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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 199697
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
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. [ ]
State issuer's revenues for its most recent fiscal year. $11,840,700
The aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing bid price on February 27, 1998 of the
Registrant's Common Stock as reported on the Over-the-Counter Bulletin Board
System was $16,864,302. 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 27, 1998:
Common Stock, $1 Par Value - 809,894 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December
31, 1997 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 17, 1998 are incorporated by reference into Part III of Form
10-KSB.
TABLE OF CONTENTS
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PART I: Page
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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............................................. 8
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 8
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
</TABLE>
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 five 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) The Southwood Corporation
("Southwood") a New Hampshire business corporation which presently owns,
develops, and manages approximately 800 acres of real estate; (iii) Pennichuck
Water Service Corporation ("Service Corporation"), a New Hampshire business
corporation which is involved in non-regulated, water-related services and
operations; (iv) Pittsfield Aqueduct Company, Inc. ("Pittsfield") which is
franchised to furnish water service in the town of Pittsfield, New Hampshire;
and (v) Pennichuck East Utility, Inc. ("PEU") which is presently seeking a
franchise to furnish water service in the New Hampshire towns of Litchfield,
Londonderry, Windham, Pelham, Hooksett and Atkinson. As discussed more fully
below, Pittsfield was acquired in a stock for stock exchange on January 30,
1998 and PEU was created in February 1998 to conduct the water utility
operations previously provided by another water company franchised to do
business in those portions of southern New Hampshire.
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 non-utility 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.
Recent Acquisitions
On January 30, 1998, the Company acquired all of the outstanding common
stock of Pittsfield in exchange for 49,118 common shares of the Company. This
acquisition is intended to be accounted for using the pooling-of-interest
method and accordingly, the Company's historical financial data provided in
future reports will be restated to include Pittsfield data. Pittsfield had been
a privately-owned water utility serving approximately 650 customers in the town
of Pittsfield, New Hampshire. Pittsfield's total assets are approximately $2.1
million and its operating revenues for 1998 are expected to be approximately
$450,000.
On November 5, 1997, the Company entered an Agreement of Purchase and
Sale of Assets with the Town of Hudson, New Hampshire (the "Town") whereby the
Company has agreed to purchase from the Town certain water utility assets
located outside its municipal jurisdiction for $7.5 million. These assets, in
addition to the utility assets located within the Town, are expected to be
purchased by the Town on or about March 30, 1998 from an investor-owned water
utility currently serving the Town and certain surrounding communities. Those
assets to be purchased by the Company will be transferred into PEU. As a result
of this purchase, the Company expects to add approximately 3,600 customers to
its existing customer base and annual revenues from these added customers is
estimated to be $2.3 million. All regulatory approvals relating to this
transaction have not yet been received at this time.
The combined effect of these two transactions is expected to have a
material impact on the operating results of the Company. The combined annual
revenues of Pittsfield and PEU are estimated to be approximately $2.7 million,
or 23% of the Company's consolidated revenues for 1997, while the addition of
4,250 new customers from these new franchise areas represents a 20% increase in
the Company's water utility customer base. These acquisitions are consistent
with the Company's long-term, strategic plan to expand its franchise and
operating activities outside of Pennichuck's core franchise area of Nashua, New
Hampshire.
Financial Information About Industry Segments
The business segment data of the Company and its subsidiaries for the
latest three years is presented in "Note H - 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 19,972 customers, accounts for 97 percent of
Pennichuck's water revenues and 96 percent of its combined plant in service.
Its franchises in the remaining towns consist of stand-alone satellite water
systems serving 1,065 customers. Pennichuck has no competition in its core
franchise area. Currently, approximately 25 percent of its water revenues are
derived from commercial and industrial customers and approximately 54 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 recent
Commission order in March 1998 resulting from its latest approved rate case.
Pursuant to that order, Pennichuck is authorized an overall rate of return of
8.34 percent on an approved rate base of approximately $34,610,000.
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 for regulatory compliance 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 46 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, 1997, Southwood received partial
payments on the note reflecting the sale of 16 units to third party buyers
during 1997. 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. Under the terms of that agreement, the developer pays 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.
Southwood also owns a 404 acre tract of land in northwest Nashua which is
presently zoned for park-industrial use. In September 1997, Southwood and the
same developer who holds the aforementioned option agreement formed Westwood
Park LLC ("Westwood"), a limited liability corporation, for the purpose of
developing that tract of land. Under the terms of the LLC agreement, Southwood
will contribute that tract of land into the corporation in exchange for a 60
percent ownership interest. The decision to proceed with the development of
this tract was made given the strong demand for commercial and industrial space
reflecting the improvement in the local and economy. However, it is Westwood's
intention to defer any infrastructure construction activities until it has
closed on the first sale of land to a certain third party, the proceeds from
which will be used to fund a portion of the infrastructure construction costs.
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, 1997 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 57 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. Except as
noted in "Footnote G - Subsequent Events" on page 42 of the Consolidated
Financial Statements of Pennichuck Corporation, there are no mortgages or
encumbrances on the Company's or its subsidiaries' properties.
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. Ten water storage reservoirs having a total storage capacity of
23.1 million gallons, 6 of which are located in Nashua, 2 in Amherst, 1
in Bedford and 1 in Hollis, New Hampshire.
Water Distribution Facilities
In addition to the above properties, as of December 31, 1997 there were
approximately 351 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 21,037 service
connections. In addition to the pipeline which lies within the street line, as
of December 31, 1997, Pennichuck owned 21,145 meters and 2,124 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:
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Nashua, NH Merrimack, NH Total
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Residential 55 87 142
Industrial 451 99 550
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Total Alternate Use Acreage 506 186 692
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Presently, 47 acres of Southwood's alternative-use land in the City of
Nashua are available for immediate development while 404 acres are contemplated
for eventual development by Westwood over the next 5 to 10 years. The remainder
of Southwood's landholdings in both Nashua and Merrimack is classified under
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 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 46 of the 1997 Pennichuck
Corporation Annual Report to Shareholders is incorporated herein by reference.
At the record date of March 11, 1998, there were 768 holders of record of
shares of the Company's common stock. The Company's common stock presently
trades on the Over-the-Counter Bulletin Board 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,
approximately $3,745,000 of Pennichuck's retained earnings was unrestricted for
payment or declaration of common dividends to the Company at December 31, 1997.
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 26 of the 1997 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 28 to 32, together with the report thereon of Arthur Andersen LLP
dated February 3, 1998 appearing on page 27, and the Quarterly Financial Data
appearing on page 45 of the 1997 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 3 through 7, and "Section 16(a)
Beneficial Ownership Reporting Compliance" on page 8, of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April 17,
1998 are incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
"Executive Compensation" on pages 9 and 10 of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April 17,
1998 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 and 3 of the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders on April 17, 1998 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 17, 1998 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 1997 Annual Report to
Shareholders for the year ended December 31, 1997, are incorporated
by reference in Item 7:
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Page Reference In -
Annual
Shareholders Form 10-KSB
Report Report
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Report of Independent Public Accountants 27
Consolidated Balance Sheets at December 31, 1997
and 1996 28-29
Consolidated Statements of Income for each of
the years ended December 31, 1997, 1996 and 1995 30
Consolidated Statements of Stockholders' Equity
for each of the years ended December 31, 1997,
1996, and 1995 31
Consolidated Statements of Cash Flows for each of
the years ended December 31, 1997, 1996 and 1995 32
Notes to Consolidated Financial Statements 33-45
(2) The Financial Statement Schedules for each of the years 1997, 1996
and 1995:
Report of Independent Public Accountants on
Schedules for the years ended December 31, 1997,
1996 and 1995 12
I - Condensed Financial Information of Registrant 13-15
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:
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Exhibit Number Description of Exhibit
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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 (Included in this Form 10-KSB
Report)
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 Line of Credit Loan
Agreement 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 Line of Credit Loan 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 Line of Credit Loan Agreement dated
March 23, 1994 between Pennichuck Corporation and Fleet
Bank-New Hampshire (Filed as Exhibit 10.10 to the
Company's 1996 third quarter Form 10-QSB Report and
incorporated herein by reference)
13 1997 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 (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)
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(b) There were no reports on Form 8-K filed in the fourth quarter of
1997.
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, 1998. 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
Boston, Massachusetts
February 3, 1998
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
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December 31
----------------------------
1997 1996
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ASSETS
Current Assets:
Cash $ 366,560 $ 223,548
Accounts Receivable 4,695 214
Refundable Income Taxes 13,011 72,011
Prepaid Expenses 45,480 13,744
----------------------------
Total Current Assets 429,746 309,517
Property and Equipment 1,163,424 1,163,424
Less Allowances for Depreciation 503,346 482,958
----------------------------
660,078 680,466
Other Assets 212,413 219,424
Investment in Wholly-Owned Subsidiaries 16,260,847 15,542,982
Advances to (from) Wholly-Owned Subsidiaries 342,723 77,993
----------------------------
$ 17,905,807 $ 16,830,382
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Other Current Liabilities $ 78,412 $ 68,546
Long Term Debt 3,680,000 3,195,000
Other Long Term Liabilities 314,117 370,434
Stockholders' Equity 13,833,278 13,196,402
----------------------------
$ 17,905,807 $ 16,830,382
============================
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues $ 60,698 $ 148,297 $ 88,729
Operating Expenses (46,026) 53,014 10,926
-----------------------------------------
Operating Income 106,724 95,283 77,803
Interest Expense 189,208 198,021 201,166
-----------------------------------------
Loss Before Income Taxes and Equity in Net Income
of Subsidiaries (82,484) (102,738) (123,363)
Federal income tax benefit 28,045 34,931 41,943
-----------------------------------------
Loss Before Equity in Earnings of Subsidiaries (54,439) (67,807) (81,420)
Equity in Earnings of Subsidiaries 1,344,530 1,306,292 1,176,390
-----------------------------------------
NET INCOME $ 1,290,091 $ 1,238,485 $ 1,094,970
=========================================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES $ (50,760) $ 188,521 $ 76,889
-----------------------------------------
INVESTING ACTIVITIES:
Equity Transfer to Subsidiary (162,185) (465,665) (74,719)
Purchase of Equipment and Other Assets -- (223,649) (37,742)
-----------------------------------------
(162,185) (689,314) (112,461)
-----------------------------------------
FINANCING ACTIVITIES:
Increase(Decrease) in Notes Payable 485,000 (1,100,000) (350,000)
Advances (to) from Subsidiaries 524,120 2,509,733 1,099,887
Repayment on Mortgage -- (653,057) (15,769)
Payment of Dividends (794,625) (755,767) (651,570)
Proceeds from dividend reinvestment 162,185 465,665 74,719
Other, net (20,723) 60,523 (117,000)
-----------------------------------------
355,957 527,097 40,267
INCREASE IN CASH 143,012 26,304 4,695
Cash at Beginning of Year 223,548 197,244 192,549
-----------------------------------------
CASH AT END OF YEAR $ 366,560 $ 223,548 $ 197,244
=========================================
</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, 1997.
NOTE B -- LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Unsecured notes payable and line of credit revolving
loan facility with Fleet Bank-NH at rates ranging
from 7.44% to 8.50% due May 31, 1999 $3,680,000 $3,195,000
=========================
</TABLE>
NOTE C -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its subsidiary,
Pennichuck Water Works, Inc., were $794,625, $755,767 and $651,570 during 1997,
1996, and 1995, respectively. No dividends were declared or paid by the
Company's other subsidiaries in 1997, 1996 or 1995.
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 26 ,1998
----------------
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 Executive March 26, 1998
- --------------------------------- Officer)
Maurice L. Arel
/s/ Stephen J. Densberger Executive Vice President and Director March 26, 1998
- ---------------------------------
Stephen J. Densberger
/s/ Charles J. Staab Vice President, Treasurer Chief Financial March 26, 1998
- --------------------------------- Officer and Director (Principal Financial
Charles J. Staab Officer)
/s/ Bonalyn J. Hartley Vice President and Controller(Principal March 26, 1998
- --------------------------------- Accounting Officer)
Bonalyn J. Hartley
/s/ Joseph A. Bellavance Director March 26, 1998
- ---------------------------------
Joseph A. Bellavance
Director March __, 1998
- ---------------------------------
Frank B. Clancy
/s/ Charles E. Clough Director March 26, 1998
- ---------------------------------
Charles E. Clough
/s/ Robert P. Keller Director March 26, 1998
- ---------------------------------
Robert P. Keller
/s/ Hannah M. McCarthy Director March 26, 1998
- ---------------------------------
Hannah M. McCarthy
/s/ Davis P. Thurber Director March 26, 1998
- ---------------------------------
Davis P. Thurber
</TABLE>
Managing Our Resources
Pennichuck Corporation 1997 Annual Report
Water...the sustenance of life. At Pennichuck, we take great pride in our
product, and maintaining stringent quality control is of the utmost importance.
This begins with protecting our natural water resources and the surrounding
watershed. Our watershed is a 27.5 square mile area from which rainfall drains,
becoming a source for Pennichuck Brook, and ultimately, our pond system.
Currently, Pennichuck is implementing a comprehensive plan to manage, protect
and improve all aspects of our watershed, as well as the immediate areas
surrounding our wells and reservoirs.
Many years of development in parts of our watershed have created special
challenges for maintaining high quality source water. Over time, wetlands that
provide natural treatment for groundwater recharge have been replaced by
impervious surfaces, reducing the base flow levels in our watershed. To meet
this challenge, Pennichuck and the State of New Hampshire have entered into a
partnership. Together, we are working to identify and repair critical areas by
constructing artificial wetlands to filter storm water run-off, and then
gradually reintroduce it to the ground water and help rebuild base flow.
At the same time, Pennichuck is working with state regulators to rewrite
and update watershed regulations that will establish new standards governing
on-site storm water treatment and ongoing water monitoring. We are also
building relationships with local communities, to educate planning and
environmental personnel about the issues affecting water quality. Ultimately,
we hope to convince every community in and around our watershed to adopt
Pennichuck's water management guidelines as part of their planning
requirements.
We believe that responsible management of our water resources and the
environment is part of being a good corporate citizen, and the obligation of
each and every company. Throughout our nearly 150-year history, Pennichuck has
always pursued a forward-thinking approach toward managing our resources. This
philosophy has proved rewarding as Pennichuck is now recognized as New
Hampshire's premier water utility. We will continue to protect the quality of
our water, the health of our customers, and the long-term profitability of your
company for many years to come.
MANAGING THE PENNICHUCK WATERSHED
[WATERSHED GRAPHIC]
AREAS OF SERVICE
[MAP]
PITTSFIELD* DERRY*
HOOKSETT* HAMPSTEAD**
GOFFSTOWN* DANVILLE
MANCHESTER** KINGSTON**
AUBURN** MERRIMACK**
RAYMOND* AMHERST*
EPPING* LITCHFIELD*
CHESTER** PLAISTOW*
SANDOWN* ATKINSON*
FREEMONT** WINDHAM*
BRENTWOOD** HUDSON***
BEDFORD* LONDONDERRY*
HOLLIS* NASHUA*
PELHAM* COHASSET, MA**
* Retail Service Area
** Wholesale Water Sales
** Operations & Maintenance Agreement
We believe development and conservation can coexist successfully, and
Pennichuck's own projects through the Southwood Corporation are proof of this
commitment.
The pond system is Pennichuck's primary source of water, accounting for about
75% of our total annual supply. Other sources of water are the Merrimack River
during peak periods, and a number of separate groundwater wells.
Our overriding objective is to maintain or improve groundwater flow rates.
We are vigilant about protecting our wells. Just one gallon of spilled gasoline
is enough to pollute 5.5 million gallons of water beyond quality drinking water
standards. We post signs, fence off protected areas, and notify residents
living in designated wellhead protection areas about the proper disposal of
hazardous household waste.
TABLE OF CONTENTS
<TABLE>
<S> <C>
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 27
Consolidated Balance Sheets 28
Consolidated Statements of Income 30
Consolidated Stockholders' Equity 31
Consolidated Statements of Cash Flow 32
Notes to Consolidated Financial Statements 33
Market and Dividend Information 46
Annual Meeting and Shareholder Information 46
Five Year Selected Financial Data 47
</TABLE>
Selected Financial Data
NET INCOME ( in 000's of dollars)
[BAR CHART]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ------ ------ ------
<S> <C> <C> <C> <C>
$871 $973 $1,095 $1,238 $1,290
</TABLE>
TOTAL ASSETS ( in millions)
[BAR CHART]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$45. $46. $47. $50. $55.
</TABLE>
EARNINGS PER SHARE
[BAR CHART]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
$1.11 $1.32 $1.53 $1.68 $1.72
</TABLE>
DIVIDENDS PER SHARE
[BAR CHART]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C>
$.64 $.75 $.91 $1.03 $1.06
</TABLE>
[PHOTO OF MAURICE L. AREL, PRESIDENT AND CHIEF EXECUTIVE OFFICER]
LETTER TO SHAREHOLDERS
Dear Shareholder:
1997 was an excellent year for Pennichuck, and it is with pleasure that I
am able to share with you such impressive performance results, across the
board, from all three of our operating companies. What makes this news even
more exciting is the knowledge that your company is strategically positioned to
embark on a period of even greater growth and higher returns, as we fulfill our
mission to become the leading water utility for all of New Hampshire.
The financial performance of your Company in 1997 resulted in the sixth
consecutive year of improved earnings. Consolidated earnings grew to $1.72 per
common share compared to $1.68 last year, even though consolidated revenues
from operations decreased from $12,202,688 in 1996 to $11,840,700. The Company
increased its annual dividend from $1.03 per share in 1996 to $1.06 per share
in 1997.
Revenue from Pennichuck Water Works, Inc. ("Pennichuck") increased to
$11,200,248 versus $10,693,151 last year. Capital improvements totaled $5.2
million, representing the biggest year for investment since 1981. The majority
of these funds were used to construct the 6.55-million- gallon Fifield Storage
Tank in Nashua, and the 150,000-gallon tank in Bedford. On February 23, 1998,
the New Hampshire PUC approved a permanent rate increase of 16.8% with "single
tariff pricing" for our core and community water systems. This rate increase is
expected to provide approximately $1,712,000 in additional revenues on an
annualized basis.
Your Company aggressively pursued the acquisition of Pittsfield Aqueduct
Company, as well as the purchase of the non-Hudson assets of the Consumers of
New Hampshire Water Company. These two acquisitions will result in the addition
of 4,500 new customers for Pennichuck. In conjunction with this expansion,
Pennichuck Water Service Company ("PWSC") secured an operations and management
agreement with the Town of Hudson that will account for a significant increase
in revenues for PWSC.
In my role as a member of the National Drinking Water Advisory Committee
to the USEPA, I co-chaired the task force to establish standardized
requirements governing the content of the new Consumer Confidence Report.
Beginning in October 1999, water companies nationwide will be mandated to
provide these reports, giving an overview of their source of supply and water
quality statistics, to all their customers. At Pennichuck, we call ours "The
Water Quality Report" and we're currently working on a version for each of our
17 individual water sources.
1997 proved to be a good year for our real estate subsidiary, The
Southwood Corporation ("Southwood"). Although revenues were lower than the
previous year, $514,000 versus $1,321,000 in 1996, Southwood still posted its
third consecutive year of positive earnings. Southwood entered into two joint
ventures, one to develop Westwood Park, a new industrial park in northwest
Nashua, and the other a new residential subdivision called Heron Cove at
Merrimack. Both projects are expected to generate revenue in the coming years.
Our primary challenges in the coming years will be to assimilate our
latest system acquisitions and cement the future success and financial growth
of all our companies. We will continue our pursuit of new opportunities, while
upholding stringent standards for protecting our watershed and the environment.
In 1997, we continued to make significant and ongoing upgrades to our
operations. These efforts ensure that Pennichuck not only succeeds in improving
the efficiency of its operations, but also continues to stay well ahead of
regulatory compliance in the face of even more stringent legislation.
Judging by the steady rise in our stock price, and the growing number of
inquiries from people wishing to join you as Pennichuck stockholders, it's
obvious that our success hasn't gone unnoticed. Given the substantial financial
resources needed to fund acquisitions, strong investor relations are critical
to Pennichuck's future growth strategy. In 1998 we are launching a program to
increase our visibility among the investment community, and promote the
marketability and value of our stock, such that it more accurately reflects
industry averages in terms of its market to book ratio. As part of this effort,
we've begun providing up to date financial information through our new website
at "www.pennichuck.com."
In closing, I would like to take this opportunity to thank Attorney Frank
B. Clancy, and Davis P. Thurber, for their long and dedicated service on the
Pennichuck Board of Directors. They will both be retiring at the 1998 annual
meeting. On that same day we look forward to welcoming new Directors Attorney
Martha O'Neill and Dr. John R. Kreick, and we look forward to a rewarding
relationship. I would also like to express my gratitude to our employees and
shareholders for your continued support.
Sincerely
/s/ MAURICE L. AREL
Maurice L. Arel
President and Chief Executive Officer
[PHOTO OF PITTSFIELD AQUEDUCT COMPANY, INC.]
[PHOTO OF PENNICHUCK EAST UTILITY, INC.]
REVIEW OF OPERATIONS
In 1997, the inevitable happened. After years of solid and steady growth,
Pennichuck succeeded in quietly becoming the largest water utility in the State
of New Hampshire. What is it about your Company that enables us to consistently
improve earnings and grow ever stronger? How can Pennichuck take on ailing
water systems, operate them profitably and succeed where others have
floundered? The answer is simple. Short-term profits have never been our focus
at Pennichuck. We have always concentrated our efforts on doing what's best for
our customers, the environment, and the long-term financial viability of your
Company. We are constantly seeking new ways to improve the quality of our
water, maintain greater system reliability, and reduce operating costs. Our
latest successes in this ongoing mission are summarized in the following
report. Further proof is evident in the improved returns enjoyed by our
shareholders, as well as in the growing recognition for Pennichuck being New
Hampshire's premier water utility.
SYSTEM IMPROVEMENTS
During 1997, Pennichuck Water Works, Inc. completed several construction
projects to help us successfully address growing demand and continue to provide
quality service to our customers.
Pennichuck's new $2.2-million Fifield Tank has a storage capacity of 6.55
million gallons of water. This addition complements an existing
5-million-gallon tank, and more than doubles water storage in the heart of
Pennichuck's core distribution system serving the central and southeast section
of Nashua. Also, the addition of a $147,000 booster pump station has
dramatically increased water pressure in the Orchard Hill service area. In
response to rapid expansion in the Powder Hill area of Bedford, Pennichuck
installed a new 150,000-gallon concrete tank, costing $292,000, to provide
additional storage for peak periods and fire protection.
[PHOTO OF POWDER HILL RESERVOIR BEDFORD, NH]
[PHOTO OF FIFIELD RESERVOIR NASHUA, NH]
In one of our newest community water systems, the Autumn Woods
subdivision of Salem, more consistent pressure will be achieved by installing a
variable drive pump in lieu of a conventional hydropneumatic tank. The system
also incorporates a back-up generator to provide uninterrupted service even
during power outages. Similar upgrades were performed at pumping stations
throughout our systems, including the Main Dunstable Booster Station, where
eliminating fluctuations in pumping pressures saves $10,000 in annual electric
costs. Utilizing variable frequency technology exemplifies how engineering more
energy-efficient solutions helps Pennichuck improve service while also saving
money.
1997 marked the completion of a five-year program to implement our
Supervisory Control and Data Acquisition System (SCADA), an automated system
that enables remote monitoring and control of system-wide operations via
computer. Taking readings every 20 seconds, SCADA constantly analyzes
everything from water quality and pumping operations, to storage tank water
levels and chemical concentrations in our treatment facilities, giving
instantaneous feedback linked to alarms. Should a problem arise, SCADA alerts
Pennichuck operators, enabling them to take action and avert problems. For
example, if a community's water usage during peak summer months triggered the
low level alarm in a neighborhood storage tank, we can warn affected households
to reduce low priority usage such as lawn sprinkling, and thereby avoid a
potential water outage.
[PHOTO OF MICHAEL SWIERZ, ENGINEERING TECHNICIAN]
Data generated by SCADA is also helpful for planning improvements and
analyzing trends, allowing us to run "what if" scenarios to determine whether
strategies such as increasing storage capacity or changing chemical usage would
reduce costs or improve operating efficiency. Dramatic savings in manpower and
increased productivity are further benefits of SCADA. Where our monitoring
procedures once required Pennichuck operators to take 1,800 readings per day,
manually on the hour, SCADA now performs these tasks automatically, freeing up
man-hours to be utilized elsewhere.
These are just two examples of the many gains in productivity and
operating efficiency directly attributable to SCADA. As a result, Pennichuck
can do more today than ever before-providing more reliable service to our
customers, and even acquiring new systems-all without significantly increasing
labor.
Effective planning and project management is paramount at Pennichuck.
Currently, the City of Nashua is systematically installing separate sewer and
storm water drains within the City. In coordination with this project,
Pennichuck is implementing the replacement of antiquated water lines. By
conducting these improvements in tandem with the City, we avoid the unnecessary
expense of new construction and road repair in the future. In the French Hill
area alone, Pennichuck will save over $60,000 in paving costs. Similarly,
Pennichuck is coordinating with the State in its continuing project to widen
the F.E. Everett Turnpike. At almost every interchange, we've had to lengthen
the sleeves around our water lines, at our own, rather than taxpayers' expense.
However, we've taken every opportunity to make simultaneous improvements,
including laying a new main to provide better distribution in the vicinity of
Exit 7.
At Pennichuck, we recognize the critical role diligent maintenance plays
in maximizing the longevity, performance and return on investment for all our
operating systems. In 1997, our field service workers conducted over 7,000
periodic tests and inspections to maintain reliable operation of all our gate
valves, hydrants and meters. In addition, they performed nearly 2,000 back flow
tests to prevent customers from inadvertently contaminating the water in their
homes. Pennichuck's inspection program extends beyond our own projects into the
community at large. Last year we inspected the installation of over 1,000 feet
of developer-installed water lines, to make sure approved standards for
construction were upheld and to help avoid costly repairs in the future.
REGULATORY COMPLIANCE
Compliance is an ever-present concern for any water utility. While our
system-wide water quality exceeds all state and government standards,
Pennichuck took action to address specific compliance issues in certain areas.
To eliminate high levels of radon detected in our Birchfield system, Pennichuck
installed a new aeration system that dissipates radon gas harmlessly into the
atmosphere. An added benefit of this system is that it also reduces hydrogen
sulfide. Successfully overcoming high fluoride levels in the Ashley Commons
area of Milford required Pennichuck to develop a highly innovative solution.
Given that only 23 homeowners were affected, building a treatment plant was
cost prohibitive. Instead Pennichuck installed point-of-use reverse osmosis
filters, and reduced the high mineral content of the water using a potassium
chloride ion exchange system. As a result, we succeeded in bringing fluoride to
below the Minimum Contaminant Level for the lowest possible cost.
[PHOTO OF EMILE DESROSIERS, WATER TREATMENT PLANT OPERATOR]
[PHOTO OF SCADA SYSTEM]
At the request of the City of Nashua, Pennichuck has switched from using
aluminum sulfate to ferric chloride as the primary coagulant in our treatment
process. Although ferric chloride is more expensive, we use less of it, so our
chemical costs have not increased. However, the change has saved the City
$300,000 annually, and allows Pennichuck to continue to discharge treatment
residuals into the city water system. Ferric chloride is also environmentally
safe, giving us more options to consider as we continue to look for the most
cost-efficient, long- term solution for handling our water treatment residuals.
In 1997, Pennichuck continued to gain Phase II and Phase IV waivers for
our newest community water systems, eliminating the need to perform a multitude
of tests. These waivers are valid for three years. To make our water testing
and analysis more efficient, we've installed sampling sites at strategic points
throughout our community water systems. Now field service workers can obtain
water samples for analysis from outlets at the roadside, rather than having to
disturb customers at home. The addition of a particle counter in the Pennichuck
Laboratory further enhances our analysis process.
[3 PHOTOS OF PITTSFIELD AQUEDUCT TREATMENT PLANT]
[PHOTO OF TARA KING, CUSTOMER SERVICE]
[PHOTO OF STEVEN GREENWOOD, SYSTEMS/NETWORK MANAGER]
PENNICHUCK PEOPLE
Committed, forward-thinking people are the key our success. We've taken
every opportunity to equip our employees with the latest technologies,
providing the tools they need to deliver better, more efficient service. Recent
advances in communications include networking all Pennichuck facilities via
high speed T-1 lines and standardizing computer operations between departments
using Windows NT. We also adopted a new utility software package to streamline
customer billing. All our internal systems are year-2000-compliant, and we are
coordinating with our vendors and suppliers to ensure a seamless administrative
transition into the next millennium.
In 1997, Pennichuck successfully negotiated a five-year union contract,
and continued ongoing cross-training programs designed to blend job
descriptions and build powerful synergy between all departments of our company.
As part of the Pennichuck Employee Service Awards program, we recognized nine
dedicated employees for over 85 years of combined service to your Company.
During "Water Week" last May, Pennichuck presented educational seminars
to over 600 local school students, and took first place for "Quality Customer
Relations" in the State Fair in Keene, NH. This award was in recognition for
our comprehensive community outreach programs aimed at educating our
customers-especially those we gained in recent acquisitions-about the
importance of water conservation and effective techniques to implement at home.
THE SOUTHWOOD CORPORATION
Pennichuck's wholly-owned subsidiary, Southwood, is a developer of
commercial and residential real estate with land holdings in Nashua and
Merrimack, NH. Continued strengthening of the economy has fueled increased
interest and activity in Southwood's new and existing development projects
alike.
At the Village at Bowers Pond subdivision, 25 of 46 units have been sold,
and we look forward to the complete build-out of this project by 1999. Westwood
Park is a joint venture with Winstanley Enterprises, Inc., to develop 800,000
square feet of industrial space in northwest Nashua. Initial approval for
subdivision and a site plan for the construction of a 246,000-square-foot
building was granted in January 30, 1998, with construction scheduled to begin
in the second quarter of this year. Winstanley Enterprises is also aggressively
marketing our other commercial development joint venture at Southwood Corporate
Park.
Heron Cove at Merrimack is an 87-unit single family detached condominium
project undertaken as a joint venture between Southwood and a major regional
developer. Municipal approvals are expected in late spring, with infrastructure
and model home construction beginning in the summer, and sales activity
commencing in late fall. Heron Cove was designed to preserve the natural beauty
and integrity of the site. Our valuable water resource abutting the development
is protected by a 300-foot natural buffer, by a ban on the use of road salts
and liquid fertilizers within the development, and by creating on-site
absorption swales to collect road drainage.
Like all Southwood development projects, Heron Cove stands as a model
that exemplifies how profitable corporate and residential real-estate
development can coexist with responsible environmental stewardship.
OUR VISION FOR THE FUTURE
Pennichuck has already begun negotiations to acquire several more
community water systems in 1998. At the same time, we are continuing to develop
a long-range strategic plan to explore further opportunities to expand our
operations, through regulatory and non- regulatory acquisitions, operations and
maintenance contracts, and other complementary businesses. Indeed, Pennichuck
is poised to become the dominant water company in the region, leveraging our
financial strength and resources to stabilize rates in the communities we
acquire, and continuing to provide a reliable supply of affordable, high
quality water for all our customers throughout New England.
[PHOTO THE VILLAGE AT BOWERS POND]
[PHOTO SOUTHWOOD CORPORATE PARK]
GROWTH AND EXPANSION
BUSINESS EXPANSION
Since 1986, Pennichuck's progressive management team has been committed
to growth, aggressively pursuing every opportunity to expand our operations in
both the regulatory and non-regulatory arenas. In doing so, we've added 1,140
new customers and 10 systems in 6 communities.
Currently, Pennichuck is on the brink of a major expansion in the Town of
Hudson, NH. On January 13th of this year, Hudson residents voted to buy the
local assets of Consumers NH Water Company, then immediately resell the 28
satellite water systems serving 3,600 customers outside the Town to Pennichuck
for $7.5 million. Hudson will retain ownership of the portion of the system
within the Town boundaries. As part of this acquisition, Pennichuck has secured
a separate agreement to operate and manage the Town-owned system, including the
well system which provides service to some 4,400 Hudson customers. In
preparation for a favorable resolution, Pennichuck has established transition
teams to smooth the acquisition, and by the time this report reaches you, we
should be fully engaged in the operation of these facilities.
Pennichuck's proven record in establishing profitable and efficient
operations and management agreements is evident in the community of Cohasset,
MA. In 1997, we began the final year of the contract and received a positive
review and audit from the Town. In June 1998, Pennichuck will again re-bid this
contract with Weston & Sampson Engineering Services, our partner in this
project.
Our acquisition of the Pittsfield Aqueduct Company (PAC), an investor-
owned water company with 650 customers in the Town of Pittsfield, NH, was
concluded on January 30, 1998. Terms of the agreement provide for a
stock-for-stock exchange, whereby the former owners of PAC have now joined you
as Pennichuck shareholders. In association with this acquisition, Pennichuck
assisted with successful rate case negotiations and in the start-up of a new
surface water treatment plant.
[PHOTO OF TOWN OF HUDSON OPERATIONS AND MAINTENANCE]
ACQUISITIONS AND DEVELOPMENT
[MAP]
PITTSFIELD DERRY
HOOKSETT HAMPSTEAD
GOFFSTOWN DANVILLE
MANCHESTER KINGSTON
AUBURN MERRIMACK
RAYMOND AMHERST
EPPING LITCHFIELD
CHESTER PLAISTOW
SANDOWN ATKINSON
FREEMONT WINDHAM
BRENTWOOD HUDSON
BEDFORD LONDONDERRY
HOLLIS NASHUA
PELHAM
* PITTSFIELD AQUEDUCT COMPANY, INC.-650 NEW CUSTOMERS IN 1998
* PENNICHUCK EAST UTILITY-3,600 NEW CUSTOMERS IN 1998
* AQUISITIONS IN THE PIPELINE-425 POTENTIAL NEW CUSTOMERS IN 1998
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, Retired, Clancy & O'Neill, Attorney's At Law
Charles E. Clough, President, Freedom Partners, LLC
Stephen J. Densberger, Executive Vice President, Pennichuck Corporation
Robert P. Keller, President and Chief Executive Officer, Commerce
Security Bancorp, Inc. and Eldorado Bank
Hannah M. McCarthy, President, Daniel Webster College
Charles J. Staab, Vice President, Chief Financial Officer and
Treasurer, Pennichuck Corporation
Davis P. Thurber, Chairman, Bank of New Hampshire Corporation
SENIOR BOARD OF DIRECTOR
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, Vice President, Chief Engineer
James L. Sullivan Jr., Secretary
RETIRING BOARD MEMBERS
Frank B. Clancy, Clancy & O'Neill, Attorneys at Law
Davis P. Thurber, Chairman, Bank of New Hampshire Corporation
[PHOTO OF DAVIS P. THURBER]
[PHOTO FRANK B. CLANCY]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS 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 one. 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 ("NHPUC") and, as
such, it must obtain approval to increase water rates to recover 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, 1997, the consolidated
operating cash flow was approximately $3,200,000, of which $2,500,000 was
derived from the Company's core water utility business and $700,000 from real
estate and other operating activities. Due to the seasonal nature of its
business, Pennichuck's cash flow during the first and second quarters of the
calendar year is generally not sufficient to meet all of its 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. The cash flow in 1997 from real estate activities was
derived from Southwood's residential joint venture activity and from the
receipt of $535,000 from the State of New Hampshire relating to a December 1996
land sale 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 time as those projects can be refinanced on a
long-term basis. In July 1997, that term loan agreement was amended to extend
the maturity date of all amounts borrowed, or to be borrowed in the next 17
months, to May 31, 1999. As a result, outstanding borrowings at December 31,
1997 totaling $3,680,000 have been classified as "Long-Term Debt" in the
Consolidated Balance Sheet; consisting of $3,365,000 in notes and $315,000
outstanding under the revolving line of credit portion of that loan. The
interest rates on the 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, 1997, the weighted
average interest rates on the outstanding term notes and borrowings under the
line of credit were 7.44% and 8.50%, respectively.
In May 1997, Pennichuck issued a $4 million, unsecured tax-exempt bond,
the proceeds from which were restricted to financing certain qualified
construction projects in 1997 and 1998. The term of this bond is for 25 years
and carries a fixed rate of interest of 6.30%. As of December 31, 1997,
approximately $906,000 of these restricted bond proceeds, plus accrued interest
earned, was available to fund projects expected to be completed in 1998.
For 1998, the Company's consolidated capital budget is estimated to be
$2.8 million, all of which relates to water utility projects of Pennichuck. The
1998 projects include (i) the replacement of 8,800 linear feet of pre-1900
distribution mains, (ii) the addition of more efficient motor starters on
Pennichuck's major electric pumps at its treatment plant, (iii) the
reconstruction of one of its dams and (iv) the relocation of distribution mains
to accommodate ongoing State highway construction projects. The remaining items
in the Company's 1998 capital budget reflect expenditures for ongoing, routine
investment in new meters, services, distribution mains and hydrants.
In order to fund its planned capital expenditures, dividends and debt
amortization requirements for 1998, the Company intends to utilize net
operating cash flow forecasted for 1998 together with the restricted cash
available at December 31, 1997. Consolidated cash flow for 1998 includes
approximately $900,000 of additional water revenues expected to be realized as
a result of the recently completed rate case discussed more fully under
"Results of Operations - 1997 Compared to 1996 - Water Utility Operations."
The Company completed the acquisition of Pittsfield Aqueduct Company, a
privately owned water utility, in a stock-for-stock exchange on January 30,
1998, which will be accounted for using the pooling-of- interests method. The
Company will conduct these water utility operations in a newly formed operating
subsidiary. See "Note G - Subsequent Events" of the footnotes to the
Consolidated Financial Statements. In addition, the Company is party to an
agreement with the Town of Hudson, whereby it will acquire, for $7.5 million,
certain utility assets of a water company formerly operating and franchised to
do business in portions of southern New Hampshire. As a result of these
transactions, the Company's pro forma capitalization in 1998 is expected to
increase by approximately $9.4 million, comprised of $8.6 million and $800,000
of funded debt and common equity, respectively. Given the expected increase in
the ratio of debt to common equity from these acquisitions, the Company may
pursue the issuance of additional common equity through either a private
placement and/or a public secondary offering of its common stock.
The Company maintains a Dividend Reinvestment and Common Stock Purchase
Plan (the "Plan") which is available to its shareholders and its residential
New Hampshire customers. Under this Plan, Pennichuck's shareholders may
reinvest all or a portion of their common dividends into shares of common stock
at a 5% discount from prevailing market prices, as well as make optional cash
payments to purchase additional shares at 100% of the prevailing market prices.
Pennichuck's residential customers living in New Hampshire may make initial
investments in the Company's common stock not exceeding $3,000 per quarter. For
the twelve months ended December 31, 1997, this Plan provided approximately
$162,000 of additional common equity capital to the Company and dividends on
approximately 13% of the total shares outstanding were reinvested pursuant to
the Plan.
ENVIRONMENTAL MATTERS
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. 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 for regulatory compliance
will be required in the next three years given the 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 higher
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.
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
For the year ended December 31, 1997, consolidated net income was
$1,290,091, or $1.72 per share, compared to $1,238,485, or $1.68 per share, in
1996. The improvement in net income occurred despite a decline of nearly
$362,000 in consolidated revenues. This decline relates to certain major real
estate sales which occurred in 1996, as discussed later in this section.
WATER UTILITY OPERATIONS
Pennichuck's operating revenues for 1997 increased 4.7%, or approximately
$500,000 over 1996, as a result of a temporary rate increase and a 3.6%
increase in billed consumption. The increase in billed consumption reflects the
drier and warmer than normal third quarter experienced in 1997 compared to 1996
and a 3.6% increase in industrial and commercial consumption. During 1997,
Pennichuck also realized 1.1% growth in new customers within its core and
community water system franchises.
On May 28, 1997, Pennichuck filed a petition with the NHPUC to increase
its water rates by approximately 18%. This petition was deemed necessary given
that Pennichuck's actual overall rate of return had declined below its then
authorized rate of return of 8.81%. This decline was as a result of $4,455,000
additional investment in its rate base as well as increased operating costs
totaling nearly $300,000 for property taxes and water treatment expenses
incurred in 1996 and 1997. In August 1997, the NHPUC granted Pennichuck's
request for a 5.12% temporary rate increase for service rendered on or after
August 18, 1997, resulting in approximately $175,000 of additional revenues
recognized in 1997. Subsequently, on February 23, 1998, the NHPUC approved a
permanent rate increase of 16.8%, which is expected to provide approximately
$1,712,000 in additional revenues on an annualized basis.
Utility operating expenses, which include costs for treatment and
production, system maintenance, administration, depreciation and amortization,
payroll and property taxes, increased 3.1% from $7,606,482 in 1996 to
$7,841,306 in 1997. More than half of this increase related to additional
treatment and production costs incurred at Pennichuck's main water treatment
facility in Nashua, New Hampshire. In 1996, the City of Nashua tripled the
per-unit fees chargeable to Pennichuck for the treatment of plant by-products
and sludge generated by the plant which are ultimately introduced into the
City's sewer treatment system. These fees were $154,000 and $89,000 in 1997 and
1996, respectively. Electrical and other power costs associated with
Pennichuck's treatment plant and outlying pumping stations increased by nearly
$39,000 over 1996, reflecting a 5.25% increase in per kilowatt charges incurred
during 1997. Additionally, as a result of Pennichuck's significant $5.3 million
investment in plant in service in 1997, depreciation and property taxes related
to that new investment increased by $75,000 and $32,000 for calendar years 1997
and 1996, respectively.
As a percent of utility operating revenues, utility operating expenses
were 70.0% and 71.1% for 1997 and 1996, respectively. Although this ratio is
not necessarily an indicator of operating efficiency, its does provide the
operating margin available to cover interest, income taxes and dividends
distributable to the Company.
WATER SERVICE OPERATIONS
Pennichuck Water Service Corporation ("PWSC"), a wholly-owned subsidiary
of the Company, is engaged in non-regulated, water-related business activities.
PWSC is a 50% partner in a joint venture with a regional water engineering firm
for the purpose of providing 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. During 1997, the joint venture provided operations and
maintenance contract services to the Town of Cohasset, Massachusetts, which
included the operation of its water treatment plant and distribution system.
This three-year contract expires on June 30, 1998 at which time the partnership
intends to renew the contract for an additional three-year term. For the twelve
months ended December 31, 1997, PWSC had revenues of approximately $66,000
resulting in pretax income of $19,000.
PWSC is pursuing additional operations and maintenance contracts as
growth opportunities for the Company. As discussed in "Note G - Subsequent
Events" of the footnotes to the Consolidated Financial Statements, PWSC intends
to enter into a five-year O&M contract with renewal options, with the Town of
Hudson, New Hampshire, to provide certain operational and maintenance functions
on its water system.
REAL ESTATE OPERATIONS
For the twelve months ended December 31, 1997, real estate revenues
totaled $514,000, a decrease of $806,533 from 1996, which year's revenues
included two major land sales, totaling $1,030,000, in Southwood Business Park.
With those sales, Southwood has no further ownership interest in that Park.
While there were no such major land sales during 1997, Southwood was
engaged as a 50% partner in Bowers Pond LLP - a residential joint venture for
the construction and sale of 46 homes. For the twelve months ended December 31,
1997, Southwood recorded approximately $408,000 of revenues reflecting the sale
of 16 houses by the partnership compared to $208,000 recorded in 1996 for the
sale of 8 lots. Under the terms of the partnership agreement, Southwood has
sold to the partnership approximately 76 acres of land in exchange for a
$920,000 non-interest bearing note. As homes are constructed and sold to third
parties, Southwood receives 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.
Other revenues from real-estate-related activities during 1997 include
approximately $92,000 of option income earned under a September 1995
development agreement with a regional developer with respect to 47 acres in the
Corporate Park. As lots are readied for development, the agreement provides for
a per-acre payment of a minimum of $60,000 to Southwood.
The operating expenses of Southwood totaled $198,000 for calendar year
1997. This represents a $784,000 decrease from 1996, which included $730,000 of
allocable infrastructure costs associated with the two 1996 land sales
discussed previously. Other major components of Southwood's operating expenses
are property taxes and property management costs. For 1997, those expenses
amounted to approximately $80,000 and $23,000, respectively. Property taxes for
1997 increased $24,000 over 1996, principally due to the receipt of certain tax
abatements received from the City of Nashua during 1996. There were no
significant adjustments to Southwood's property assessments during 1997.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
For the twelve months ended December 31, 1996, consolidated net income
for 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, representing a 6.2% increase
over the previous 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 detail below.
WATER UTILITY OPERATIONS
Water revenues in 1996 decreased to $10,693,151, representing a 1%
decline from 1995. This decrease is principally the result of a 3.1% decline in
billed consumption within Pennichuck's core system, due partly to the damper
and cooler weather conditions experienced during 1996, and partly to a 3%
decline in industrial consumption reflecting a weak economy in the
manufacturing sector during that year. Total rainfall in 1996 was 53" compared
to 39" in 1995 and represented the fourth rainiest year since 1900. As in
recent past 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 operating
expenses were $7,606,482, representing a $440,000, or 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. 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, reflecting an aggressive preventive maintenance program for services
and gate valves. Other significant changes in operating costs included a
$77,000 increase in depreciation expense reflecting the increased investment in
plant in service and a $104,000 increase in property taxes resulting from
reassessments of Pennichuck's property during 1995 and additional taxable
property placed in service during 1996.
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 included two major land sales, both within Southwood
Business 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 "Accounts
Receivable" in the accompanying Consolidated Balance Sheet as of December 31,
1996.
Also in May 1996, Southwood entered into a joint venture, Bowers Pond
LLP, to develop a 46-lot residential subdivision in Nashua. As of December 31,
1996, the partnership had sold 8 lots and Southwood has 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 included $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 in 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 $204,000, which approximated the fair market value of NYNEX's one
half interest at that time. 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 shared equally between Southwood and the Company and
the total investment in that parcel is $319,000. That parcel is also included
within the 47 acres under the development option agreement discussed earlier,
and is classified under "Deferred Land Costs" in the accompanying Consolidated
Balance Sheets.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" for the year ended December 31, 1997. This SFAS
replaces primary earnings per share with basic earnings per share. Basic
earnings per share is calculated by dividing earnings available to common
shareholders by the weighted average shares outstanding. SFAS No. 128 also
requires the presentation of diluted earnings per share, which is calculated
similarly to fully- diluted earnings per share. For the twelve months ended
December 31, 1997 and 1996, the calculations of basic earnings per share were
not materially different from diluted earnings per share.
During the second quarter of 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Although adoption of these two Statements is not
required until fiscal years beginning after December 15, 1997, the
Company does not believe that it will be materially affected by the
new reporting standards set forth in those Statements.
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 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. Conversely, during periods
of lower inflation and lower interest rates, the rates of return granted by the
NHPUC have tended to be similarly reduced.
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, 1997 and 1996 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 present fairly, in
all material respects, the consolidated financial position of Pennichuck
Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 3, 1998
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Property, Plant and Equipment
Land $ 380,241 $ 378,237
Buildings 18,619,434 15,847,287
Equipment 44,133,944 41,861,346
Construction work in progress 139,511 149,930
----------------------------
63,273,130 58,236,800
Less accumulated depreciation 16,178,927 14,898,405
----------------------------
47,094,203 43,338,395
Current Assets
Cash 400,388 260,668
Restricted cash 905,768 --
Accounts receivable, net of reserves of $25,000 in
1997 and 1996 668,421 1,207,762
Unbilled revenue 990,000 920,000
Refundable income taxes 12,971 62,848
Materials and supplies, at cost 192,120 225,373
Prepaid expenses and other current assets 465,486 382,388
----------------------------
3,635,154 3,059,039
Other Assets
Deferred land costs 2,408,321 2,412,374
Deferred charges and other assets 1,641,706 1,106,198
Investment in real estate partnerships 310,211 153,692
----------------------------
4,360,238 3,672,264
----------------------------
$ 55,089,595 $ 50,069,698
============================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
STOCKHOLDERS' EQUITY AND LIABILITIES
Stockholders' Equity
Common stock - $1 par value - authorized 2,400,000
shares; issued 758,929 and 748,156 shares in 1997
and 1996, respectively $ 758,929 $ 748,156
Additional paid in capital 5,250,943 5,120,306
Retained earnings 7,876,346 7,380,880
----------------------------
13,886,218 13,249,342
Less cost of 2,641 shares of common stock in
treasury in 1997 and 1996 (52,940) (52,940)
----------------------------
13,833,278 13,196,402
Preferred Stock, no par value, 100,000 shares
authorized, no shares issued in 1997 and 1996 -- --
Long-Term Debt, Less Current Portion 25,435,826 20,995,000
Current Liabilities
Current portion of long-term debt 100,000 818,750
Accounts payable 388,768 265,342
Accrued interest payable 350,597 329,951
Other current liabilities 922,097 714,536
----------------------------
1,761,462 2,128,579
Commitments and Contingencies
Deferred Credits and Other Reserves
Deferred income taxes 2,745,534 2,265,629
Regulatory liability 1,217,040 1,247,756
Deferred investment tax credits 1,164,354 1,197,390
Customer advances and other liabilities 162,951 244,487
----------------------------
5,289,879 4,955,262
Contributions in Aid of Construction 8,769,150 8,794,455
----------------------------
$ 55,089,595 $ 50,069,698
============================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Water utility operations $ 11,200,248 $ 10,693,151 $ 10,788,740
Real estate and other operations 640,452 1,509,537 697,443
--------------------------------------------
11,840,700 12,202,688 11,486,183
Operating Expenses
Water utility operations 7,841,306 7,606,482 7,165,797
Real estate and other operations 189,817 982,293 839,622
--------------------------------------------
8,031,123 8,588,775 8,005,419
Operating Income 3,809,577 3,613,913 3,480,764
Other income 44,760 7,249 1,914
Interest expense 1,773,580 (1,630,581) (1,703,570)
--------------------------------------------
Income Before Provision for Income Taxes 2,080,757 1,990,581 1,779,108
Provision for Income Taxes 790,666 752,096 684,138
--------------------------------------------
Net Income $ 1,290,091 $ 1,238,485 $ 1,094,970
============================================
Weighted Average Shares Outstanding 750,763 736,494 716,312
--------------------------------------------
Basic Earnings Per Common Share $ 1.72 $ 1.68 $ 1.53
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 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)
Net Income 1,290,091
Dividend Reinvestment Plan 9,723 9,723 152,487
Common Dividends Declared -- $1.06
per share (794,625)
Common Equity Issuance Costs (34,300)
Exercise of Stock Options 1,050 1,050 12,450
-------------------------------------------------------------
Balances at December 31, 1997 758,929 $758,929 $5,250,943 $7,876,346 $(52,940)
=============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,290,091 $ 1,238,485 $ 1,094,970
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,359,533 1,223,568 1,142,214
Amortization of deferred investment tax credits (33,036) (33,036) (33,036)
Provision for deferred income taxes 479,905 489,538 241,735
Changes in assets and liabilities:
Accounts receivable and unbilled revenue 469,341 (384,283) (266,105)
Refundable income taxes 49,877 (48,757) 35,087
Materials and supplies 33,253 (5,616) (21,429)
Prepaid expenses (83,098) 7,489 4,059
Deferred charges and other assets (626,337) (253,658) (365,971)
Accounts payable and accrued expenses 330,733 (262,505) 649,315
Other (91,352) 311,438 698,129
-----------------------------------------
Net Cash Provided by Operating Activities 3,178,910 2,282,663 3,178,968
Investing Activities:
Purchase of property, plant & equipment (5,147,097) (3,151,858) (2,528,110)
Contributions in aid of construction 101,665 467,577 537,134
(Increase) in restricted cash (905,768) -- --
(Increase) decrease in investment in real estate partnerships (156,851) (36,877) 7,489
-----------------------------------------
Net Cash Used in Investing Activities (6,108,051) (2,721,158) (1,983,487)
Financing Activities:
Proceeds from long-term borrowings 4,055,826 8,000,000 --
Payments on long-term debt (818,750) (6,114,307) (147,019)
Net (decrease) increase in notes payable to bank 485,000 (1,100,000) (350,000)
Dividends paid (794,625) (755,767) (651,569)
Proceeds from dividend reinvestment plan and other, net 141,410 466,474 (42,272)
-----------------------------------------
Net cash provided (used in) financing activities 3,068,861 496,400 (1,190,860)
Increase in Cash 139,720 57,905 4,621
Cash at Beginning of Year 260,668 202,763 198,142
-----------------------------------------
Cash at End of Year $ 400,388 $ 260,668 $ 202,763
=========================================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
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, which
includes principally the water utility assets of Pennichuck, 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. The useful lives range from six to
ninety years and the average composite depreciation rate was 2.29% and 2.21% in
1997 and 1996, respectively.
Maintenance, repairs and minor improvements are charged to expense as
incurred. Improvements which significantly increase the value of property,
plant and equipment are capitalized.
Allowance for Funds Used During Construction ("AFUDC"): AFUDC represents
a non-cash credit to income with a corresponding charge to plant in service.
AFUDC amounts reflect the cost of borrowed funds and, if applicable, equity
capital when used to fund major plant construction projects. Such AFUDC amounts
were immaterial for 1997, 1996 and 1995.
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 certain
regulatory assets and costs of obtaining debt financing. Debt expenses are
amortized over the term of the related bonds and notes.
Regulatory Assets: Pennichuck is subject to the provisions of Statement
of Financial Accounting Standard ("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 $431,698 and $268,385 at December 31, 1997 and 1996, respectively.
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.
Deferred Land Costs: Included in deferred land costs are Southwood's
original basis in its landholdings and developmental costs for its Corporate
Park. Deferred land costs are stated at the lower of cost or market.
Investment in Partnership: Southwood is a 50 percent general partner in a
land development project and has sold a certain parcel of land to the
partnership in exchange for a promissory note. Revenues relating to the sale of
this parcel are deferred until the lots are ultimately sold to third parties.
Real estate transactions are presented using the cost recovery method. Under
this method, any deferred gain and related note receivable are offset for
financial statement purposes. Southwood's investment in this partnership is
recorded using the equity method of accounting. As of December 31, 1997 and
1996, that note receivable balance was $440,000 and $540,000 respectively,
which was offset by the deferred gain of approximately $433,000 and $532,000 in
1997 and 1996, respectively.
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 ("CIAC"):
Under construction contracts with real estate developers and others, Pennichuck
receives advances for the costs of new main installation. In accordance with
its tariff provisions, Pennichuck makes refunds on a portion of the advances as
new customers attach to the main over periods generally not exceeding five
years.
Customer advances which are no longer refundable are transferred to the
CIAC account. The CIAC account and related plant asset are amortized over the
life of the property. Pennichuck also credits to CIAC the fair market value of
developer installed mains and any excess of fair market value over the cost of
community water systems purchased from developers.Note A - Significant
Accounting
Diluted Earnings Per Share: Diluted earnings per share were $1.71, $1.67
and $1.52 for the twelve months ended December 31, 1997, 1996 and 1995,
respectively. Diluted earnings per share were computed by dividing actual net
income by the adjusted weighted average number of shares of common stock
outstanding (755,354 in 1997, 739,542 in 1996 and 718,645 in 1995) which
include the effect of any dilutive unexercised stock options.
NOTE B - INCOME TAXES
The components of the federal and state income tax provision at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal $ 650,230 $ 618,113 $ 547,526
State 173,472 167,019 169,648
Amortization of investment tax credits (33,036) (33,036) (33,036)
-----------------------------------
$ 790,666 $ 752,096 $ 684,138
===================================
Currently payable $ 295,836 $ 311,101 $ 471,780
Deferred 494,830 440,995 212,358
-----------------------------------
$ 790,666 $ 752,096 $ 684,138
===================================
</TABLE>
The following is a reconciliation between the statutory federal income
tax rate and the effective income tax rate for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.5 5.6 6.3
Amortization of investment tax credits (1.6) (1.7) (1.9)
----------------------
Effective tax rate 37.9% 37.9% 38.4%
======================
</TABLE>
The Company made income tax payments of $340,000, $386,000 and $419,000
in 1997, 1996 and 1995, respectively.
The Company has $384,289 and $344,144 of alternative minimum tax credits
available at December 31, 1997 and 1996, respectively. 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
$1,217,040 and $1,247,756 at December 31, 1997 and 1996, 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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Liabilities:
Property related $ 4,899,468 $ 4,483,590
Other 254,542 192,792
---------------------------
5,154,010 4,676,382
Assets:
Investment tax credits 710,343 741,059
Regulatory liability 197,282 197,282
Alternative minimum tax carry forward 384,289 344,144
Prepaid taxes on contributions in aid of construction 912,328 940,154
Other 204,234 188,114
---------------------------
2,408,476 2,410,753
Net Deferred Tax Liabilities $ 2,745,534 $ 2,265,629
===========================
</TABLE>
NOTE C - DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Unsecured Notes Payable to Various Insurance Companies:
9.10%, due April 1, 2005 $ 3,500,000 $ 3,500,000
7.40%, due March 1, 2021 8,000,000 8,000,000
8.95% due August 1, 1997 -- 718,750
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 3,060,000 3,120,000
Unsecured Business Finance Authority 1994 Revenue Bond
(Series B), 6.45%, due December 1, 2016 1,940,000 1,980,000
Unsecured Business Finance Authority 1997 Revenue Bond,
6.30%, due May 1, 2022 4,000,000 --
Unsecured Notes Payable and Line of Credit revolving
loan facility at rates ranging from 7.44% to 8.50%
due May 31, 1999 3,680,000 3,195,000
Capitalized Lease Obligation 55,826 --
-----------------------------
25,535,826 21,813,750
Less current portion 100,000 818,750
-----------------------------
$ 25,435,826 $ 20,995,000
=============================
</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, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 100,000
1999 3,863,000
2000 333,000
2001 333,000
2002 316,826
2003 and thereafter 20,590,000
</TABLE>
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, 1997, approximately $3,745,000 of Pennichuck's
retained earnings was unrestricted for payment or declaration of common
dividends.
During 1997, 1996 and 1995, the Company paid interest of $1,729,000,
$1,468,000 and $1,682,000, respectively.
The Company has available a $4,500,000 unsecured, revolving credit
facility with a bank, of which $3,680,000 was outstanding at December 31, 1997.
Outstanding borrowings under this facility are due on May 31, 1999. The
interest rates on the outstanding borrowings are based on the bank's cost of
funds and LIBOR, as defined, and ranged from 7.44% to 8.50% at December 31,
1997. During 1997, the weighted average interest rate on borrowings under this
facility of the Company was 7.75% and 7.74% during 1996.
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, 1997 is as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
-------------- ------------
<S> <C> <C>
Long-term debt $ 25,535,826 $ 26,979,624
</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, restricted cash, notes payable
and line of credit to the bank at December 31, 1997 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>
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,014,577 in 1997 and $1,789,383 in 1996 $ 2,023,847 $ 1,796,966
=============================
Projected benefit obligation for service rendered to date $ (2,451,150) $ (2,185,580)
Plan assets at a fair value (insurance contracts) 2,656,625 2,228,687
-----------------------------
Plan assets in excess of projected benefit obligation 205,475 43,107
Prior service costs 8,306 9,091
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 64,854 161,450
Unrecognized net transition asset (124,679) (138,486)
-----------------------------
Prepaid pension cost included in deferred charges and
other assets $ 153,956 $ 75,162
=============================
</TABLE>
Net pension cost for 1997, 1996 and 1995 includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 138,996 $ 126,933 $ 114,948
Interest cost on projected benefit obligation 163,290 145,325 126,765
Actual return on plan assets (200,193) (149,411) (152,954)
Amortization of (gains) and deferrals (11,596) (47,956) (13,022)
-----------------------------------
Net periodic pension cost $ 90,497 $ 74,891 $ 75,737
===================================
</TABLE>
For the years ended December 31, 1997 and 1996, 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 in 1997 and 1996. The expected long- term rate of return on plan
assets was 9 percent in 1997, 1996 and 1995.
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 $68,103, $61,882 and $62,287,
respectively, for 1997, 1996 and 1995.
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 postretirement benefit cost for the
years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current active employees $ (300,339) $ (268,303)
Retirees (198,457) (192,853)
-------------------------
Total (498,796) (461,156)
Plan assets at fair value 0 0
-------------------------
Funded status (underfunded) (498,796) (461,156)
Unrecognized net (gain) (124,289) (129,883)
Unrecognized prior service cost 139,100 153,600
Unrecognized transition obligation 153,500 184,400
-------------------------
Accrued postretirement benefit cost $ (330,485) $ (253,039)
=========================
Service cost $ 22,478 $ 22,129
Interest cost 33,928 31,452
Amortization of prior service cost 14,500 14,500
Amortization of transition obligation 30,900 30,900
Amortization of unrecognized (gains) (4,385) (4,282)
-------------------------
$ 97,421 $ 94,699
=========================
</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 1997 and 1996,
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 $14,495
and the accumulated postretirement benefit obligation by $92,550 in 1997.
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 SFAS No.
123, "Accounting for Stock Based Compensation."
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income:
As reported $1,290,091 $1,238,485
Pro forma $1,282,694 $1,227,245
Earnings per share:
As reported $1.72 $1.68
Pro forma $1.71 $1.67
</TABLE>
Because the methodology proscribed by SFAS 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, 1997, all options which had been granted were exercisable and
50,000 share 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, 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
---------------------------------------
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
Granted 4,525 $16.25
Expired --
Exercised (1,050) $12.50-$16.25
---------------------------------------
Balance at December 31, 1997 50,000 26,920 $12.50-$17.25
=======================================
</TABLE>
Of the 26,920 options outstanding at December 31, 1997, 2,860 have an
exercise price of $12.50 and a remaining contractual life of less than one
year; 15,150 shares have an exercise price of $15.00 and a remaining life of 1
to 2 years; 4,485 shares have an exercise price of $17.25 and a remaining life
of 8 years; and 4,425 shares have an exercise price of $16.25 and a remaining
life of 9 years. 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 1997 and 1996, respectively: risk-free interest
rates of 6.3% and 5.5%; expected dividend yields of 5.4% and 5.2%; expected
lives of 5 years; and expected volatility of 22% and 34%.
NOTE G - SUBSEQUENT EVENTS
On January 30, 1998, the Company purchased all of the outstanding common
stock of Pittsfield Aqueduct Company ("Pittsfield") in exchange for 49,111
common shares of the Company. This acquisition is intended to be accounted for
using the pooling-of-interest method and accordingly, historical financial data
in future reports will be restated to include Pittsfield data. Pittsfield had
been a privately- owned water utility serving approximately 650 customers in
central New Hampshire. Pittsfield's operations are not expected to have a
significant impact on the consolidated results of the Company. Pittsfield's
total assets are approximately $2.1 million and its operating revenues for 1998
are expected to be approximately $450,000.
On November 5TH, 1997, the Company entered into an Agreement of Purchase
and Sale of Assets with the Town of Hudson, New Hampshire (the "Town") whereby
the Company has agreed to purchase from the Town certain water utility assets
located outside of the Town's municipal jurisdiction for $7.5 million. It is
expected that this purchase will occur in March 1998 once these assets, in
addition to certain water utility assets located within the Town, have been
purchased by the Town from an investor-owned water utility currently serving
the Town and certain surrounding communities. Those assets to be purchased by
the Company will be transferred into a new, wholly-owned, operating subsidiary
of the Company, Pennichuck East Utility, Inc. which will be a regulated entity
similar to Pennichuck. As a result of this purchase, the Company expects to add
approximately 3,600 customers to its existing customer base and the annual
revenues from these added customers is estimated to be $2.3 million. All
regulatory approvals relating to this transaction have not yet been received at
this time.
In order to fund this purchase from the Town, the Company has obtained a
commitment for permanent debt financing from its bank. The $7.5 million
financing consists of two notes with maturities of 2 and 7 years and fixed
interest rates of 6.20% to 6.50%, respectively. These notes will be secured by
the operating assets of the new operating subsidiary.
In addition, PWSC and the Town have entered into a long-term contract
whereby PWSC will provide certain operations and maintenance functions for the
Town in exchange for an annual fee. The initial term of this agreement will be
five years with options to renew thereafter.
NOTE H - 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, 1997, 1996 and 1995.
The "Other" category includes the sundry activities of the Parent Company and
PWSC.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues:
Water utility $11,200,248 $10,693,151 $10,788,740
Real estate 514,143 1,320,676 631,181
Other 126,309 188,861 66,262
-----------------------------------------
Total operating revenues $11,840,700 $12,202,688 $11,486,183
=========================================
Operating income (loss):
Water utility $ 3,358,942 $ 3,086,669 $ 3,588,095
Real estate 316,411 421,025 (190,425)
Other 134,224 106,219 83,094
-----------------------------------------
Total operating income $ 3,809,577 $ 3,613,913 $ 3,480,764
=========================================
Capital additions:
Water utility $ 5,147,097 $ 3,132,327 $ 2,509,370
Real estate -- -- --
Other -- 19,531 18,740
-----------------------------------------
Total capital additions $ 5,147,097 $ 3,151,858 $ 2,528,110
=========================================
Identifiable assets:
Water utility $51,180,479 $44,606,671 $43,814,798
Real estate 2,554,608 3,223,048 3,036,524
Other 1,354,508 2,239,979 1,041,871
-----------------------------------------
Total identifiable assets $55,089,595 $50,069,698 $47,893,193
=========================================
Depreciation and Amortization
Expense:
Water utility $ 1,325,635 $ 1,194,196 $ 1,112,148
Real estate 4,385 -- --
Other 29,513 29,372 30,066
-----------------------------------------
Total depreciation and amortization expense $ 1,359,533 $ 1,223,568 $ 1,142,214
=========================================
</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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Allocated parent expenses:
Water utility $ 345,785 $ 273,983 $ 308,130
Real estate and other 50,970 39,823 23,507
-----------------------------------
Total allocated parent expenses $ 396,755 $ 313,806 $ 331,637
===================================
</TABLE>
Within the water utility business segment, one customer accounted for
over 10 percent of total operating revenues. During 1997, 1996, and 1995, the
water utility recorded $1,693,000, $1,685,000, and $1,683,000, respectively, in
water revenues which were derived from fire protection and other billings to
the City of Nashua.
NOTE I - QUARTERLY FINANCIAL DATA (UNDAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
1997
Operating Revenues $2,497 $2,895 $3,516 $2,933
Operating Income 560 957 1,384 909
Net Income 103 326 579 282
---------------------------------------
Earnings Per Share $ .14 $ .43 $ .78 $ .37
1996
Operating Revenues $2,906 $2,728 $3,107 $3,462
Operating Income 508 939 1,014 1,153
Net Income 56 344 377 461
---------------------------------------
Earnings Per Share $ .08 $ .47 $ .51 $ .62
</TABLE>
MARKET & DIVIDEND INFORMATION
The Company's common stock is traded on the Over-the-Counter market under
the symbol "PNNW". Prior to December 2, 1997, the Company's common stock had
been traded on the NASDAQ National Market System. On December 31, 1997, there
were approximately 755 holders of record of the 756,288 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>
1997
Fourth Quarter $20.00 $18.13 $.27
Third Quarter 20.25 18.00 .27
Second Quarter 19.50 15.50 .26
First Quarter 18.00 15.50 .26
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
</TABLE>
ANNUAL MEETING AND SHAREHOLDER INFORMATION
Pennichuck Corporation's Annual Shareholders' Meeting will be held at
3:00 p.m. on Friday, April 17, 1998, 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
New Hampshire 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
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues $11,840,000 12,202,688 11,486,183 10,215,780 9,696,362
Net income $ 1,290,091 1,238,485 1,094,970 972,548 870,587
Earnings per share $ 1.72 1.68 1.53 1.32 1.11
Cash dividends declared per share of common stock $ 1.06 1.03 .91 .75 .64
Total assets $55,089,595 50,069,698 47,893,193 46,528,250 45,389,505
Long-term debt & redeemable preferred stock $25,535,826 21,813,750 21,028,011 16,880,030 17,706,626
Weighted average shares outstanding 750,717 736,494 716,312 714,422 712,704
Book value per share $ 18.29 17.70 17.03 16.55 15.99
Number of common shareholders of record 755 753 477 490 494
Utility plant additions $ 5,147,097 3,132,327 2,509,370 2,406,595 3,674,704
Water delivered (million gallons per day) 12.53 12.30 12.79 12.51 12.52
Mains (feet) 1,850,650 1,837,023 1,815,956 1,807,282 1,790,811
Services:
Core system 19,972 19,744 19,581 19,340 19,068
Community systems 1,065 1,061 1,041 954 953
Meters 21,145 20,912 20,691 20,448 20,2188
Hydrants 2,124 2,120 2,112 2,107 2,087
Rainfall (in inches) 47.36 53.24 38.94 42.70 42.59
Number of employees at year end 57 56 55 57 58
</TABLE>
Pennichuck Corporation
Four Water Street
PO Box 448
Nashua, NH 03061-0448
603 882-5191
Fax 603 882-4125
www.pennichuck.com
4370AR98
Exhibit 10.2
PENNICHUCK CORPORATION
----------------------
DEFERRED COMPENSATION PROGRAM
DEFERRAL ELECTION FORM
I understand that this Deferral Election Form constitutes the agreement
between Pennichuck Corporation ("Company") and me for the deferral of my
director's fees and that my signature on this Form validates any election to
make a deferral and that any previously submitted Form(s) are hereby revoked.
1. Election of Deferral. I elect to defer % of my director's fees for future
services as a member of the Company's Board of Directors for 199 and
thereafter, with the balance to be paid to me on the dates that such fees
are otherwise payable.
2. Form of Distribution. I understand that I may select a form of
distribution of such fees either in cash or in shares of the Company's
$1.00 par value common stock ("Common Shares") upon my eligibility for
such distribution based upon the conditions set forth in Paragraph 4(i),
(ii) and (iii). I hereby elect the following form of distribution:
_____ (A) Payment of all fees deferred together with cumulative
interest thereon to be paid to me in cash.
Interest. I understand that any amounts deferred will
be credited with interest calculated monthly at
interest rates equal to the Company's average cost of
money for its short term borrowings.
_____ (B) Payment of all fees deferred together with cumulative
dividends thereon to be paid to me in Common Shares of the
Company. I understand that my account will be credited on
June 30 and December 31 each year (or such other dates on
which directors' fees are paid) for unit share equivalents,
such share equivalents to be calculated using the closing bid
price of the Company's Common Shares on said dates. In the
event of a change in the number of Common Shares through a
declaration of a stock dividend, stock split or otherwise,
the amount of unit share equivalents will be adjusted
accordingly.
Dividends. I understand that any amounts deferred will
be credited with additional unit share equivalents for
any regular and special dividends that may be declared
from time to time by the Company, such share
equivalents to be calculated using the closing bid
price of the Company's common stock on the respective
dividend payable dates, including fractional
equivalents.
Nature of Common Shares. I further understand that the
Common Shares acquired hereby will not be registered
under the Securities Act of 1933, as amended; will be
characterized as "restricted securities" within the
meaning of said Securities Act and Regulation D
thereunder; that any certificate(s) representing such
shares will bear a legend to such effect; and, that any
subsequent sale or disposition of such shares, if any,
will be made in accordance with the requirements of the
Securities Act, including compliance with Rule 144
promulgated thereunder.
3. Method of Distribution. I understand that I have no right to such fees
during the Deferral Period, as that term is defined in Paragraph 4 below,
and hereby elect the following:
_____ (A) The cumulative amounts deferred by me, whether in form of
cash or unit share equivalents, and the total interest or
dividends accrued on such amounts, minus any amounts required
to be withheld for federal income tax purposes, will be
delivered to me directly in one lump sum in the form of
distribution selected above, at the end of the Deferral
Period.
_____ (B) The cumulative amounts deferred by me and the interest or
dividends accrued on such amounts, minus amounts required to
be withheld for federal income tax purposes, will be
delivered to me commencing at the end of the Deferral Period
in _______ approximately equal annual installments in the
form of distribution selected above.
It is my understanding that this election as to method of distribution
may be changed at any time up to one year prior to the end of the
Deferral Period either by completing a Deferral Election Form bearing a
date subsequent to the date thereof or by so instructing the Company in
writing.
4. Deferral Period. The Deferral Period shall begin when the directors' fees
would otherwise have been received by the director, and end at such time
as the director (i) attains the age of 70, (ii) ceases to be a director,
or (iii) dies, whichever shall first occur.
5. Conversion of Existing Account Balances. If applicable, I elect to
convert % of my existing account balance into unit share equivalents of
the Company's Common Shares, such share equivalents to be calculated
based on the closing bid price of the Company's common stock on the date
of this election. I understand that this conversion is made on a one
time, irrevocable basis.
6. Beneficiary. In the event that I should die before any or all deferred
amounts have been paid to me, I designate the following beneficiary to
receive the remainder of such payment due to be paid as designated
pursuant to Paragraph 3 above. I understand that in the event some other
beneficiary was designated previously by me, this Paragraph 6, if
completed, will revoke such designation.
NAME: __________________________________________________________
ADDRESS: _______________________________________________________
________________________________________________________________
SOCIAL SECURITY NUMBER: ________________________________________
7. Irrevocability of Election. The foregoing election is made by me with
knowledge that this specific election is irrevocable with respect to each
calendar year unless a new Deferral Election Form is subsequently
executed and delivered to you on or before the last day of the preceding
calendar year.
8. Program Unfunded. During the Deferral Period, no deferring director will
have any rights to the amounts which he has deferred. Nothing contained
herein shall be deemed to create a trust of any kind or create any
fiduciary relationship. Funds invested under this Program shall continue
for all purposes to be a part of the general funds of the Company, and no
person other than the Company shall, by virtue of the provisions of this
Program, have any interest in such funds. To the extent that any director
acquires a right to receive payments from the Company under this Program,
such right shall be no greater than the right of any unsecured general
creditor of the Company.
9. Withholding. Distribution of any deferral benefits will be reduced for
any amounts required to be withheld by the Company pursuant to any
governmental law or regulation with respect to taxes or similar
provisions.
10. Nonassignability. The Company will refuse to recognize any pledge or
assignment of income deferred under this Deferred Compensation Program
and will resist any attempt by an outsider to attach deferred benefits.
DATED: __________________________________________________ , 19___
SIGNED: _________________________________________________________
ACKNOWLEDGEMENT
---------------
I hereby certify that the foregoing Deferral Election Form signed by
___________________________ and dated ________________, 19___ was received by
me on __________________, 19___ .
SIGNED: ________________________________
Exhibit 21
SUBSIDIARIES OF PENNICHUCK CORPORATION
Pennichuck Water Works, Inc.
The Southwood Corporation
Pennichuck Water Service Corporation
Pittsfield Aqueduct Company, Inc.
Pennichuck East Utility, Inc.
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