain-related expenses, now also includes the
activities of Southwood. Prior to 2009, Southwoods activities were considered a reportable
segment and were reported on the line titled Real estate operations. The line titled Other is
not a reportable segment and is shown only to reconcile to the total amounts shown in our
Consolidated Financial Statements.
The following table presents information about our primary business segments as of and for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
34,022
|
|
|
$
|
29,993
|
|
|
$
|
28,303
|
|
Water management services
|
|
|
2,461
|
|
|
|
2,770
|
|
|
|
2,647
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
Other
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
36,492
|
|
|
$
|
32,772
|
|
|
$
|
30,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method net (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Water management services
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,390
|
|
Other
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity method net (loss) earnings
|
|
$
|
(7
|
)
|
|
$
|
(4
|
)
|
|
$
|
3,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
16
|
|
Water management services
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
3,361
|
|
|
$
|
3,578
|
|
|
$
|
3,617
|
|
Water management services
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Other
|
|
|
8
|
|
|
|
80
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
3,369
|
|
|
$
|
3,658
|
|
|
$
|
3,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
2,517
|
|
|
$
|
1,665
|
|
|
$
|
1,597
|
|
Water management services
|
|
|
82
|
|
|
|
133
|
|
|
|
148
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
1,141
|
|
Other
|
|
|
(200
|
)
|
|
|
(235
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
2,399
|
|
|
$
|
1,563
|
|
|
$
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
3,987
|
|
|
$
|
2,484
|
|
|
$
|
2,521
|
|
Water management services
|
|
|
125
|
|
|
|
191
|
|
|
|
224
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2,219
|
|
Other
|
|
|
(331
|
)
|
|
|
(293
|
)
|
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
Total net income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated parent expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
919
|
|
|
$
|
926
|
|
|
$
|
941
|
|
Water management services
|
|
|
33
|
|
|
|
42
|
|
|
|
43
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8
|
|
Other
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated parent expenses
|
|
$
|
959
|
|
|
$
|
975
|
|
|
$
|
992
|
|
|
|
|
|
|
|
|
|
|
|
The operating revenues within each business segment are sales to unaffiliated customers.
Expenses allocated by the parent company to its subsidiaries are calculated based primarily on a
ratio of each subsidiarys revenues, assets, customer base and net plant to the consolidated
amounts for each metric.
All of the employees of the consolidated group are employees of Pennichuck Water, which in
turn allocates a portion of its labor and other direct expenses and general and administrative
expenses to our Companys other subsidiaries. This intercompany allocation reflects Pennichuck
Waters estimated costs that are associated with conducting the activities within our Companys
subsidiaries. The allocation of Pennichuck Water costs is based on, among other things, time
records for direct labor, customer service activity and accounting transaction activity.
Within the regulated water utility business segment, one customer accounted for approximately
8.0%, 8.5% and 8.4% of water utility revenues in 2010, 2009 and 2008, respectively. During 2010,
2009 and 2008, the regulated water utility segment recorded approximately $2.7 million, $2.6
million and $2.4 million, respectively, in water revenues which were derived from fire protection
and other billings to this customer. As of December 31, 2010, 2009 and 2008, this customer
accounted for approximately 9.9%, 8.7% and 8.3% of total accounts receivable, respectively.
75
The following table presents information about our two primary business segments as of and for
the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
176,098
|
|
|
$
|
171,073
|
|
|
$
|
165,280
|
|
Water management services
|
|
|
127
|
|
|
|
319
|
|
|
|
159
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2,394
|
|
Other
|
|
|
5,376
|
|
|
|
6,213
|
|
|
|
7,121
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
181,601
|
|
|
$
|
177,605
|
|
|
$
|
174,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
8,499
|
|
|
$
|
8,084
|
|
|
$
|
14,420
|
|
Water management services
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchases of property, plant and equipment
|
|
$
|
8,499
|
|
|
$
|
8,084
|
|
|
$
|
14,425
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated water utility operations
|
|
$
|
4,446
|
|
|
$
|
4,262
|
|
|
$
|
4,171
|
|
Water management services
|
|
|
5
|
|
|
|
9
|
|
|
|
12
|
|
Real estate operations
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
Other
|
|
|
8
|
|
|
|
15
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense
|
|
$
|
4,459
|
|
|
$
|
4,286
|
|
|
$
|
4,201
|
|
|
|
|
|
|
|
|
|
|
|
Note 6Financial Measurement and Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of its financial instruments.
However, there are inherent weaknesses in any estimation technique. Therefore, for substantially
all financial instruments, the fair value estimates herein are not necessarily indicative of the
amounts that we could have realized in a sales transaction for these instruments. The estimated
fair value amounts have been measured as of their respective year ends and have not been
reevaluated or updated for purposes of these financial statements subsequent to those respective
dates.
We use a fair value hierarchy which prioritizes the inputs to valuation methods used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as
follows:
Level 1: Based on quoted prices in active markets for identical assets.
Level 2: Based on significant observable inputs.
Level 3: Based on significant unobservable inputs.
An asset or liabilitys level within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
76
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 December 31, 2010 and 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(314
|
)
|
|
$
|
|
|
|
$
|
(314
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying value of certain financial instruments included in the accompanying
consolidated balance sheet, along with the related fair value, as of December 31, 2010 and 2009 was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(in thousands)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
(60,719
|
)
|
|
$
|
(55,349
|
)
|
|
$
|
(60,176
|
)
|
|
$
|
(55,794
|
)
|
Interest rate swap liability
|
|
|
(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, which was
entered into in the first quarter of 2010, represents the estimated cost to terminate this
agreement as of December 31, 2010 based upon the then-current interest rates and the related credit
risk.
The carrying values of our cash and cash equivalents, line of credit and accounts receivable
approximate their fair values because of their short maturity dates.
Note 7Equity Investments in Unconsolidated Companies
As of December 31, 2010 and 2009, 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 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 (Stabile), 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.
77
Until December 2008, Southwood also held a 50 percent ownership interest in three other
limited liability companies known as HECOP I, HECOP II and HECOP III. All, or most, of the
remaining ownership interest in each of these companies was held by Stabile. Net (loss) earnings from
investments accounted for under the equity method for the year ended December 31, 2008 included a
non-recurring, non-operating, after state tax gain of approximately $3.4 million ($2.3 million
after federal income taxes) from the January 2008 sale of the three commercial real estate
properties that were owned by HECOPs I III. The land and office buildings sold comprised
substantially all of the assets of HECOPs I III. Consequently, these three entities were
dissolved in December 2008. For the year ended December 31, 2008, cash distributions received from
HECOPs I III totaled $3.8 million.
Southwood uses the equity method of accounting for its investments in joint ventures and
accordingly, its investment is adjusted for its share of earnings or losses and for any
distributions or dividends received from the joint ventures. For the years ended December 31,
2010, 2009 and 2008, Southwoods share of earnings or losses from its investments in joint ventures
was approximately $(7,000), $(4,000) and $3.4 million, respectively. Southwoods share of earnings
or losses are included under Net (loss) earnings from investments accounted for under the equity
method in the accompanying consolidated statements of income.
Note 8Income Taxes
The components of the federal and state income tax provision as of December 31, 2010, 2009 and
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,937
|
|
|
$
|
1,190
|
|
|
$
|
2,427
|
|
State
|
|
|
495
|
|
|
|
406
|
|
|
|
349
|
|
Amortization of investment tax credits
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,399
|
|
|
$
|
1,563
|
|
|
$
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
661
|
|
|
$
|
161
|
|
|
$
|
698
|
|
Deferred
|
|
|
1,738
|
|
|
|
1,402
|
|
|
|
2,045
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,399
|
|
|
$
|
1,563
|
|
|
$
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation between the statutory federal income tax rate and the
effective income tax rate for 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State tax rate, net of federal benefit
|
|
|
5.3
|
%
|
|
|
6.8
|
%
|
|
|
3.1
|
%
|
Permanent differences
|
|
|
0.1
|
%
|
|
|
|
|
|
|
0.1
|
%
|
Amortization of investment tax credits
|
|
|
(0.6
|
)%
|
|
|
(0.9
|
)%
|
|
|
(0.5
|
)%
|
Other
|
|
|
|
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
38.8
|
%
|
|
|
39.6
|
%
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
78
The State of New Hampshire income tax liability on income attributable to our Companys
joint ventures is imposed at the limited liability company level, and not at the Pennichuck
Corporation level (in contrast to federal income taxes). Therefore, State of New Hampshire income
taxes in the amount of approximately $-0-, $-0- and $217,000 were reflected in 2010, 2009 and 2008,
respectively, under Net (loss) earnings from investments accounted for under the equity method in
the accompanying consolidated statements of income.
The temporary items that give rise to the net deferred tax liability as of December 31, 2010
and 2009 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Property-related, net
|
|
$
|
22,021
|
|
|
$
|
19,733
|
|
Pension deferred asset
|
|
|
1,589
|
|
|
|
1,505
|
|
Other
|
|
|
1,116
|
|
|
|
878
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
24,726
|
|
|
|
22,116
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Pension accrued liability
|
|
|
1,831
|
|
|
|
1,597
|
|
Federal net operating loss carryforward
|
|
|
862
|
|
|
|
1,555
|
|
Alternative minimum tax credit
|
|
|
374
|
|
|
|
374
|
|
NH Business Enterprise Tax credits
|
|
|
161
|
|
|
|
360
|
|
Other
|
|
|
2,318
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,546
|
|
|
|
4,895
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
|
19,180
|
|
|
|
17,221
|
|
Less current deferred tax asset
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
Net non-current deferred tax liability
|
|
$
|
19,180
|
|
|
$
|
18,776
|
|
|
|
|
|
|
|
|
We had a federal net operating loss in 2009 in the amount of approximately $4.1 million. The
net operating loss, which can be carried forward until the year 2029, is expected to be partially
utilized in 2010 in the amount of $1.6 million with the balance of $2.5 million carried forward to
2011. The benefit of the net operating loss carried forward is approximately $862,000 and is
included in Deferred Income Taxes in the Consolidated Balance Sheet as of December 31, 2010.
As of December 31, 2010, we estimated approximately $374,000 of cumulative federal alternative
minimum tax credits that may be carried forward indefinitely as a credit against our regular tax
liability.
79
As of December 31, 2010, we had New Hampshire Business Enterprise Tax (NHBET) credits as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of
|
|
Original
|
|
|
Remaining
|
|
|
Year of
|
|
Origination
|
|
Amount
|
|
|
Amount
|
|
|
Expiration
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
104
|
|
|
$
|
54
|
|
|
|
2014
|
|
2010
|
|
|
107
|
|
|
|
107
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
211
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We anticipate that we will fully utilize our remaining NHBET credits before they expire and,
therefore, we have not recorded a valuation allowance.
Investment tax credits resulting from utility plant additions are deferred and amortized. The
unamortized investment tax credits are being amortized through the year 2033.
We had a regulatory liability related to income taxes of approximately $890,000 and $839,000
as of December 31, 2010 and 2009, respectively. This represents the amount of deferred taxes
recorded at rates higher than currently enacted rates and the impact of deferred investment tax
credits on future revenue.
We made a review of our portfolio of uncertain tax positions. In this regard, an uncertain
tax position represents our expected treatment of a tax position taken in a filed tax return, or
planned to be taken in a future tax return, that has not been reflected in measuring income tax
expense for financial reporting purposes. As a result of this review, we determined that we had no
material uncertain tax positions.
We file income tax returns in the U.S. federal jurisdiction, the State of New Hampshire and
the Commonwealth of Massachusetts. Our 2007 through 2009 tax years remain subject to examination
by the Internal Revenue Service and state jurisdictions. Recently, we were notified that our 2009
Federal Income Tax Return will be examined by the Internal Revenue Service.
Our practice is to recognize interest and/or penalties related to income tax matters in other
income (expense). We recorded such interest and/or penalties during the years ended December 31,
2010, 2009 and 2008 in the amounts of approximately $0, $3,000 and $4,000, respectively.
80
Note 9Debt
Long-term debt as of December 31, 2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Unsecured senior notes payable due to an insurance company:
|
|
|
|
|
|
|
|
|
7.40%, due March 1, 2021
|
|
$
|
6,400
|
|
|
$
|
6,800
|
|
5.00%, due March 4, 2010
|
|
|
|
|
|
|
5,000
|
|
Unsecured Business Finance Authority:
|
|
|
|
|
|
|
|
|
Revenue Bond (2005 Series BC-4), 5.375%, due October 1, 2035
|
|
|
12,290
|
|
|
|
12,500
|
|
Revenue Bond (2005 Series BC-3), 5.00%, due April 1, 2018
|
|
|
7,500
|
|
|
|
7,500
|
|
Revenue Bond (2005 Series A), 4.70%, due October 1, 2035
|
|
|
12,125
|
|
|
|
12,125
|
|
Revenue Bond (Series 2005A), 4.70%, due January 1, 2035
|
|
|
1,810
|
|
|
|
1,810
|
|
Revenue Bond (Series 2005B), 4.60%, due January 1, 2030
|
|
|
2,325
|
|
|
|
2,335
|
|
Revenue Bond (Series 2005C), 4.50%, due January 1, 2025
|
|
|
1,180
|
|
|
|
1,205
|
|
Revenue Bond (Series 2005D), 4.50%, due January 1, 2025
|
|
|
1,000
|
|
|
|
1,075
|
|
Revenue Bond, 1997, 6.30%, due May 1, 2022
|
|
|
3,400
|
|
|
|
3,600
|
|
Secured notes payable to bank, floating-rate, due March 1, 2030
|
|
|
4,384
|
|
|
|
|
|
Unsecured New Hampshire State Revolving Fund (SRF) notes
(1)
|
|
|
8,605
|
|
|
|
6,538
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
61,019
|
|
|
|
60,488
|
|
Less current portion
|
|
|
(1,053
|
)
|
|
|
(5,897
|
)
|
Less original issue discount
|
|
|
(300
|
)
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
59,666
|
|
|
$
|
54,279
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
SRF notes are due through 2031 at interest rates ranging from 1% to
4.488%. These notes are payable in 120 to 240 consecutive monthly installments of
principal and interest. The 1% rate applies to construction projects still in process
until the earlier of (i) the date of substantial completion of the improvements, or (ii)
various dates specified in the note (such earlier date being the interest rate change
date). Commencing on the interest rate change date, the interest rate changes to the
lower of (i) the rate as stated in the note or (ii) 80% of the established 11 General
Obligations Bond Index published during the specified time period before the interest rate
change date.
|
The aggregate principal payment requirements subsequent to December 31, 2010 are as follows:
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
|
|
|
|
2011
|
|
$
|
1,053
|
|
2012
|
|
|
1,105
|
|
2013
|
|
|
1,107
|
|
2014
|
|
|
1,121
|
|
2015
|
|
|
1,153
|
|
2016 and thereafter
|
|
|
55,480
|
|
|
|
|
|
Total
|
|
$
|
61,019
|
|
|
|
|
|
Certain covenants (as described below) in Pennichuck Waters and Pennichuck Easts loan
agreements and in our Bank of America revolving credit loan agreement effectively restrict our
ability to upstream dividends from Pennichuck Water and Pennichuck East, as well as pay dividends
to our shareholders.
81
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 December 31, 2010 and 2009, Pennichuck Waters net worth was $53.1 million and
$52.6 million, respectively.
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 December 31, 2010 and 2009, Pennichuck Easts net worth was $7.0 million and $5.6 million,
respectively.
Our Bank of America revolving credit loan agreement contains a covenant that requires us to
maintain a minimum consolidated tangible net worth of $46.0 million ($37.0 million plus equity
proceeds subsequent to December 2007). As of December 31, 2010 and 2009, our consolidated tangible
net worth was $56.2 million and $55.2 million, respectively.
Our Company has available a revolving credit facility with a bank. Borrowings under the
revolving credit facility bear interest at a variable rate equal to the 30-day LIBOR rate plus a
range of 1.2% to 1.7% based on financial ratios. The revolving credit facility matures on June 30,
2011 and is subject to renewal and extension by the bank at that time.
Our short-term borrowing activity for the years ended December 31, 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Established line at year end
|
|
$
|
16,000
|
|
|
$
|
16,000
|
|
Maximum amount outstanding during year
|
|
$
|
645
|
|
|
$
|
3,765
|
|
Average amount outstanding during year
|
|
$
|
16
|
|
|
$
|
2,058
|
|
Amount outstanding at year end
|
|
$
|
|
|
|
$
|
|
|
Weighted average interest rate during year
|
|
|
3.25
|
%
|
|
|
3.19
|
%
|
Interest rate at year end
|
|
|
3.25
|
%
|
|
|
3.25
|
%
|
In addition, Pennichuck East has a $1.5 million revolving credit facility with a bank which
was established on February 9, 2010. Borrowings under this facility are subject to variable
interest rates equal to either a quoted rate at the time of any borrowings or LIBOR rates plus
1.75%, based upon the timeframe for which monies are borrowed, ranging from 30 days to nine months
in duration. This facility matures on February 9, 2012, and no borrowings have been made against
this facility during its existence.
As of December 31, 2010, we had a $4.4 million interest rate swap which qualifies as a
derivative. This financial derivative is designated as a cash flow hedge. This financial
instrument is used to mitigate interest rate risk associated with our outstanding $4.4 million loan
which has a floating interest rate based on the three-month London Interbank Offered Rate (LIBOR)
plus 1.75% as of December 31, 2010. The combined effect of the LIBOR-based borrowing formula and
the swap produces an all-in fixed borrowing cost equal to 5.95%. The fair value of the financial
derivative, as of December 31, 2010, included in our consolidated balance sheet under Deferred
credits and other reserves as Other liabilities was $314,000. Changes in the fair value of this
derivative were deferred in accumulated other comprehensive loss.
82
Swap settlements are recorded in the income statement with the hedged item as interest
expense. During the twelve months ended December 31, 2010, $145,000, pre-tax, was reclassified
from accumulated other comprehensive loss to interest expense as a result of swap settlements. We
expect to reclassify approximately $167,000, pre-tax, from accumulated other comprehensive loss to
interest expense as a result of swap settlements, over the next twelve months.
Note 10Shareholder Rights Plan
On April 20, 2000, our Board of Directors (Board) adopted a shareholder rights plan and
declared a dividend of one preferred share purchase right (Right) for each outstanding share of
common stock, $1.00 par value. The Rights become exercisable in the event that a person or group
acquires, or commences a tender or exchange offer to acquire, more than 15% (up to 20% with the
prior approval of the Board of Directors) of our Companys outstanding common stock.
Effective March 24, 2010, our Board voted unanimously to extend the expiration date of the
Rights under the rights plan from April 19, 2010 to November 1, 2010. Effective October 29, 2010,
our Board voted unanimously to extend the expiration date of the Rights under the rights plan from
November 1, 2010 to the date of the 2011 annual meeting of our Companys shareholders, which is
expected to be on May 5, 2011. Concurrent with its vote approving the extension of the expiration
date of the Rights, the Board also reaffirmed its previously adopted resolution that any extension
of the expiration date of the Rights beyond the date of our Companys 2011 annual meeting of
shareholders would be subject to a majority shareholder vote at that meeting. Effective November
11, 2010, we amended the rights plan pursuant to which the execution and delivery of the Merger
Agreement, the consummation of the merger, and the consummation of any other transaction
contemplated by the Merger Agreement will not be deemed to result in events that authorize the
exercise of the Rights under our rights plan.
Note 11Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(in thousands, except per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
7,394
|
|
|
$
|
9,135
|
|
|
$
|
11,765
|
|
|
$
|
8,198
|
|
Operating Income
|
|
|
1,055
|
|
|
|
2,631
|
|
|
|
4,762
|
|
|
|
1,648
|
|
Net income
|
|
|
75
|
|
|
|
996
|
|
|
|
2,273
|
|
|
|
437
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.02
|
|
|
|
0.21
|
|
|
|
0.49
|
|
|
|
0.09
|
|
Diluted
|
|
|
0.02
|
|
|
|
0.21
|
|
|
|
0.48
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
7,023
|
|
|
$
|
8,452
|
|
|
$
|
9,473
|
|
|
$
|
7,824
|
|
Operating Income
|
|
|
830
|
|
|
|
2,239
|
|
|
|
3,516
|
|
|
|
1,407
|
|
Net (loss) income
|
|
|
(68
|
)
|
|
|
763
|
|
|
|
1,374
|
|
|
|
313
|
|
(Loss) earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.02
|
)
|
|
|
0.18
|
|
|
|
0.32
|
|
|
|
0.07
|
|
Diluted
|
|
|
(0.02
|
)
|
|
|
0.18
|
|
|
|
0.32
|
|
|
|
0.07
|
|
83
|
|
|
Item 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
There were no disagreements or other reports or other reportable events of the type for which
disclosure would be required under Item 304(b) of Regulation S-K.
|
|
|
Item 9A.
|
|
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 of the end of the period covered by this
Annual Report on Form 10-K.
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 SECs 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 Annual Report on Form 10-K to provide assurance that (i) information
relating to the 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 SEC 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.
ParenteBeard LLC, our independent registered public accounting firm, has audited the Companys
effectiveness of internal control over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control-Integrated Framework
issued by the committee of Sponsoring
Organizations of the Treadway Commission. Managements Report and the Report of Independent
Registered Public Accounting Firm on Internal Control Over Financial Reporting are set forth in
Part II, Item 8 in this Annual Report on Form 10-K.
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.
84
|
|
|
Item 9B.
|
|
OTHER INFORMATION
|
None.
PART III
|
|
|
Item 10.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors of the Company
Joseph A. Bellavance
Mr. Bellavance has been a director since 1983. Mr. Bellavance is
Chairman of Bellavance Beverage Company, Inc., and President of Bellavance Realty Corporation, in
Nashua. Since 1963, Mr. Bellavance has managed every aspect of his family-owned beverage
distributorship, which has been operating in Nashua for over 100 years. During this time, Mr.
Bellavance has developed a close working relationship with Anheuser-Busch, Pennichucks largest
industrial customer. He has also been a joint owner/manager of PROSIT, LLC, which is principally
involved with the ownership and management of real estate, since August 2003. Mr. Bellavance
received his Bachelor of Science degree in Business Administration from the University of New
Hampshire. He is a director and past president of the New Hampshire Wholesale Beverage Association,
a director of New Hampshire The Beautiful, a member of the Nashua Rotary Club and previously
served as a director of the National Beer Wholesalers Association.
Steven F. Bolander
Dr. Bolander has been a director since April 2004. Dr. Bolander is Dean
Emeritus of the University of New Hampshires Whittemore School of Business and Economics. He has
been a consultant to BAE Systems since October 2003 and has consulted with over 50 major
corporations during the past 30 years. He holds a Doctor of Business Administration degree from
Kent State University, a Master of Business Administration degree from the University of Colorado,
and a Bachelor of Science in Chemistry degree from Iowa Wesleyan College.
Clarence A. Davis
Mr. Davis is the former Chief Executive Officer of Nestor, Inc. (NasdaqG:
NEST), a software solution company, 2007 2009. He is the former Chief Operating Officer (2000 -
2005) and Chief Financial Officer (1998 2000) of The American Institute of Certified Public
Accountants (AICPA). He earned a BS in accounting at Long Island University and is a Certified
Public Accountant. He serves on the Board of Directors of Gabelli SRI Fund, Gabelli Global Deal
Fund, Telephone and Data Systems, Inc. and Sonesta International Hotels.
Michael I. German
Mr. German is Chief Executive Officer and President of Corning Natural
Gas Corporation (OTCBB: CNIG), a position he has held since December 2006. He has served as a
director of Corning since November 2006. From August 2005 through December 2006, Mr. German was
Senior Vice President, Utility Operation of Southern Union Company. From 2003 until 2005, he was
President of Southern Connecticut Gas, Connecticut Natural Gas and Maine Natural Gas, all
subsidiaries of Energy East Corporation, a publicly-held energy services and delivery provider. Mr.
German has a BA degree from Trinity College and an MBA from Columbia University. He also has a JD
from Boston University and is a member of the District of Columbia Bar. Mr. German serves on the
Board of Directors of Three Rivers Development Corporation, American Gas Association and Northeast
Gas Association. He also serves as a Trustee of Adirondack Park Institute.
85
Janet M. Hansen
Ms. Hansen worked in the water utility industry for 30 years until her
retirement in 2005. She was Executive Vice President of Aquarion Company, the largest investor
owned water utility in New England, from 1995 to 2005 and its Chief Financial Officer from 1992 to
2000. She was Chairman of Aquarion Water Company, Aquarion Companys principal operating
subsidiary, from 2003 to 2005 and its CEO from 2000 to 2003. Ms. Hansen has been a member of the
Board of Directors of Peoples United Financial Inc., (NasdaqGS: PBCT), a bank holding company,
since 2004. She serves on their Executive Committee and Audit Committee, on which she has been
designated the Audit Committee Financial Expert. She also serves on the Boards of Directors of
Bridgeport Hospital and the University of Connecticut Foundation.
Robert P. Keller
Mr. Keller has been a director since 1983. Mr. Keller is a Certified
Public Accountant. Since November 2003, he has been managing director of Triumph Investment Funds
(two community bank private equity funds) located in Bedford, New Hampshire. From March 2002 until
May 2003, he was Chairman and Chief Executive Officer of InStar Services Group, Inc. (a nationwide
provider of insurance restorations and reconstruction services), headquartered in Fort Worth,
Texas. Since September 2002, he has served as Chairman of the Board of Directors and Chairman of
the Compensation Committee of Security Business Bank of San Diego and as Chairman of Security
Business Bancorp, Inc (OTCBB: SBBC). In addition, he is a director of Homeland Renewable Energy,
Inc. (HRE), a biomass power company in Newtown, Pennsylvania, and serves as a member of HREs
Compensation and Audit Committees. Mr. Keller is also the Chairman of the Board of Directors of
First State Bank in Cranford, New Jersey
John R. Kreick
Dr. Kreick has been a director since 1998 and was elected Chairman of
Pennichucks Board of Directors in September 2003. Dr. Kreick served as our interim Chief Executive
Officer from April 2, 2003 until August 4, 2003. He previously served as President of Lockheed
Sanders from 1989 to 1998 and as a Vice President of the Lockheed Martin Corporation (NYSE: LMT)
from 1988 until 1998. Dr. Kreick was elected a director of Draper Lab in January 2001, and Chairman
of its Board in October 2001. He completed his term as a Draper director in October 2008. He was
elected a director of EMS Technologies, Inc. (NasdaqGS: ELMG), a public company, in February of
2003. He consults for various companies, including Lockheed Martin and BAE Systems. Dr. Kreick
received his Bachelor of Science degree in physics from the University of Michigan in 1965. As a
Rackman graduate fellow, he worked at the Universitys Space Physics Research Laboratory and
received his Masters of Science degree in physics in 1966. He received his Ph.D. in theoretical
physics from the University of Michigan in 1969 and he holds eight patents in infrared and
electro-optical technology. He has also served on numerous Department of Defense panels and
committees. In 1993, Dr. Kreick received the Electronic Warfare Associations highest awardthe
Gold Medal of Electronic Warfare and is a recipient of Aviation Week magazines Aerospace Laurels
Award for his long-term contributions to electronic warfare.
Hannah M. McCarthy
Ms. McCarthy has been a director since 1994 and served as interim Chief
Executive Officer of the Company from April 15, 2006 until August 21, 2006. Since September 1,
2006, Ms. McCarthy has been serving as President of Newbury College in Brookline, Massachusetts, a
position she accepted immediately following her five months as interim President and Chief
Executive Officer of Pennichuck Corporation. She was named President Emeritus of Daniel Webster
College in Nashua, where she was President for 25 years, when she stepped down from that post in
June 2005. She earned her Bachelor of Arts degree at Simmons College, and did graduate work at
Rivier College and Southern New Hampshire University. Ms. McCarthy has served as a director of the
Boys and Girls Club of Nashua, the
New Hampshire Charitable Foundation, and the Foundation of International Society of Transport
Aircraft Traders.
86
Duane C. Montopoli
Mr. Montopoli has been President, Chief Executive Officer and a director of
Pennichuck since he joined the Company in August 2006. He brought to Pennichuck more than 30 years
business experience including 16 years as a CEO. From January 2005 until joining Pennichuck, Mr.
Montopoli was Principal of Montopoli & Company LLC of North Andover, MA, which he founded to
provide management consulting services. During this period, from February 2005 until January 2006,
he worked as a Senior Consultant for LoftusGroup LLC of Greenwich, Connecticut, a management
consulting firm. From February 2002 until October 2004, Mr. Montopoli was employed by Hitchiner
Manufacturing Co., Inc. of Milford, New Hampshire, first as Chief Financial Officer until April
2002 and thereafter as President and Chief Executive Officer. Hitchiner is a privately-held
manufacturer of ferrous investment cast metal parts and assemblies. From 1998 until 2000, Mr.
Montopoli served as Chief Executive Officer of Medical Resources, Inc. of Hackensack, New Jersey,
formerly a NASDAQ-listed provider of outpatient diagnostic imaging services. From 1986 until 1998,
he served as Chief Executive Officer of Chemfab Corporation of Merrimack, New Hampshire, formerly a
NYSE-listed manufacturer of polymer-based engineered products. He began his career in public
accounting with Arthur Young & Company, a predecessor firm of Ernst & Young LLP, where he rose to
the level of general partner. Mr. Montopoli completed the Advanced Management Program at Harvard
Business School in 1997, received his MBA degree from Golden Gate University in San Francisco in
1978, and received his BBA degree from the University of Cincinnati in 1972 where he graduated
magna cum laude. He is a director of Southworth International Group, Inc. of Falmouth, Maine, a
privately-held manufacturer and distributor of vertical lifting and positioning products.
James M. Murphy
Mr. Murphy is Chairman of Q10 Capital, LLC, a national mortgage banking firm
(owned and operated by 18 independent mortgage bankers), a position he has held since November of
2003, and Founder and Chairman of Q10 New England Realty Resources, an independent mortgage banking
company, a position he has held since July of 1982. Prior to founding Q10 New England Realty
Resources, Mr. Murphy held executive position in the investment departments of Mass Mutual Life
Insurance Company and Union Mutual Life Insurance Company. Mr. Murphy has been a Certified Mortgage
Banker since 1999, a member of the Society of Chartered Realty Investors since July of 2005 and a
director since 2006, and has held a State Certified Appraiser designation since February 1993. Mr.
Murphy has been a director of the Mortgage Bankers Association of America since 2000 and was the
Associations Chairman in 2002. Mr. Murphy is also a Director of The Francis Ouimet Scholarship
Fund. He also has held public office as Chairman of the Board of Selectmen in his home town of
Duxbury, MA.
Martha E. ONeill
Ms. ONeill is a third-generation director of Pennichuck who has been
serving on the Board since 1998. Ms. ONeill has been practicing as an attorney with the Nashua law
firm of Clancy & ONeill, P.A. since 1982, and is currently President of the firm. She is a
graduate of Wellesley College and Georgetown University Law Center. Ms. ONeill serves on the
Rivier College Board of Trustees, Mary A. Sweeney Home Board of Trustees, Charles H. Nutt Surgical
Hospital Board, the Boys & Girls Club of Greater Nashua, Inc. Charitable Foundation Board of
Trustees, the Currier Museum of Art Advisory Council, the Bishops Charitable Assistance Fund, the
J. Wilfred Anctil Foundation and the Southern New Hampshire Medical Center Board of Trustees.
87
Executive Officers
Duane C. Montopoli
Mr. Montopoli is our President and Chief Executive Officer. Further
information regarding Mr. Montopoli may be found in Part III. Item 10 Directors of the Company of
this Annual Report on Form 10-K. He is 62 years old.
Thomas C. Leonard
Mr. Leonard assumed the position of Senior Vice President Finance,
Treasurer and Chief Financial Officer of Pennichuck Corporation on July 7, 2008. From June 2006
until July 2008, he served as Vice President of CRA International (NasdaqGS: CRAI), an economics
and finance based litigation consulting firm in Boston, Massachusetts, where he was responsible for
providing expert accounting services. From December 2002 to May 2006, Mr. Leonard served as
Managing Director of Huron Consulting Group (NasdaqGS: HURN), a litigation consulting firm in
Boston, Massachusetts and Washington D.C., where he evaluated financial matters and provided
forensic analysis. He is a member of the Board of Directors of Kadant Inc. (NYSE: KAI) where he
chairs the Audit Committee and is a member of the Compensation Committee. Mr. Leonard is a
Certified Public Accountant and is 56 years old.
Donald L. Ware
Mr. Ware was appointed President of Pennichuck Water Works, Inc. and our
other water utilities on March 17, 2006. Mr. Ware has been our Vice President of Engineering since
1996, and has been Senior Vice President, Operations and Chief Engineer for Pennichuck Water Works,
Inc. since May 2004. He has also been a Vice President and director of Pennichuck Water Service
Corporation since 1995, and a director of Pennichuck East Utility, Inc. and Pittsfield Aqueduct
Company, Inc. since 1998. He holds a Bachelor of Science degree in Civil Engineering from Bucknell
University and is a licensed professional engineer in New Hampshire, Massachusetts and Maine. He
also holds a Masters of Business Administration degree from the Whittemore Business School at the
University of New Hampshire. Mr. Ware is 54 years old.
Stephen J. Densberger
Mr. Densberger is our Executive Vice President and has been
affiliated with Pennichuck since 1974. Mr. Densberger was the Treasurer of Pennichuck from 1978 to
1983. He also served as President and a director of Pennichuck Water Service Corporation since 1995
and as a director of Pittsfield Aqueduct Company, Inc. and of Pennichuck East Utility, Inc. since
1998. Mr. Densberger is a graduate of Assumption College and holds a Master of Business
Administration degree from the Whittemore School of Business and Economics of the University of New
Hampshire. He is an active member and past President of the New Hampshire Water Works Association
and past President of the New England Water Works Association. Mr. Densberger serves as a Trustee
and Chair of the Management Division of the American Water Works Association. He is a Councilor on
the New Hampshire Department of Environmental Services Water Council and a former Alderman in the
city of Nashua. Mr. Densberger is 60 years old.
88
Roland E. Olivier
Mr. Olivier assumed the position of General Counsel and Corporate
Secretary of Pennichuck Corporation and President of the Southwood Corporation on August 25, 2008.
He has served as director of Pennichuck East Utility, Inc., Pittsfield Aqueduct Company, Inc. and
Pennichuck Water Service Corporation since 2009. From 2003 until August 2008, he was the Corporate
Counsel to Hitchiner Manufacturing Co., Inc. in Milford, New Hampshire, one of New Hampshires
largest manufacturing companies. At Hitchiner, Mr. Olivier reported to the President of the
company, was a member of the companys senior management committee and the Assistant Secretary to
the Board of Directors. He has been practicing law for over thirty years and specializes in
corporate, regulatory, mergers and acquisitions, technology, intellectual property and
international law. Mr. Olivier earned a BS at the U.S. Military Academy, West Point, New York and a
JD at Columbus School of Law at Catholic
University of America. Over the past 13 years, Mr. Olivier has also been actively involved in
leadership positions and as a member of the board for a number of non-profit organizations, state
boards and advisory councils in New Hampshire. He is a member of the Business and Industry
Association (BIA) committees for Economic Development, and Energy and Regulated Utilities and a
director of the New Hampshire Legends of Hockey. Mr. Olivier has served as the President and Board
Member of the NH International Trade Association, Vice-Chairman and Board Member of the Software Association of
NH, and Board Member of the New Hampshire licensing Board for state foresters (Board of
Foresters). He is 64 years old.
Bonalyn J. Hartley
Ms. Hartley has been with Pennichuck since 1979. Since 2001, she has served
as Vice President Administration & Regulatory Affairs for Pennichuck Corporation, Pennichuck Water
Works, Inc., Pennichuck East Utility, Inc. and Pittsfield Aqueduct Company, Inc. and as a director
of Pennichuck East Utility, Inc. and Pittsfield Aqueduct Company, Inc. since 1998. She has also
been Vice President Administration and a director of the Pennichuck Water Service Corporation since
1995. Ms. Hartley serves as Pennichuck Corporations Corporate Compliance officer. She is a
graduate of Rivier College with a Bachelor of Science degree in Business Management. Ms. Hartley is
a member of the Finance Committee for Home Health & Hospice, Nashua NH and Director of YMCA of
Greater Nashua. She is also a director of the New England Chapter of the National Association of
Water Companies and a member of the New England Water Works Association. She is a joint owner of
Lakeview Antique Center, LLC. Ms. Hartley is 66 years old.
Further information required by this Item will be contained in the Proxy Statement, which we
intend to file with the SEC within 120 days after the end of our fiscal year ended December 31,
2010. Such information is incorporated by reference into this Annual Report on Form 10-K.
89
|
|
|
Item 11.
|
|
EXECUTIVE COMPENSATION
|
Information required by this Item will be contained in the Proxy Statement, which we intend to
file with the SEC within 120 days after the end of our fiscal year ended December 31, 2010. Such
information is incorporated by reference into this Annual Report on Form 10-K.
|
|
|
Item 12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Information required by this Item will be contained in the Proxy Statement, which we intend to
file with the SEC within 120 days after the end of our fiscal year ended December 31, 2010. Such
information is incorporated by reference into this report.
|
|
|
Item 13.
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
Information required by this Item will be contained in the Proxy Statement, which we intend to
file with the SEC within 120 days after the end of our fiscal year ended December 31, 2010. Such
information is incorporated by reference into this Annual Report on Form 10-K.
|
|
|
Item 14.
|
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
Information required by this Item will be contained in the Proxy Statement, which we intend to
file with the SEC within 120 days after the end of our fiscal year ended December 31, 2010. Such
information is incorporated by reference into this Annual Report on Form 10-K.
90
PART IV
|
|
|
Item 15.
|
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) The following Consolidated Financial Statements of Pennichuck Corporation and
subsidiaries for the year ended December 31, 2010 are included in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income for each of the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Shareholders Equity for each of the years ended December 31, 2010, 2009 and 2008
Consolidated Statement of Comprehensive Income for each of the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for each of the years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
(2) The following Consolidated Financial Statement Schedules of Pennichuck Corporation
for each of the years 2010, 2009 and 2008 are included in this Annual Report on
Form 10-K
:
ICondensed Financial Information of Registrant
IIValuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or notes thereto.
91
(3) EXHIBIT INDEX:
The following is a list of exhibits which are either filed or incorporated by reference as
part of this Annual Report on
Form
10-K
.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
2.1
|
|
|
Agreement and Plan of Merger, dated as of November 11, 2010, by
and between Pennichuck Corporation and the City of Nashua, New
Hampshire (filed as Exhibit 2.1 to the Companys Current Report on
Form 8-K filed on November 12, 2010 and incorporated herein by
reference)
|
|
|
|
|
|
|
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)
|
92
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
4.8
|
|
|
Sixth Amendment to Rights Agreement, effective as of March 2,
2009, by and between Pennichuck Corporation and American Stock
Transfer & Trust Company, LLC (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)
|
|
|
|
|
|
|
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, dated 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)
|
|
|
|
|
|
|
10.1
|
|
|
Reserved
|
|
|
|
|
|
|
10.2
|
|
|
Loan Agreement dated March 22, 2005 between Pennichuck Corporation
and Fleet National Bank, a Bank of America Company (filed as
Exhibit 10.1 to the Companys Current Report on Form 8-K, filed on
March 28, 2005 and incorporated herein by reference)
|
|
|
|
|
|
|
10.3
|
|
|
Revolving Credit Promissory Note of Pennichuck Corporation to
Fleet National Bank, a Bank of America Company, dated March 22,
2005 (filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K, filed on March 28, 2005 and incorporated herein by
reference)
|
|
|
|
|
|
|
10.4
|
|
|
Guaranty Agreement by Pennichuck Water Works, Inc. and Fleet
National Bank, a Bank of America Company, dated March 22, 2005
(filed as Exhibit 10.3 to the Companys Current Report on Form
8-K, filed on March 28, 2005 and incorporated herein by reference)
|
|
|
|
|
|
|
10.5
|
|
|
Subordination Agreement by Pennichuck Water Works, Inc. and Fleet
National Bank, a Bank of America Company, and joined by Pennichuck
Corporation, dated March 22, 2005 (filed as Exhibit 10.4 to the
Companys Current Report on Form 8-K, filed on March 28, 2005 and
incorporated herein by reference)
|
|
|
|
|
|
|
10.6
|
|
|
Insurance Funded Deferred Compensation Agreement dated June 13,
1994 (filed as Exhibit 10.9 to the Companys second quarter 1994
Quarterly Report on Form 10-QSB and incorporated herein by
reference)
|
|
|
|
|
|
|
10.7
|
|
|
Reserved
|
93
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.8
|
|
|
Loan Agreement dated April 8, 1998, between Pennichuck
Corporation, Pennichuck East Utility, Inc. and Fleet Bank-NH
(filed as Exhibit 10.11 to the Companys second quarter 1998
Quarterly Report on Form 10-QSB and incorporated herein by
reference)
|
|
|
|
|
|
|
10.9
|
|
|
Amendment Agreement, dated as of June 19, 2008, by and among
Pennichuck Corporation, Pennichuck East Utility, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.5 to the Companys second quarter 2008 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.10
|
|
|
Employment Agreement, dated as of October 24, 2006 by and between
Duane C. Montopoli and Pennichuck Corporation (filed as Exhibit
10.1 to the Companys third quarter 2006 Quarterly Report on Form
10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.11
|
|
|
Amendment Agreement dated March 29, 2004 to Loan Agreement dated
April 8, 1998, as amended, between Pennichuck Corporation and
Pennichuck East Utility, Inc., as borrowers, The Southwood
Corporation and Pennichuck Water Service Corporation as
guarantors, and Fleet National Bank (filed as Exhibit 10.18 to the
Companys first quarter 2004 Quarterly Report on Form 10-Q and
incorporated herein by reference)
|
|
|
|
|
|
|
10.12
|
|
|
Indenture of Lease dated as of April 23, 2004 by and between
Pennichuck Water Works, Inc., as lessee and HECOP III, LLC, as
lessor (filed as Exhibit 10.19 to the Companys second quarter
2004 Quarterly Report on Form 10-Q and incorporated herein by
reference)
|
|
|
|
|
|
|
10.13
|
|
|
2010 Executive Officer Bonus Plan dated as of January 28, 2010
(filed as Exhibit 10.1 to the Companys first quarter 2010
Quarterly Report on Form 10-Q and incorporated herein by
reference)
|
|
|
|
|
|
|
10.14
|
|
|
Guaranty Agreement between Pennichuck Corporation and Banknorth
National Association dated January 20, 2005 (filed as Exhibit
10.15 to the Companys 2004 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
|
|
|
10.15
|
|
|
Amended and Restated Summary of Non-Employee Director Compensation
(filed as Exhibit 10.6 to the Companys second quarter 2008
Quarterly Report on Form 10-Q and incorporated herein by
reference)
|
|
|
|
|
|
|
10.16
|
|
|
Third Amendment to Lease effective July 27, 2010, by and between
Pennichuck Water Works, Inc. and Direct Invest Heron Cove
(filed as Exhibit 10.1 to the Companys second quarter 2010
Quarterly Report on Form 10-Q and incorporated herein by
reference)
|
|
|
|
|
|
|
10.17
|
|
|
Form of Stock Option granted under the 2000 Stock Option Plan
(filed as Exhibit 10.19 to the Companys 2004 Annual Report on
Form 10-K and incorporated herein by reference)
|
|
|
|
|
|
|
10.18
|
|
|
Letter Agreement dated as of August 8, 2008 by and between
Pennichuck Corporation and Roland E. Olivier (filed as Exhibit
10.1 to the Companys third quarter 2008 Quarterly Report on Form
10-Q and incorporated herein by reference)
|
94
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.19
|
|
|
Amendment Agreement by and among Pennichuck Corporation,
Pennichuck East Utility, Inc., and Fleet National Bank, dated as
of April 8, 2005 (filed as Exhibit 10.1 to the Companys Current
Report on Form 8-K, filed on April 14, 2005 and incorporated
herein by reference)
|
|
|
|
|
|
|
10.20
|
|
|
Master Loan and Trust Agreement by and among the Business Finance
Authority of the State of New Hampshire, Pennichuck Water Works,
Inc. and the Bank of New York Trust Company, N.A., as trustee,
dated as of October 1, 2005 (filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K, filed on October 25, 2005
and incorporated herein by reference)
|
|
|
|
|
|
|
10.21
|
|
|
Employment Agreement, dated as of October 3, 2006, by and between
Donald L. Ware and Pennichuck Corporation (filed as Exhibit 10.2
to the Companys third quarter 2006 Quarterly Report on Form 10-Q
and incorporated herein by reference)
|
|
|
|
|
|
|
10.22
|
|
|
Settlement Agreement, dated as of November 11, 2010, by and
between Pennichuck Corporation and the City of Nashua, New
Hampshire (filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K filed on November 12, 2010 and incorporated herein by
reference)
|
|
|
|
|
|
|
10.23
|
|
|
Addendum Dated October 1, 2008 to Master Loan and Trust Agreement
(filed as Exhibit 10.2 to the Companys third quarter 2008
Quarterly Report on Form 10-Q and incorporated herein by
reference)
|
|
|
|
|
|
|
10.24
|
|
|
Amended and Restated Change of Control Agreement, dated as of
November 15, 2010, by and between Pennichuck Corporation and
Bonalyn J. Hartley
|
|
|
|
|
|
|
10.25
|
|
|
Amended and Restated Change of Control Agreement, dated as of
November 15, 2010, by and between Pennichuck Corporation and
Stephen J. Densberger (filed as Exhibit 10.4 to the Companys
Current Report on Form 8-K filed on November 19, 2010 and
incorporated herein by reference)
|
|
|
|
|
|
|
10.26
|
|
|
Amendment Agreement, dated as of August 31, 2006, by and among
Pennichuck Corporation, Pennichuck Water Works, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.7 to the Companys third quarter 2006 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.27
|
|
|
Amendment Agreement, dated as of August 31, 2006, by and among
Pennichuck Corporation, Pennichuck East Utility, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.8 to the Companys third quarter 2006 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.28
|
|
|
Reserved
|
|
|
|
|
|
|
10.29
|
|
|
First Amendment to Change of Control Agreement, dated as of
February 1, 2007, by and between Pennichuck Corporation and
Bonalyn J. Hartley (filed as Exhibit 10.29 to the Companys 2006
Annual Report on Form 10-K and incorporated herein by reference)
|
|
|
|
|
|
|
10.30
|
|
|
Reserved
|
95
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.31
|
|
|
First Amendment to Change of Control Agreement, dated as of
February 1, 2007, by and between Pennichuck Corporation and
Stephen J. Densberger (filed as Exhibit 10.31 to the Companys
2006 Annual Report on
Form 10-K
and incorporated herein by
reference)
|
|
|
|
|
|
|
10.32
|
|
|
Third Amendment to Employment Agreement, dated as of November 15,
2010, by and between Pennichuck Corporation and Donald L. Ware
(filed as Exhibit 10.3 to the Companys Current Report on Form 8-K
filed on November 19, 2010 and incorporated herein by reference)
|
|
|
|
|
|
|
10.33
|
|
|
Change of Control Agreement, dated as of November 15, 2010, by and
between Pennichuck Corporation and Thomas C. Leonard (filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on
November 19, 2010 and incorporated herein by reference)
|
|
|
|
|
|
|
10.34
|
|
|
Pennichuck Corporation 2009 Equity Incentive Plan dated as of
March 11, 2009 (filed as Exhibit 10.1 to the Companys first
quarter 2009 Quarterly Report on Form 10-Q and incorporated herein
by reference)
|
|
|
|
|
|
|
10.35
|
|
|
Amendment Agreement, dated as of October 19, 2007, by and among
Pennichuck Corporation, Pennichuck Water Works, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.1 to the Companys third quarter 2007 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.36
|
|
|
Amendment Agreement, dated as of October 19, 2007, by and among
Pennichuck Corporation, Pennichuck East Utility, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.2 to the Companys third quarter 2007 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.37
|
|
|
First Amendment to Master Loan and Trust Agreement, dated as of
October 1, 2007, by and among the Business Finance Authority of
the State of New Hampshire, Pennichuck Water Works, Inc. and the
Bank of New York Trust Company, N.A., as Trustee (filed as Exhibit
10.3 to the Companys third quarter 2007 Quarterly Report on Form
10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.38
|
|
|
Change of Control Agreement, dated as of November 15, 2010, by and
between Pennichuck Corporation and Roland E. Olivier (filed as
Exhibit 10.5 to the Companys Current Report on Form 8-K filed on
November 19, 2010 and incorporated herein by reference)
|
|
|
|
|
|
|
10.39
|
|
|
Second Amendment to Change of Control Agreement, dated November
13, 2007, amending the Change of Control Agreement, dated October
25, 2006 by and between Pennichuck Corporation and Stephen J.
Densberger (filed as Exhibit 10.39 to the Companys 2007 Annual
Report on Form 10-K and incorporated herein by reference)
|
|
|
|
|
|
|
10.40
|
|
|
Second Amendment to Change of Control Agreement, dated November
13, 2007, amending the Change of Control Agreement, dated October
25, 2006 by and between Pennichuck Corporation and Bonalyn J.
Hartley (filed as Exhibit 10.40 to the Companys 2007 Annual
Report on Form 10-K and incorporated herein by reference)
|
96
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.41
|
|
|
First Amendment to Employment Agreement, dated November 9, 2007,
amending the Employment Agreement, dated October 24, 2006, by and
between Pennichuck Corporation and Duane C. Montopoli (filed as
Exhibit 10.41 to the Companys 2007 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
|
|
|
10.42
|
|
|
Second Amendment to Employment Agreement, dated as of November 15,
2010, by and between Pennichuck Corporation and Duane C. Montopoli
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on November 19, 2010 and incorporated herein by reference)
|
|
|
|
|
|
|
10.43
|
|
|
First Amendment to Employment Agreement, dated November 7, 2007,
amending the Employment Agreement, dated October 3, 2006 by and
between Pennichuck Corporation and Donald L. Ware (filed as
Exhibit 10.43 to the Companys 2007 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
|
|
|
10.44
|
|
|
Second Amendment to Master Loan and Trust Agreement, dated as of
May 1, 2008, by and among the Business Finance Authority of the
State of New Hampshire, Pennichuck Water Works, Inc. and the Bank
of New York Trust Company, N.A., as Trustee (filed as Exhibit 10.3
to the Companys first quarter 2008 Quarterly Report on Form 10-Q
and incorporated herein by reference)
|
|
|
|
|
|
|
10.45
|
|
|
Letter Agreement dated as of May 19, 2008 by and between
Pennichuck Corporation and Thomas C. Leonard (filed as Exhibit
10.1 to the Companys second quarter 2008 Quarterly Report on Form
10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.46
|
|
|
Amendment to Lease dated March 17, 2006 by and between Pennichuck
Water Works, Inc. and HECOP III, LLC. (filed as Exhibit 10.2 to
the Companys second quarter 2008 Quarterly Report on Form 10-Q
and incorporated herein by reference)
|
|
|
|
|
|
|
10.47
|
|
|
Second Lease Amendment dated May 6, 2008 by and between Pennichuck
Water Works, Inc. and Direct Invest Heron Cove, LLC. (filed as
Exhibit 10.3 to the Companys second quarter 2008 Quarterly Report
on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.48
|
|
|
Amendment Agreement, dated as of June 19, 2008, by and among
Pennichuck Corporation, Pennichuck Water Works, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.4 to the Companys second quarter 2008 Quarterly
Report on Form 10-Q and incorporated herein by reference)
|
|
|
|
|
|
|
10.49
|
|
|
Loan Agreement dated March 1, 1996 between Pennichuck Water Works,
Inc. and American United Life Insurance Company regarding
$8,000,000 7.40% Senior Notes due March 1, 2021 (filed as Exhibit
10.2 to the Companys Current Report on Form 8-K filed on December
9, 2009 and incorporated herein by reference)
|
|
|
|
|
|
|
10.50
|
|
|
Second amendment to Employment Agreement, dated as of February 20,
2010, by and between Donald L. Ware and Pennichuck Corporation
(filed as Exhibit 10.50 to the Companys 2009 Annual Report on
Form 10-K and incorporated herein by reference)
|
|
|
|
|
|
|
10.51
|
|
|
Master Loan and Trust Agreement dated as of February 9, 2010 by
and between Pennichuck East Utility, Inc. and CoBANK, ACB (filed
as Exhibit 10.51 to the Companys 2009 Annual Report on Form 10-K
and incorporated herein by reference)
|
97
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
10.52
|
|
|
Promissory Note and Supplement dated as of February 9, 2010 by and
between Pennichuck East Utility, Inc. and CoBANK, ACB (filed as
Exhibit 10.52 to the Companys 2009 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
|
|
|
10.53
|
|
|
Promissory Note and Supplement dated as of February 9, 2010 by and
between Pennichuck East Utility, Inc. and CoBANK, ACB (filed as
Exhibit 10.53 to the Companys 2009 Annual Report on Form 10-K and
incorporated herein by reference)
|
|
|
|
|
|
|
10.54
|
|
|
Amendment Agreement, dated as of April 26, 2006, by and between
Pennichuck Corporation, Pennichuck Water Works, Inc. and Bank of
America, N.A. (successor by merger to Fleet National Bank) (filed
as Exhibit 10.54 to the Companys 2009 Annual Report on Form 10-K
and incorporated herein by reference)
|
|
|
|
|
|
|
14
|
|
|
Code of Ethics for Financial Professionals (filed as Exhibit 14 to
the Companys 2003 Annual Report on
Form 10-K
and incorporated
herein by reference)
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries of Pennichuck Corporation (filed as Exhibit 21 to the
Companys first quarter 2008 Quarterly Report on Form 10-Q and
incorporated herein by reference)
|
|
|
|
|
|
|
23.1
|
|
|
Consent of ParenteBeard LLC
|
|
|
|
|
|
|
24
|
|
|
Power of Attorney (combined in Signature Page)
|
|
|
|
|
|
|
31.1
|
|
|
Rule 13a-14(a) Certification of Chief Executive Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
31.2
|
|
|
Rule 13a-14(a) Certification of Chief Financial Officer of the
Company in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
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*
|
|
|
|
|
|
Filed herewith.
|
|
*
|
|
Certification is not deemed filed for purposes of Section 18 of the Exchange Act or otherwise
subject to the liability of that section. Such certification is not deemed to be incorporated
by reference into any filing under the Securities Act or the Exchange Act except to the extent
that the registrant specifically incorporates it by reference.
|
98
SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation (Parent Company Only)
Condensed Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,380
|
|
|
$
|
1,568
|
|
Accounts receivable
|
|
|
13
|
|
|
|
1
|
|
Prepaid expenses and other
|
|
|
746
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,139
|
|
|
|
3,236
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
10
|
|
|
|
27
|
|
Deferred tax asset
|
|
|
1,549
|
|
|
|
331
|
|
Investment in subsidiaries
|
|
|
51,714
|
|
|
|
51,689
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
56,412
|
|
|
$
|
55,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
73
|
|
|
$
|
64
|
|
Shareholders equity
|
|
|
56,339
|
|
|
|
55,219
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
56,412
|
|
|
$
|
55,283
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
99
SCHEDULE ICONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
Pennichuck Corporation (Parent Company Only)
Condensed Statements of Income
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Operating revenues
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Operating expenses
|
|
|
600
|
|
|
|
614
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(591
|
)
|
|
|
(605
|
)
|
|
|
(281
|
)
|
Interest & other income
|
|
|
120
|
|
|
|
205
|
|
|
|
171
|
|
Interest Expense
|
|
|
(8
|
)
|
|
|
(80
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes and Equity in
Earnings of Subsidiaries
|
|
|
(479
|
)
|
|
|
(480
|
)
|
|
|
(386
|
)
|
Income Tax Benefit
|
|
|
179
|
|
|
|
210
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Equity in Earnings of Subsidiaries
|
|
|
(300
|
)
|
|
|
(270
|
)
|
|
|
(243
|
)
|
Equity in Earnings of Subsidiaries
|
|
|
4,081
|
|
|
|
2,652
|
|
|
|
4,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,781
|
|
|
$
|
2,382
|
|
|
$
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
Pennichuck Corporation (Parent Company Only)
Condensed Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Operating activities
|
|
$
|
1,085
|
|
|
$
|
(818
|
)
|
|
$
|
(1,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity transfer from subsidiaries
|
|
|
3,379
|
|
|
|
2,980
|
|
|
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
3,379
|
|
|
|
2,980
|
|
|
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in line of credit, net
|
|
|
|
|
|
|
(1,465
|
)
|
|
|
1,465
|
|
Advances to subsidiaries, net
|
|
|
(752
|
)
|
|
|
(5,094
|
)
|
|
|
(8,267
|
)
|
Proceeds from issuance of common stock and
dividend reinvestment plan
|
|
|
479
|
|
|
|
7,852
|
|
|
|
281
|
|
Dividends paid
|
|
|
(3,379
|
)
|
|
|
(2,980
|
)
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,652
|
)
|
|
|
(1,687
|
)
|
|
|
(9,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
812
|
|
|
|
475
|
|
|
|
(7,939
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
1,568
|
|
|
|
1,093
|
|
|
|
9,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,380
|
|
|
$
|
1,568
|
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
100
Pennichuck Corporation (Parent Company Only)
Notes to Condensed Financial Statements
NOTE AACCOUNTING POLICIES
Basis of Presentation
. In the parent company only financial statements, the Companys
investment in its subsidiaries is stated at cost plus equity in undistributed earnings of its
subsidiaries. Parent company only financial statements should be read in conjunction with the
Companys Annual Report to Shareholders for the year ended December 31, 2010.
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.
NOTE BCOMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its subsidiaries were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(in thousands)
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Pennichuck Water Works, Inc.
|
|
$
|
3,079
|
|
|
$
|
1,489
|
|
|
$
|
2,548
|
|
Pennichuck East Utility, Inc.
|
|
|
|
|
|
|
1,491
|
|
|
|
|
|
Pennichuck Water Service Corporation
|
|
|
300
|
|
|
|
|
|
|
|
250
|
|
The Southwood Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,379
|
|
|
$
|
2,980
|
|
|
$
|
2,798
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
at End
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
|
of
|
|
(in thousands)
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
(1)
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
53
|
|
|
$
|
161
|
|
|
$
|
160
|
|
|
$
|
54
|
|
2009
|
|
|
37
|
|
|
|
123
|
|
|
|
107
|
|
|
|
53
|
|
2008
|
|
|
104
|
|
|
|
30
|
|
|
|
97
|
|
|
|
37
|
|
|
|
|
(1)
|
|
Amounts include accounts receivable write-offs, net of recoveries.
|
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on:
|
|
|
|
|
|
PENNICHUCK CORPORATION
|
|
|
By:
|
/s/ Duane C. Montopoli
|
|
|
|
|
Name:
Duane C. Montopoli,
|
|
|
|
|
President and Chief Executive Officer
|
|
DATE: March 4, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Each person whose signature appears below hereby makes, constitutes and appoints Duane C. Montopoli
acting individually, his true and lawful attorney, with full power to sign for such person and in
such persons name and capacity indicated below any and all amendments to this Form 10-K, hereby
ratifying and confirming such persons signature as it may be signed by said attorney to any and
all amendments.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Duane C. Montopoli
Duane C. Montopoli
|
|
President, Chief Executive Officer and
Director (Principal Executive
Officer)
|
|
March 4, 2011
|
|
|
|
|
|
/s/ Thomas C. Leonard
Thomas C. Leonard
|
|
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
|
|
March 4, 2011
|
|
|
|
|
|
/s/ Larry D. Goodhue
Larry D. Goodhue
|
|
Controller (Principal
Accounting Officer)
|
|
March 4, 2011
|
|
|
|
|
|
/s/ Joseph A. Bellavance
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Steven F. Bolander
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Clarence A. Davis
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Michael I. German
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
102
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Janet M. Hansen
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert P. Keller
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ John R. Kreick
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Hannah M. McCarthy
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ James M. Murphy
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
|
|
|
|
|
/s/ Martha E. ONeill
|
|
Director
|
|
March 4, 2011
|
|
|
|
|
|
103
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