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, 1999
[ ] 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
incorporation or organization) Identification No.)
Four Water Street, Nashua, New Hampshire 03061
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 603-882-5191
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock (par value $1.00 per share)
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---- ----
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year.
$17,809,258
The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the last sales price on March 3, 2000 of the
Registrant's Common Stock as reported on the Nasdaq National Market System
was $34,937,000. 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 March 3, 2000:
Common Stock, $1 Par Value - 1,752,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1999 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 20, 2000 are incorporated by reference into
Part III of Form 10-KSB.
TABLE OF CONTENTS
PART I: Page
Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTIES 4
Item 3. LEGAL PROCEEDINGS 6
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 6
PART II:
Item 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 6
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
Item 7. FINANCIAL STATEMENTS 7
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 7
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 7
Item 10. EXECUTIVE COMPENSATION 8
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 8
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 8
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 9
PART I:
Item 1. DESCRIPTION OF BUSINESS
Overview
Pennichuck Corporation (the "Company") is a holding company based in
Nashua, New Hampshire. Its principal operating subsidiaries are engaged
primarily in the collection, storage, treatment, distribution and sale of
potable water throughout southern and central New Hampshire. These
subsidiary corporations - Pennichuck Water Works, Inc. ("Pennichuck"),
Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct
Company, Inc. ("Pittsfield"), are each engaged in business as a regulated
public utility, subject to the jurisdiction of the New Hampshire Public
Utilities Commission (the" NHPUC"). They collectively serve approximately
24,300 residential and 2,000 commercial and industrial customers. The
Company was formed in 1983 following the reorganization of Pennichuck
Water Works, which was first established in 1852, into a dedicated water
utility. At the same time several tracts of land, formerly held for
watershed protection purposes, were transferred to The Southwood
Corporation ("Southwood"). Southwood is involved in the development of
commercial and residential real estate. The Company also conducts non-
regulated, water-related management services and contract operations
through another subsidiary, Pennichuck Water Service Corporation (the
"Service Corporation").
Our Water Business
Pennichuck is franchised by the NHPUC 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. Its core system, which services
over 21,100 customers, accounts for 98% of Pennichuck's revenues and 96% of
its combined plant in service. Its franchises in the remaining towns
consist of stand-alone satellite water systems serving nearly
1,400 customers. Pennichuck has no competition in its core franchise area.
Currently, approximately 27% of its water revenues are derived from
commercial and industrial customers and approximately 57% from residential
customers, with the balance being derived from fire protection and other
billings to municipalities, principally the City of Nashua.
Pennichuck East was organized in 1998 to acquire certain water
utility assets from the Town of Hudson, New Hampshire ("Hudson"), following
its acquisition of those assets from an investor-owned water utility which
previously served Hudson and surrounding communities. Pennichuck East is
franchised to gather and distribute water in the New Hampshire towns of
Litchfield, Pelham, Windham, Londonderry, Derry, Raymond and Hooksett,
which are areas adjacent to the service franchise served by Pennichuck.
The water utility assets owned by Pennichuck East consist principally of
water transmission and distribution mains, hydrants, wells, pump stations
and pumping equipment, water services and meters, easements and certain
tracts of land. Pennichuck East serves approximately 3,900 customers and
annual revenues were approximately $2.6 million for calendar year 1999.
Pittsfield was acquired by the Company in 1998 and serves approximately
615 customers in and around Pittsfield, New Hampshire with annual revenues
of approximately $423,000.
Regulation
The Company's water utilities are regulated by the NHPUC with respect
to their water rates, securities issues and service. New Hampshire law
provides that utilities are entitled to charge rates which permit them to
earn a reasonable return on the cost of the property employed in serving
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 current water rates
are based on a March 1998 NHPUC order resulting from its latest approved
rate case. Pennichuck is authorized an overall rate of return of 8.34% on an
approved rate base of approximately $34.61 million. Pennichuck East is
authorized an overall rate of return of 8.37% on an approved rate base of
approximately $7.5 million. Pittsfield is authorized an overall rate of
return of approximately 10% on an approved rate base of approximately $1.6
million.
The Company's water utilities are subject to the water quality
regulations issued 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 the Company's water utilities' treated water
currently meets or exceeds all standards set by the EPA and management 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 has led to stricter monitoring standards which require
additional operating costs for the Company. It is expected that these
additional monitoring and testing costs arising from EPA mandates should
eventually be recouped through water rates.
Other Operations
The Company formed the Service Corporation to conduct its non-
regulated, water-related activities. Its activities include providing
contract operations and maintenance, water testing and billing services to
municipalities. In 1998, the Service Corporation entered into a long-term
agreement with the Town of Hudson to provide operations and maintenance
contract services to the Town with respect to the water utility assets it
acquired from an investor-owned water utility. In addition, the Service
Corporation is involved in laboratory analysis and sundry activities.
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 formerly
owned by Pennichuck Water Works for watershed protection purposes.
Since 1988, Southwood has been involved in the planning and
development of Southwood Corporate Park, a 65 acre commercially-zoned land
parcel located in Nashua, New Hampshire. Over the past ten years, Southwood
has sold two lots of 8 and 10 acres in 1988 and 1995, respectively. In July
1995, Southwood entered into an option agreement with a regional real
estate developer ("the Developer") for the remaining acreage in Southwood
Corporate Park. Under 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. In
September 1997, Southwood and the Developer formed Westwood Park LLC
("Westwood"), to develop a 404 acre tract of land in northwest Nashua
presently zoned for park-industrial use. Southwood conveyed the land to
Westwood in exchange for a 60% interest in Westwood.
Southwood is also a 50% partner in Heron Cove Office Park LLC ("HECOP
I"), a limited liability corporation formed in January 1999 to construct
and own a 39,000 square foot office building located in Merrimack, New
Hampshire. As of December 31, 1999, approximately 16,000 square feet of
space had been leased and the remainder is expected to be leased in the
second quarter of 2000.
In October 1997, Southwood entered into a joint venture known as
Heron Cove LLC ("Heron Cove") for the development of an 87 unit, single-
family community located in Merrimack, New Hampshire. Under the terms of
the joint venture agreement, Southwood conveyed the related land parcel to
Heron Cove in exchange for a non-interest bearing note secured by a second
mortgage on the real estate conveyed. Southwood holds a 50% interest in
this joint venture. As of December 31, 1999, 30 units had been constructed
and sold to third parties and 14 lots were subject to purchase contracts.
Financial Information About Industry Segments
The business segment data of the Company and its subsidiaries for the
latest three years is presented in "Note I - Business Segment Information"
in the Notes to the Consolidated Financial Statements included in Item 7 of
this Form 10-KSB Report.
Employees
The Company employs 71 permanent employees and officers. Of these,
there are 40 management and clerical employees who are non-union. The
remaining employees are members of the United Steelworkers Union. The
current 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
Office Buildings
The Company owns and occupies a three story, 11,616 square foot
building located in downtown Nashua, New Hampshire. It also owns a separate
building in Nashua which serves as an operations center and storage facility
for its construction and maintenance activities. Except as noted in "Note
H - Acquisition" on page 47 of the Consolidated Financial Statements of
Pennichuck Corporation, there are no mortgages or encumbrances on our
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 neighboring 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 and related
impounding dams comprise the chief source of water supply in Nashua and
Merrimack, New Hampshire.
2. 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, New Hampshire.
3. A water intake plant and pumping facility located on the
Merrimack River in Merrimack. This 20 million gallon per day supplemental
water supply source provides an additional source of water during dry
summer periods and will provide a long-term supply for Pennichuck's service
area.
4. Approximately 672 acres of land located in Nashua and Merrimack
which are owned and held for watershed and reservoir purposes.
5. Ten water storage reservoirs having a total storage capacity of
23.1 million gallons, six of which are located in Nashua, two in Amherst,
one in Bedford and one in Hollis, New Hampshire.
The source of supply for Pennichuck East is a well system owned by
the Town of Hudson in Litchfield, New Hampshire. Pennichuck East has
entered into a long-term water supply agreement to obtain water from this
well system.
Pittsfield owns Berry Pond located in the vicinity of its water
treatment facility in Pittsfield, New Hampshire, which serves as its
primary source of supply.
Water Distribution Facilities
The distribution facilities of the Company's regulated water
companies consist of the following:
<TABLE>
<CAPTION>
Pennichuck Pennichuck East Pittsfield
-----------------------------------------
<S> <C> <C> <C>
Transmission & Distribution
Mains (in miles) 364 104 13
Services 22,035 3,936 624
Meters 22,013 3,914 625
Hydrants 2,174 339 70
</TABLE>
Land Held for Future Development
Following Pennichuck Water Works' reorganization in 1984 into a
holding company structure, approximately 1,088 acres were transferred to
Southwood. Since 1984, Southwood has sold or transferred approximately 783
acres of land to third parties or to participating joint ventures. The
Company has transferred 499 acres of watershed protection land to
Pennichuck since 1984 and currently holds 425 acres of land which have not
been transferred to Pennichuck or Southwood due to access limitations which
restrict the ability to subdivide and transfer that land. Of that acreage,
approximately 242 acres are available for buffer and alternate use.
Based on vegetation, topographical, wetland and hydrological studies,
Southwood has subdivided its remaining 305 acres into buffer (non-
developable) and alternate use (developable) designations, resulting in an
approximate breakout of 108 and 197 acres, respectively. Of the
approximately 197 acres of alternate use land, 102 acres are located
primarily in the northwestern section of City of Nashua, New Hampshire and
95 acres are located in the western and southerly portions of the Town of
Merrimack, New Hampshire. The following table summarizes of the current
approved zoning for Southwood's alternate use land:
<TABLE>
<CAPTION>
Nashua, NH Merrimack, NH Total
-------------------------------------
<S> <C> <C> <C>
Residential 55 -- 55
Industrial 47 95 142
Total Alternate Use Acreage 102 95 197
</TABLE>
Presently, 47 acres of Southwood's alternative-use land in the City
of Nashua are available for immediate development. The remainder of
Southwood's landholdings in both Nashua and Merrimack are classified under
"Current Use" status, resulting in an assessment that is based on the
property's actual use and not its highest or best use.
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,
no matters were submitted to a vote of security
holders.
PART II:
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Market & Dividend Information" on page 50 of the 1999 Pennichuck
Corporation Annual Report to Shareholders is incorporated herein by
reference. At the record date of March 13, 2000, there were nearly 800
holders of record of shares of the Company's common stock. The Company's
common stock presently trades on the Nasdaq National Market System under
the symbol "PNNW."
Certain bond and note agreements involving Pennichuck require, among
other things, restrictions on the payment or declaration of dividends by
Pennichuck to the Company. Under Pennichuck's most restrictive covenant,
approximately $4,899,000 of Pennichuck's retained earnings was unrestricted
for payment or declaration of common dividends to the Company at December
31, 1999.
As discussed in "Note F - Stock Based Compensation Plans" in the
Notes to the Consolidated Financial Statements included in Item 7 of this
Form 10-KSB Report, the Company maintains a stock option plan for the
benefit of its officers and key employees. Under the plan, incentive stock
options may be granted to acquire shares of the Company's common stock,
$1.00 par value, at an exercise price equal to the closing sale price of
the Company's common stock on the date of grant. The following table
provides the number of shares of common stock that were sold pursuant to
the exercise of options:
<TABLE>
<CAPTION>
Calendar Number of Shares Sold Pursuant
Year To the Exercise of Options
--------------------------------------------------
<S> <C>
1997 1,575
1998 6,378
1999 10,006
</TABLE>
The offer and sale of shares of common stock under the plan is exempt from
the registration requirements of the Securities Act of 1933, as amended
("Act"), pursuant to Section 3(a)(11) thereof, as (i) the Company is
incorporated under the laws of and does business within the State of New
Hampshire, and (ii) all employees receiving and exercising stock option
grants are residents of the State of New Hampshire. The shares acquired
pursuant to such exercise are restricted from transfer for one year
following the date of acquisition.
Each of the independent members of the Company's Board of Directors received
100 shares of common stock in December 1999 as additional compensation for
services rendered as directors; one of such directors received such
compensation in the form of common share equivalents pursuant to a deferred
compensation agreement. The transfer of these shares to the Company's
directors is exempt from the registration requirements of the Act pursuant
to Section 4(2) thereof, the private placement exemption; as such, the
transfer of the shares is restricted.
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 19 to 28 of the 1999
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 30 to 34 together with the report thereon of Arthur
Andersen LLP dated February 2, 2000 appearing on page 29, and the Quarterly
Financial Data appearing on page 49 of the 1999 Pennichuck Corporation
Annual Report to Shareholders are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with the Company's
accountants on any accounting matters or financial disclosures during the
two most recent fiscal years.
PART III:
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
"Election of Directors" on pages 4 to 8 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 20, 2000
are incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
"Executive Compensation" on pages 15 to 17 of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders on April
20, 2000 is incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" on pages 2 through 4 of the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders on April 20, 2000 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 17 of the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders
on April 20, 2000 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 1999 Annual Report to
Shareholders for the year ended December 31, 1999, are incorporated
by reference in Item 7:
<TABLE>
<CAPTION>
Page Reference In -
Annual
Shareholders Form 10-KSB
Report Report
----------------------------
<S> <C> <C>
Report of Independent Public Accountants 29
Consolidated Balance Sheets at
December 31, 1999 and 1999 30-31
Consolidated Statements of Income for each of
the years ended December 31, 1999, 1998 and
and 1997 32
Consolidated Statements of Stockholders'
Equity for each of the years ended December 31,
1999, 1998, and 1997 33
Consolidated Statements of Cash Flows for each
of the years ended December 31, 1999, 1998 and
1997 34
Notes to Consolidated Financial Statements 35-49
(2) The Financial Statement Schedules for
each of the years 1999, 1998 and 1997:
Report of Independent Public Accountants
on Schedules for the years ended
December 31, 1999, 1998 and 1997 13
I - Condensed Financial Information of Registrant 14-16
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or
notes thereto.
(3) Exhibit Index:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
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 Bylaws of Pennichuck
Corporation (Filed as Exhibit 3.3 to
the Company's 1995 second quarter
Form 10-QSB Report and incorporated
herein by reference)
3.4 Articles of Amendment to the Articles of Incorporation
of Pennichuck Corporation (Filed as Exhibit 3.4 to the
Company's 1999 second quarter Form 10-QSB Report and
incorporated herein by reference)
10.1 Deferred Compensation Program for Directors of
Pennichuck Corporation (Filed as Exhibit 10.2 to the
Company's 1997 Form 10-KSB Report and incorporated
herein by reference)
10.2 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)
10.3 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)
10.4 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)
10.5 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)
10.6 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 Form 10-QSB Report and incorporated
herein by reference)
10.7 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)
10.8 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-NH (Filed as Exhibit 10.10 to the
Company's 1996 third quarter Form 10-QSB Report and
incorporated herein by reference)
10.9 Amendment Agreement dated March 18, 1998 to Amended
and Restated Revolving Line of Credit Loan Agreement dated
March 23, 1994 between Pennichuck Corporation and Fleet
Bank-NH (Filed as Exhibit 10.10 to the Company's 1998 first
quarter Form 10-QSB report and incorporated herein by
reference)
10.10 Loan Agreement dated April 8, 1998 between Pennichuck
Corporation, Pennichuck East Utility, Inc. and Fleet Bank-
NH (Filed as Exhibit 10.11 to the Company's 1998 second
quarter Form 10-QSB report and incorporated herein by
reference)
10.11 Amendment Agreement dated April 24, 1998 to Loan
Agreement dated April 8, 1998 between Pennichuck
Corporation, Pennichuck East Utility, Inc., The Southwood
Corporation, Pennichuck Water Service Corporation and
Fleet Bank-NH (Filed as Exhibit 10.12 to the Company's
1998 second quarter Form 10-QSB report and incorporated
herein by reference)
10.12 Employment Agreement by and between Pennichuck Corporation
and Maurice L. Arel (Filed as Exhibit 10.13 to the Company's
1998 Form 10-KSB Report and incorporated herein by reference)
10.13 Form of Change of Control Agreement by and between Pennichuck
Corporation and executive officers (Stephen J. Densberger,
Charles J. Staab, Bonalyn J. Hartley and Donald L. Ware) each
dated January 8, 1999 (Filed as Exhibit 10.14 to the Company's
1999 first quarter Form 10-QSB Report and incorporated herein by
reference)
10.14 Amendment Agreement dated August 24, 1999 to Amended and
Restated Revolving Line of Credit Agreement dated March 23,
1994 between Pennichuck Corporation, Pennichuck Water Works,
Inc. and Fleet Bank-NH (Filed as Exhibit 10.15 to the Company's
1999 third quarter Form 10-QSB Report and incorporated herein by
reference)
13 1999 Annual Report to Shareholders
(Furnished only for the information of the Securities and
Exchange Commission and is not deemed to be filed except for
those portions which are expressly incorporated herein by
reference)
21 Subsidiaries of Pennichuck Corporation
(Filed as Exhibit 21 to the Company's 1997 Form 10-KSB Report
and incorporated herein by reference)
23 Consent of Arthur Andersen LLP
(Included in this Form 10-KSB Report)
27 Financial Data Schedule (included only in the electronic filing
of this Form 10-KSB Report)
99 Dividend Reinvestment and Common Stock Purchase Plan, as
amended (Filed as Exhibit 4.1 to Post-Effective Amendment No. 1
to Registration Statement on Form S-3 filed on March 24, 1997
and incorporated herein by reference)
</TABLE>
(b) There were no reports on Form 8-K filed in the fourth quarter of
1999.
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 2, 2000. 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 2, 2000
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
-------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 2,229,943 $ 3,587,240
Accounts Receivable
Refundable Income Taxes 237,950 146,057
Prepaid Expenses 8,651 9,915
--------------------------
Total Current Assets 2,476,544 3,743,212
Property and Equipment 1,250,801 1,233,493
Less Allowances for Depreciation 546,930 524,614
--------------------------
703,871 708,879
Other Assets 8,119 252,958
Investment in Subsidiaries 24,980,440 22,055,599
--------------------------
$28,168,974 $26,760,648
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Other Current Liabilities $ 117,229 $ 141,921
Long Term Debt 1,500,000 1,500,000
Other Long Term Liabilities 294,436 307,558
Stockholders' Equity 26,257,309 24,811,169
--------------------------
$28,168,974 $26,760,648
==========================
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Operating Revenues $ 56,764 $ 76,309 $ 60,698
Operating Expenses --- (29,079) (46,026)
------------------------------------
Operating Income 56,764 47,230 106,724
Interest Income & Other 181,459
Interest (Expense) (39,979) (144,116) (189,208)
------------------------------------
Income (Loss) Before Income
Taxes and Equity in Net Income
of Subsidiaries 198,244 (96,886) (82,484)
Federal Income Tax (Provision) Benefit (77,871) 32,941 28,045
------------------------------------
Income (Loss) Before Equity
in Earnings of Subsidiaries 120,373 (63,945) (54,439)
Equity in Earnings of Subsidiaries 2,495,292 2,169,998 1,344,530
------------------------------------
NET INCOME $2,615,665 $2,106,053 $1,290,091
====================================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES $ 62,010 $ (41,727) $ (50,760)
----------------------------------------
INVESTING ACTIVITIES:
Equity Transfer to Subsidiary (429,550) (2,812,937) (162,185)
Net Decrease (Increase) in Property
and Equipment and Other Assets 179,768 (147,401) ---
----------------------------------------
(249,782) (2,960,338) (162,185)
----------------------------------------
FINANCING ACTIVITIES:
Increase(Decrease) in Notes Payable (6,680,000) 485,000
Proceeds from Issuance of Equity, net 8,802,337 ---
Proceeds from Long-term Borrowings 4,500,000 ---
Advances (to) from Subsidiaries 288,973 536,920
Payment of Dividends (1,590,041) (970,196) (807,425)
Proceeds from Dividend Reinvestment
and Other, net 420,516 281,631 141,462
----------------------------------------
(1,169,525) 6,222,745 355,957
(DECREASE)INCREASE IN CASH (1,357,297) 3,220,680 143,012
Cash at Beginning of Year 3,587,240 366,560 223,548
----------------------------------------
CASH AT END OF YEAR $ 2,229,943 $ 3,587,240 $ 366,560
----------------------------------------
</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, 1999.
NOTE B -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its
subsidiaries were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Pennichuck Water Works, Inc. $1,521,587 $945,181 $794,625
Pittsfield Aqueduct Company, Inc. --- 12,800 12,800
Pennichuck East Utility, Inc. 68,454 12,215 ----
----------------------------------
TOTAL $1,590,041 $970,196 $807,425
==================================
</TABLE>
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 20, 2000
--------------
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
- --------------------------------------------------------------------------------------------
<C> <S> <C>
/s/ Maurice L. Arel President and Director (Principal
- ------------------- Executive Officer) March 20, 2000
Maurice L. Arel
/s/ Stephen J. Densberger Executive Vice President
- ------------------------- and Director March 20, 2000
Stephen J. Densberger
/s/ Charles J. Staab Vice President, Treasurer
- --------------------- Chief Financial Officer
Charles J. Staab and Director (Principal Financial Officer) March 20, 2000
/s/ Bonalyn J. Hartley Vice President and Controller
- ---------------------- (Principal Accounting Officer) March 20, 2000
Bonalyn J. Hartley
/s/ Joseph A. Bellavance Director March 20, 2000
- ------------------------
Joseph A. Bellavance
/s/ Charles E. Clough Director March 20, 2000
- ----------------------
Charles E. Clough
/s/ Robert P. Keller Director March 20, 2000
- --------------------
Robert P. Keller
/s/ John R. Kreick Director March 20, 2000
- ------------------
John R. Kreick
/s/ Hannah M. McCarthy Director March 20, 2000
- -----------------------
Hannah M. McCarthy
/s/ Martha E. O'Neill Director March 20, 2000
- ---------------------
Martha E. O'Neill
</TABLE>
QUALITY RIGHT AT THE SOURCE
PENNICHUCK CORPORATION 1999 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TOTAL ASSETS (IN 000'S OF DOLLARS)
<C> <C> <C> <C> <C>
$49,136 $51,357 $57,240 $70,838 $75,581
1995 1996 1997 1998 1999
<CAPTION>
NET INCOME (IN 000'S OF DOLLARS)
<C> <C> <C> <C> <C>
$1,148 $1,289 $1,207 $2,106 $2,616
1995 1996 1997 1998 1999
<CAPTION>
DIVIDENDS PER SHARE
<C> <C> <C> <C> <C>
$.57 $.65 $.68 $.79 $.92
1995 1996 1997 1998 1999
<CAPTION>
BASIC EARNINGS PER SHARE
<C> <C> <C> <C> <C>
$1.00 $1.09 $1.01 $1.61 $1.50
1995 1996 1997 1998 1999
<CAPTION>
CONSOLIDATED REVENUES (IN 000'S OF DOLLARS)
<C> <C> <C> <C> <C>
$11,700 $12,417 $12,056 $17,395 $17,809
1995 1996 1997 1998 1999
</TABLE>
CONTENTS
Selected Financial Data 1
Mission statement 3
Letter to Shareholders 4
Review of Operations 6
Board of Directors and Officers 18
Management's Discussion and Analysis 19
Report of Independent Public Accountants 29
Consolidated Balance Sheets 30
Consolidated Statements of Income 32
Consolidated Stockholders' Equity 33
Consolidated Statements of Cash Flow 34
Notes to Consolidated Financial Statements 35
Market and Dividend Information 50
Annual Meeting and Shareholder Information 51
Five Year Selected Financial Data 52
Map of Service Territory Inside Back Cover
QUALITY, OUR CLEAR MISSION
Pennichuck Corporation ("The Company") is a holding company with five
wholly-owned operating subsidiaries: Pennichuck Water Work, Inc.
("Pennichuck"), Pennichuck East Inc. ("Pennichuck East"), Pittsfield
Aqueduct Company, Inc. ("Pittsfield"), The Southwood Corporation
("Southwood") and Pennichuck Water Service Corporation (the "Service
Company"). Pennichuck Water Service Corporation provides water system
management services for communities such as Hudson, New Hampshire. The
Southwood Corporation is a developer of commercial and residential real
estate with landholdings in Nashua and Merrimack, NH. The mission of
Pennichuck is to be a leading private supplier of quality, safe drinking
water and water-related services in New England.
LETTERS TO SHAREHOLDERS
DEAR SHAREHOLDERS
For Pennichuck Corporation, 1999 was another remarkable year in every respect.
It was a year of increased financial performance, sound strategic planning,
and exploration of new opportunities in both the regulated and non-regulated
business segments. As a result of these efforts, your Company is positioned
to continue to prosper well into the new millennium.
For a company such as Pennichuck, with a proud 148-year history, this
is not the first time we've welcomed the dawn of a new century. Of course,
times have changed dramatically. In the early 1990s, Pennichuck was a single
company serving approximately 3,600 customers in Nashua. Over the years,
Pennichuck has grown into a holding company comprised of five subsidiaries
engaged in non-regulated contract water operations and real estate, in
addition to our regulated water utility business. Today, your Company serves
over 32,000 customers in 22 cities and towns throughout southern New
Hampshire.
1999 was another very successful year with strong financial
performance. Total consolidated revenues rose to $17.8 million compared to
$17.4 million in 1998. Net income also increased, reaching $2.6 million in
1999 versus $2.1 million the previous year. Earnings per share, however,
decreased slightly from $1.61 in 1998 to $1.50 in 1999. This is attributable
to a 39% increase in the number of common shares outstanding, as a result of
our stock offering in November of 1998. As you know, your Company's share
price increased substantially in 1999, from $21 in December 1998 to nearly
$33 by the end of 1999. Although the current share price is off its December
close, your Company's market to book value and other financial ratios are
becoming more aligned with those of its industry peers.
Gross revenues for our three regulated water utilities, Pennichuck
Water Works, Pennichuck East Utility, and Pittsfield Aqueduct Company, were
$16.3 million compared to $15 million the previous year. This increase was
the result of having 12 full months of revenue from Pennichuck East, our
adding over 500 new customers, and the very warm, dry weather we experienced
in the month of June, when our total pumpage surpassed all previous records.
In general, 1999 was a year of assimilation. Primarily, our efforts
were focused on fully integrating the acquisitions and expansion undertaken
in the previous year, by streamlining operations, sharing resources and
achieving maximum economies of scale for greater profitability. The water
system in the town of Hudson, New Hampshire, is just one example. Pennichuck
Water Service Company entered into a long-term contract to operate and manage
this system serving over 5,000 customers.
During 1999, we also spent considerable time laying the groundwork for
future acquisitions and expanding our contract operations. We nurtured
relationships with towns and communities, and investigated ways that
Pennichuck might best serve these communities should the opportunity arise in
the future. We also explored new opportunities in non-regulated water
industries, specifically in the areas of private laboratory testing,
operations consulting, and providing contract operation services to non-
community water systems, such as schools, day care centers, businesses and
apartment buildings.
The strong economy proved to be extremely beneficial to our real estate
subsidiary, The Southwood Corporation. Highlights on the residential side
included selling the remaining three homes in our Bowers Pond project, the
sale of 30 homes in our Heron Cove project, and the commencement of our
Ayer's Crossing project. On the commercial side, the infrastructure for
Phase I of Westwood Park is now complete, and we continue to aggressively
market our Southwood Park industrial development. We expect the strong
interest in our commercial and residential projects to continue in 2000.
As new rules and practices dictated by the reauthorization of the Safe
Drinking Water Act (SDWA) in 1996 come into effect, the water industry will
be subject to ever stricter regulation. More stringent requirements for
minimum contaminant levels for radon and disinfectant byproducts are just two
of the regulatory issues on the immediate horizon. Successfully complying
with these, and other proposed standards, will undoubtedly place an
additional financial burden on water utilities in the form of significant
capital improvements. However, for Pennichuck the outlook is positive. First,
we anticipate that new growth opportunities will arise from the acquisition
of water companies that are ill-prepared to meet the challenge of stricter
regulatory requirements. And second, we hope that water quality issues will
raise public awareness for the true value of water, the importance of
conservation, and the need for Pennichuck to protect our precious source
water. These are all critical concerns given the urbanization of
Pennichuck's own watershed area.
As a result of our proactive effort to raise your Company's profile
among the investment community, Pennichuck stock is now followed much more
closely by investment analysts. To enable you and your fellow stockholders
to share in Pennichuck's success, we increased the dividend per share twice
during the year, resulting in a 16.5% increase over 1998. I am pleased to
report that your annualized dividend is currently $0.96 per share.
I believe that it is the vision, foresight and sound strategic planning
of your Company's management team, combined with the dedication and hard work
of all our employees, that has enable Pennichuck to succeed and prosper
throughout all these years. I would like to express my gratitude to our
employees and directors, and to you the shareholders of Pennichuck. As we look
forward to the new century and beyond, I believe your Company is in the
strongest position it has ever been.
Sincerely,
/s/ Maurice L. Arel
- -------------------
Maurice L. Arel
President and Chief Executive Officer
REVIEW OF OPERATIONS
PROTECTING FUTURE SUPPLIES
Ask anyone, and they'll agree that water is a valuable resource. But few
realize just how precious an abundant supply of quality water is today, or
think about the fact that, in the not too distant future, water will likely
become the most valuable commodity known to man.
For many people, it's hard to imagine how something that appears to be
so plentiful, that's all around us, could ever be in short supply. But for
people like us, at Pennichuck, we know how much time, effort and expense it
takes to maintain consistent water quality, and just how fragile are our own
surface and groundwater sources of supply.
Indeed, for a number of years now, one of our primary long-term
initiatives has been to continue the implementation of our Watershed
Protection Plan. With the advent of tighter governmental regulations
regarding the quality of source water, and the ongoing threat from both
residential and commercial development, protecting the delicate environment
in our watershed area is of paramount importance to the future of your
Company.
In support of this effort, representatives from Pennichuck made
presentations at a number of town meetings, and held several educational
forums in conjunction with the Nashua Regional Planning Commission.
Ultimately, our goal is to convince political leaders from all the
communities within our watershed area to adopt ordinances that would require
greater minimum set-backs and more effective on-site treatment of stormwater
for any new development projects.
In 1999, Pennichuck submitted proposals and grant requests that would
enable us to establish two large stormwater treatment systems similar to the
successful project implemented on the campus of the New Hampshire Community
Technical College. This innovative project entailed constructing large,
manmade wetlands to collect stormwater, allowing it to seep back into the
water table, rather than being discharged directly into the Pennichuck
Brook. As the first project of its kind in our state, the Pennichuck Brook
Urban Runoff Project attracts regular visitors from the New Hampshire Water
Works Association as well as government agencies.
The growing challenges of meeting stricter requirements for water
quality, coupled with population growth that is increasing overall demand,
mean that communities are becoming more and more dependent on one another
for their supply of water. Pennichuck predicted the growing regionalization
and interdependence among community water systems over 10 years ago. Our
vision is becoming a reality today. More and more, we believe that the
supply of water will be managed on a regional basis rather than by each
individual community. By cooperating as a group, instead of working in
isolation, the regionalization of water would ensure a more consistent
supply of higher quality water for everyone. However, if it's to be
successful, regionalization requires the cooperation of all the communities
involved. To this end, Pennichuck made inquiries with the owners of numerous
small systems, and the management of several municipalities, to discuss
potential opportunities for acquisition or privatization in conjunction with
our regionalization effort.
THE CORE SYSTEM
The summer of 1999 will be remembered as one of the most challenging ever,
as a result of the very dry spring, followed by near drought conditions. The
lack of rain, combined with low snowfall during the winter, meant our
groundwater reserves were very low going into our most demanding period of
the year for water usage, late spring and summer.
In fact, Pennichuck achieved record levels for pumpage in our core
system. Although Pennichuck succeeded in satisfying the incredible demand,
the tremendous velocity of water going through the pipes dislodged rust and
other sedimentation in some of the older sections of the
system, resulting in temporary discoloration of the water in certain areas.
Once again, the dry weather served to illustrate that, in our
community water systems, our sources of supply are not endless. Even after
imposing conservation measures, and in some cases a complete ban on non-
essential water use, it was still necessary for Pennichuck to deliver bulk
water in trucks to serve customers in certain communities. While trucking
water alleviated these short-term emergencies, establishing new sources of
supply continues to be a priority. We anticipate that major capital
projects, either being planned or already underway, will eliminate the need
to truck water to most of these communities in the near future.
One of the most significant capital improvements Pennichuck completed
during 1999 was the change-out of the filtration media at our Nashua water
treatment plant. This facility is in our core water system, serving over
85,000 customers in the city of Nashua and in portions of the towns of
Amherst, Milford, Merrimack and Hollis. Replacing the existing 20-year-old
filtration media was mandatory, in order to stay in compliance with the new
requirements of the Interim Enhanced Surface Water Treatment Rule (IESWTR),
enacted in November 1998. With the completion of the filter media change-
out, Pennichuck achieved full compliance with stricter standards for water
turbidity (clarity) more than one year ahead of the July 2000 regulatory
deadline.
While changing out the filtration media itself took just a few months,
the project actually began in 1998 with a pilot study conducted by an
independent engineering company to evaluate the effectiveness of a number of
different options. Based on the results of the pilot study, Pennichuck opted
to use a two-step filtration process that consists of a 24-inch layer of
Granular Activated Carbon (GAC), on top of a 12-inch bed of 0.4 mm sand. The
total cost of the project, including the pilot study, was over $600,000.
During 1999, the city of Nashua continued progress in its long-term
sewer separation project. This is a 10-year program to replace the current
network of single pipes carrying both sewer effluent and storm water, with
separate drains for each. Although the current system is adequate most of
the time, during heavy rains, water flow can increase from 12 million to
over 50 million gallons. This volume is more than the waste-water treatment
facility can handle, and consequently the combined sewer overflow (CSO) is
discharged into the Merrimack river.
In order to lay independent pipelines to carry stormwater and
effluent, the city must dig up the streets. Pennichuck is taking advantage
of this opportunity to upgrade some of the oldest pipelines in our core
system. By replacing or relining pipes at the same time as the city, we
avoid considerable expense from paving costs while also improving service to
our customers.
Working in conjunction with the city, Pennichuck replaced over 6,000
feet of pipe during 1999. We switched the old, small-diameter cast iron pipe
with larger diameter ductile iron pipe that is much less susceptible to
corrosion and sediment build-up. Obviously, conducting this work mandated
shutting down several water lines. This, in turn, created unusual flow
conditions which resulted in water discoloration in some areas of the
system. As part of the process, we plotted these problem areas, and have
since succeeded in convincing the city of Nashua to alter its CSO project
schedule in order to allow us to address these areas immediately. In the
next phase of the project, Pennichuck expects to spend $2.5 million,
replacing over 18,000 feet of pipe.
Last year, Pennichuck installed a second crossing at Salmon Brook to
the last remaining large section of undeveloped land in Nashua. The addition
of this new 12-inch transmission main improves Pennichuck's ability to
deliver water into southwest Nashua, and ensures we will be adequately
prepared to meet the growing demand from the inevitable development in
coming years.
COMMUNITY WATER SYSTEMS
Pennichuck continues to explore cooperative arrangements to buy and sell
water between adjacent communities for the benefit of both parties.
Interconnection of water supplies between towns helps meet the demands of
growth and expands the Company's customer base.
The interconnection between Manchester Water Works and our Powder Hill
system in Bedford exemplifies this point. Establishing a pipeline between
the two systems means that the water for Powder Hill will be supplied by
Manchester. This innovative solution will alleviate the chronic supply
problems in Powder Hill, and is far more cost-effective than the alternative
of establishing a whole new source of local supply. In addition, the
interconnection pipeline will enable Pennichuck to provide water service to
new customers along the way.
Similarly, Pennichuck is investigating ways to connect our Londonderry
water system directly to Manchester. Currently, Londonderry is supplied by
the neighboring town of Derry. Although Manchester is further away,
establishing the interconnecting pipeline is a highly attractive proposition
financially.
Pennichuck also drilled three new wells in our East Derry community
water system. In doing so, we more than doubled the capacity of the well
field. As a result, even during the hot, dry summer of 1999, no outages were
experienced in this community.
It's one thing to acquire new water systems. Quite another to operate
them efficiently. In 1999, Pennichuck successfully integrated three
additional community water systems into our day-to-day operations. These
were Sweet Hill in Plaistow, Great Bay in Newmarket, and Cabot Preserve, a
newly established water system in Bedford, New Hampshire.
In an effort to reduce the cost of reading meters and to test the
effectiveness of radio meter reading, Pennichuck conducted a pilot study in
one of our community systems, Great Bay, located in Newmarket, NH. This
technology enables Pennichuck employees to read customers' meters using a
radio monitoring device inside their vehicle. Instead of walking from house
to house, they simply drive by and take the readings as they go. The fact
that the Great Bay system is the furthest away from our headquarters, also
makes it the most expensive to read manually. We will be expanding this
program to other remote community systems throughout the coming year.
PENNICHUCK EAST UTILITY, INC.
1999 marked our first full year of operating Pennichuck East Utility
("Pennichuck East"). This has proved to be a very challenging undertaking,
requiring us to make major improvements to many of the community systems.
For example, we have upgraded three of the largest water booster stations,
installing bigger pumps with variable frequency drives. Where the previous
pumps delivered water at pressures that would fluctuate dramatically, now
these systems maintain adequate and consistent pressure across a wide range
of usage demands.
Once all the necessary improvements are made, Pennichuck anticipates
enjoying the rewards of a highly streamlined operation, and expects that
Pennichuck East will impose much lower demands on your Company's human and
financial resources. We also expect that as we succeed in stabilizing water
rates and supply in the Pennichuck East operating territory, we will see a
growing influx of new customers who will help increase the revenues and
profitability of this subsidiary.
PITTSFIELD AQUEDUCT COMPANY
When Pennichuck acquired the Pittsfield Aqueduct Company ("pittsfield"), we
inherited a system that was antiquated in some areas. In the past year,
we've made many new upgrades that have dramatically increased the quality of
water and the reliability of service to our customers.
Pennichuck worked with the town of Pittsfield to secure a two-year
grant worth $544,000, from the Department of Housing and Urban Development
(HUD). The purpose of the grant is to help fund the replacement of the aging
tin/cement water pipe in the older sections of the community.
Another significant improvement was the installation of Pennichuck's
Supervisory Control And Data Acquisition (SCADA) system in the Pittsfield
water treatment plant. Now, the SCADA system allows us to monitor the
operation of the Pittsfield facility, remotely, from our Nashua water
treatment plant. Keeping our highly trained technical personnel and skilled
management team in Nashua, rather than duplicating their talents in all our
various subsidiaries, demonstrates how Pennichuck is able to operate
numerous systems in far-reaching geographical locations very cost
effectively.
After making a substantial capital investment into the Pittsfield
system, Pennichuck expects to show improved returns as early as the coming
year. We also believe that our acquisition of Pittsfield will prove to be an
important strategic foothold that will enable Pennichuck to capitalize on
future expansion opportunities in the mid and northern part of New
Hampshire.
NON-REGULATED INDUSTRIES
In addition to pursuing operating and maintenance contracts, like the one we
have secured in the town of Hudson, Pennichuck Water Service Company (the
"Service Company") also initiated several marketing programs aimed at
capitalizing on new business opportunities in the non-regulated water
industry. One segment we are targeting is serving public non-community water
systems. These are public facilities such as schools, day care centers and
apartment buildings, that cater to 25 or more people on a daily basis, but
are not served by municipal water systems. Stricter requirements for the
monitoring and control of quality issues in these systems have created a
need for ongoing analysis, planning and engineering, performed by a highly
qualified specialist. There are over 425 such systems in New Hampshire
alone, and we believe that this market presents a significant revenue
opportunity for our Service Company.
To complement this initiative, the Service Company is also
investigating expansion into providing laboratory services. Based on the
encouraging results of our analysis of the laboratory market made during
1999, we remain committed to developing this segment of our business.
Selling billing reports to other utilities, and sewer billing data to
the City of Nashua, provided additional sources of incremental revenue for
the Service Company. However, like the opportunities in non-community water
systems and laboratory testing, the potential in this area remains largely
untapped. To promote a stronger presence and help penetrate these markets,
the Service Company participated in two trade shows during 1999, and we
intend to continue our proactive marketing efforts in the foreseeable
future.
SOUTHWOOD CORPORATION
The Southwood Corporation ("Southwood") is the Company's real estate
subsidiary. In 1999, the sale of three remaining lots at Bowers Pond brought
this residential project to completion. We also sold 30 units in Heron Cove,
a development consisting of 87 single-family detached condominiums, and
started work on the infrastructure at Ayer's Crossing, a seven-unit
residential development. Southwood also made significant progress in its
commercial projects. The infrastructure for our Westwood Park industrial
development project is now complete, and Delta Education has already
constructed a 247,000-square-foot industrial building, with a further
90,000-square-foot addition planned in the year 2000. WEI, our partner in
developing Southwood Park, continues to promote this project aggressively,
and we expect to see significant activity both in our commercial real estate
ventures, and in our Heron Cove and Ayer's Crossing residential projects,
during the coming year.
One of Pennichuck's corporate mandates is that any development project
undertaken by Southwood must adhere to the strict standards set forth in our
Watershed Protection Plan. Consequently, all construction must have at least
a 300-foot buffer. However, we have less influence over projects undertaken
by other parties. For example, in a development that abuts Bowers Pond, a
developer was only intending to provide the minimum setback of 50-feet
required under the ordinances in force at the time of purchase. Pennichuck
reached an agreement that required the developer to provide a 120-foot
buffer between the homes and Bowers Pond.
LOOKING AHEAD
Pennichuck continues to seek ways to improve our operations for even greater
efficiency. This applies not just to water delivery, but to customer
service, too. In 1999, Pennichuck utilized a new automated phone service to
alert customers of system outages and emergency repairs. Now, we can contact
1,500 customers in an hour.
In 2000, we plan to implement direct pay and credit card payment
programs as an added convenience for our customers. We are also hoping to
complete a total revision of the Pennichuck Web site to provide easier
access and more information for our customers and shareholders. In doing so,
we will be looking for new ways to leverage the power of the Internet to
manage receivables, and provide even more efficient service.
In a word, 1999 was a year of assimilation. We concentrated our
efforts on upgrading the infrastructure and improving the efficiency of the
systems Pennichuck acquired the previous year. At the same time, we were
setting the stage for us to fully capitalize on new growth opportunities as
they arise in the future.
Pennichuck's far sighted vision and effective long-term planning in
the past are paying huge dividends today. Rest assured we will continue to
pursue the same proven strategy in the future. By fiercely guarding our
valuable sources of supply, Pennichuck is ensuring the long-term superiority
of our product. By making the significant capital investment required to
keep our systems operating at their peak, Pennichuck is ensuring quality and
reliability for our customers. By addressing stricter industry requirements
ahead of time, Pennichuck is ensuring that regulatory concerns don't ever
become a crisis. With the continuing regionalization of our water industry,
the current landscape of many small operators will inevitably give way to
just a few dominant water utilities. Our job is to make sure your Company is
one of them.
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.
Charles E. Clough, President, Freedom Partners, LLC
Stephen J. Densberger, Executive Vice President, Pennichuck Corporation
Robert P. Keller, President and Chief Executive Officer, Eldorado Bancshares,
Inc.
John R. Kreick, Phd., CEO, Lockheed Sanders, retired
Hannah M. McCarthy, President, Daniel Webster College
Martha E. O'Neill, Esq., Clancy and O'Neill, P.A.
Charles J. Staab, Vice President, Chief Financial Officer and Treasurer,
Pennichuck Corporation
SENIOR BOARD OF DIRECTORS
John C. Collins
OFFICERS (LEFT TO RIGHT)
Maurice L. Arel, President, Chief Executive Office
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
Corporate Secretary
James L. Sullivan Jr., Esquire
MANAGEMENT'S DISCUSSION & ANALYSIS
Pennichuck Corporation (the "Company") has five wholly-owned subsidiaries.
Three of these subsidiaries, Pennichuck Water Works, Inc. ("Pennichuck"),
Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct
Company, Inc. ("Pittsfield"), are involved in the supply and distribution of
water in cities and towns throughout southern and central New Hampshire.
Because they are regulated by the New Hampshire Public Utilities Commission
("NHPUC"), these water subsidiaries must obtain approval to increase their
water rates, in order to recover increases in operating expenses, and to
obtain the opportunity to earn a return on rate base investments. A fourth
subsidiary, Pennichuck Water Service Corporation (the "Service
Corporation"), is involved in non-regulated, water-related services and
operations, while the fifth, The Southwood Corporation ("southwood") owns,
manages and develops real estate.
In Management's Discussion and Analysis, we explain the general
financial condition and the results of operations for the Company and its
operating subsidiaries, including:
* What our earnings and costs were in 1999, 1998 and 1997,
* why those earnings and costs were different from the year before,
* where our earnings come from,
* how all of this affects our overall financial condition,
* what our expenditures for capital projects were in 1999, and
* where cash will come from to pay for future capital expenditures.
As you read Management's Discussion and Analysis, please refer to our
Consolidated Financial Statements and the Selected Financial Data contained
in this Report. You should be aware that in January 1998 we merged with
Pittsfield by exchanging 49,428 of our shares for substantially all of the
outstanding common stock of Pittsfield. We used the pooling-of-interests
method to account for this merger. This methodology requires us to combine
Pittsfield's historical financial statements with our historical financial
statements for all periods which are shown prior to January 30, 1998.
RESULTS OF OPERATIONS
In this section, we discuss our 1999, 1998 and 1997 results of operations
and the factors affecting them. We begin with a general overview of our
earnings per share ("EPS") generated by our businesses.
TOTAL EARNINGS PER SHARE OF COMMON STOCK
Twelve Months Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Water Utility Operations $1.18 $1.44 $ .83
Real Estate and Other Operations .32 .17 .18
-----------------------
Consolidated EPS $1.50 $1.61 $1.01
=======================
</TABLE>
Our consolidated revenues tend to be seasonal, because of the overall
significance of the water sales of our water utility business as a percent
of our consolidated revenues. Typically, water revenues are lowest during
the first and fourth quarters of the calendar year. Water revenues are
usually highest in the second and third quarters, due to increased water
consumption by our customers during the late spring and summer months. In
addition, our consolidated revenues are significantly affected by sales of
major real estate parcels which may occur from time to time (see discussion
below).
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
For calendar year 1999, our consolidated net income increased 24%, to $2.62
million from $2.1 million in 1998, while our basic earnings per share
decreased to $1.50 from $1.61 last year. However, for 1999, the basic
earnings per share calculations include the dilutive effect of an additional
483,000 new common shares which were issued in our November 1998 common
equity offering. At the time, these additional shares represented a 39%
increase in the number of outstanding common shares.
Our consolidated revenues in 1999 were $17.8 million, representing a
2.4% increase over last year. As we discuss below, this increase in our
revenues is primarily attributed to growth in each of our utility
subsidiaries.
WATER UTILITY OPERATIONS
Utility operating revenues for 1999 totaled $16.3 million, representing a
$1.36 million increase over the same period in 1998. In 1999, approximately
81%, 16% and 3% of our total utility operating revenues were generated by
Pennichuck, Pennichuck East and Pittsfield, respectively.
The principal reasons for our utility revenue growth in 1999 were:
* Additional revenues of $556,000 in 1999 from Pennichuck East which
began its operations in April 1998,
* additional billed revenues of approximately $450,000 from a 16.8%
rate increase granted to Pennichuck which became effective on April
1, 1998, and
* additional revenues of approximately $350,000 resulting from
increased water consumption within Pennichuck's core and community
systems due to the unusually hot and dry months of June and July
1999, and a 1.5% overall growth rate in new customers.
During 1999, none of our water utility subsidiaries was involved in any rate
relief proceedings before the NHPUC.
The expenses of operating our water utility business include such
broad categories as:
* Water treatment and purification,
* pumping and other distribution system functions,
* general and administrative functions,
* depreciation on existing operating assets, and
* taxes other than income taxes.
Our operating expenses increased by $1.1 million, or 11.2%, to $11
million for the twelve months ended December 31, 1999. We attribute this
increase to (i) $312,000 of operations and maintenance costs relating to the
addition of Pennichuck East which began operations in April 1998, (ii)
$229,000 of additional depreciation expense and $83,000 of additional
property taxes, incurred by our three utilities during 1999 as a result of
net investments in new plant assets totaling $4.7 million in 1999 and $3.7
million in 1998, and (iii) approximately $302,000 of additional production
and treatment costs incurred during 1999 due to the increased consumption
discussed earlier. The combined utility operating expenses as a percentage
of combined utility revenues increased from 66.1% in 1998 to 67.4% in 1999.
REAL ESTATE AND OTHER OPERATIONS
For the twelve months ended December 31, 1999 and 1998, the revenues from
all of our real estate and other activities totaled $1.48 million and $2.42
million, respectively. Of these amounts, approximately $860,000 and $1.91
million relate to real estate revenues which we earned during these
comparative periods, respectively.
In 1999, Southwood's revenues included the following:
* $714,000 from partnership activities earned through our 50%
ownership interest in two residential joint ventures,
* $85,000 of option fee income earned under a development option
agreement with a regional developer, and
* a pretax gain of $72,000 from the sale of a one-half interest in a
land parcel to a local developer.
In connection with the final item, we conveyed our remaining interest
in that land parcel to a limited liability corporation- Heron Cove Office
Park I LLC ("HECOP I") in which Southwood is a 50% owner. HECOP I owns a
39,000-square-foot office building which is partially occupied by a local
developer, and the remaining space is expected to be leased to a third party
during the second quarter of 2000.
Fiscal year 1998 real estate revenues included approximately $1.38
million from the sale of a major tract of land by Westwood Park LLC
("Westwood"), a commercial development joint venture with a regional
developer formed in 1998. Westwood currently owns approximately 378 acres of
land in Nashua which is zoned for commercial and industrial use. Westwood's
pretax operating loss for 1999 was $73,000, resulting primarily from real
estate taxes and interest on an outstanding construction loan.
Revenues from other operating activities during 1999 include $539,000
for contract operations and laboratory analyses performed by the Service
Corporation and $79,000 from lease and miscellaneous income. For the same
period in 1998, revenues of the Service Corporation were approximately
$436,000, consisting of $270,000 in contract operations income and $65,000
of sundry revenues. In April 1998, the Service Corporation signed a five-
year contract with the neighboring Town of Hudson, New Hampshire ("Hudson").
We provide certain operations and maintenance functions for Hudson in
exchange for a fixed monthly fee as agreed by both parties.
The operating expenses associated with our real estate and other non-
utility activities decreased from $1.78 million in 1998 to $728,000 in 1999.
Of this decrease, $1.1 million relates to the allocated land and development
costs associated with the 1998 Westwood land sale discussed earlier. The
non-utility operating costs in 1999 are principally comprised of $468,000
for contract operations and other services, $68,000 of property taxes on
Southwood's landholdings, and $174,000 for property management and other
costs associated with Southwood's real estate activities including the
$73,000 Westwood loss discussed above.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
For the twelve month period that ended on December 31, 1998, our
consolidated net income exceeded $2.1 million, or $1.61 per common share,
compared to $1.2 million, or $1.01 per common share for 1997. The
consolidated revenues from all of our business activities in 1998 were
nearly $17.4 million, representing an increase of $5.34 million, or 44.3%,
over 1997. As we discuss below, this increase in consolidated operating
revenues is principally attributed to: The acquisition of two new water
utilities - Pennichuck East and Pittsfield, and a major land sale which
occurred in the third quarter of 1998.
WATER UTILITY OPERATIONS
The operating revenues from our water utility operations totaled nearly $15
million in 1998. Compared to 1997, this represented a $3.56 million increase
in water revenues. There are several reasons for this increase:
* First, our largest water utility, Pennichuck, was granted a
permanent rate increase of approximately 16.8% by the NHPUC
effective on April 1, 1998, and our water utility revenues for 1998
included approximately $1.2 million relating to this rate increase.
* Second, Pittsfield's revenues more than doubled from $215,000 in
1997 to $443,000 in 1998. The 106% increase in Pittsfield's
revenues resulted from a 101% rate increase which was approved by
the NHPUC in December 1997.
* The third major factor affecting our increased water revenues was
the addition of Pennichuck East, which contributed approximately
$1.93 million in water revenues during its first nine months of
operations in 1998.
On a combined basis, our utility operating expenses increased by $1.75
million to $9.9 million in 1998. The principal reasons for this increase
were:
* $1.27 million relating to the additional operations of Pennichuck
East which commenced on April 8, 1998,
* $267,000 of additional depreciation expense recorded by Pennichuck,
as a result of a higher composite depreciation rate we began using
on April 1, 1998 (from 2.15% to 2.44%) and the addition of nearly
$4.2 million of new plant assets, and
* $116,000 of additional water treatment costs, principally due to
increased pumpage over 1997.
REAL ESTATE AND OTHER OPERATIONS
For the twelve months ended December 31, 1998 and 1997, we recognized
revenues from our real estate business activities of $1.91 million and
$514,000, respectively. In the third quarter of 1998, we recognized $1.3
million from the sale of a certain land parcel by Westwood Park LLC, of
which Southwood is a 60% owner. In addition, Southwood recognized $488,000
in revenues earned through its Bowers Pond LLC joint venture, and $89,000 of
option fee income earned under a development option agreement with a
regional developer.
In 1998, revenues from contract operations, principally with the Town
of Hudson, and other non-regulated operating activities totaled $436,000.
For the same period in 1997, revenues from our Service Corporation were
approximately $66,000, consisting of $46,000 from contract operations and
$20,000 from sundry leases and rents.
The expenses associated with our real estate activities increased from
$198,000 in 1997 to $1.42 million in 1998. Of this increase, approximately
$1.1 million is related to the allocable land and infrastructure costs for
the major land parcel that we sold in the third quarter of 1998. In
addition, Southwood wrote down its basis in a certain piece of residential
property, to reflect the demolition of a dwelling which was no longer deemed
useful. This write-down, together with the cost of razing the dwelling,
amounted to nearly $90,000 in the third quarter of 1998. The remaining
expenses were primarily for property taxes on Southwood's real estate
holdings which totaled $76,000 in 1998 compared to $80,000 in 1997.
LIQUIDITY AND FINANCIAL CONDITION
In the following paragraphs, we discuss the financial condition of the
Company and its wholly-owned subsidiaries. This discussion focuses primarily
on the adequacy of capital needed for our business activities.
The primary source of cash which we need for normal operating
activities, capital projects and dividend payments to our shareholders, is
the operating cash flow which we generate from day-to-day activities.
Historically, during periods when operating cash flow is not sufficient, we
have borrowed funds under a revolving loan facility (the "Loan Agreement")
with our bank, Fleet Bank-NH ("Fleet"). The Loan Agreement allows us to
borrow up to $2.5 million at interest rates tied to Fleet's cost of funds or
LIBOR, whichever is lower. During 1999, there were no borrowings outstanding
under this Loan Agreement.
For 2000, our cash flow needs are expected to be met by short-term
investments of nearly $2.3 million, available at the end of 1999, and from
internally generated funds. The short-term investments we had on hand at the
end of 1999 are the remaining proceeds from a $9.4 million public equity
offering completed in November 1998. In that offering, we issued 483,000 new
common shares, which represented a 39% increase in the number of shares
issued and outstanding of the Company at that time. The net proceeds to us
were approximately $8.8 million. Of that amount, $4.5 million was used to
repay outstanding interim bank debt.
Our capital expenditures for 1999 totaled $4.7 million, which is net
of approximately $2 million in contributions in aid of construction from
area developers. Practically all of our capital expenditures in 1999 were
for projects relating to our water utility business. The more significant
projects included:
* Replacement of 4,300 linear feet of pre-1900 distribution mains,
* change-out of the filter media in our water treatment facility at a
cost of $688,000, and
* nearly $700,000 for the installation of 4,000 feet of new
distribution lines and additional system improvements.
The remaining items in the Company's 1999 capital program reflect
expenditures for ongoing, routine investment in new meters, services,
distribution mains and hydrants. For 2000, we expect that our total
expenditures for capital projects will be approximately $5.9 million, of
which $950,000 is expected to be funded by contributions in aid of
construction and state grants. The remainder is expected to be funded by
internally generated cash and from our short-term investments.
The Consolidated Balance Sheet at December 31, 1999 also reflects a
line item captioned "Minority interest" totaling $295,000. This represents a
40% interest held by a third party in Westwood Park LLC ("Westwood"), a real
estate development venture. Southwood owns the remaining 60% majority
interest in Westwood, and financial data for this project are included in
the accompanying consolidated financial statements at December 31, 1999.
We offer a Dividend Reinvestment and Common Stock Purchase program
which is available to our shareholders and our residential New Hampshire
customers. Under this program, our shareholders may reinvest all or a
portion of their common dividends into shares of common stock at a 5%
discount from prevailing market prices. We also accept optional cash
payments to purchase additional shares at 100% of the prevailing market
prices. Since its inception in 1993, this program has provided us with
nearly $1.2 million of additional common equity.
ENVIRONMENTAL MATTERS
Our water utility subsidiaries are subject to the water quality regulations
set forth by the United States Environmental Protection Agency ("EPA") and
the New Hampshire Department of Environmental Services ("DES"). The EPA is
required to periodically set new maximum contaminant levels for certain
chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The
quality of our treated water currently meets or exceeds all standards set by
the EPA and DES. Given the present water quality standards set by the SDWA,
as well as those proposed for the year 2000, we do not anticipate any
significant capital expenditures will be required in the next three years
for regulatory compliance. However, increased monitoring and reporting
standards have led to additional operating costs for us. It is expected that
any additional monitoring and testing costs arising from EPA and DES
mandates will eventually be recouped through water rates in our utilities'
next rate filings.
YEAR 2000 ISSUE
Prior to December 31, 1999, we performed an exhaustive review of our
hardware and software systems in order to determine the level of readiness
to meet the next millennium. Because we own some operating assets which pre-
date 1900, we were aware of the potential Year 2000 problem well before the
recent publicity. In fact, eight-digit dates have been a requirement for all
of our in-house software developed since 1987. In addition, the Year 2000
issue has been addressed in all of our computer migration and upgrades since
1990.
As part of our Year 2000 project planning, we identified mission-
critical applications and, in early 1994, we implemented a five-year plan to
replace or upgrade both hardware and software. All of our software
applications were evaluated to identify any Year 2000 problems, their
importance to our operations, and efficiencies to be gained with newer and
updated software. At this time, our NT network, financial accounting,
billing, customer service information and meter management, human resources,
work orders, inventory control, and various maintenance programs and SCADA
management systems are Year 2000 compliant. All of these systems and
applications have operated satisfactorily since January 1, 2000, and we have
not experienced any problems in connection with the Year 2000 issue.
As part of our planning process, we also identified and contacted all
external vendors who provide and/or require date dependent information, as
well as those customers who are material to our operations, to ensure that
they too are in compliance with the Year 2000 issue. We have not experienced
any problems or difficulties in our dealings with our major vendors and
suppliers since the turn of the millennium. However, for all vendors or
customers who we deemed to be critical to our operations, we developed a
disaster recovery plan outlining alternative actions to prepare for
any potential event of vendor non-compliance.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." While not
material, the effect of this Statement is discussed in "Note C - Debt" of
the Notes to Consolidated Financial 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 our water utility companies 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
reduced reflecting that lower inflation and interest rate environment. There
can be no absolute assurance that the NHPUC will approve rate increases to
recover any future increased operational costs.
AUDITOR'S REPORT
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 (a New Hampshire corporation) as of December
31, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pennichuck Corporation and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/S/ Arthur Andersen LLP
-----------------------
Boston, Massachusetts
February 2, 2000
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31
1999 1998
<S> <C> <C>
Property, Plant and Equipment
Land $ 998,458 $ 998,916
Buildings 22,498,206 22,248,416
Equipment 58,619,793 53,104,353
Construction work in progress 954,773 295,846
-------------------------
83,071,230 76,647,531
Less accumulated depreciation (20,066,457) (18,258,227)
-------------------------
63,004,773 58,389,304
Current Assets
Cash 2,437,674 3,601,648
Restricted cash 897 639
Accounts receivable, net of reserves of
$37,000 in 1999 and 1998 1,333,072 1,024,329
Unbilled revenue 1,175,955 1,307,000
Refundable income taxes 271,312 51,519
Materials and supplies, at cost 311,712 319,744
Prepaid expenses and other current assets 467,587 470,352
-------------------------
5,998,209 6,775,231
Other Assets
Deferred land costs 3,753,144 3,029,243
Deferred charges and other assets 2,430,389 2,169,775
Investment in real estate partnerships 394,329 474,628
-------------------------
6,577,862 5,673,646
-------------------------
$75,580,844 $70,838,181
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
Stockholders' Equity and Liabilities December 31
1999 1998
<S> <C> <C>
Stockholders' Equity
Common stock - $1 par value - authorized
5,000,000 shares; issued 1,761,070
in 1999 and 1,714,236 shares in 1998 $ 1,761,070 $ 1,714,236
Additional paid in capital 14,457,786 13,820,759
Retained earnings 10,361,038 9,335,414
-------------------------
26,579,894 24,870,409
Less cost of 14,418 shares of common
stock in treasury in 1999 and 4,412
shares in 1998 (322,585) (59,240)
-------------------------
26,257,309 24,811,169
Minority Interest 294,809 314,078
Preferred stock, no par value, 100,000
shares authorized, no shares issued in
1999 and 1998 - -
Long-term Debt, less current portion 27,223,378 28,001,997
Current Liabilities
Current portion of long-term debt 1,042,593 183,000
Accounts payable 479,333 568,391
Accrued interest payable 382,703 350,065
Other current liabilities 1,225,487 765,809
3,130,116 1,867,265
-------------------------
Commitments and Contingencies - -
Deferred Credits and Other Reserves
Deferred income taxes 4,360,463 3,415,154
Deferred investment tax credits 1,098,282 1,131,318
Regulatory liability 1,194,870 1,213,605
Post-retirement health benefit obligation 518,285 414,231
Customer advances and other liabilities 203,227 160,467
-------------------------
7,375,127 6,334,775
Contributions in Aid of Construction 11,300,105 9,508,897
-------------------------
$75,580,844 $70,838,181
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Revenues
Water utility operations $16,331,633 $14,972,347 $11,415,065
Real estate and other operations 1,477,625 2,422,447 640,452
---------------------------------------
17,809,258 17,394,794 12,055,517
Operating Expenses
Water utility operations 11,005,271 9,898,732 8,148,894
Real estate and other operations 728,083 1,776,938 189,817
---------------------------------------
11,733,354 11,675,670 8,338,711
Operating Income 6,075,904 5,719,124 3,716,806
Other Income 170,305 33,586 42,277
Interest Expense (2,024,601) (2,263,636) (1,812,091)
---------------------------------------
Income Before Provision for Income Taxes 4,221,608 3,489,074 1,946,992
Provision for Income Taxes 1,625,212 1,342,405 739,969
---------------------------------------
Net Income Before Minority Interest 2,596,396 2,146,669 1,207,023
Minority Interest in Loss (Earnings) of
Westwood Park LLC 19,269 (40,616) -
---------------------------------------
Net Income $ 2,615,665 $ 2,106,053 $ 1,207,023
=======================================
Earnings Per Common Share:
Basic $ 1.50 $ 1.61 $ 1.01
=======================================
Diluted $ 1.49 $ 1.59 $ 1.00
=======================================
Weighted Average Shares Outstanding:
Basic 1,745,698 1,306,286 1,200,287
=======================================
Diluted 1,755,659 1,327,383 1,207,173
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
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, 1996 1,196,841 $1,196,841 $ 5,104,477 $ 7,799,959 $ (52,940)
Net income 1,207,023
Dividend reinvestment plan 14,585 14,585 147,625
Common dividends declared-$.68 per share (807,425)
Common equity issuance costs (34,300)
Exercise of stock options 1,575 1,575 11,925
--------------------------------------------------------------
Balances at December 31, 1997 1,213,001 1,213,001 5,229,727 8,199,557 (52,940)
Net income 2,106,053
Common stock offering, net 483,000 483,000 8,319,337
Dividend reinvestment plan 12,322 12,322 194,027
Common dividends declared-$.79 per share (970,196)
Exercise of stock options 6,378 6,378 52,785 (6,300)
Retirement of repurchased shares (465) (465) (5,248)
Directors' deferred compensation plan 30,131
--------------------------------------------------------------
Balances at December 31, 1998 1,714,236 1,714,236 13,820,759 9,335,414 (59,240)
Net income 2,615,665
Dividend reinvestment plan 12,600 12,600 268,169
Common dividends declared-$.92 per share (1,590,041)
Exercise of stock options 34,234 34,234 347,946 (279,783)
Common equity issuance costs (10,000)
Directors' fees and other deferred
compensation plan 30,912 16,438
--------------------------------------------------------------
Balances at December 31, 1999 1,761,070 $1,761,070 $14,457,786 $10,361,038 $(322,585)
==============================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 2,615,665 $ 2,106,053 $ 1,207,023
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,141,767 1,935,581 1,486,655
Amortization of deferred
investment tax credits (33,036) (33,036) (33,036)
Provision for deferred income taxes 926,574 651,575 483,505
Changes in assets and liabilities:
Accounts receivable and unbilled revenue (177,698) (576,443) 470,458
Refundable income taxes (219,793) (38,548) 36,499
Materials and supplies 8,032 (111,912) 36,559
Prepaid expenses 2,765 14,077 (83,330)
Deferred charges and other assets (865,345) (1,594,872) (824,553)
Accounts payable and accrued expenses 403,258 389,865 282,663
Other 96,166 18,713 (91,352)
------------------------------------------
Net cash provided by (used in) operating activities 4,898,355 2,761,053 2,971,091
Investing Activities:
Purchases of property,
plant & equipment (6,735,185) (11,278,815) (5,974,194)
Contributions in aid of construction 2,012,082 676,190 101,665
(Increase) decrease in restricted cash (258) 905,129 (905,768)
(Increase) decrease in investment in
real estate partnerships (231,148) 154,942 (156,851)
------------------------------------------
Net cash (used in) investing activities (4,954,509) (9,542,554) (6,935,148)
Financing Activities:
Proceeds from long-term borrowings 263,198 9,446,395 5,197,618
Proceeds from common stock offering, net - 8,802,337 -
Payments on long-term debt (182,224) (4,259,016) (950,603)
Net (decrease) increase in notes
payable to bank - (3,680,000) 485,000
Increase (decrease) in minority interest (19,269) 314,078 -
Dividends paid (1,590,041) (970,197) (807,425)
Proceeds from dividend reinvestment
plan and other, net 420,516 281,631 141,410
------------------------------------------
Net cash (used in) provided by financing activities (1,107,820) 9,935,228 4,066,000
(Decrease) increase in cash (1,163,974) 3,153,727 101,943
Cash at beginning of year 3,601,648 447,921 345,978
------------------------------------------
Cash at end of year $ 2,437,674 $ 3,601,648 $ 447,921
==========================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of Pennichuck Corporation and subsidiaries
are as follows:
Basis of Presentation: The consolidated financial statements include
the accounts of Pennichuck Corporation, an investor-owned holding company
(the "company") and its subsidiaries, Pennichuck Water Works, Inc.
("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East"),
Pittsfield Aqueduct Company, Inc. ("Pittsfield"), The Southwood Corporation
("southwood") and Pennichuck Water Service Corporation (the "Service
Corporation").
Nature of Operations: Pennichuck, Pennichuck East and Pittsfield
(collectively referred to as the "Company's utility subsidiaries") are
engaged principally in the gathering and distribution of potable water to
approximately 26,400 customers in southern and central New Hampshire. The
Service Corporation is involved in non-regulated, water-related services and
contract operations. Southwood owns, manages and develops real estate.
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 the Company's utility
subsidiaries, is recorded at cost plus an allowance for funds used during
construction 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 2.24% and 2.47% in 1999 and 1998, 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 1999, 1998 and 1997.
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.
Deferred Charges and Other Assets: Deferred charges include certain
regulatory assets and costs of obtaining debt financing. Regulatory assets
are amortized over periods being recovered through authorized rates. Debt
expenses are amortized over the term of the related bonds and notes.
Regulatory Assets: The Company's utility subsidiaries are subject to
the provisions of Statement of Financial Accounting Standard ("SFAS") 71,
"Accounting for the Effects of Certain Types of Regulations." Such utility
subsidiaries have recorded certain regulatory assets in cases where the New
Hampshire Public Utilities Commission (the "NHPUC") 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 $789,671
and $596,107 at December 31, 1999 and 1998, respectively.
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 Partnerships: Southwood is a 50 percent general partner
in two residential development projects and has sold certain parcels of land
to those partnerships in exchange for promissory notes. Revenues relating to
the sales of those parcels 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 these partnerships is recorded using the equity method of
accounting. As of December 31, 1999 and 1998, the notes receivable balance
was $655,500 and $1,060,500, respectively, which was offset by the deferred
gain of approximately $645,000 and $1,053,000, in 1999 and 1998,
respectively. During 1999, one of the residential joint venture partnerships
sold land and a home to an executive officer of the Company. The terms of
that sale were the same as the terms which would be given to any independent
third party purchaser.
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.
Contributions in Aid of Construction ("CIAC"): Under construction
contracts with real estate developers and others, Pennichuck receives non-
refundable advances for the costs of new main installation. 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.
Earnings Per Share:
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the twelve months ended December
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended 1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 1.50 $ 1.61 $ 1.01
Dilutive effect of unexercised stock options (.01) (.02) (.01)
Diluted earnings per share $ 1.49 $ 1.59 $ 1.00
======================================
Numerator:
Basic net income $2,615,665 $2,106,053 $1,207,023
======================================
Diluted net income $2,615,665 $2,106,053 $1,207,023
======================================
Denominator:
Basic weighted average shares outstanding 1,745,698 1,306,286 1,200,287
Dilutive effect of unexercised stock options 9,961 21,097 6,886
--------------------------------------
Diluted weighted average shares outstanding 1,755,659 1,327,383 1,207,173
======================================
</TABLE>
NOTE B - INCOME TAXES
The components of the federal and state income tax provision at December 31
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Federal $1,320,519 $1,088,849 $599,533
State 337,729 286,592 173,472
Amortization of investment tax credits (33,036) (33,036) (33,036)
------------------------------------
$1,625,212 $1,342,405 $739,969
====================================
Currently payable $ 816,062 $ 856,765 $245,139
Deferred 809,150 485,640 494,830
------------------------------------
$1,625,212 $1,342,405 $739,969
====================================
</TABLE>
The following is a reconciliation between the statutory federal income tax
rate and the effective income tax rate for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.3 5.4 5.6
Amortization of investment tax credits (.8) (.9) (1.6)
------------------------------
Effective tax rate 38.5% 38.5% 38.0%
==============================
</TABLE>
The Company made income tax payments of $858,892, $802,564 and $353,000 in
1999, 1998 and 1997, respectively.
The Company has $65,522 and $214,732 of alternative minimum tax
credits available at December 31, 1999 and 1998, 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
$1,194,870 and $1,213,605 at December 31, 1999 and 1998, 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Liabilities:
Property related $6,171,627 $5,368,591
Other 330,757 320,295
------------------------
6,502,384 5,688,886
Assets:
Investment tax credits 688,173 706,908
Regulatory liability 197,282 197,282
Alternative minimum tax carry forward 65,522 214,732
Taxes on contributions in aid of construction 832,288 876,819
Other 358,656 277,991
------------------------
2,141,921 2,273,732
------------------------
Net Deferred Tax Liabilities $4,360,463 $3,415,154
========================
</TABLE>
NOTE C - DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------
<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
Unsecured Industrial Development
Authority Revenue Bond (1988 Series),
7.50%, due July 1, 2018 1,235,000 1,300,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series A), 6.35%,
due December 1, 2019 2,940,000 3,000,000
Unsecured Business Finance Authority 1994
Revenue Bond (Series B), 6.45%, due
December 1, 2016 1,860,000 1,900,000
Unsecured Business Finance Authority 1997
Revenue Bond, 6.30%, due May 1, 2022 4,000,000 4,000,000
Secured notes payable to bank, floating rate,
due April 8, 2005 6,000,000 6,000,000
Mortgage construction loan to bank at LIBOR
plus 175 points due September 11, 2000 709,593 446,360
Capitalized lease obligation 21,378 38,637
-------------------------
28,265,971 28,184,997
Less current portion 1,042,593 183,000
-------------------------
$27,223,378 $28,001,997
=========================
</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 periodic interest payments (either monthly
or semi-annually) which are based on the outstanding principal balances. The
aggregate principal payment requirements subsequent to December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 1,042,593
2001 318,378
2002 315,000
2003 315,000
2004 315,000
2005 and thereafter 25,960,000
</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, 1999, approximately $4,499,000 of
Pennichuck's retained earnings was unrestricted for payment or declaration
of common dividends.
During 1999, 1998 and 1997, the Company paid interest of $1,967,318,
$2,200,659 and $1,759,000 respectively.
The Company has available a $2,500,000 unsecured, revolving credit
facility with a bank and at December 31, 1999 and 1998, there were no
outstanding borrowings under this facility. Any subsequent outstanding
borrowings under this facility are due on June 30, 2001. The weighted
average interest rate on borrowings under this facility was 7.66% during
1998.
The Company has entered into interest rate exchange agreements to
mitigate interest rate risks associated with its floating-rate loans. The
agreements provide for the exchange of fixed rate interest payment
obligations for floating rate interest payment obligations on notional
amounts of principal. The net amounts paid and received under the agreements
are reflected as interest expense.
On April 24, 1998, the Company entered into two interest rate swap
agreements at a fixed rate of 6.50%. The notional amount of the debt for
which interest rate exchanges have been entered into under these agreements
is $6,000,000 at December 31, 1999. The Company has only the above mentioned
limited involvement with derivative financial instruments and does not use
them for trading purposes. They are used to manage specific interest rate
risks.
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, 1999 is as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
- ------------------------------------------------------------------
<S> <C> <C>
Long-term debt $28,265,971 $27,607,147
Interest rate swaps $ -0- $ (181,000)
</TABLE>
There are no quoted market prices for the Company's various long-term debt
issues and thus, their fair values have been determined based on quoted
market prices for securities similar in nature and in remaining maturities.
The fair value for long-term debt shown above does not purport to represent
the amounts at which those debt obligations would be settled. The fair
market value of the Company's interest rate swaps represents the estimated
unrealized gain upon termination of these agreements based upon current
interest rates.
The carrying values of the Company's cash and restricted cash
approximate their fair values because of the short maturity dates of those
financial instruments.
NOTE E - BENDFIT PLANS PENSION PLAN
PENSION PLAN
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>
1999 1998
----------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,268,511 in 1999 and $2,435,571 in 1998 $ 2,280,267 $ 2,445,822
============================
Projected benefit obligation for service
rendered to date (2,978,617) (2,949,116)
Plan assets at a fair value (insurance contracts) 3,223,705 2,974,201
----------------------------
Plan assets in excess of projected benefit obligation 245,088 25,085
Prior service costs 6,736 7,521
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions 176,568 340,814
Unrecognized net transition asset (97,065) (110,872)
----------------------------
Prepaid pension cost included in
deferred charges and other assets $ 331,327 $ 262,548
============================
</TABLE>
Net pension cost for 1999, 1998 and 1997 includes the following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 186,006 $ 149,581 $ 138,996
Interest cost on projected benefit obligation 201,832 180,820 163,290
Expected return on plan assets (255,738) (226,636) (200,193)
Amortization of (gains) and deferrals (1,536) (12,708) (11,596)
-------------------------------------
Net periodic pension cost $ 130,564 $ 91,057 $ 90,497
=====================================
</TABLE>
For the years ended December 31, 1999 and 1998, the actuarial present value
of the projected benefit obligation was determined using a discount rate of
7.5% and 7.0%, respectively, and an assumed rate of increase in future
compensation levels of 5%. The expected long-term rate of return on plan
assets was 9% in 1999, 1998 and 1997.
SALARY DEFERRAL PLAN
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 $91,469, $78,312 and $68,103, respectively,
for 1999, 1998 and 1997.
OTHER POSTRETIREMENT BENEFITS
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current active employees $(447,740) $(430,743)
Retirees (152,434) (226,202)
------------------------
Total (600,174) (656,945)
Plan assets at fair value 72,335 0
------------------------
Funded status (underfunded) (527,839) (656,945)
Unrecognized net (gain) (119,911) (4,486)
Unrecognized prior service cost 110,100 124,600
Unrecognized transition obligation 91,700 122,600
------------------------
Accrued postretirement benefit cost, net $(445,950) $(414,231)
========================
Service cost $ 37,995 $ 24,805
Interest cost 39,643 37,136
Amortization of prior service cost 14,500 14,500
Amortization of transition obligation 30,900 30,900
Amortization of unrecognized (gains) (1,505) (3,598)
------------------------
$ 121,533 $ 103,743
========================
</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, the Company has
assumed a discount rate of 7.75% in 1999 and 7% in 1998 and a maximum
medical care cost trend rate of 5% in 1999 and 1998, 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 $111,360 and the accumulated postretirement
benefit obligation by $17,441 in 1999.
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>
1999 1998
------------------------
<S> <C> <C>
Net income:
As reported $2,615,665 $2,106,053
Pro forma $2,586,364 $2,070,895
Earnings per share:
As reported $ 1.50 $ 1.61
Pro forma $ 1.48 $ 1.59
</TABLE>
At December 31, 1999, all options which had been granted were exercisable
and 40,238 shares were available for future grants under the plan as shown
in the following table:
<TABLE>
<CAPTION>
Options Price Per
Outstanding Share
---------------------------
<S> <C> <C>
Balance at December 31, 1996 35,168 $ 8.33-$11.50
Granted 6,788 $10.83
Expired -
Exercised (1,575) $ 8.33-$10.83
---------------------------
Balance at December 31, 1997 40,381 $ 8.33-$11.50
Granted 11,288 $12.67
Expired (646) $8.33
Exercised (6,378) $ 8.33-$12.67
---------------------------
Balance at December 31, 1998 44,645 $10.00-$12.67
Granted 9,900 $21.00
Expired (275) $10.00
Exercised (34,234) $10.00-$21.00
---------------------------
Balance at December 31, 1999 20,036 $10.00-$21.00
===========================
</TABLE>
Of the 20,036 options outstanding at December 31, 1999, 600 have an exercise
price of $10.00 and a remaining contractual life of less than one year;
2,927 shares have an exercise price of $11.50 and a remaining contractual
life of 6 years; 2,964 shares have an exercise price of $10.83 and a
remaining life of 7 years; and 5,145 shares have an exercise price of $12.67
and a remaining life of 8 years; and 8,400 shares have an exercise price of
$21.00 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 1999 and
1998, respectively: risk-free interest rates of 4.9% and 6.3%; expected
dividend yields of 5.3% and 5.2%; expected lives of 5 years; and expected
volatility of 35% and 22%.
In September 1997, the Company amended its deferred compensation plan
for its directors. Under the terms of the amended plan, directors may elect
to receive their directors' fees in common shares of the Company or in cash
upon either attaining age 70 or retirement from the board of directors. As
of December 31, 1999, 15,365 common shares of the Company had been reserved
for issuance under this plan.
NOTE G - MERGER OF THE COMPANY AND PITTSFIELD AQUEDUCT COMPANY
On January 30, 1998, Pittsfield Aqueduct Company ("Pittsfield") was merged
with and into the Company through the issuance of 49,428 shares of
Pennichuck Corporation which were exchanged for substantially all of the
outstanding common shares of Pittsfield. The merger was accounted for as a
pooling-of-interests.
NOTE H - ACQUISITION
On November 5, 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 agreed to purchase from the Town certain water utility assets
located outside of the Town's municipal jurisdiction for $7.5 million. This
purchase occurred in April 1998 once those assets, in addition to certain
water utility assets located within the Town, were purchased by the Town
from an investor-owned water utility previously serving the Town and certain
surrounding communities. Those assets purchased by the Company were
transferred into a new, wholly-owned, operating subsidiary of the Company,
Pennichuck East, which is a regulated entity similar to Pennichuck. As a
result of this purchase, the Company added approximately 3,600 customers to
its existing customer base. Based on unaudited data, if the Company had
acquired Pennichuck East at the beginning of each period reported,
consolidated revenues would have been approximately $18,038,000 and
$14,506,000 for 1998 and 1997, respectively.
In order to fund this purchase from the Town, the Company obtained a
commitment for permanent debt financing from its bank. The $7.5 million
financing consisted of two notes, $3 million and $4.5 million, with
maturities of 2 and 7 years, respectively. In connection with this debt, the
Company entered into two interest rate swap agreements which fix the
interest rates at 6.20% and 6.50%, respectively. In November 1998, the
Company repaid the $3 million note. The remaining note is secured by the
operating assets of the new operating subsidiary.
In addition, the Service Corporation and the Town entered into a long-
term contract whereby Service Corporation will provide certain operations
and maintenance functions for the Town in exchange for an annual fee. The
initial term of this agreement is for five years with options to renew
thereafter.
NOTE I - BUSINSESS SEGMENT INFORMATION
Pennichuck Corporation's operating activities are grouped into three 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 and central New Hampshire.
Real estate - Involved in the ownership, development, management and
sale of industrial and residential property in Nashua and Merrimack, New
Hampshire.
Contract operations and other - Includes the contract operations and
laboratory testing activities of the Service Corporation and sundry
activities of the Company.
The tables below present information about Pennichuck Corporation's
three primary business segments for the years ended December 31, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Operating revenues:
Water utility $16,331,633 $14,972,347 $11,415,065
Real estate 860,103 1,909,793 514,143
Contract operations & other 617,522 512,654 126,309
---------------------------------------
Total operating revenues $17,809,258 $17,394,794 $12,055,517
=======================================
Operating income:
Water utility $ 5,326,362 $ 5,073,615 $ 3,266,171
Real estate 591,887 489,940 316,411
Contract operations & other 157,655 155,569 134,224
---------------------------------------
Total operating income $ 6,075,904 $ 5,719,124 $ 3,716,806
=======================================
Capital additions:
Water utility $ 6,717,877 $11,208,746 $ 5,974,194
Real estate - - -
Contract operations & other 17,308 70,069 -
---------------------------------------
Total capital additions $ 6,735,185 $11,278,815 $ 5,974,194
=======================================
Identifiable assets:
Water utility $68,337,550 $62,392,754 $53,331,333
Real estate 4,243,177 3,666,320 2,554,608
Contract operations & other 3,000,117 4,779,107 1,354,508
---------------------------------------
Total identifiable assets $75,580,844 $70,838,181 $57,240,449
=======================================
Depreciation and amortization
expense:
Water utility $ 2,068,180 $ 1,792,739 $ 1,452,757
Real estate - 80,833 4,385
Contract operations & other 73,587 62,009 29,513
---------------------------------------
Total depreciation and
amortization expense $ 2,141,767 $ 1,935,581 $ 1,486,655
=======================================
</TABLE>
The operating revenues within each business segment are sales to
unaffiliated customers. Operating income is defined as segment revenues
less operating expenses including allocable Parent Company expenses
attributable to each business segment as shown.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Allocated parent expenses:
Water utility $477,156 $416,106 $ 345,785
Real estate and other 41,491 21,635 50,970
---------------------------------
Total allocated parent expenses $518,647 $437,741 $ 396,755
=================================
</TABLE>
Within the water utility business segment, one customer accounted for over
10 percent of total operating revenues. During 1999, 1998, and 1997, the
water utility recorded $1,784,000, $1,726,000 and $1,693,000, respectively,
in water revenues which were derived from fire protection and other billings
to the City of Nashua.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------
(In thousands of dollars,
except per share amounts)
<S> <C> <C> <C> <C>
1999
Operating Revenues $3,892 $4,710 $5,131 $4,076
Operating Income 1,177 1,722 1,897 1,280
Net Income 456 777 870 513
Earnings Per Share $ .26 $ .45 $ .50 $ .29
1998
Operating Revenues $2,916 $3,973 $6,404 $4,102
Operating Income 849 1,411 2,385 1,074
Net Income 236 510 1,049 311
Earnings Per Share $ .19 $ .42 $ .85 $ .15
1997
Operating Revenues $2,551 $2,946 $3,571 $2,988
Operating Income 593 961 1,411 752
Net Income 122 326 589 170
Earnings Per Share $ .10 $ .27 $ .49 $ .15
</TABLE>
MARKET AND DIVIDEND INFORMATION
The Company's common stock is currently traded on the Nasdaq National Market
System ("NMS") under the symbol "PNNW". From December 2, 1997 to October
28, 1998, the Company's common stock was traded on the Nasdaq Over-the-
Counter ("OTC") Bulletin Board system. On December 31, 1999, there were
approximately 800 holders of record of the 1,761,070 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 closing sales prices as reported on the Nasdaq NMS and OTC Bulletin
Board system during the applicable periods and the dividends declared by the
Company during those periods. All amounts have been restated for the three
for two stock split effected on September 1, 1998.
<TABLE>
<CAPTION>
Dividends
Period High Low Declared
- --------------------------------------------------
<S> <C> <C> <C>
1999
Fourth Quarter $34.00 $24.00 $.24
Third Quarter 29.00 22.00 .23
Second Quarter 22.63 19.31 .23
First Quarter 21.75 19.63 .22
1998
Fourth Quarter $22.00 $19.00 $.22
Third Quarter 20.50 15.00 .19
Second Quarter 16.00 15.00 .19
First Quarter 16.00 12.00 .19
1997
Fourth Quarter $13.33 $12.09 $.17
Third Quarter 13.50 12.00 .17
Second Quarter 13.00 10.33 .17
First Quarter 12.00 10.33 .17
</TABLE>
Pennichuck Corporation's Annual Shareholders' Meeting will be held at 3:00
p.m. on Thursday, April 20, 2000, at the Nashua Marriot 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: EquiServe, Limited Partnership,
Shareholder Services Department, 150 Royall Street, Canton, MA 02021, 781/
575-3001, www.equiserve.com.
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 DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Operating revenues $17,809 $17,395 $12,056 $12,417 $11,700
Net income (in 000's) $2,616 $2,106 $1,207 $1,289 $1,148
Earnings per share-basic $1.50 $1.61 $1.01 $1.09 $1.00
Cash dividends
declared per share
of common stock $.92 $.79 $.68 $.65 $.57
Total assets (in 000's) $75,581 $70,838 $57,240 $51,357 $49,136
Long-terms debt &
redeemable preferred
stock (in 000's) $28,266 $28,185 $26,678 $21,946 $21,028
Weighted average shares
outstanding-basic 1,745,698 1,306,286 1,200,287 1,178,883 1,148,610
Book value per share $15.03 $14.51 $12.07 $11.78 $11.32
Utility plant
additions (in 000's) $6,718 $11,209 $5,974 $3,205 $2,569
Water delivered
(million gallons per day) 14.91 14.44 12.74 12.51 13.03
Mains (miles) 481 470 364 361 356
Services:
Core & community systems 22,213 21,422 21,037 20,805 20,622
Pittsfield Aqueduct 625 623 615 615 616
Pennichuck East 3,804 3,766
Meters 26,642 25,984 21,759 21,526 21,279
Hydrants 2,583 2,540 2,194 2,190 2,182
Rainfall (in inches) 42.87 47.15 47.36 53.24 38.94
Number of employees
at year end 71 66 57 56 55
Per share amounts prior to 1999, have been restated for the September 1998
three-for-two stock split.
Pennichuck Corporation
4 Water Street
PO Box 448
Nashua NH 03061-0448
800 553 5191
603 882 5191
Fax 603 882 4125
www.pennichuck.com
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennichuck Corporation:
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 2, 2000, into Pennichuck Corporation's
Form 10-KSB for the year ended December 31, 1999 and into the Company's
previously filed Registration Statement on Form S-3 (No. 33-98188). It should
be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1999 or performed any audit procedures subsequent
to the date of our report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 21, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 63,004,773
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 5,998,209
<TOTAL-DEFERRED-CHARGES> 2,430,389
<OTHER-ASSETS> 4,147,473
<TOTAL-ASSETS> 75,580,844
<COMMON> 1,761,070
<CAPITAL-SURPLUS-PAID-IN> 14,457,786
<RETAINED-EARNINGS> 10,361,038
<TOTAL-COMMON-STOCKHOLDERS-EQ> 26,257,309
0
0
<LONG-TERM-DEBT-NET> 27,202,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,042,593
0
<CAPITAL-LEASE-OBLIGATIONS> 21,378
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 20,762,755
<TOT-CAPITALIZATION-AND-LIAB> 75,580,844
<GROSS-OPERATING-REVENUE> 17,809,258
<INCOME-TAX-EXPENSE> 1,625,212
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 11,733,354
<OPERATING-INCOME-LOSS> 6,075,904
<OTHER-INCOME-NET> 170,305
<INCOME-BEFORE-INTEREST-EXPEN> 6,246,209
<TOTAL-INTEREST-EXPENSE> 2,024,601
<NET-INCOME> 2,615,665
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,615,665
<COMMON-STOCK-DIVIDENDS> 1,590,041
<TOTAL-INTEREST-ON-BONDS> 2,024,601
<CASH-FLOW-OPERATIONS> 4,898,355
<EPS-BASIC> 1.50
<EPS-DILUTED> 1.49
</TABLE>
