U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
COMMISSION FILE NUMBER 0-18552
Pennichuck Corporation
(Name of small business issuer in its charter)
New Hampshire 02-0177370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Water Street, Nashua, New Hampshire 03061
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 603-882-5191
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $1.00 per share)
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 X No ____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
$12,202,688
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the average of the closing bid and asked prices
on March 7, 1997 of the Registrant's Common Stock as reported on the NASDAQ
National Market System was $10,630,854. For purposes of this calculation,
the "affiliates" of the registrant include its directors and executive
officers.
State the number of shares outstanding of each of the issuer's classes
of common stock as of February 28, 1997:
Common Stock, $1 Par Value - 747,666 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Part II of Form 10-KSB.
Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held April 18, 1997 are incorporated by reference into Part III of
Form 10-KSB.
TABLE OF CONTENTS
PART I:
Page
----
Item 1. DESCRIPTION OF BUSINESS........................... 2
Item 2. DESCRIPTION OF PROPERTIES......................... 5
Item 3. LEGAL PROCEEDINGS ................................ 7
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS ............................. 7
PART II:
Item 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS ..................... 7
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ... 7
Item 7. FINANCIAL STATEMENTS ............................. 7
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE .......... 7
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT ............................. 8
Item 10. EXECUTIVE COMPENSATION............................ 8
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ........................... 8
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ... 8
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.......................... 9
PART I:
Item 1. DESCRIPTION OF BUSINESS
General Development of Business
Pennichuck Corporation (the "Company") is a business corporation
organized under the laws of the State of New Hampshire. The Company is a
holding company, the principal purpose of which is to acquire an interest in
or control of corporations or associations engaging in any lawful
activities, including (i) corporations engaged in the business of gathering
and distributing water and related businesses, and (ii) corporations engaged
in the business of owning, developing and managing real estate.
The Company has three wholly-owned operating subsidiaries:, (i)
Pennichuck Water Works, Inc. ("Pennichuck") which furnishes water service in
the City of Nashua, New Hampshire and portions of Amherst, Bedford, Derry,
Epping, Hollis, Merrimack, Milford, and Plaistow, New Hampshire;, (ii) and
The Southwood Corporation ("Southwood") a New Hampshire business corporation
which presently owns, develops, and manages approximately 830 acres of
real estate; and (iii) Pennichuck Water Service Corporation ("Service
Corporation"), a New Hampshire business corporation which is involved in
non-regulated, water-related services and operations. .
The predecessor to the Company is Pennichuck Water Works, which was
established in 1852. For 130 years prior to 1983, Pennichuck Water Works
operated solely as a water utility company engaged in the business of
supplying water service in Nashua, New Hampshire and certain areas
contiguous to Nashua, subject to the jurisdiction of the New Hampshire
Public Utilities Commission (the "Commission").
In 1980, Pennichuck Water Works completed construction of a $7 million
water treatment plant, thereby enabling it to consider other uses for
approximately 1,340 acres of land which, for many years, it had held for
watershed protection purposes. The following year, the New Hampshire
Supreme Court, in an action brought by the City of Nashua (as plaintiff
against Pennichuck Water Works), affirmed its previous rulings that any
profits resulting from the sale of fixed capital should accrue to the
benefit of the shareholders rather than the ratepayers. Principally as a
result of these events, in early 1983, Pennichuck Water Works' shareholders
voted to reorganize into a holding company whereby substantially all of its
assets and liabilities would be transferred to two wholly-owned subsidiary
corporations. In connection with the corporate reorganization, Pennichuck
Water Works changed its name to "Pennichuck Corporation" and Pennichuck and
Southwood were formed as the two new subsidiary corporations.
Pennichuck, a public utility corporation, acquired by transfer
substantially all of the utility assets of Pennichuck Water Works while
major portions of the nonutility land were transferred to Southwood. The
reorganization also was intended to facilitate opportunities for the Company
to expand and diversify into related or unrelated business activities. The
transfer of utility assets was substantially completed during 1984. The
Service Corporation was formed in 1995 to engage in non-regulated, water-
related services and operations.
Financial Information About Industry Segments
The business segment data of the Company and its subsidiaries for the
latest three years is presented in "Note G - Business Segment Information"
in the Notes to the Consolidated Financial Statements included in Item 7 of
this Form 10-KSB Report.
Narrative Description of Business
Pennichuck Water Works, Inc.
Pennichuck is franchised to gather and distribute water in the City of
Nashua, New Hampshire and in portions of the towns of Amherst, Bedford,
Derry, Epping, Hollis, Merrimack, Milford and Plaistow, New Hampshire.
Pennichuck has transmission mains which directly interconnect its core
system in Nashua with the surrounding towns of Amherst, Hudson, Merrimack
and Milford. Pennichuck's core system, which services 19,744
customers, accounts for 97 percent of Pennichuck's water revenues and 98
percent of its combined plant in service. Its franchises in the remaining
towns consist of stand-alone satellite water systems serving 1,061
customers. The U.S. Census figures show an increase in population in Nashua
from 41,000 in 1960 to approximately 80,000 in 1989. Pennichuck has no
competition in its core franchise area. Currently, approximately 26
percent of its wateroperating revenues are derived from commercial and
industrial customers and approximately 52 percent from residential
customers, with the balance being derived from fire protection and other
billings to municipalities, principally the City of Nashua.
Pennichuck is engaged in business as a public utility, subject to the
jurisdiction of the Commission. Pennichuck is regulated by the Commission
with respect to its rates, securities issues and service. New
Hampshire law provides that Pennichuck is entitled to charge rates which
permit it to earn a reasonable return on the cost of the property it employs
in serving its customers, less accrued depreciation and contributed capital
("Rate Base"). The cost of capital permanently employed by a utility in its
utility business marks the minimum rate of return which a utility is
lawfully entitled to earn on its Rate Base. Pennichuck's currently approved
water rates are based on a Commission order dated November 2, 1993 resulting
from its latest approved rate case, as amended by a step increase granted in
December 1994 discussed in the following paragraph. Pennichuck is authorized
an overall rate of return of 8.81 percent on an approved rate base of
$28,302,998.
In January 1993, Pennichuck filed with the Commission for a rate
increase of 24.48 percent, representing additional annual revenues of
$1,960,000. On March 23, 1993 the Commission granted Pennichuck a temporary
rate increase of 5.65 percent for consumption on or after April 1, 1993
until such time as final rates were approved. On November 2, 1993 the
Commission approved an overall permanent rate increase of 13.8 percent
representing additional annual revenues of $1,152,000. As part of the
November 1993 rate case settlement, the Commission's report and order also
stipulated for a step increase on December 1, 1994, provided that
Pennichuck's actual overall rate of return, as adjusted for certain pro
forma amounts, was not exceeding its allowed rate of return for the twelve
months ended September 30, 1994. The amount of the step increase was based
on significant new plant additions placed in service from October 1, 1993 to
September 30, 1994 as well as certain cost increases incurred by Pennichuck
during that period. On December 5, 1994, the Commission approved an overall
step increase of 3.48 percent, or an additional annual revenue increase of
$350,000, for service rendered on or after December 1, 1994.
Pennichuck is subject to the water quality regulations promulgated by
the United States Environmental Protection Agency ("EPA"). The EPA is
required to periodically set new maximum contaminant levels for certain
chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The
quality of Pennichuck's treated water currently meets or exceeds all
standards set by the EPA and Pennichuck does not anticipate that any
significant capital expenditures will be required in the next three years
given the present water quality standards set by the SDWA. The
reauthorization of the SDWA by Congress in 1996 may lead to stricter
monitoring standards which may require additional operating costs for
Pennichuck. It is expected that any additional monitoring and testing costs
arising from EPA mandates should eventually be recouped through water rates.
The Southwood Corporation
Southwood, the Company's real estate subsidiary, was organized for the
purpose of owning, developing, selling and managing approximately 1,340
acres of undeveloped land in Nashua and Merrimack, New Hampshire. This land
was formerly owned by Pennichuck Water Works for watershed protection
purposes.
1996, Southwood entered into a joint venture agreement with a local
builder for the development of a 35 unit residential development in the
northwestern part of Nashua. The partnership agreement provided that
Southwood convey the related parcel of land to the partnership in exchange
for a non-interest bearing note from the partnership secured by a second
mortgage on the real estate conveyed. At December 31, 1996, Southwood
received partial payments on the note reflecting the sale of 8 units to
third party buyers during the fourth quarter of 1996. Southwood accounts
for these real estate transactions using the cost recovery method in which
the gain on sale of land to the partnership is deferred until lots are sold
to third parties and any deferred gain is offset against the related note
receivable balance.
Since 1988, Southwood has been involved in the planning and
development of two major office parks, Southwood Corporate Park and
Southwood Business Park, located at Exit 8 on the F.E. Everett Turnpike in
Nashua, New Hampshire. At the end of 1996, Southwood sold its last
remaining lot in the Business Park to the State of New Hampshire, thereby
concluding its real estate ownership interest in that park. Southwood,
however, continues to own approximately 47 acres of land in the
Corporate Park, which is zoned for commercial use.
In July 1995, Southwood entered into an option agreement with a
regional real estate developer for the remaining 47 acres of available land
located in Southwood Corporate Park, including the parcel owned by 555
Aeyers Mills Associates. Under the terms of that agreement, the developer
will pay to Southwood an option fee each year equal to the annual carrying
costs associated with that land. The option agreement is for a minimum term
of five years.
In December 1990, Southwood sold a 50 percent interest in a 6.75 acre
parcel of land in its Corporate Park to NYNEX Properties Company, Inc.
("NYNEX"). Simultaneously, both Southwood and NYNEX transferred their
respective interests into a joint venture partnership, 555 Aeyers Mills
Associates. The primary purpose of the partnership was to develop,
construct and lease a 90,000 square foot office building once the commercial
real estate market improved. However, the continued deterioration in the
commercial real estate market during the early 1990's caused Southwood
and 555 Aeyers Mills Associates to defer pursuing any development
activities. Furthermore, as a result of NYNEX's recent decision to divest
itself of any real estate development activities, the Company purchased
NYNEX's 50 percent interest in the partnership, pursuant to the terms of the
partnership agreement, in May 1996.
Southwood also owns a 404 acre tract of land in northwest Nashua which
is presently zoned park-industrial. It does not expect to commence
development of this tract until such time as the demand for additional
industrial and commercial floor space improves.
Southwood presently has classified its investment in landholdings and
related development costs as long-term "Deferred land costs" in the audited
Consolidated Balance Sheet at December 31, 1996 included in Item 7 of this
Form 10-KSB Report. The decision to retain long-term ownership and
management or to implement a plan for periodic liquidation of its
developable land will be dependent on prevailing real estate market
conditions and future cash flow needs.
Pennichuck Water Service Corporation
In April 1995, the Company formed Pennichuck Water Service Corporation
("Service Corporation"), a wholly-owned subsidiary, for the purpose of
conducting its non-regulated, water-related activities. The contemplated
activities include providing operations and maintenance contract services to
municipalities, water testing and billing services. In 1995, the Service
Corporation entered into a joint venture partnership with a regional water
engineering firm to provide operations and maintenance contract services to
the Town of Cohasset, Massachusetts.
Employees
The Company and its subsidiaries employ 56 permanent employees and
officers. Of these, there are 32 management and clerical employees who are
non-union. The remaining employees are members of the United Steelworkers
Union. The union contract, which was re-negotiated and completed in
February 1997, has been extended through February 2002. In the opinion of
management, employee relations are satisfactory.
Item 2. DESCRIPTION OF PROPERTIES
The Company owns a three story, 11,616 square foot building located in
downtown Nashua, New Hampshire which it and its subsidiaries occupy. The
mortgage which was previously outstanding on this building was repaid in
March 1996.
Water Supply Facilities
Pennichuck's principal properties are located in Nashua, New
Hampshire, with the exception of several source-of-supply land tracts which
are located in the towns of Amherst, Merrimack and Hollis, New Hampshire. In
addition, Pennichuck owns four impounding dams which are situated on the
Nashua and Merrimack border.
The location and general character of Pennichuck's principal plant and
other materially important physical properties are as follows:
1. Holt Pond, Bowers Pond, Harris Pond and Supply Pond, comprising
Pennichuck's chief source of supply in Nashua and Merrimack, New Hampshire,
together with approximately 672 acres of land located in Nashua and
Merrimack which are owned and held for watershed and reservoir purposes.
2. Four impounding dams which are situated on Pennichuck Brook in
Nashua and Merrimack, New Hampshire.
3. An Infilco Degremont treatment plant using physical chemical
removal of suspended solids and sand filtration with a rated capacity of 35
million gallons per day, located in Nashua.
4. A water intake plant and pumping facility located on the Merrimack
River in Merrimack. This facility, a 20 million gallon per day supplemental
water supply source, was completed on June 3, 1985. This plant provides
additional water during dry summer periods and will provide a long-term
supply for Pennichuck's service area.
5. Eight water storage reservoirs having a total storage capacity of
16.5 million gallons, 5 of which are located in Nashua, 2 in Amherst and 1
in Hollis, New Hampshire.
Water Distribution Facilities
In addition to the above properties, as of December 31, 1996 there
were approximately 348 miles of transmission and distribution mains of
various sizes in streets located in Nashua, Merrimack, Amherst,
Derry, Bedford and Plaistow, New Hampshire which bring water service to
customers through 20,805 service connections. In addition to the
pipeline which lies within the street line, as of December 31, 1996,
Pennichuck owned 20,912 meters and 2,120 hydrants.
Pennichuck also owns a separate building in Nashua which serves as an
operations center and storage facility for its construction and maintenance
activities.
Land Held for Future Development
As discussed above in "ITEM 1. DESCRIPTION OF BUSINESS - General
Development of Business," approximately 1,340 acres of the 2,012 total acres
then owned by Pennichuck Water Works became available for alternate use upon
the completion of Pennichuck's water treatment facility in 1980. Following
Pennichuck Water Works' reorganization in 1984 into a holding company
structure, approximately 1,088 acres were transferred to the Company's real
estate development subsidiary, The Southwood Corporation. Since 1984,
Southwood has sold approximately 288 acres of land to third parties or to
participating joint ventures discussed earlier under "ITEM 1. DESCRIPTION OF
BUSINESS - Narrative Description of Business -- The Southwood Corporation."
The Company has transferred 499 acres of watershed protection land to
Pennichuck since 1984 and currently holds 425 acres of land which has not
been transferred to Pennichuck or Southwood due to access limitations which
restrict the ability to subdivide and transfer that land. Of that acreage
held by the Company, approximately 242 acres are available for buffer and
alternate use..
Based on vegetation, topographical, wetland and hydrological studies,
Southwood has subdivided the remaining 800 acres into buffer (non-
developable) and alternate use (developable) designations, resulting in an
approximate breakout of 108 and 692 acres, respectively. Of the
approximately 692 acres of alternate use land, 506 acres are located
primarily in the northwestern section of City of Nashua, New Hampshire and
186 acres are located in the western and southerly portions of the Town of
Merrimack, New Hampshire. The following table provides a breakout of the
current approved zoning for Southwood's alternate use land:
<TABLE>
<CAPTION>
Nashua, NH Merrimack, NH Total
---------- ------------- -----
<S> <C> <C> <C>
Residential 95 - 95
Industrial 411 186 597
----------------------------------------
Total Alternate Use
Acreage 506 186 692
========================================
</TABLE>
Presently, only 47 acres of Southwood's alternative-use land in the
City of Nashua are available for immediate development, while the remainder
of its landholding in both Nashua and Merrimack is classified as Current Use
Status. In December 1995, Southwood filed for approximately $50,000 in
abatements from the City of Nashua, which was received in May 1996. In
addition, the assessed value of property located in Southwood Corporate Park
was reduced by nearly $1.8 million during 1996 as a result of further
negotiations with the City of Nashua.
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, Pennichuck, Southwood and the
Service Corporation, are not involved in any material litigation or other
proceedings which, in management's opinion, would have an adverse effect on
the business, the consolidated financial condition or the operating results
of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this Report,
there were no matters submitted to a vote of security holders.
PART II:
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Market & Dividend Information" on page 41 of the 1996 Pennichuck
Corporation Annual Report to Shareholders is incorporated herein by
reference. At the record date of March 7, 1997, there were 750 holders of
record of shares of the Company's common stock. The Company's common stock
trades on the Nasdaq National Market System under the symbol PNNW.
Certain bond and note agreements involving Pennichuck require, among
other things, restrictions on the payment or declaration of dividends by
Pennichuck to the Company. Under Pennichuck's most restrictive covenant,
cumulative common dividend payments or declarations by Pennichuck subsequent
to December 31, 1989 are limited to cumulative net income earned after that
date plus $1,000,000. At December 31, 1996, approximately $3,451,000 of
Pennichuck's retained earnings was unrestricted for payment or declaration
of common dividends to the Company.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appears on pages 15 to 22 of the 1996
Pennichuck Corporation Annual Report to Shareholders is incorporated herein
by reference.
Item 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Pennichuck Corporation
appearing on pages 24 to 28, together with the report thereon of Arthur
Andersen LLP dated February 3, 1997 appearing on page 23, and the Quarterly
Financial Data appearing on page 40 of the 1996 Pennichuck Corporation
Annual Report to Shareholders are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's
accountants on any accounting matters or financial disclosures during the
two most recent fiscal years.
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
"Election of Directors" on pages 4 through 8 and "Section 16(a)
Beneficial Ownership Reporting Compliance" of the Securities Exchange Act of
1934 on page 8 of the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 18, 1997 are incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
"Executive Compensation" on pages 9 through 10 of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April
18, 1997 is incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" on pages 2 through 4 of the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders on April 18, 1997
is incorporated herein by reference.
In determining which persons may be affiliates of the Company for the
purpose of disclosing on the cover page of this Form 10-KSB Report the
market value of voting shares held by non-affiliates, the Company has
treated only the members of its Board of Directors and executive officers as
affiliates and has excluded from the calculation all shares over which such
affiliates acknowledge beneficial ownership. No determination has been made
that any director or executive officer or person connected with a director
or executive officer is an affiliate or that any other person is not an
affiliate. The Company specifically disclaims any intention to characterize
any person as being or not being an affiliate.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Relationships and Related Transactions" on page 11 of the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders
on April 18, 1997 is incorporated herein by reference.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of financial statements and exhibits filed as part of this
report:
(1) The following Consolidated Financial Statements of Pennichuck
Corporation and subsidiaries, included in the 1996 Annual
Report to Shareholders for the year ended December 31, 1996,
are incorporated by reference in Item 7:
<TABLE>
<CAPTION>
Page Reference In -
--------------------------------
Annual
Shareholders Form 10-KSB
Report Report
------------ -----------
<S> <C> <C>
Report of Independent Public Accountants 23
Consolidated Balance Sheets at
December 31, 1996 and 1995 24-25
Consolidated Statements of Income for each of
the years ended December 31, 1996, 1995
and 1994 26
Consolidated Statements of Stockholders'
Equity for each of the years ended December 31,
1996, 1995, and 1994 27
Consolidated Statements of Cash Flows for each
of the years ended December 31, 1996, 1995 and
1994 28
Notes to Consolidated Financial Statements 29-40
(2) The Financial Statement Schedules for each
of the years 1996, 1995 and 1994:
Report of Independent Public Accountants
on Schedules for the years ended
December 31, 1996, 1995 and 1994 12
I - Condensed Financial Information of Registrant 13-15
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
(3) Exhibits Index:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
-------------- ----------------------
<C> <S>
3.1 Restated Articles of Incorporation of Pennichuck
Corporation (Filed as Exhibit 3.1 to the Company's
1990 Form 10-K Report and incorporated herein by
reference)
3.2 Articles of Amendment to the Articles of
Incorporation of Pennichuck Corporation
(Filed as Exhibit 3.2 to the Company's 1994 Form 10-
KSB Report and incorporated herein by reference)
3.3 Amended and Restated By-laws of Pennichuck
Corporation (Filed as Exhibit 3.3 to the Company's
1995 second quarter Form 10-QSB Report and
incorporated herein by reference)
10.1 1985 Stock Option Plan (Filed as Exhibit 10.1 to the
Company's registration statement on Form 10 filed in
April 1990 and incorporated herein by reference)
10.2 Deferred Compensation Program for Directors of
Pennichuck Corporation (Filed as Exhibit 10.2 to the
Company's registration statement on Form 10 filed in
April 1990 and incorporated herein by reference)
10.3 Amended Line of Credit Agreement dated October 2,
1991 between Pennichuck Corporation and Fleet Bank-
NH (Filed as Exhibit 10.7 to the Company's 1991 Form
10-K Report and incorporated herein by reference)
10.4 Second Amendment dated March 23, 1994 to Line
of Credit Agreement between Pennichuck Corporation
and Fleet Bank-NH dated October 2, 1991 (Filed as
Exhibit 10.7 to the Company's 1994 first quarter
Form 10-QSB Report and incorporated herein by
reference)
10.5 Amended and Restated Revolving Credit Promissory
Note dated March 23, 1994 between Pennichuck
Corporation and Fleet Bank-NH (Filed as Exhibit 10.8
to the Company's 1994 second quarter Form 10-QSB
Report and incorporated herein by reference)
10.6 Insurance Funded Deferred Compensation Agreement
dated June 13, 1994 (Filed as Exhibit 10.9 to the
Company's 1994 second quarter Form 10-QSB Report and
incorporated herein by reference)
10.7 Amendment Agreement dated May 4, 1995 to Amended and
Restated Revolving Credit Agreement dated March 23,
1994 between Pennichuck Corporation and Fleet Bank-
NH (Filed as Exhibit 10.8 to the Company's 1995
second quarter From 10-QSB Report and incorporated
herein by reference)
10.8 1995 Incentive Stock Option Plan (Filed as Exhibit
10.9 to the Company's 1995 second quarter
Form 10-QSB Report and incorporated herein by
reference)
10.9 Amendment Agreement dated July 31, 1996 to Amended
and Restated Revolving Credit Agreement dated March
24, 1994 between Pennichuck Corporation and Fleet
Bank-NH (Filed as Exhibit 10.10 to the Company's
1996 third quarter Form 10-QSB Report and
incorporated herein by reference)
13 1996 Annual Report to Shareholders (Furnished only
for the information of the Securities and Exchange
Commission and is not deemed to be filed except
for those portions which are expressly incorporated
herein by reference)
21 Subsidiaries of Pennichuck Corporation (Filed as
Exhibit 21 to the Company's 1995 Form 10-KSB Report
and incorporated herein by reference)
23 Consent of Arthur Andersen LLP (Included in this
Form 10-KSB Report)
99 Dividend Reinvestment and Common Stock Purchase
Plan, as amended (Filed as Exhibit 4.1 to Post-
Effective Amendment No.1 to Registration Statement
on Form S-3 filed on March 24, 1997 and incorporated
herein by reference)
</TABLE>
(b) There were no reports on Form 8-K filed in the fourth quarter of 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Pennichuck Corporation
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Pennichuck Corporation's
Annual Report to shareholders incorporated by reference in this Form 10-KSB,
and have issued our report thereon dated February 3, 1997. Our audits were
made for the purpose of forming an opinion on those basic financial
statements taken as a whole. The schedule listed in the attached index of
this Form 10-KSB is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not a part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
February 3, 1997
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 223,548 $ 197,244
Accounts Receivable 214 138
Refundable Income Taxes 72,011 15,540
Prepaid Expenses 13,744 12,044
--------------------------
Total Current Assets 309,517 224,966
Property and Equipment 1,163,424 1,143,893
Less Allowances for Depreciation 482,958 462,711
--------------------------
680,466 681,182
Other Assets 219,424 81,979
Investment in Wholly-Owned Subsidiaries 15,542,982 14,526,793
Advances to (from) Wholly-Owned
Subsidiaries 77,993 (526,078)
--------------------------
$16,830,382 $14,988,842
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Other Current
Liabilities $ 68,546 $ 136,334
Long Term Debt 3,195,000 2,262,374
Other Long Term Liabilities 370,434 342,923
Stockholders' Equity 13,196,402 12,247,211
--------------------------
$16,830,382 $14,988,842
==========================
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Revenues $ 148,297 $ 88,729 $ 89,648
Operating Expenses 53,014 10,926 (23,632)
-------------------------------------------
Operating Income 95,283 77,803 113,280
Interest Expense 198,021 201,166 147,632
-------------------------------------------
Loss Before Income
Taxes and Equity in Net
Income of Subsidiaries (102,738) (123,363) (34,352)
Federal income tax benefit 34,931 41,943 11,680
-------------------------------------------
Loss Before Equity
in Earnings of Subsidiaries (67,807) (81,420) (22,672)
Equity in Earnings of Subsidiaries 1,306,292 1,176,390 995,220
-------------------------------------------
NET INCOME $1,238,485 $1,094,970 $ 972,548
===========================================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES $ 188,521 $ 76,889 $ (89,398)
-------------------------------------------
INVESTING ACTIVITIES:
Equity Transfer to Subsidiary (465,665) (74,719) (41,392)
Purchase of Equipment and
Other Assets (223,649) (37,742) (31,851)
Preferred Stock Redemption Received
From Subsidiary -- -- 681,000
-------------------------------------------
(689,314) (112,461) 607,757
-------------------------------------------
FINANCING ACTIVITIES:
Increase(Decrease) in Notes Payable (1,100,000) (350,000) 1,295,000
Advances (to) from Subsidiaries 2,509,733 1,099,887 (422,392)
Repayment on Mortgage (653,057) (15,769) (14,346)
Payment of Dividends (755,767) (651,570) (567,531)
Preferred Stock Redemption -- -- (681,000)
Proceeds from dividend reinvestment 465,665 74,719 41,392
Other 60,523 (117,000) --
-------------------------------------------
527,097 40,267 (348,877)
INCREASE IN CASH 26,304 4,695 169,482
Cash at Beginning of Year 197,244 192,549 23,067
-------------------------------------------
CASH AT END OF YEAR $ 223,548 $ 197,244 $ 192,549
===========================================
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Notes to Condensed Financial Statements
NOTE A -- ACCOUNTING POLICIES
Basis of Presentation. In the parent-company-only financial statements, the
Company's 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 Company's Annual Report to
Shareholders for the year ended December 31, 1996.
NOTE B -- LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
---- ----
<S> <C> <C>
Unsecured notes payable and line of credit
revolving loan facility with Fleet Bank-NH
at rates ranging from 7.00% to 8.25% due
May 31, 1998 $3,195,000 $1,625,000
Mortgage payable to Bank of New
Hampshire, 9.50%, repaid in March 1996 -- 653,011
--------------------------
3,195,000 2,278,011
Less current portion -- 15,637
--------------------------
$3,195,000 $2,262,374
==========================
</TABLE>
NOTE C -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its
subsidiary, Pennichuck Water Works, Inc., were $755,767, $651,570 and
$535,455, during 1996, 1995, and 1994, respectively. No dividends were
declared or paid by Southwood in 1996, 1995 or 1994.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pennichuck Corporation
(Registrant)
Date: March 21,1997
By: /s/ Charles J. Staab
Charles J. Staab
Vice President, Treasurer and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Maurice L. Arel President and Director (Principal
Maurice L. Arel Executive Officer) March 7, 1997
/s/ Stephen J. Densberger Executive Vice President
Stephen J. Densberger and Director March 7, 1997
/s/ Charles J. Staab Vice President, Treasurer
Charles J. Staab Chief Financial Officer
and Director (Principal Financial
Officer) March 7, 1997
/s/ Bonalyn J. Hartley Vice President and Controller
Bonalyn J. Hartley (Principal Accounting Officer) March 7, 1997
/s/ Joseph A. Bellavance Director March 7, 1997
Joseph A. Bellavance
/s/ Frank B. Clancy Director March 7, 1997
Frank B. Clancy
/s/ Charles E. Clough Director March 7, 1997
Charles E. Clough
/s/ Robert P. Keller Director March 7, 1997
Robert P. Keller
/s/ Hannah M. McCarthy Director March 7, 1997
Hannah M. McCarthy
_______________________ Director ___________
Davis P. Thurber
</TABLE>
----------
the | People | we serve
----------
PHOTOS:
1 [young child w/ bath tub]
2 [grandfather & grandson in canoe on pond]
3 [diner w/ 3 people]
4 [4 girls in synchro swim class]
Pennichuck Corporation 1996 Annual Report
table of Contents
Mission Statement and Selected Financial Data 1
Letter to Shareholders 2
Review of Operations 4
Board of Directors and Officers 14
Management's Discussion and Analysis 15
Report of Independent Public Accountants 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 26
Consolidated Statements of Stockholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29
Market and Dividend Information 41
Annual Meeting and Shareholder Information 41
Five Year Selected Financial Data 42
Message from your Employees 45
the People we serve
For over 100 years, Pennichuck has been a partner in the growth and well-
being of our community. Historically, it was the region's abundant supply
of water that brought industry into the area, bringing with it new jobs,
and a steady influx of people seeking a better way of life. Today,
Pennichuck continues to draw on the region's sources of water to supply
domestic, commercial, industrial and fire protection services for
customers in the city of Nashua and across southern New Hampshire. From
the largest manufacturing facilities, to a child at a school water
fountain, these are the people we serve, at home and at work, our friends
and neighbors in the Pennichuck community.
Water is destined to become the most valuable commodity of all. As a
leading supplier of quality, safe drinking water and water-related
services, Pennichuck has enjoyed steady growth. Your company will always
pursue new opportunities with careful planning and forethought, while
continuing to meet the growing needs of the people we serve. Pennichuck
remains committed to environmental stewardship and protecting the
watershed, in order to preserve the purity and abundance of our most
precious resource for future generations. Just as we always have since
1852.
PHOTO:
5 [Canoe oars (silouetted)]
selected financial data
Pennichuck Corporation ("The Company") is a holding company with three
wholly-owned operating subsidiaries: Pennichuck Water Works, Inc.
("Pennichuck"), The Southwood Corporation ("Southwood") and Pennichuck
Water Service Corporation ("PWSC").
The mission of Pennichuck is to be a leading private supplier of
quality, safe drinking water and water-related services in New England.
Pennichuck Water Service Corporation provides water system
management services for Cohasset, Massachusetts.
The Southwood Corporation is a developer of commercial and
residential real estate with land-holdings in Nashua and Merrimack, New
Hampshire.
Five Year Comparative Financial Highlights--
Pennichuck Corporation and Subsidiaries
(information replaces 4 charts)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(in 000's of dollars)
<S> <C> <C> <C> <C> <C>
Net Income $ 466,000 $ 871,000 $ 973,000 $ 1,095,000 $ 1,238,000
Total Assets $43,745,000 $45,390,000 $46,528,000 $47,893,000 $50,070,000
Earnings per Share $ 0.54 $ 1.11 $ 1.32 $ 1.53 $ 1.68
Dividends per Share $ 0.64 $ 0.64 $ 0.75 $ 0.91 $ 1.03
</TABLE>
letter to shareholders
Dear Shareholder:
The people we serve. That has always been the focus of your Company. This
year's annual report provides a pictorial collage that illustrates not
just the diversity of our customers, but also their broad range of needs.
At Pennichuck, we believe better service for our customers results in
improved returns for our shareholders.
Despite average water consumption, 1996 was a good year for your
Company. Thanks to strict cost control and an improved real estate market,
1996 marked the fifth consecutive year of improved earnings. Consolidated
revenue from operations was $12,203,000 versus $11,486,000 in 1995.
Consolidated earnings grew to $1.68 per common share compared to $1.53
last year. The Company increased its annual dividend from $.91 per share
in 1995 to $1.03 per share in 1996.
1996 was also our first full year of offering the optional cash
payment feature of our Dividend Reinvestment and Common Stock Repurchase
Plan, as well as initial cash investments for Pennichuck customers and
employees. For the year, the Company added over 250 new shareholders and
raised over $466,000 in new equity, which we subsequently invested in new
construction projects.
Pennichuck Water Works, Inc. ("Pennichuck") generated annual
revenues of $10,693,000 versus $10,789,000 last year. This reduction in
revenue was due to a 3.1% reduction in billed consumption for the year,
caused by a very wet month of July. During the year, Pennichuck refinanced
$8 million of debt, which lowered its overall cost of debt and helped
improve earnings for the year. As part of its growth strategy, Pennichuck
established a wholesale contract with the Merrimack Village District (MVD)
for the purchase of water to service a new, 245-unit development currently
under construction in Bedford. The contract also provides for the future
sale of water to MVD by Pennichuck. During the year, we added 247 new
customers to existing systems and opened preliminary discussions with a
number of development companies regarding the potential acquisition of
their water systems.
The year brought dramatic changes in federal regulation of drinking
water through the reauthorization of the Safe Drinking Water Act by the US
Congress. Over the coming months, the United States Environmental
Protection Agency (USEPA) will be developing new regulations to meet the
requirements of the Act. As a member of the National Drinking Water
Advisory Commission to the USEPA, I will be directly involved in drafting
these new regulations. In addition, the US Congress eliminated the tax on
contributions in aid of construction (CIAC) imposed on utilities since
1986. Eliminating the tax on CIAC makes the acquisition of small systems
much more attractive to Pennichuck.
Management continued to nurture its relationship with State
regulatory agencies and our delegation to the New Hampshire Legislature.
Proactive communication keeps officials informed of our long term
expansion plans, relative to issues which could negatively impact our
Company.
The Southwood Corporation ("Southwood") generated revenue of
$1,321,000 this year, compared to $631,000 in 1995. Revenue came from the
sale of two parcels in Southwood Business Park, from the sale of 8 units
in our residential joint venture called "Village at Bowers Pond" and from
certain development option fees. As part of our ongoing program to reduce
cost, Southwood filed for tax abatements which resulted in an annual
property tax reduction of $69,000.
Pennichuck Water Service Corporation ("PWSC"), and its joint venture
partner, continue to profitably manage the water treatment and
distribution system for the town of Cohasset, Massachusetts. As always,
PWSC seeks new opportunities where our specialized expertise and
capabilities could be utilized.
I wish to express my appreciation to our employees and directors for
their commitment and hard work. The success of our Company over this past
year is directly attributable to their efforts. Also, I would like to
recognize our customers and shareholders for their loyalty and support.
Sincerely,
/s/ MAURICE L. AREL
Maurice L. Arel
President and Chief Executive Officer
PHOTO:
6 [Maurice Arel]
Maurice Arel
PHOTO:
7 [man washing car with little girl]
Labor of love:
washing a treasured antique the old-fashioned way, with hose and sponge --
and a little help -- on a glorious, sunny Saturday morning at Brinton's
Landing in Nashua.
REVIEW OF OPERTIONS
the families we serve
1996 was a year of dramatic change in the water works industry, and a year
of significant accomplishment here at Pennichuck. The following report is
categorized according to what we see as the most significant challenges
impacting our industry and your Company:
[] Government regulation and mandates:
Safe Drinking Water Act (SDWA);
State and local government regulation
[] Infrastructure maintenance and replacement
[] Source water protection
[] Technological advancements
[] Customer service expectations
GOVERNMENT REGULATION
We have already mentioned that the US Congress passed the reauthorization
of the Safe Drinking Water Act. Pennichuck management played an active
role in efforts to influence this legislation and ensure that the final
reauthorization was both constructive and realistic. We worked through our
national and regional trade associations, and we visited our legislators
in Washington, to gain their support for a workable law that could be
implemented by the industry.
The new SDWA regulations did not require us to make any immediate
changes at Pennichuck. However, we will be modifying our treatment
processes significantly as we move into the future. In 1996, we conducted
a bench-scale study to analyze the use of ozone as a primary disinfectant
in our water treatment process. Not only does ozone improve the taste and
odor of drinking water, it is also one of the few treatment techniques
proven to be effective in eliminating the threat of giardia lambia and
cryptosporidium; two types of protozoan which have contaminated drinking
water supplies in some municipal water systems. In addition, ozone will
help water utilities meet more stringent regulations for several other
purity parameters in the future.
Highway construction by the State of New Hampshire imposes a
significant financial burden on the Company when it conflicts with our
water lines. Currently, the New Hampshire Department of Transportation is
widening the F.E. Everett Turnpike which runs north and south through the
middle of our service area. We have crossings at virtually every highway
interchange, and at each one, we are required to extend the steel sleeves
protecting our pipelines. In several instances, we have had to relocate
our pipeline and install new sleeves, while maintaining uninterrupted
service to our customers. Since 1994, we have spent approximately $900,000
on highway related relocation work, and we anticipate spending a further
$300,000 over the next two years.
PHOTOS:
8 [family hiking at pond]
9 [grandfather & grandson canoeing on pond]
10 [young child in bath]
11 [bucket of suds w/ sponge]
Back to nature: hiking the trails around the tranquil Supply Pond at our
treatment facility; passing down a wealth of knowledge and fish stories at
Beaver Lake in East Derry, NH; a bath that makes getting clean almost as
much fun as getting dirty.
PHOTO:
12 [diner with three people]
Main street America: customers enjoy great food and friendly service at
Central Diner on Main Street, Nashua. Anyone for apple pie?
the Businesses we serve
On the local level, we are working with the city of Nashua to better
facilitate the dewatering of wastewater sludge from our water treatment
plant. Currently, we dispose our water treatment residuals into the Nashua
wastewater system. However, our residuals contain aluminum which hinders
the dewatering process. In 1997, we will change to using ferric chloride,
an iron based product, instead of aluminum sulfate. Since the ferric
residuals will not interfere with the dewatering process at the city
wastewater plant, we should be able to continue to use the sewer system
for our residual disposal. The less desirable alternative would be to
manage residuals on site, which would involve constructing sludge lagoons.
INFRASTRUCTURE MAINTENANCE AND REPLACEMENT
The water utility profession is customer-driven. Assuring our customers
consistent water quality and ongoing system reliability is our primary
responsibility. The success of our operations and management practices is
measured by our ability to deliver a dependable supply of water to meet
the needs of the community and protect public health, all at a fair price.
Pennichuck has an extensive infrastructure which requires regular
maintenance and, ultimately, replacement in order to always ensure
dependable service for our customers. In 1996, we continued our main pipe
rehabilitation program, replacing 2,800 ft. of 100+ year-old pipeline with
new ductile iron pipe. The old pipe was small-diameter, unlined cast-iron
pipe which had become severely corroded, preventing the necessary flows to
provide good service. Ongoing replacement of old service lines, hydrants
and gate valves improves overall system reliability. Routine meter testing
and maintenance ensures accuracy and fairness.
PHOTOS:
13 [dentist with child]
14 [clerk at produce dept. at supermarket]
15 [barber trimming hair of customer]
16 [coffee cup w/ spoon]
"Open a little wider please..." a cavity-free check up at Dr. Fasulo's;
keeping the fruits and vegetables crisp and fresh at Shop 'n Save; is it
the cut, or the conversation that keeps 'em coming back to Chuck's Barber
Shop?
All of Pennichuck's production equipment benefits from regularly
scheduled maintenance. Pumps and motors must operate on demand to meet
customer expectations. Valves must function properly to isolate system
problems and minimize customer outages. Hydrants must be checked and
operated to make sure they will work well in the event of a fire.
The Company owns and operates five dams which need regular
inspection and maintenance. We also own buildings throughout our systems
which need attention. Our Concord Street production facility incorporates
several buildings which were constructed in the 1800s. These buildings
house modern production equipment and provide useful storage. We make
every effort to maintain these structures and preserve their historical
architecture.
Pennichuck plans to continue to update and modernize its
infrastructure in 1997. The construction of a new 6.6-million-gallon
reservoir adjacent to our 5-million-gallon Fifield storage tank will
provide necessary storage at an anticipated cost of $2.2 million. The
Company also plans to replace 7,075 feet of old, cast-iron pipe in
conjunction with the city of Nashua's project to upgrade the sewer system.
This will result in increased fire protection and water quality to the
impacted areas, at an anticipated cost of $728,000. In 1997, the Company
also plans to upgrade the spillway capacity of the Supply Pond Dam which
was built in the late 1800s. It is expected to cost about $300,000 in
order for the dam to meet current state and federal regulations. In
addition to these major projects, Pennichuck will make ongoing investments
in new technology, improving the watershed and replacing outdated
equipment.
SOURCE WATER PROTECTION
The Pennichuck Brook watershed is our primary source of water, accounting
for about 75% of our total annual supply. The watershed is heavily
developed in several areas, and stormwater runoff from these developments
presents a special challenge for maintaining high quality source water.
During the year, we outlined a Watershed Protection Plan that will
identify which geographical drainage areas feed the Pennichuck Brook
system, as well as potential non-point pollution sources. In addition to
helping us establish priorities for the mitigation and remediation of
stormwater, the Plan will help us obtain regulatory support for any
improvements we institute. When it's finished in 1997, our Plan will serve
as a comprehensive guide for managing, protecting and improving all
aspects of our watershed.
TECHNOLOGICAL ADVANCEMENTS
Technology helps us improve quality and reliability. We rely on computer
technology throughout our water production and treatment processes, to
collect data, as well as to measure and monitor flows and pressures. This
year, we continued to implement our Supervisory Control and Data
Acquisition (SCADA) System. Now, virtually all of our remote pumping
stations are monitored from our water treatment plant in Nashua. We can
oversee operations, make changes and collect information from each
station, remotely, via a personal computer terminal in our Concord Street
control room.
Utilizing computer-aided drafting to create technical specifications
is yet another way technology has helped us improve efficiency. Before
work begins on any construction project, from a new plant addition to a
simple pipe extension, all contractors are given detailed technical
specifications to follow. Adhering to one set of standards ensures uniform
material use and consistent installation practices, resulting in greater
long term quality and reliability, as well as cost savings.
1996 also saw the completion of our Company-wide computerization
effort. Now, most Pennichuck employees are equipped with personal
computers running WindowsTM and Microsoft(R) Office. This is part of our
long-range strategy to network all three of our facilities together, with
everyone using current Windows programs, rather than our older,
incompatible legacy applications. As part of this process, we have
replaced our ten-year-old accounting software package with Macola,TM a
Windows-based accounting program. In pursuing this migration strategy,
we've already succeeded in eliminating the "only" software package that
would have experienced date problems in the year 2000. At this time, all
of our applications software is "Year 2000" compliant.
PHOTO:
17 [Taggart ice general manager with bags of ice]
One cool customer: Taggart Ice Company in South Nashua makes hundreds of
tons of ice every year. General Manager, Jody Ruonala, chills out in the
company's warehouse-sized freezer.
the Industries we serve
In addition, the Company is developing a business resumption plan
that details disaster recovery procedures, not just for computer and
support services, but for all aspects of the Company's operations. We
expect to complete this plan in 1997.
CUSTOMER SERVICE EXPECTATIONS
The customers we serve demand a high quality product at a reasonable
price. In addition to water that's clear and clean, odorless and great-
tasting, our customers expect strong water pressure and responsive service
from our organization. At Pennichuck, we work hard to understand our
customers' needs in order to better serve them. We maintain a computerized
log to track all customer concerns, and we have a well-trained staff to
communicate the human side and friendly face of our Company to our
customers.
As with any company, Pennichuck is only as strong as its people. All
our employees are empowered to make real-time decisions. They are trained
to anticipate, respond and correct problems such as service breakdowns
quickly and effectively. To achieve this goal, training and education is
essential. In every department throughout the Company, employees are
encouraged to maintain certifications, attend seminars, pursue computer
training, and take advantage of courses offered by our professional and
trade associations. At Pennichuck, we believe every employee has the
opportunity, and indeed, the responsibility, to extend good will to our
customers.
Your Company operates with a singular focus aimed at bettering
ourselves and our performance. We are continually striving to find new
ways to improve our efficiency, improve our water quality and improve our
customer service. However, everyone, including customers, must understand
that there is a very real economic cost associated with the improvements
we make.
PHOTOS:
18 [Sanders print circuit board processor]
19 [Anheuser-Busch lager tanks]
20 [Hampshire Chemical employees collecting field samples]
21 [scoop with ice]
An aqueous in-line cleaner removes residue from printed circuit boards
manufactured at Sanders; lager tanks at the Merrimack Brewery of Anheuser-
Busch; collecting field samples at Hampshire Chemical.
PHOTO:
22 [4 girls at Boys' and Girls' Club synchro swim class]
All the right moves: 12- to 14-year-old girls perfect their ballet-like
moves during the Wednesday evening synchronized swimming class at the Boys
and Girls Club of Greater Nashua. Olympics 2004 here we come!
the Communities we serve
GROWTH AND REGIONALIZATION
Since 1986, Pennichuck has successfully acquired sixteen (16) community
water systems throughout southern New Hampshire, adding over 1,000 new
customers in the process. In addition, we were granted franchise approval
from the New Hampshire Public Utilities Commission to serve major portions
of the towns of Amherst and Bedford, as well as limited portions of
Merrimack, Hollis and Milford. We also established wholesale water
agreements with the towns of Milford, Merrimack and Hudson. In 1995, we
entered into a three-year, joint venture agreement with Weston and Sampson
Services to maintain and operate the water system for the town of
Cohasset, Massachusetts. We are midway through our second year of
successful and profitable operations under this agreement.
During 1996, we continued this positive trend, acquiring community
water systems and pursuing maintenance and operations contracts for other
municipal water systems. We have completed acquisition agreements for
seven new community water systems, serving 500 new customers located in
Bedford, Amherst, Salem and Plaistow, New Hampshire. We also submitted
proposals to maintain and operate the water systems for the towns of
Devens, Massachusetts, and Hudson, New Hampshire. We narrowly missed
winning the Devens bid which was awarded to another contract operator. The
contract for Hudson will be decided in late 1997 or early 1998. Whatever
the result, you can be assured that your Company will continue to pursue
new opportunities for growth and expansion in various communities
throughout our region and into the future.
PHOTOS:
23 [two students at pennichuck jr. high school]
24 [nashua waste water treatment plant]
25 [two firefighters at nashua fire station one]
26 [swimmers goggles]
A refreshing break between classes at Pennichuck Junior High; Nashua
Waste Water Treatment Facility recycles our precious resource, returning
it safely to the environment; Nashua Fire Department Station No. 1 at the
ready in case of any emergency.
board of Directors and Officers
BOARD OF DIRECTORS
Maurice L. Arel, President, Chief Executive Officer, Pennichuck Corporation
Joseph A. Bellavance, President, Bellavance Beverage Company, Inc.
Frank B. Clancy, Clancy & O'Neill, Attorneys at Law
Charles E. Clough, President, Freedom Energy Company
Stephen J. Densberger, Executive Vice President, Pennichuck Corporation
Robert P. Keller, Chief Executive Officer, Commerce Security Bancorp, Inc.
Hannah M. McCarthy, President, Daniel Webster College
Charles J. Staab, Vice President, Chief Financial Officer and Treasurer
Davis P. Thurber, Chairman, Bank of New Hampshire Corporation
SENIOR BOARD OF DIRECTORS
John C. Collins
OFFICERS
Maurice L. Arel, President, Chief Executive Officer
Stephen J. Densberger, Executive Vice President
Charles J. Staab, Vice President, Chief Financial Officer and Treasurer
Bonalyn J. Hartley, Vice President-Controller
Donald L. Ware, Chief Engineer
James L. Sullivan Jr., Secretary
IN MEMORIAM
James L. Sullivan, Past President & Senior Director
Pennichuck Water Works, Inc. from 1957-1996
management's Discussion & Analysis of financial condition and result of
operations
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements, and with the five year
Selected Financial Data on page 42. Pennichuck Corporation (the "Company")
has three wholly-owned subsidiaries: Pennichuck Water Works, Inc.
("Pennichuck") which is involved in water supply and distribution, The
Southwood Corporation ("Southwood") which owns, manages and develops real
estate, and Pennichuck Water Service Corporation ("PWSC") which is
involved in non-regulated, water-related services and operations. The
activities of these subsidiaries are discussed separately under "Results
of Operations." Pennichuck's operations are regulated by the New Hampshire
Public Utilities Commission (the "NHPUC") and, as such, Pennichuck must
obtain approval before raising water rates to recover corresponding
increases in operating expenses and to obtain the opportunity to earn a
return on recent rate base investments.
LIQUIDITY AND CAPITAL RESOURCES
The operating and capital funds required by the Company's subsidiaries are
generally provided by internally-generated cash, and as necessary, by
borrowings available under a revolving credit facility with Fleet Bank-NH
("Fleet"). For the twelve months ended December 31, 1996, the consolidated
operating cash flow was approximately $2,300,000, of which $1,900,000 was
derived from the Company's core water utility business and $400,000 from
real estate and other operating activities. Due to the seasonal nature of
Pennichuck's business, cash flow during the first and second quarters of
the calendar year is generally insufficient to meet all of the Company's
cash requirements for debt service, dividend payments, capital
expenditures and working capital. However, cash flow from utility
operations tends to be greater in the third and fourth quarters as a
result of increased water consumption during the late-spring and summer
months. Cash flow derived from real estate activities in 1996 was derived
from the sale of one land parcel and Southwood's residential joint
venture, as discussed later under "Results of Operations."
Under a revolving term loan agreement with Fleet, the Company has
available an unsecured $4.5 million credit facility. This facility is
utilized to fund any shortfall in working capital and to fund capital
projects on an interim basis until such projects can be refinanced on a
long-term basis. In July 1996, that term loan agreement was amended to
extend the maturity date of all amounts borrowed (or to be borrowed in the
next 17 months) until May 31, 1998. As a result, outstanding borrowings
totaling $3,195,000 at December 31, 1996, have been classified as "Long-
term debt" in the Consolidated Balance Sheet; consisting of $2,750,000 in
short-term notes maturing on March 12, 1997, plus $445,000 outstanding
under the revolving line of credit portion of that loan. The interest
rates on the short-term notes are tied to Fleet's cost of funds, or LIBOR,
whichever is lower, and the interest rate on borrowings outstanding under
the line of credit is at Fleet's "base rate." At December 31, 1996, the
weighted average interest rates on the outstanding term notes and
borrowings under the line of credit were 7.09% and 8.25%, respectively.
In March 1996, Pennichuck issued an $8 million, unsecured note, the
proceeds of which were used to refinance $5,330,000 of existing long-term
debt, as well as $2,670,000 of outstanding borrowings with Fleet. The term
of this note is for 25 years and carries a fixed interest rate of 7.40%.
For 1997, the Company's consolidated capital budget is estimated to
be $5.3 million, all of which relates to water utility projects. The 1997
capital budget contains several major projects, the most significant of
which is a 6.6 million-gallon-water storage facility at an estimated cost
of $2,200,000. Other major projects include (i) replacing 7,000 linear
feet of pre-1900 distribution mains, (ii) upgrading Pennichuck's major
electric pumps at its treatment plant for greater operating efficiency,
(iii) dredging one of Pennichuck's source of supply ponds and
reconstructing one of its dams, and (iv) relocating a distribution main to
accommodate ongoing State highway construction projects.
In order to partially fund its 1997 capital expenditure program,
Pennichuck has obtained preliminary approval from the New Hampshire
Business Finance Authority to issue up to $4,500,000 in tax exempt bonds.
Pending regulatory approval by the NHPUC, this financing should be
completed during the second quarter of 1997. It is expected that budgeted
operating cash flow, together with any unused portion of the Company's
line of credit, will be sufficient to fund the remainder of Pennichuck's
capital budget and provide the necessary operating funds for the Company's
subsidiaries. Given the significant rate base investment, in the amount of
$3,100,000, that Pennichuck made in 1996, and the $5,300,000 planned in
1997, Pennichuck intends to file for rate relief with the NHPUC in the
second quarter of 1997. At this time, no determination has been made
regarding the amount of the rate relief to be requested.
Pennichuck is subject to the water quality regulations promulgated
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 ("SDWA"). The
quality of Pennichuck's treated water currently meets or exceeds all
standards set by the EPA and Pennichuck does not anticipate that any
significant capital expenditures will be required in the next three years
given present water quality standards set by the SDWA. The re-
authorization of the SDWA by Congress in 1996 will lead to increased
monitoring standards which may result in increased operating costs for
Pennichuck. It is expected that any additional monitoring and testing
costs arising from EPA mandates will eventually be recouped through water
rates.
Consolidated retained earnings of the Company increased by $482,718
during 1996 to $7,380,880 at December 31, 1996. The net increase in
retained earnings resulted from $1,238,485 of net income less $755,767 for
the payment of dividends on its common stock. For the twelve months ended
December 31, 1996, the Company paid dividends of $1.03 per common share,
representing a 13% increase over the previous year. However, the Company's
ability and willingness to pay future dividends on its common stock are
dependent on its future earnings and financial condition.
In October 1995, the Company amended its dividend reinvestment plan
(the "Plan"). Such amendments increased the number of common shares
offered under the Plan from 100,000 to 200,000, and expanded Plan
participation to include Pennichuck's residential customers and employees
residing in New Hampshire. Under the amended Plan, participants are
allowed to make initial and subsequent optional cash investments in shares
of common stock, not exceeding $3,000 per quarter. The Company began
issuing shares for initial investments and optional cash investments in
February 1996. For the year ended December 31, 1996, a total of 26,218 new
shares were issued under the Plan, resulting in approximately $466,000 of
additional common equity capital.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
For the twelve months ended December 31, 1996, consolidated net income of
the Company and its subsidiaries was $1,238,485, or $1.68 per common
share, compared to $1,094,970, or $1.53 per common share in 1995. For
1996, consolidated revenues increased to $12,202,688; a 6.2% increase over
last year. Although consolidated revenues in 1996 increased over the year
before, water revenues generated by Pennichuck decreased by $96,000 while
revenues from real estate and other operations increased by $812,000, for
reasons discussed in greater detail below.
WATER UTILITY OPERATIONS
In 1996, water revenues decreased to $10,693,151; a 1% decline from 1995.
That decrease is principally the result of a 3.1% decline in billed
consumption within Pennichuck's core system, reflecting the damper and
cooler conditions experienced during 1996, and a 3% decline in industrial
consumption due to a continued weak economy in the manufacturing sector.
Total rainfall in 1996 was 53" compared to 39" in 1995 and represented the
fourth rainiest year since 1900. As in recent years, Pennichuck realized a
modest 1.2% growth rate in new customers within its core and community
water system franchises.
For the twelve months ended December 31, 1996, Pennichuck's overall
rate of return on rate base, as defined, was 8.42%, or 39 basis points
below its allowed overall rate of return of 8.81%. That decrease in
Pennichuck's overall return reflects its added investment in rate base in
the amount of $1.9 million, from $27.9 million at the end of 1994 to $29.8
million at the end of 1996, and a 25% increase in property taxes paid to
the city of Nashua and the town of Merrimack, totaling nearly $250,000
during the same two-year period. The Company expects that Pennichuck will
be allowed a rate increase so that it can earn a reasonable return on its
additions to rate base, and in order to recover the additional taxes by
increasing the rates charged to its customers. However, Pennichuck will
not be able to charge its customers for any increase in taxes incurred
prior to the effective date of any such rate increase. Given the
significant investment in rate base planned for 1997 and increased
operating costs incurred, Pennichuck expects to file for a rate increase
with the NHPUC during the second quarter of 1997, although the amount of
such increase has yet to be determined.
The utility's operating expenses include costs for treatment and
production, maintenance, administration, property taxes, and depreciation
and amortization. For the twelve months ended December 31, 1996,
Pennichuck's operating expenses were $7,606,482, representing a 6.1%
increase over 1995. Treatment and production costs totaled $1,726,000 for
1996; a $57,000 increase from the previous year, caused primarily by an
$83,000 increase in chemical and sludge removal costs. In February 1996,
the city of Nashua increased the sludge disposal rate charged Pennichuck
from $1.31 to $3.91 per hundred cubic feet, resulting in a $50,000
increase in fees. Increased production costs, however, were partially
offset by $67,000 in reduced power costs as a result of a 3.8% decrease in
1996 pumpage. Distribution and maintenance expenses in 1996 increased by
$103,000 over 1995, a result of an aggressive preventive maintenance
program for services and gate valves. Other significant changes in
operating costs include a $77,000 increase in depreciation expense
reflecting the increased investment in plant in service. Also, property
taxes increased $104,000 as a result of re-assessments of Pennichuck's
property during 1995 and additional taxable property placed in service
during 1996. Property taxes continue to be a major component of
Pennichuck's cost structure, representing approximately 17% of its total
operating costs and 12% of its total operating revenues.
As a percent of utility operating revenues, operating expenses were
71.1% and 66.4% for 1996 and 1995, respectively. Although this ratio is
not necessarily an indicator of operating efficiency, it does provide the
operating margin available to cover interest, income taxes and dividends
distributable to the Company.
WATER SERVICE OPERATIONS
In an effort to expand its non-regulated, water-related business
activities, the Company created a wholly-owned subsidiary, Pennichuck
Water Service Corporation ("PWSC"). PWSC entered into a joint venture with
a regional water engineering firm to provide water-related operations and
maintenance contract services to municipalities, especially those which
may have financial difficulty complying with the mandates of the SDWA.
Contract operation and public-private partnerships provide viable
alternatives for such municipalities. In May 1995, the joint venture
entered into a three year contract with the town of Cohasset,
Massachusetts, to operate its water treatment plant and distribution
system. Operation of this system began on July 1,1995. While this single
contract alone did not have a material impact on the Company's 1996
consolidated earnings, PWSC is pursuing additional operating maintenance
contracts as growth opportunities for the Company.
REAL ESTATE AND OTHER OPERATIONS
For the twelve months ended December 31, 1996, real estate and other
revenues increased to $1,509,537 compared to $697,443 in 1995. That
increase is attributable to several significant real estate transactions
which occurred during 1996, as discussed further below.
1996 revenues include two major land sales, both within Southwood
Business Park. As a result of these sales, Southwood no longer has any
further ownership interest in this Park. In January 1996, Southwood sold a
19.6-acre parcel in its Business Park for $495,000, net of commission, and
in December 1996, Southwood sold its last remaining lot in its Business
Park to the State of New Hampshire for $535,000. Although the latter sale
closed on December 30, 1996, the proceeds from that sale were not received
until early January 1997 and, therefore, Southwood has included the
revenue from the sale under "Account receivable" in the accompanying
Consolidated Balance Sheet as of December 31, 1996.
Other revenues from real estate-related activities during 1996
include approximately $82,000 of option income earned under a development
agreement entered into in September 1995 with a regional developer. As
lots are readied for development, the agreement provides for a per-acre
payment of a minimum of $60,000 to Southwood. Presently, there are 47
acres in the Corporate Park subject to this agreement.
Also in May 1996, Southwood entered into a joint venture, Bowers
Pond LLP, with a local developer to develop a 35-lot residential
subdivision in Nashua. Under the terms of the agreement, Southwood, as a
50% partner, has sold to the partnership approximately 15 acres of land in
exchange for a $700,000 non-interest bearing note. As homes are
constructed and sold to third parties, Southwood will receive principal
payments on the note of $20,000 per lot and, in addition, will receive 50%
of the profit on each home. Under generally accepted accounting
principles, the note receivable has been offset by the deferred gain on
the sale of land to the partnership, and any gains will be recorded as the
homes are sold to third parties. As of December 31, 1996, the partnership
had sold 8 lots and Southwood had recorded $208,000 in revenues from those
sales. There were no such residential partnership activities during 1995.
The operating expenses associated with Southwood's activities were
approximately $982,000 in 1996, and include $730,000 of allocable
infrastructure costs associated with the two land sales discussed
previously. Also included in real estate operating expenses are property
taxes totaling $56,000 and $187,000, for 1996 and 1995 respectively. Gross
real estate taxes in 1996 totaled approximately $106,000 and were offset
by the receipt of approximately $50,000 from the city of Nashua relating
to the settlement of the prior year's property tax abatements. In
addition, the assessed value of property located in Southwood Corporate
Park was reduced by nearly $1.8 million during 1996 as a result of
negotiations with the city of Nashua.
In May 1996, NYNEX Corporation ("NYNEX"), a partner with Southwood
in 555 Aeyers Mills Associates, sold its one-half interest in that
partnership to the Company for approximately $204,000. NYNEX's decision to
sell its interest was part of a corporate-wide plan to divest itself from
real estate development activities. That partnership was originally formed
to develop, construct and lease a 90,000-square-foot office building on a
6.75-acre site owned by the partnership in Southwood Corporate Park. The
entire ownership interest in that parcel is now included within the 47
acres under the development option agreement discussed earlier.
In addition to the 47 acres remaining to be developed in Southwood
Corporate Park, Southwood owns approximately 645 acres in the city of
Nashua and the town of Merrimack which is available for development.
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
For the twelve months ended December 31, 1995, consolidated net income of
the Company and its subsidiaries was $1,094,970, or $1.53 per common
share, compared to $972,548, or $1.32 per common share in 1994. Earnings
per share for 1994 includes $.14 from the settlement of several property
tax abatements received from the city of Nashua relating to prior years'
non-utility property assessments. For 1995, consolidated revenues
increased to $11,486,183; a 12.4% increase over 1994.
WATER UTILITY OPERATIONS
Water revenues increased to $10,788,740 in 1995; a 6.2% increase over
1994. This increase was principally the result of favorable rate and
volume increases experienced by Pennichuck during 1995. On December 1,
1994, Pennichuck initiated a step increase of 3.5%, which had been
stipulated by the NHPUC as part of Pennichuck's November 1993 rate case
settlement. The amount of the step increase was based on certain
additional rate base investment and increased operating costs incurred
from October 1, 1993 to September 30, 1994. The full benefit of that step
increase, amounting to approximately $345,000, was realized during 1995.
The increase in water revenues was further affected by a 2.6% increase in
water consumption in 1995 as compared to 1994. The increased consumption
occurred primarily in the third quarter, as a result of lower than normal
rainfall and warmer than normal temperatures during that period. In 1995,
Pennichuck added 284 new customers within its core system franchise, and
acquired one additional community water system with 70 customers in
Epping, New Hampshire.
For the twelve months ended December 31, 1995, Pennichuck's
operating expenses were $7,165,797; a $350,000, or 5.1%, increase over
1994. Operating costs for 1995 reflect a major increase for property taxes
in the city of Nashua and the town of Merrimack as a result of property
re-assessments which became effective April 1, 1995. The Company
previously reported that the operating assets of Pennichuck were in the
process of being reassessed by those local authorities for the tax year
April 1, 1995 to March 31, 1996. In August 1995, Pennichuck reached a
settlement agreement with Nashua and Merrimack with respect to the
assessed values of its utility properties, resulting in a 23% increase
over previous assessments. On an annualized basis, this represents
approximately $240,000 of additional property taxes, of which
approximately $180,000 is recognized in 1995.
Treatment and production costs totaled $1,669,000 for 1995
reflecting a $103,000 increase from the previous year. This is principally
due to an 11.6% increase in pumpage during the third quarter, as a result
of warmer, drier weather than in the same quarter of 1994. Other
significant cost increases during 1995 were approximately $42,000 in
additional depreciation and amortization expense due to the increased
investment in plant in service during 1995 and 1994, and $33,000 of
additional employee benefits relating to pension and other post-retirement
benefits.
REAL ESTATE OPERATIONS
For the twelve months ended December 31, 1995, real estate and other
revenues increased to $697,443 compared to only $52,884 in 1994. This
increase is attributable to two significant real estate transactions which
occurred during 1995, as discussed below.
During 1995, Southwood experienced renewed interest in its
Corporate and Business Parks, due to the gradual absorption of vacant
office space in the greater Nashua area over the past two years. In August
1995, Southwood sold a 9.96-acre parcel of land within its Corporate Park
to a local company for $647,000, which is reflected in the Consolidated
Statements of Income, net of approximately $65,000 of closing costs. This
sale resulted in a net pretax gain of $147,000.
As discussed earlier, effective September 1, 1995, Southwood entered
into an option agreement with a regional real estate developer for the
remaining 47 acres of available land located in Southwood Corporate Park.
For the year ended December 31, 1995, Southwood has recorded $40,000 in
option income relating to this agreement, and the estimated annual income
from this agreement is expected to offset the current carrying costs of
the land under option.
The operating expenses associated with Southwood's activities were
approximately $821,000 in 1995, and include $410,000 of allocable
infrastructure costs associated with the sale of the 9.96-acre parcel as
previously discussed. Also included in real estate operating expenses are
property taxes totaling $187,000 and $62,000 in 1995 and 1994,
respectively. Gross real estate taxes in 1994 totaled $217,000, which were
offset by the receipt of approximately $155,000 from the city of Nashua in
settlement of prior years' property tax abatements.
EFFECTS OF INFLATION
The effects of inflation on the utility operations of the consolidated
group are not material since the NHPUC allows most prudent and reasonable
cost increases to be recouped through increased water rates. It should be
noted, however, that a regulatory lag exists from the time that the
utility incurs higher costs to the time that it is allowed to bill
revenues sufficient to cover these cost increases. In times of high
inflation, this lag could have a detrimental effect on the profitability
of Pennichuck and the Company.
Report of Arthur Andersen, LLP
INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Pennichuck Corporation:
We have audited the accompanying consolidated balance sheets of Pennichuck
Corporation and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Pennichuck Corporation and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN, LLP
Boston, Massachusetts
February 3, 1997
consolidated Balance Sheets
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Assets
Property, Plant and Equipment
Land $ 378,237 $ 317,739
Buildings 15,847,287 15,172,619
Equipment 41,861,346 39,214,221
Construction work in progress 149,930 522,374
----------------------------
58,236,800 55,226,953
Less accumulated depreciation 14,898,405 13,780,780
----------------------------
43,338,395 41,446,173
Current Assets
Cash 260,668 202,763
Accounts receivable, net of reserves of $25,000 in
1996 and 1995 1,207,762 854,479
Unbilled revenue 920,000 889,000
Refundable income taxes 62,848 14,091
Materials and supplies, at cost 225,373 219,757
Prepaid expenses and other current assets 382,388 389,877
----------------------------
3,059,039 2,569,967
Other Assets
Deferred land costs 2,412,374 2,844,090
Deferred charges and other assets 1,106,198 916,148
Investment in real estate partnership 153,692 116,815
----------------------------
3,672,264 3,877,053
$ 50,069,698 $ 47,893,193
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
consolidated Balance Sheets, continued
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Stockholders' Equity and Liabilities
Stockholders' Equity
Common stock - $1 par value - authorized 2,400,000
shares, issued and outstanding 748,156 and 721,598
shares in 1996 and 1995, respectively $ 748,156 $ 721,598
Additional paid in capital 5,120,306 4,678,530
Retained earnings 7,380,880 6,898,162
----------------------------
13,249,342 12,298,290
Less cost of 2,641 and 2,539 shares of common stock
in treasury in 1996 and 1995, respectively (52,940) (51,079)
----------------------------
13,196,402 12,247,211
Preferred Stock
No par value, 100,000 shares authorized, no shares
issued in 1996 and 1995 -- --
Long-Term Debt, Less Current Portion 20,995,000 20,881,078
Current Liabilities
Current portion of long-term debt 818,750 146,933
Accounts payable 265,342 586,309
Accrued interest payable 329,951 194,514
Other current liabilities 714,536 903,412
----------------------------
2,128,579 1,831,168
Commitments and Contingencies
Deferred Credits and Other Reserves
Deferred income taxes 2,265,629 1,776,091
Regulatory liability 1,247,756 1,280,679
Deferred investment tax credits 1,197,390 1,230,426
Customer advances and other liabilities 244,487 270,630
----------------------------
4,955,262 4,557,826
Contributions in Aid of Construction 8,794,455 8,375,910
----------------------------
$ 50,069,698 $ 47,893,193
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
consolidated statements of Income
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Water utility operations $ 10,693,151 $ 10,788,740 $ 10,162,896
Real estate and other operations 1,509,537 697,443 52,884
--------------------------------------------
12,202,688 11,486,183 10,215,780
Operating Expenses
Water utility operations 7,606,482 7,165,797 6,815,856
Real estate and other operations 982,293 839,622 94,212
---------------------------------------------
8,588,775 8,005,419 6,910,068
Operating Income 3,613,913 3,480,764 3,305,712
Other Income (Expense) 7,249 1,914 (26,731)
Interest Expense (1,630,581) (1,703,570) (1,716,226)
---------------------------------------------
Income Before Provision for Income Taxes 1,990,581 1,779,108 1,562,755
Provision for Income Taxes 752,096 684,138 590,207
---------------------------------------------
Net Income 1,238,485 1,094,970 972,548
Preferred Stock Dividend and Premium Paid on
Early Redemption of Preferred Stock -- -- 32,077
---------------------------------------------
Earnings Applicable to Common Shares $ 1,238,485 $ 1,094,970 $ 940,471
=============================================
Weighted Average Shares Outstanding 736,494 716,312 714,422
=============================================
Earnings Per Common Share $ 1.68 $ 1.53 $ 1.32
=============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
consolidated statements of Stockholders' Equity
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Common Common Additional
Stock- Stock- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 713,571 $ 713,571 $ 4,654,860 $ 6,049,745 $ (18,504)
Net income 972,548
Dividend reinvestment plan 2,926 2,926 38,467
Dividends Declared:
Redeemable preferred stock (32,077)
Common stock - $.75 per share (535,455)
-----------------------------------------------------------
Balances at December 31, 1994 716,497 716,497 4,693,327 6,454,761 (18,504)
Net income 1,094,970
Dividend reinvestment plan 5,061 5,061 69,658
Common Dividends declared - $.91 per share (651,569)
Common equity issuance costs (84,915)
Exercise of stock options 40 40 460
Repurchase of 2,025 common shares (32,575)
-----------------------------------------------------------
Balances at December 31, 1995 721,598 721,598 4,678,530 6,898,162 (51,079)
Net income 1,238,485
Dividend reinvestment plan 26,218 26,218 439,446
Common Dividends declared - $1.03 per share (755,767)
Common equity issuance costs (1,770)
Exercise of stock options 340 340 4,100
Repurchase of 102 common shares (1,861)
-----------------------------------------------------------
Balances at December 31, 1996 748,156 $ 748,156 $ 5,120,306 $ 7,380,880 $ (52,940)
===========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
consolidated statements of Cash Flows
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,238,485 $ 1,094,970 $ 972,548
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,223,568 1,142,214 1,182,180
Amortization of deferred investment tax credits (33,036) (33,036) (33,036)
Provision for deferred income taxes 489,538 241,735 448,401
Changes in assets and liabilities:
Accounts receivable and unbilled revenue (384,283) (266,105) 354,662
Refundable income taxes (48,757) 35,087 (49,178)
Materials and supplies (5,616) (21,429) 21,576
Prepaid expenses 7,489 4,059 (9,750)
Deferred charges and other assets (253,658) (365,971) (330,703)
Accounts payable and accrued expenses (262,505) 649,315 (329,220)
Other 311,438 698,129 11,377
-----------------------------------------
Net Cash Provided by Operating Activities 2,282,663 3,178,968 2,238,857
Investing Activities:
Purchase of property, plant & equip. (3,151,858) (2,528,110) (2,412,639)
Contributions in aid of construction 467,577 537,134 234,766
Decrease in restricted cash -- -- 166,880
(Increase) decrease in investment in real estate
partnership (36,877) 7,489 1,000
-----------------------------------------
Net Cash Used in Investing Activities (2,721,158) (1,983,487) (2,009,993)
Financing Activities:
Proceeds from long-term borrowings 8,000,000 -- 5,400,000
Payments on long-term debt (6,114,307) (147,019) (5,545,596)
Net (decrease) increase in notes payable to bank (1,100,000) (350,000) 1,295,000
Dividends paid (755,767) (651,569) (567,532)
Redemption of redeemable preferred stock -- -- (681,000)
Common equity issuance costs & other 809 (116,991) --
Proceeds from dividend reinvestment plan 465,665 74,719 41,393
-----------------------------------------
Net Cash Provided (Used in) Financing Activities 496,400 (1,190,860) (57,735)
Increase in Cash 57,905 4,621 171,129
Cash at Beginning of Year 202,763 198,142 27,013
-----------------------------------------
Cash at End of Year $ 260,668 $ 202,763 $ 198,142
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Notes to consolidated financial statements
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of Pennichuck Corporation and
subsidiaries are as follows:
Basis of Presentation: The financial statements include the accounts of
Pennichuck Corporation, an investor-owned holding company (the "Company")
and its subsidiaries, Pennichuck Water Works, Inc. ("Pennichuck"), The
Southwood Corporation ("Southwood") and Pennichuck Water Service
Corporation ("PWSC").
Nature of Operations: Pennichuck is engaged principally in the gathering
and distribution of potable water to approximately 22,000 customers in
southern New Hampshire. Southwood owns, manages and develops real estate.
PWSC is involved in non-regulated, water-related services and operations.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions. These may affect the reported amounts
of assets and liabilities and 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.
Property, Plant and Equipment: Property, plant and equipment is recorded
at cost plus an allowance for funds used during construction ("AFUDC") on
major additions. The provision for depreciation is computed on the
straight-line method over the estimated useful lives of the assets
including property funded with contributions in aid of construction.
Maintenance, repairs and minor improvements are charged to expense
as incurred. Improvements which significantly increase the value of
property, plant and equipment are capitalized.
Revenues: Standard charges for water utility services to customers are
recorded as revenue, based upon meter readings. 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 based on experience and specific identification of delinquent
customer accounts.
Deferred Charges and Other Assets: Deferred charges include costs of
obtaining debt financing, regulatory assets and costs incurred for plant
expansion. Debt expenses are amortized over the term of the bonds and
notes.
Regulatory Assets: Pennichuck is subject to the provisions of SFAS 71,
"Accounting for the Effects of Certain Types of Regulations." Pennichuck
has recorded certain regulatory assets in cases where the New Hampshire
Public Utilities Commission has permitted, or is expected to permit,
recovery of these costs over future periods. Included in deferred charges
and other assets are regulatory assets totaling $268,385 and $234,896 at
December 31, 1996 and 1995, respectively.
Deferred Land Costs: Included in deferred land costs are Southwood's
original basis in its landholdings and developmental costs for its
Corporate and Business Parks. Deferred land costs are stated at the lower
of cost or market.
Investment in Partnership: Southwood is a 50 percent partner in a land
development joint venture for a certain tract of land owned by the
partnership. Southwood's investment in this partnership is recorded at
the lower of cost or estimated net realizable value.
In March 1995, the Financial Accounting Standards Board issued SFAS
121, "Accounting for the Impairment of Long Lived Assets and Long Lived
Assets to be Disposed of." This statement imposes a stricter criterion for
regulatory assets by requiring that such assets be probable of recovery at
each balance sheet date. The Company adopted this standard on January 1,
1996 and the adoption did not have a material impact on the financial
position or the results of operations based on the current regulatory
structure under which Pennichuck operates.
Income Taxes: The provision for federal and state income taxes is based
on income reported in the 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. Investment credits previously realized for income tax
purposes are amortized for financial statement purposes over the life of
the property giving rise to the credit.
Customer Advances and Contributions in Aid of Construction: Under
construction contracts with real estate developers and others, Pennichuck
receives advances for the costs of new main installation. Pennichuck
makes refunds on a portion of the advances as customers attach to the main
over periods generally not exceeding five years. Customer advances which
are no longer refundable are transferred to the contributions in aid of
construction account and amortized over the life of the property.
Pennichuck also credits to contributions in aid of construction 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.
Earnings Per Share: Earnings per share are based on the weighted average
number of shares of Common Stock outstanding (736,494 for 1996, 716,312
for 1995, and 714,422 for 1994) after deducting preferred dividends and a
premium paid for the early redemption of redeemable preferred stock.
NOTE B - INCOME TAXES
The components of the federal and state income tax provision at December
31 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal $ 618,113 $ 547,526 $ 484,208
State 167,019 169,648 139,035
Amortization of investment tax credits (33,036) (33,036) (33,036)
-----------------------------------
$ 752,096 $ 684,138 $ 590,207
===================================
Currently payable $ 311,101 $ 471,780 $ 416,862
Deferred 440,995 212,358 173,345
-----------------------------------
$ 752,096 $ 684,138 $ 590,207
===================================
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the effective income tax rate for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.6 6.3 5.9
Amortization of investment tax credits (1.7) (1.9) (2.1)
-----------------------
Effective tax rate 37.9% 38.4% 37.8%
=======================
</TABLE>
The Company made income tax payments of $386,000, $419,000 and $352,000
in 1996, 1995 and 1994, respectively.
The Company has $344,000 of alternative minimum tax credits
available at December 31, 1996 and 1995. These credits may be carried
forward indefinitely to offset future regular tax and are recorded as a
reduction to accumulated deferred income taxes.
The Company has a regulatory liability related to income taxes of
$1,247,756 and $1,280,679 at December 31, 1996 and 1995, 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. The liability is being amortized consistent with the
Company's ratemaking treatment.
The temporary items that give rise to the net deferred tax liability
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Liabilities:
Property related $ 4,483,590 $ 4,014,021
Other 192,792 158,435
--------------------------
4,676,382 4,172,456
Assets:
Investment tax credits 741,059 774,000
Regulatory liability 197,282 197,282
Alternative minimum tax carry forward 344,144 344,000
Prepaid taxes on contributions in aid of construction 940,154 885,899
Other 188,114 195,184
--------------------------
2,410,753 2,396,365
Net deferred tax liabilities $ 2,265,629 $ 1,776,091
==========================
</TABLE>
NOTE C - DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Unsecured notes payable to various insurance companies:
8.95%, due August 1, 1997 $ 718,750 $ 750,000
9.10%, due April 1, 2005 3,500,000 3,500,000
7.40%, due March 1, 2021 8,000,000 8,000,000
Unsecured Industrial Development Authority Revenue Bond
(1988 Series), 7.50%, due July 1, 2018 1,300,000 1,300,000
Unsecured Business Finance Authority 1994 Revenue Bond
(Series A), 6.35%, due December 1, 2019 3,160,000 3,200,000
Unsecured Business Finance Authority 1994 Revenue Bond
(Series B), 6.45%, due December 1, 2016 1,940,000 2,000,000
Unsecured notes payable and line of credit revolving loan
facility with Fleet Bank-NH at rates ranging from 7.00%
to 8.25% due May 31, 1998 3,195,000 1,625,000
Mortgage payable to Bank of New Hampshire, 9.50%, repaid
in March 1996 -- 653,011
----------------------------
21,813,750 21,028,011
Less current portion 818,750 146,933
----------------------------
$ 20,995,000 $ 20,881,078
============================
</TABLE>
The 1994 Series A and B Bonds are not subject to optional redemption until
2004 at which time they may be redeemed in whole or in part at a premium
not to exceed 2% and may be redeemed at par on or after December 1, 2008.
The notes and bonds payable require semi-annual interest payments which
are based on the outstanding principal balances. The aggregate principal
payment requirements subsequent to December 31, 1996 are as follows:
1997 $ 818,750
1998 3,295,000
1999 165,000
2000 315,000
2001 315,000
2002 315,000
2003 and thereafter 16,590,000
The note and bond agreements require, among other things, the maintenance
of certain financial ratios and restrict the payment or declaration of
dividends by Pennichuck. Under Pennichuck's most restrictive covenant,
cumulative common dividend payments or declarations by Pennichuck
subsequent to December 31, 1989 are limited to cumulative net income
earned after that date plus $1,000,000. At December 31, 1996,
approximately $3,451,000 of Pennichuck's retained earnings was
unrestricted for payment or declaration of common dividends.
During 1996, 1995 and 1994, the Company paid interest of $1,468,000,
$1,682,000 and $1,645,000, respectively.
The Company has available a $4,500,000 unsecured, revolving credit
facility with a bank, of which $3,195,000 was outstanding at December 31,
1996. Outstanding borrowings under this facility are due on May 31, 1998.
The interest rates on the outstanding borrowings are based on the bank's
cost of funds, as defined, and ranged from 7% to 8.25% at December 31,
1996. During 1996, the weighted average interest rate on borrowings under
this facility of the Company was 7.74% and 7.72% for 1995.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain financial instruments included in the
accompanying consolidated balance sheet as of December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
<S> <C> <C>
Long-term debt $ 21,813,750 $ 22,120,000
</TABLE>
There are no quoted market prices for the Company's various long-term debt
issues and thus, their fair values have been determined based on quoted
market prices for securities similar in nature and in remaining
maturities. The fair values shown above do not purport to represent the
amounts at which those obligations would be settled.
The carrying values of the Company's cash, notes payable and line of
credit to the bank at December 31, 1996 approximate their fair values
because of the short maturity dates of those financial instruments.
NOTE E - BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all
full-time employees. The benefits are formula based, giving consideration
to both past and future service. The Company's funding policy is to
contribute annually up to the maximum amount deductible for federal tax
purposes. 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.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$1,789,383 in 1996 and $1,484,774 in 1995 $ 1,796,966 $ 1,524,375
--------------------------
Projected benefit obligation for service rendered to date (2,185,580) (2,016,607)
Plan assets at a fair value (insurance contracts) 2,228,687 2,008,421
--------------------------
Plan assets in excess of (less than) projected benefit obligation 43,107 (8,186)
Prior service costs 9,091 9,876
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions 161,450 147,076
Unrecognized net transition asset (138,486) (152,293)
--------------------------
Prepaid (accrued) pension cost included in other accrued expenses $ 75,162 $ (3,527)
==========================
</TABLE>
Net pension cost for 1996, 1995 and 1994 includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 126,933 $ 114,948 $ 105,803
Interest cost on projected benefit obligation 145,325 126,765 115,910
Actual return on plan assets (149,411) (152,954) (148,162)
Amortization of (gains) and deferrals (47,956) (13,022) (13,022)
-----------------------------------
Net periodic pension cost $ 74,891 $ 75,737 $ 60,529
===================================
</TABLE>
For the years ended December 31, 1996 and 1995, the actuarial present
value of the projected benefit obligation was determined using a discount
rate of 7.5 percent and an assumed rate of increase in future compensation
levels of 5 percent and 4.5 percent in 1996 and 1995, respectively. The
expected long-term rate of return on plan assets was 9 percent in 1996,
1995 and 1994.
In addition, the Company has a salary deferral plan covering
substantially all full-time employees. Under this plan, the Company
matches 100% of the first 3% of the employee's salary contributed to the
plan. The matching employer's contributions were $61,882, $62,287 and
$52,331, respectively, for 1996, 1995 and 1994.
The Company provides postretirement medical benefits to current and
retired employees, which are payable upon reaching normal retirement date.
Future benefits payable to current employees are capped based on the
actual percentage of wage and salary increases earned from the plan
inception date to normal retirement date. The accumulated benefit
obligation, unrecognized transition obligation and net periodic
postetirement benefit cost for the years ended December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current active employees $ (268,303) $ (293,600)
Retirees (192,853) (269,600)
Total (461,156) (563,200)
Plan assets at fair value 0 0
-------------------------
Funded status (underfunded) (461,156) (563,200)
Unrecognized net (gain) loss (129,883) (2,123)
-------------------------
Unrecognized prior service cost 153,600 168,100
Unrecognized transition obligation 184,400 215,300
-------------------------
Accrued postretirement benefit cost $ (253,039) $ (181,923)
=========================
Service cost $ 22,129 $ 22,900
Interest cost 31,452 35,400
Amortization of prior service cost 14,500 14,500
Amortization of transition obligation 30,900 30,900
Amortization of unrecognized gains (4,282) --
-------------------------
$ 94,699 $ 103,700
=========================
</TABLE>
The Company is presently allowed to recover a portion of the
postretirement benefits relating to active employees and retirees in its
rates. To calculate the estimated accumulated benefit obligation for 1996
and 1995, the Company has assumed a discount rate of 7.5 percent and a
maximum medical care cost trend rate of 5 percent, which is the projected
annual increase in future compensation levels. A one percent increase in
the assumed health care cost trend rate would have increased the
postretirement benefit cost by $13,401 and the accumulated postretirement
benefit obligation by $85,566 in 1996.
NOTE F - STOCK BASED COMPENSATION PLANS
The Company has a stock option plan for officers and key employees which
provides for incentive options. The Company accounts for the plan under
APB Opinion No. 25, under which no compensation cost has been recognized
in the Consolidated Statements of Income. On a pro forma basis, the
Company's net income and earnings per share would have been reduced to the
following amounts had compensation cost for the plan been determined
consistent with FASB Statement No. 123, "Accounting for Stock Based
Compensation."
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net income:
As reported $ 1,238,485 $ 1,094,970
Pro forma $ 1,220,385 $ 1,066,890
Earnings per share:
As reported $ 1.68 $ 1.53
Pro forma $ 1.66 $ 1.49
</TABLE>
Because the methodology proscribed by Statement 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. At December 31, 1996, all options which had been granted
were exercisable and 50,000 shares were available for future grants under
the plan as shown in the following table:
<TABLE>
<CAPTION>
Reserved Options Price Per
Shares Outstanding Share
-------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1993 27,440 4,750 $12.50
Granted 8,150 $15.00
Expired (1,600) $12.50-$15.00
Exercised -0-
-------------------
Balance at December 31, 1994 27,440 11,300 $12.50-$15.00
Granted 8,000 $15.00
Expired (27,440)
Exercised (40) $12.50
Additional shares reserved 50,000 -0-
-------------------
Balance at December 31, 1995 50,000 19,260 $12.50-$15.00
Granted 4,525 $17.25
Expired
Exercised (340) $12.50-$17.25
-------------------
Balance at December 31, 1996 50,000 23,445 $12.50-$17.25
===================
</TABLE>
Of the 23,445 options outstanding at December 31, 1996, 3,810 have an
exercise price of $12.50 and a remaining contractual life of one year;
15,150 shares have an exercise price of $15.00 and a remaining life of 2
to 3 years; and 4,485 shares have an exercise price of $17.25 and a
remaining life of 9 years. The Board of Directors determines the option
price, which is the fair market value at the grant dates. Shares acquired
pursuant to such options are subject to a restriction against transfer for
a period of twelve months after acquisition by the employee.
The fair value of each option grant is estimated on the date of
grant using the Black-Sholes option pricing model with the following
assumptions used for grants in 1995 and 1996, respectively: risk-free
interest rates of 7.8% and 5.5%; expected dividend yields of 4.9% and
5.2%; expected lives of 4 and 5 years; and expected volatility of 28% and
34%.
NOTE G - BUSINESS SEGMENT INFORMATION
Pennichuck Corporation's operating activities are grouped into two primary
business segments as follows:
Water utility - Involved in the collection, treatment and distribution of
potable water for domestic, industrial, commercial and fire protection
service in the city of Nashua and certain surrounding communities in
southern New Hampshire. Real estate - Involved in the ownership,
development, management and sale of industrial and residential property in
the city of Nashua.
The tables below present information about Pennichuck Corporation's two
primary business segments for the years ended December 31, 1996, 1995 and
1994. The "Other" category includes the sundry activities of the Parent
Company and PWSC.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Water utility $ 10,693,151 $ 10,788,740 $ 10,162,896
Real estate 1,320,676 631,181 (1,916)
Other 188,861 66,262 54,800
--------------------------------------------
Total operating revenues $ 12,202,688 $ 11,486,183 $ 10,215,780
============================================
Operating income (loss):
Water utility $ 3,086,669 $ 3,588,095 $ 3,312,192
Real estate 421,025 (190,425) (119,760)
Other 106,219 83,094 113,280
--------------------------------------------
Total operating income $ 3,613,913 $ 3,480,764 $ 3,305,712
============================================
Capital additions:
Water utility $ 3,132,327 $ 2,509,370 $ 2,410,383
Real estate -- -- --
Other 19,531 18,740 2,256
--------------------------------------------
Total capital additions $ 3,151,858 $ 2,528,110 $ 2,412,639
============================================
Identifiable assets:
Water utility $ 44,606,671 $ 43,814,798 $ 40,816,065
Real estate 3,223,048 3,036,524 3,190,360
Other 2,239,979 1,041,871 2,521,825
--------------------------------------------
Total identifiable assets $ 50,069,698 $ 47,893,193 $ 46,528,250
============================================
Depreciation and amortization expense:
Water utility $ 1,194,196 $ 1,112,148 $ 1,132,173
Real estate -- -- --
Other 29,372 30,066 50,007
--------------------------------------------
Total depreciation and amortization expense $ 1,223,568 $ 1,142,214 $ 1,182,180
============================================
</TABLE>
The operating revenues within each business segment are sales to
unaffiliated customers. Operating income (loss) is defined as segment
revenues less operating expenses including allocable Parent Company
expenses attributable to each business segment as shown below.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Allocated parent expenses:
Water utility $ 273,983 $ 308,130 $ 354,261
Real estate and other 39,823 23,507 20,751
-----------------------------------
Total allocated parent expenses $ 313,806 $ 331,637 $ 375,012
===================================
</TABLE>
Within the water utility business segment, one customer accounted for over
10 percent of total operating revenues. During 1996, 1995, and 1994, the
water utility recorded $1,685,000, $1,683,000, and $1,621,000,
respectively, in water revenues which were derived from fire protection
and other billings to the city of Nashua.
NOTE H - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
1996
Operating revenues $ 2,906 $ 2,728 $ 3,107 $ 3,462
Operating income 508 939 1,014 1,153
Net income 56 344 373 465
Earnings per share $ .08 $ .47 $ .72 $ .41
1995
Operating revenues $ 2,296 $ 2,772 $ 3,788 $ 2,630
Operating income 554 985 1,314 628
Net income 82 343 512 158
Earnings per share $ .11 $ .48 $ .72 $ .22
</TABLE>
Market & Dividend information
The Company's common stock is traded on the over-the-counter market and
quoted on the NASDAQ National Market System under the Symbol "PNNW." On
December 31, 1996, there were approximately 750 holders of record of the
745,515 shares of the Company's common stock outstanding. The following
table sets forth the comparative market prices per share of the Company's
common stock based on the high and low sales prices as reported on the
NASDAQ National Market System and the dividends declared by the Company
during those periods.
<TABLE>
<CAPTION>
Dividends
Period High Low Declared
- ------ ------- ------- ---------
<S> <C> <C> <C>
1996
Fourth quarter $ 19.88 $ 15.50 $ .26
Third quarter 20.88 18.00 .26
Second quarter 21.00 17.00 .26
First quarter 22.00 17.25 .25
1995
Fourth quarter $ 20.50 $ 17.00 $ .25
Third quarter 17.25 13.75 .22
Second quarter 15.50 13.25 .22
First quarter 16.00 15.00 .22
</TABLE>
Annual Meeting and Shareholder information
Pennichuck Corporation's Annual Shareholders' Meeting will be held at 3:00
p.m. on Friday, April 18, 1997, at the Nashua Marriott Hotel, 2200
Southwood Drive in Nashua, New Hampshire.
Shareholder Relations: Pennichuck Corporation, 4 Water Street, PO Box 448,
Nashua, NH 03061-0448, Attn: Shareholder Relations. Tel: 603/882-5191.
Stock Transfer Agent and Registrar: First National Bank of Boston, PO Box
644, Mail Stop 45-02-09, Boston, MA 02105-0644. Tel: 800/736-3001.
Dividend Reinvestment and Common Stock Purchase Plan: Pennichuck
Corporation has a Dividend Reinvestment and Common Stock Purchase Plan
which is open to all holders of Pennichuck's common shares and to all of
Pennichuck's residential customers. Participants in the Plan receive their
dividends in the form of Pennichuck common shares and may also, within
certain limits, make additional cash purchases through the Plan.
For a copy of the Plan Prospectus and an enrollment form, please
call Shareholder Relations.
five year selected Financial Data
PENNICHUCK CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 12,202,688 11,486,183 10,215,780 9,696,362 9,196,669
Net income $ 1,238,485 1,094,970 972,548 870,587 466,094
Earnings per share $ 1.68 1.53 1.32 1.11 .54
Cash dividends declared per share of
common stock $ 1.03 .91 .75 .64 .64
Total assets $ 50,069,698 47,893,193 46,528,250 45,389,505 43,744,928
Long-term debt & redeemable preferred
stock $ 21,813,750 21,028,011 16,880,030 17,706,626 17,913,929
Weighted average shares outstanding 736,494 716,312 714,422 712,704 712,640
Book value per share $ 17.70 17.03 16.55 15.99 15.52
Number of common shareholders of record 753 477 490 494 499
Utility plant additions $ 3,132,327 2,509,370 2,406,595 3,674,704 3,570,042
Water delivered (million gallons per day) 12.30 12.79 12.51 12.52 12.10
Mains (feet) 1,837,023 1,815,956 1,807,282 1,790,811 1,724,580
Services:
Core system 19,744 19,581 19,340 19,068 18,662
Community systems 1,061 1,041 954 953 885
Meters 20,912 20,691 20,448 20,218 19,678
Hydrants 2,120 2,112 2,107 2,087 2,042
Rainfall (in inches) 53.24 38.94 42.70 42.59 44.21
Number of employees at year end 56 55 57 58 54
</TABLE>
the People who serve you
The people at Pennichuck. We are your Company. Every one of us knows that,
ultimately, we all work for you, the shareholders. It is not a
responsibility we take lightly. We consider it an honor to serve you,
providing reliable, friendly and efficient service for all our customers,
while protecting the health, safety and well-being of everyone in the
Pennichuck community.
PHOTO:
27 [Pennichuck employees group shot]
PHOTO:
28 [PWW building]
Pennichuck Corporation
Four Water Street
PO Box 448
Nashua, NH 03061
603 882-5191
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-KSB into Pennichuck Corporation's
previously filed Registration Statement File No. 33-98188.
/s/ Arthur Andersen LLP
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 261,000
<SECURITIES> 0
<RECEIVABLES> 2,153,000
<ALLOWANCES> (25,000)
<INVENTORY> 225,000
<CURRENT-ASSETS> 3,059,000
<PP&E> 58,237,000
<DEPRECIATION> (14,898,000)
<TOTAL-ASSETS> 50,070,000
<CURRENT-LIABILITIES> 2,129,000
<BONDS> 20,995,000
0
0
<COMMON> 748,000
<OTHER-SE> 12,448,000
<TOTAL-LIABILITY-AND-EQUITY> 50,070,000
<SALES> 0
<TOTAL-REVENUES> 12,203,000
<CGS> 0
<TOTAL-COSTS> 8,582,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,631,000
<INCOME-PRETAX> 1,990,000
<INCOME-TAX> 752,000
<INCOME-CONTINUING> 1,238,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,238,000
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
</TABLE>
