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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18552
Pennichuck Corporation
(Exact name of Registrant as specified 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)
Registrant's telephone number, including area code: 603-882-5191
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered under Section 12(g) of the Act:
Common Stock (par value $1.00 per share)
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceeding 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
----- -----
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained in this form, and will not
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-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting common equity held by non-
affiliates of the Registrant based on the last sales price on March 11,
2002 of the Registrant's Common Stock as reported on the Nasdaq National
Market System was $61,025,355. For purposes of this calculation, the
"affiliates" of the Registrant include its directors and executive
officers. This determination of affiliate status is not necessarily a
conclusive determination for any other purpose.
The number of shares of the Registrant's Common Stock, $1 par value,
outstanding as of March 11, 2002 was 2,390,339.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Page
PART I:
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II:
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
PART I:
Item 1. 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
26,200 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
nearly 21,800 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 over 1,600
customers. Pennichuck has no competition in its core franchise area.
Currently, approximately 29% of its water revenues are derived from
commercial and industrial customers and approximately 53% from residential
customers, with the balance being derived from fire protection and other
billings to municipalities, principally the City of Nashua and the towns of
Amherst, Merrimack and Milford.
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
2
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 4,100 customers and annual revenues were approximately $2.9
million for calendar year 2001.
Pittsfield was acquired by the Company in 1998 and serves
approximately 625 customers in and around Pittsfield, New Hampshire with
annual revenues of approximately $415,000.
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 water rates that
were in effect during 2001 were based on a March 1998 NHPUC order in which
Pennichuck was authorized an overall rate of return of 8.34% on an approved
rate base of approximately $34.61 million. However, in March 2002,
Pennichuck was granted an overall rate increase of 14.43% based on an
overall rate of return of 8.58% and an approved rate base of approximately
$43.1 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
("USEPA") and the New Hampshire Department of Environmental Services
("NHDES"). The USEPA 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 current standards set by the
USEPA and the NHDES.
Pennichuck's filtration plant in Nashua is impacted by the Interim
Enhanced Surface Water Treatment Rule ("IESWTR") which establishes a new
turbidity standard of 0.3 NTU. Pennichuck is in the process of evaluating
alternatives to meet the new IESWTR turbidity
3
standard and it expects to determine what modifications will be required to
its filtration plant by the fall of 2002.
Two of Pennichuck's small community water systems have wells that
produce water with arsenic levels in excess of the new standard of 10 ppb.
It will be necessary for Pennichuck to install arsenic treatment systems at
these locations. Pennichuck's remaining community water systems have wells
that produce water meeting the new arsenic standard.
Capital expenditures associated with federal and State water quality
standards have historically been recognized and approved by the NHPUC for
inclusion in our utilities' water rates.
Contract and Real Estate Operations
The Company formed the Service Corporation to conduct its non-
regulated, water-related activities. Its activities initially included
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 September 2001,
the Service Corporation also entered into a long-term agreement with the
Town of Salisbury, Massachusetts to perform similar operations and
maintenance services.
The NHDES has mandated water quality standards for non-transient,
non-community water systems ("NTNCWS") - defined as public facilities such
as schools, apartment and office buildings accommodating more than 25
persons and served by a community well. There are an estimated 600 such
NTNCWS in New Hampshire which will require the services of a certified
water operator, such as the Service Corporation, in order to meet the
mandates of the NHDES. Accordingly, the Service Corporation is actively
pursuing new contracts under which it would serve as a certified water
operator and provide various water-related monitoring, maintenance, testing
and compliance reporting services for these systems in New Hampshire.
Southwood, the Company's real estate subsidiary, was organized for
the purpose of owning, developing, selling and managing approximately 1,088
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. From 1988 through 2001, Southwood
sold four lots totaling 25 acres in the Corporate Park. In January 2002,
Southwood sold the remaining 40 acres to a regional real estate developer
(the "Developer") under the terms of an
4
option agreement between Southwood and the Developer. Under that agreement
which was entered into during 1995, the Developer paid to Southwood an
option fee each year equal to the annual carrying costs associated with
that land.
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. Since 1997, Westwood
has sold four parcels totaling approximately 364 acres to third parties,
leaving a balance of approximately 40 acres which are restricted in use
for future groundwater supplies.
Southwood is also a 50% partner in Heron Cove Office Park I, LLC,
Heron Cove Office Park II, LLC and Heron Cove Office Park III, LLC which
are limited liability corporations formed to construct and own a 39,000
square foot, a 42,000 square foot and a 66,000 square foot office building,
respectively, located in Merrimack, New Hampshire. As of December 31, 2001,
all of the office space in each building had been leased to third parties
under long-term lease agreements.
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, 2001, all 87 units had been
constructed and sold to third parties and this LLC is expected to be
liquidated in 2002.
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 8 of
this Form 10-K Report.
Employees
The Company employs 80 permanent, full-time employees and officers.
Of these, there are 44 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 in February 2002, expires
in February 2007. In the opinion of management, employee relations are
satisfactory.
5
RISK FACTORS
Water Business
The Company's main source of revenues and earnings is its water
utility operations. The water supply and distribution industry is subject
to regulations and uncertainties which affect the Company and its financial
operations in varying degrees.
Rate Regulation. The Company's water utility subsidiaries,
Pennichuck, Pennichuck East and Pittsfield are regulated by the NHPUC with
respect to the rates we charge our customers for water and the amount of
our capital and debt financing. The profitability of our water operations
is largely dependent on the timeliness and adequacy of rate relief allowed
by the NHPUC.
Regulatory Lag. The NHPUC generally provides our water utilities
with the opportunity to earn a rate of return on our capital invested in
property used to serve our customers. However, a delay, known as
"regulatory lag" normally occurs between the time capital is invested and
the effective date of increased water rates, which reflect that investment.
Water Quality Concerns; Changes in Regulatory Standards. Water
utility companies are always subject to certain water quality risks related
to environmental contamination. Our water systems have water treatment and
alternate water source and storage facilities available as short-term
sources of supply in the event of contamination of one of our water
sources. While our treated water currently meets or exceeds all standards
set by federal and state authorities, it is possible that new or stricter
standards could be imposed that will raise our operating costs
significantly. Although these costs would likely be recovered in the form
of higher rates, there can be no assurance that the NHPUC would approve a
rate increase to recover such costs.
Threats to Nation's Health and Security. Water utility companies
have generally been on a heightened state of alert since the threats to the
nation's health and security in the fall of 2001. We have taken steps to
increase security at our water utility facilities, heightened employee
awareness of threats to our water supplies, and added security measures
regarding the delivery and handling of certain chemicals used in our
business. We have and will continue to bear extraordinary costs for
security precautions to protect our operations and water supplies. We are
not aware of any specific threats to our water utility businesses or other
operations; however, we likely cannot control the outcome of such events
should they occur.
Impact of Weather and Seasonal Demands. The demand for our water and
our revenues is impacted by weather and is seasonal in nature. Normally,
our most profitable quarters are the second and third calendar year
quarters due to increased water consumption during the late spring and
summer months. Demand is normally lower during cool, wet springs and
summers than it is during warm, hot springs and summers.
Dependence on Certain Industrial Customers. Approximately 29% of our
operating revenues are derived from commercial and industrial customers.
Pennichuck's largest water customer is responsible for about 10% of its
daily average demand. In the short term, our profitability would be
adversely impacted were that customer to significantly reduce its water
requirements in the future or if our other commercial and industrial
customers materially reduce their use of our water. In this case, we would
seek the approval of the NHPUC to increase the rates of our remaining
customers to recover any lost revenues from the loss of such major
industrial customers. Any increase in our rates and improvement in our
profitability from a loss of a major customer could take at least 12 months
to realize, an example of regulatory lag. In addition, there can be no
assurance that the NHPUC would approve such a rate increase request.
Real Estate Business
Development Risks. Southwood, our real estate subsidiary, is the
owner of several tracts of land located in Southern New Hampshire, which is
planned for development. The demand and prices for Southwood's real estate
are dependent upon interest rates and construction costs as well as general
economic conditions.
Carrying Costs. Real estate assets are subject to ongoing
maintenance costs and property taxes. Reductions in demand for our
properties may cause us to continue to incur operating costs without any
offsetting income.
Item 2. 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 C- Debt" in the Notes to the Consolidated Financial
Statements included in Item 8 of this Form 10-K Report, 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, New Hampshire.
2. An Infilco Degremont treatment plant using physical chemical
removal of suspended solids and sand and carbon 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. Pennichuck has a permit from the Army
Corps of Engineers to withdrawal up to 30 million gallons per day of
water from the Merrimack River at this intake. The existing pumps are
capable of providing up to 16.2 million gallons 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. Eleven water storage reservoirs having a total storage
capacity of 20.7 million gallons, six of which are located in Nashua,
two in Amherst, one in Bedford, one in Derry and one in Hollis, New
Hampshire.
7
The source of supply for Pennichuck East is a well system owned by
the Town of Hudson in Litchfield, New Hampshire, purchased water from
the Manchester Water Works or individual bedrock wells. Pennichuck East
has entered into a long-term water supply agreements to obtain water
from Hudson and Manchester Water Works.
The Pittsfield Aqueduct Company owns the land surrounding Berry
Pond and it treats the water from this Pond through two 0.25 mgd Neptune
Microfloc package filtration plants located in Pittsfield, New
Hampshire. Berry Pond serves as the sole source of supply for
Pittsfield.
Water Distribution Facilities
The distribution facilities of the Company's regulated water
companies consist of, among other assets, the following:
Pennichuck Pennichuck East Pittsfield
---------- --------------- ----------
Transmission & Distribution
Mains (in miles) 397 111 13
Services 22,808 4,277 639
Meters 23,820 4,181 645
Hydrants 2,223 371 70
Land Held for Future Development
Following Pennichuck Water Works' reorganization in 1984 into a
holding company structure, the Company transferred 402 acres of previously
designated watershed protection land to Pennichuck and approximately 1,088
acres of buffer and alternate use land were transferred to Southwood. Since
1984, Southwood has sold or transferred approximately 796 acres of land to
third parties or to participating joint ventures. The Company holds
approximately 340 acres of land which have not been transferred to
Pennichuck or Southwood due to access limitations which currently restrict
the ability to subdivide and transfer that land.
Based on vegetation, topographical, wetland and hydrological studies,
the Company and Southwood have designated their remaining 632 acres into
buffer (non-developable) and alternate use (developable) designations,
resulting in an approximate breakout of 283 and 349 acres, respectively. Of
the approximately 349 acres of alternate use land, 76 acres are located
primarily in the northwestern section of city of Nashua, New Hampshire and
273 acres are located in the western and southerly portions of the town of
Merrimack, New Hampshire. The following table summarizes the currently
approved zoning for alternate use land:
8
Nashua, NH Merrimack, NH Total
---------- ------------- -----
Residential 36 168 204
Industrial 40 105 145
-- --- ---
Total Alternate Use Acreage 76 273 349
== === ===
In January 2002, Southwood sold the remaining 40 acres in Southwood
Corporate Park, leaving 36 acres of alternate use land available in the
city of Nashua. The remainder of the Company's and Southwood's landholdings
in 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 REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market
System ("NMS") under the symbol "PNNW." On December 31, 2001, there were
approximately 774 holders of record of the 2,387,634 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 during the applicable periods and the
dividends declared by the Company during those periods. All stock
information has been adjusted to reflect the four-for-three stock split
effected December 3, 2001.
9
Dividends
Period High Low Declared
- ------ ---- --- ---------
2001
Fourth Quarter $26.81 $19.19 $.19
Third Quarter 24.17 20.85 .19
Second Quarter 25.61 19.02 .19
First Quarter 21.76 18.51 .19
2000
Fourth Quarter $21.38 $17.81 $.19
Third Quarter 21.00 18.00 .18
Second Quarter 22.69 16.50 .18
First Quarter 24.75 15.66 .18
1999
Fourth Quarter $25.50 $18.00 $.18
Third Quarter 21.75 16.50 .17
Second Quarter 16.97 14.48 .17
First Quarter 16.31 14.72 .17
Certain bond and note agreements involving the Company's subsidiary,
Pennichuck Water Works, Inc. ("Pennichuck Water"), require, among other
things, restrictions on the payment or declaration of dividends by
Pennichuck Water to the Company. Under Pennichuck Water's most restrictive
covenant, approximately $3,863,000 of Pennichuck Water's retained earnings
was unrestricted for payment or declaration of common dividends to the
Company at December 31, 2001.
In the first quarter of fiscal 2001, the Company issued 16,278 shares
of Common Stock to Director Charles E. Clough representing the conversion
of accrued common share equivalents pursuant to the Company's Deferred
Compensation Program for Directors of Pennichuck Corporation. Under this
Program, Directors may defer the receipt of earned Director's fees in the
form of common share equivalents and subsequently receive such deferred
amounts in shares of Common Stock. The issuance of these shares was exempt
from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) thereof, the private placement exemption; as such, the
transfer of such shares is restricted pursuant to the requirements of the
Act. The Company did not make any unregistered sales of Common Stock during
the fourth quarter of fiscal 2001.
10
Item 6. SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating revenues (in $000's) $22,754 $23,671 $17,809 $17,395 $12,056
Net income (in $000's) $ 3,612 $ 3,683 $ 2,616 $ 2,106 $ 1,207
Earnings per share - basic $ 1.52 $ 1.56 $ 1.12 $ 1.21 $ 0.76
Cash dividends declared per
share of common stock $ 0.76 $ 0.73 $ 0.69 $ 0.59 $ 0.51
Total assets (in $000's) $87,841 $82,880 $75,581 $70,838 $57,240
Long-term debt (in $000's) $27,420 $27,237 $28,266 $28,185 $26,678
Prior year numbers have been restated to reflect the merger of
Pittsfield Aqueduct Company, Inc. in 1998, three-for-two stock split in
September 1998, and the four-for-three stock split in December 2001. 1998
numbers reflect the acquisition of Pennichuck East Utility, Inc.
11
PART II.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Pennichuck Corporation (the "Company") has five wholly-owned
subsidiaries. Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East
Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc.
("Pittsfield") are involved in water supply and distribution in cities and
towns throughout southern and central New Hampshire. These water
subsidiaries are regulated by the New Hampshire Public Utilities Commission
("NHPUC") and, as such, they must obtain approval to increase their water
rates to recover increases in operating expenses and to obtain the
opportunity to earn a return on rate base investments. Pennichuck Water
Service Corporation (the "Service Corporation") is involved in non-
regulated, water-related services and contract operations and The Southwood
Corporation ("Southwood") owns, manages, develops, and sells real estate.
As you read Management's Discussion and Analysis, please refer to the
Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Selected Financial Data contained in this Report.
Forward-Looking Statements
In addition to the historical financial information, this report
contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on current information and expectations and on several
assumptions concerning future events that involve risks, uncertainties and
factors which may be beyond the Company's control. As such, the actual
performance of the Company may be materially different from the future
results or performance implied by the forward-looking statements contained
in this report. Such factors include, among other things, changes in
governmental regulations, changes in the economic and business environment
that may impact demand for the Company's water and real estate products,
changes in capital requirements that may affect the Company's level of
capital expenditures and unusual changes in weather conditions that impact
water consumption. Accordingly, the Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Results of Operations
In this section, we discuss our 2001, 2000 and 1999 results of
operations and the factors affecting them. We begin with a general
overview of our earnings per share ("EPS") generated by our core
businesses.
12
Basic Earnings Per Share of Common Stock *
Twelve Months Ended
December 31
2001 2000 1999
---------------------------
Water utility operation $ .81 $ .65 $ .88
Real estate operations .63 .83 .16
Contract operations & other .08 .08 .08
---------------------------
Consolidated Basic EPS $1.52 $1.56 $1.12
===========================
* Restated for the four-for-three stock split effected December 2001
Our consolidated revenues tend to be significantly affected by
weather conditions experienced throughout the year and by sales of major
real estate parcels which may occur from time to time (see discussion
below). Water revenues are typically at their lowest point during the first
and fourth quarters of the calendar year. However, water revenues in the
second and third quarters tend to be greater because of increased water
consumption for non-essential usage by our customers during the late spring
and summer months.
Results of Operations - 2001 Compared to 2000
As indicated in the table above, there was a significant shift in the
earnings among the Company's core businesses from 2000 to 2001. Although
consolidated net income decreased 2% to $3.61 million in 2001 from $3.68
million in 2000, practically all of that decrease resulted from the fact
that gains on two major land sales were realized in 2000 by Westwood Park
LLC ("Westwood"), in which Southwood has a controlling 60% ownership
interest. The impact of those sales alone on earnings per share was $.56 in
2000. As discussed below, the 2001 earnings from our utility operations,
however, increased by $420,000, or $.18 per share over last year.
Water Utility Operations
On a combined basis, net income of our three utilities in calendar
year 2001 was approximately $1.94 million compared to $1.52 million in
2000. Of the increase, $351,000 alone was attributed to Pennichuck, the
Company's core water utility subsidiary and $102,000 was attributed to
Pennichuck East; net income for Pittsfield declined by almost $34,000.
Utility operating revenues for 2001 totaled $17.41 million -- a 9%
increase from 2000. For 2001, approximately 81%, 17% and 2% of our total
utility operating revenues
13
were generated by Pennichuck, Pennichuck East and Pittsfield, respectively,
which was not materially different than in 2000.
The principal reasons for the increase in our utility revenues were:
* A $956,000 increase in billed consumption within Pennichuck's core
system from 2000 to 2001 resulting from the extended hot and dry
weather conditions during 2001 compared to 2000,
* An 8.52% temporary rate increase granted to Pennichuck effective on
September 8, 2001 resulting in approximately $350,000 of additional
revenues and
* A 20.8% increase in billed consumption within Pennichuck East's system
from 2000 to 2001 as a result of the weather conditions noted above.
In June 2001, Pennichuck, the Company's principal water utility
subsidiary, filed for a 20.09% rate increase with the NHPUC, representing a
request for $2.5 million in additional annual revenues. In connection with
that rate filing, the NHPUC approved a temporary rate increase of 8.52%
applied on bills rendered on or after September 8, 2001. On March 1, 2002,
the NHPUC issued its final order in which it granted final approval of an
overall 14.43% revenue increase. The approved rate order includes an 8.67%
rate increase on bills rendered on or after September 8, 2001 and an
additional step adjustment of 5.76% on service rendered on or after March
1, 2002. The combined rate increases are expected to result in additional
annual revenues of approximately $1.8 million based on comparable
consumption levels experienced during the past two years. During 2001,
there were no other rate filings made by the Company's other regulated
utilities.
The operating expenses of 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 (principally property taxes)
Combined utility operating expenses increased by $794,000, or 6.8%,
to $12.4 million for the twelve months ended December 31, 2001. That
increase is attributable to (i) $182,000 of additional depreciation
incurred by our three utilities during 2001 reflecting their $6 million net
investment in new plant assets during 2001 and (ii) approximately $160,000,
or 4.9%, for additional administrative costs, primarily health insurance
and other employee benefit costs. As a result of the increase in utility
revenues, offset partially by the increase in utility expenses, the
utilities' combined operating income increased by $654,000 from 2000 to
2001. As a percentage of combined utility revenues, the utilities'
operating margin increased from 27.2% in 2000 to 28.7% in 2001.
14
Real Estate Operations
Net income from our real estate operations was approximately $1.5
million and $1.96 million for the twelve months ended December 31, 2001 and
2000, respectively.
Real estate earnings during 2001 and 2000 were positively impacted by
major real estate sales conducted through Westwood, in which Southwood has
a 60% ownership interest. In 2001, Westwood sold a parcel of land to the
City of Nashua for $2 million and in 2000, Westwood sold two land parcels
having a combined sales price of approximately $5.49 million. Southwood's
share of the after-tax gain from these sales was $.30 per share and
$.56per share for calendar years 2001 and 2000, respectively.
In addition to the revenues generated by Westwood, other real estate
revenues during 2001 include:
* $524,000 as Southwood's share of pretax profit from its residential
joint venture known as Heron Cove LLC,
* $422,000 from the sale of two land parcels in Southwood Corporate
Park,
* $100,000 from the sale of a residential land parcel to a local
developer and
* $141,000 from Southwood's share of pretax income relating to its 50%
ownership in three commercial office buildings
In connection with the last item above, Southwood holds a 50%
ownership interest in each of three limited liability companies, known as
HECOP I, II and III. Each limited liability company owns land and a
commercial office building, subject to a mortgage note with a local bank.
The mortgage notes, totaling approximately $9.6 million, which are not
included in the accompanying Consolidated Financial Statements, are each
secured by the underlying real property; and in addition, Southwood and its
partner have each provided guarantees of the notes. As of December 31, 2001,
all of the combined office space, totaling approximately 147,000 square feet,
had been leased under long-term lease agreements.
The operating expenses associated with our real estate operations
decreased from $2.36 million in 2000 to $912,000 in 2001. Principally all
of that decrease relates to the allocated land and infrastructure
development costs associated with the Westwood land sales in 2000 discussed
earlier. The operating expenses in 2001 are comprised of (i) $79,000 of
property taxes on Southwood's landholdings, (ii) $396,000 of allocated
costs of land sales relating to Southwood Corporate Park and (iii) $164,000
for intercompany management charges.
15
Contract Operations and Other
Revenues from Contract Operations and Other increased $467,000, or
65%, to $1,186,000 in 2001. Of that increase, nearly $296,000 was generated
by the Service Corporation as a result of (i) an additional 16 operating
contracts signed during the year and (ii) a new multi-year operating
contract with a Massachusetts' municipality which was entered into in
September 2001. Under the terms of that contract, the Service Corporation
operates and maintains the municipality's water system, including all meter
reading and billing functions. The Service Company earned nearly $108,000
of revenues during the fourth quarter of 2001 from that contract. Revenues
from Other operations increased $171,000 to $228,000 in 2001. This increase
was primarily attributable to the sale of timber harvested from portions of
the Company's undeveloped landholdings. Other revenues also include rental
income from several tower leases totaling approximately $50,000 in each of
2001 and 2000.
The operating expenses associated with our Contract operations and
other activities increased significantly from $485,000 in 2000 to $881,000
in 2001, principally as a result of
* $117,000 in added contract operating costs relating to the
acquisition of the new systems discussed above
* $78,000 from increased intercompany management charges and
* $63,000 increase in costs relating to shareholder and other
administrative matters
Results of Operations - 2000 Compared to 1999
As indicated in the table set forth under Results of Operations above,
there was a significant shift in the earnings among the Company's core
businesses from 1999 to 2000. Although consolidated net income increased
nearly 41% to $3.68 million from $2.62 million in 1999, practically all of
that increase resulted from the gains on two major land sales by Westwood.
The impact of those sales alone on earnings per share was $.56 in 2000.
Our consolidated revenues in 2000 were $23.67 million compared to
$17.81 million in 1999, an increase of $5.86 million or 33%. Of that
increase, $5.49 million was attributable to the two Westwood land sales
discussed above.
Water Utility Operations
On a combined basis, net income of our three utilities in calendar
year 2000 was approximately $1.52 million, or $538,000 less than in 1999.
Of that decrease, nearly $450,000 alone was attributed to Pennichuck, the
Company's core water utility subsidiary, while net income for Pennichuck
East also declined by $107,000.
16
Utility operating revenues for 2000 totaled $15.96 million -- a 2.25%
decrease from 1999. For 2000, approximately 82%, 16% and 2% of our total
utility operating revenues were generated by Pennichuck, Pennichuck East
and Pittsfield, respectively, which was not materially different than in
1999.
The principal reasons for the decrease in our 2000 utility revenues
were:
* A $490,000 decrease in billed consumption within Pennichuck's core
system from 1999 to 2000 resulting from the unusually hot and dry
months of June and July 1999 compared to the cooler and damper
weather conditions experienced in 2000; offset however,
* By an increase of 2.2% in the number of customers serviced by the
three water utilities.
Our utility operating expenses increased by $609,000, or 5.5%, to
$11.6 million for the twelve months ended December 31, 2000. That increase
is attributable to (i) $189,000 of additional depreciation expense and
$89,000 of additional property taxes incurred by our three utilities during
2000 reflecting their $3.5 million net investment in new plant assets
during 2000 and $4.7 million in 1999 and (ii) approximately $160,000, or
4.9%, for additional administrative costs, primarily health insurance and
other benefit costs. As a result of the decrease in utility revenues and
increase in utility expenses from 1999 to 2000, the utilities' combined
operating income as a percentage of combined utility revenues decreased
from 32.6% to 27.2%, respectively, over such period.
Real Estate and Other Operations
Real estate earnings during 2000 were positively impacted by two
principal land sales and by Southwood's involvement in residential joint
ventures. The two major land sales alone accounted for nearly $1.22 million
in net income for 2000. There were no such major land sales in 1999.
In 2000, real estate revenues increased to $6.99 million compared to
$860,000 in 1999 for the following reasons:
* $5.49 million from the sale of two land parcels by Westwood Park, LLC
in which Southwood has a 60% ownership interest,
* $1.33 million from two residential partnerships in which Southwood
has a 50% ownership and
* $100,000 from the sale of a one-half interest in a 6.3 acre land
parcel to a local developer
The robust housing market in southern New Hampshire during 2000 was
reflected in the performance of the two residential partnerships in which
Southwood participated.
17
Ayers Crossing LLC, formed for the construction and sale of 7 homes, was
begun and concluded in calendar year 2000. Heron Cove LLC began
construction and sales in 1999 and in 2000, that partnership sold 42 homes
to third parties compared to 30 homes in 1999. The remaining 15 homes were
sold during 2001.
Revenues from contract operations conducted by the Service
Corporation during 2000 increased $111,000 over 1999 to $650,000. Of that
increase, nearly $80,000 was derived from 22 new contracts under which the
Service Corporation performs various water-related monitoring, maintenance,
testing and compliance reporting services for water systems throughout New
Hampshire. Other operating revenues totaling $68,000 in 2000 and $78,000
in 1999 were derived from sundry lease and laboratory activities conducted
by the Company and the Service Corporation.
The operating expenses associated with our real estate and other non-
utility activities increased significantly from $728,000 in 1999 to $2.84
million in 2000. Of that increase, $1.87 million relates to the allocated
land and development costs associated with the Westwood land sales
discussed earlier. The remaining non-utility operating costs in 2000 were
principally comprised of (i) $505,000 for contract operations and other
services, (ii) $73,000 of property taxes on Southwood's landholdings and
(iii) $250,000 for property management and other costs associated with
Southwood's real estate activities.
Liquidity and Financial Condition
The following paragraphs discuss the financial condition of the
Company and its wholly-owned subsidiaries. This discussion focuses
primarily on the adequacy of available capital needed for our business
activities.
Over the past two years, the primary sources of cash needed for
normal operating activities, capital projects, debt service and dividend
payments were (i) available cash from the Company's short-term investments
and (ii) operating cash flow generated from day to day business activities.
During previous periods when available cash and operating cash flow were
not sufficient, we have borrowed funds under a revolving loan facility (the
"Loan Agreement") with our bank. The Loan Agreement allows the Company and
its subsidiaries to borrow up to $2.5 million at interest rates tied to the
bank's cost of funds or LIBOR, whichever is lower. However, during 2001,
2000 and 1999, there were no borrowings outstanding under this Loan
Agreement.
At December 31, 2001 and 2000, the Company's cash equivalents,
primarily short-term investments, totaled approximately $3.3 million and
$3.7 million, respectively, which were available to fund any operating cash
flow deficiencies and capital expenditures of the Company and its
subsidiaries. Throughout 2001 and 2000, any available excess cash was
invested in short-term money market funds and as a result, the Company
realized approximately $153,000 in interest income in 2001 and $141,000 in
2000. For calendar year 2001, the consolidated cash flow of the Company,
before capital
18
expenditures and common dividends, was $8.68 million, broken out by
business segment as follows:
2001 2000
------------------
Water utility operations $ 6.21 $ 4.77
Real estate operations 2.12 2.29
Contract operations & other .35 (.05)
------------------
$ 8.68 $ 7.01
==================
Given the one-time nature of the real estate sales that occurred in
2001 and 2000, there is no assurance that the significant contribution to
consolidated cash flow generated from real estate activities will
continue. In January 2002, Southwood sold the remaining land in its
Corporate Park for approximately $2.7 million, the gain from which will be
recognized in the first quarter of 2002.
Our capital expenditures in 2001 totaled $6.0 million, net of
approximately $2.2 million in the form of contributions in aid of
construction from state grants and area developers. Practically all of our
capital expenditures in 2001 were for projects relating to our water
utility business. The more significant projects included:
* $1,594,000 for replacing aging distribution mains in Nashua and
Pittsfield, New Hampshire
* $1,546,000 for the construction of two new water storage tanks and
restoration of one existing tank serving certain Pennichuck community
water systems
* $357,000 for the final phase of developing and implementing software
applications for a company-wide enterprise resource planning program
The remaining items in the Company's 2001 capital program reflect
expenditures for ongoing, routine investment in additional pump stations,
new meters, services, distribution mains and hydrants and sundry system
improvements. For 2002, we expect that our total expenditures for capital
projects will be approximately $7.12 million, of which $1.13 million is
expected to be funded by contributions in aid of construction, state grants
and low-interest, state revolving loans. Our cash needs for capital
expenditures are expected to be met from a combination of internally-
generated funds and short-term investments and if needed, from borrowings
under the Company's available line of credit.
Over the next several years, Pennichuck expects that its capital
investment program will continue to include significant expenditures for
replacing aging distribution mains in Nashua and in certain smaller
community water systems. In 1999, the City of Nashua (the "City") began a
public works program mandated by the United States Environmental Protection
Agency ("EPA") requiring the City to separate its storm water runoff and
sewer discharge systems over the next 10 years. Pennichuck will take the
opportunity to replace any aged or deteriorating water mains in those
sections where the City is performing its sewer separation work.. In the
past 3 years, Pennichuck has spent approximately $2.4 million replacing its
aged mains and it's 2002 capital budget includes
19
approximately $850,000 for similar work. It is likely that Pennichuck will
continue to spend $1 to $2 million annually on replacing its aging
infrastructure within Nashua.
Dividend Reinvestment and Common Stock Purchase Plan
We offer a Dividend Reinvestment and Common Stock Purchase program
that is available to our shareholders and residential utility customers.
Under this program, our shareholders may reinvest all or a portion of their
common dividends into shares of common stock at 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 the Company with nearly $1.6 million of additional common
equity.
Environmental Matters
Our water utility subsidiaries are subject to the water quality
regulations set forth by the 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 the DES.
However, increased monitoring and reporting standards have led to
additional operating costs for us. Additional monitoring and testing costs
arising from EPA and DES mandates should eventually be recovered through
water rates in our utilities' next rate filings.
Pennichuck's filtration plant in Nashua is impacted by the Interim
Enhanced Surface Water Treatment Rule ("IESWTR") which establishes anew
turbidity standard of 0.3 NTU. Pennichuck is in the process of evaluating
alternatives to meet the new IESWTR turbidity standard and it expects to
determine what modifications will be required to its filtration plant by
the fall of 2002.
Two of Pennichuck's small community water systems have wells that
produce water with arsenic levels in excess of the new standard of 10 ppb.
It will be necessary for Pennichuck to install arsenic treatment systems at
these locations. Pennichuck's remaining community water systems have wells
that produce water meeting the new arsenic standard.
Capital expenditures associated with federal and State water quality
standards have historically been recognized and approved by the NHPUC for
inclusion in our utilities' water rates.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." As
amended by SFAS
20
No. 137, "Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138,
"An Amendment to SFAS No. 133," SFAS No. 133 establishes certain accounting
and reporting standards requiring every derivative instrument to be recorded
in the Company's balance sheet as either an asset or liability measured at
its fair value. These Statements require that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Company adopted SFAS No. 133 as of
January 1, 2001 as further discussed in Note C -Debt to the Consolidated
Financial Statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations." SFAS No. 141 addresses changes in
the financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, "Business Combinations", and SFAS No. 38,
"Accounting for Pre-acquisition Contingencies of Purchased Enterprises."
Effective July 1, 2001, all business combinations should be accounted for
using only the purchase method of accounting. The Company does not believe
the adoption of this statement will have a material effect on its financial
position, results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which requires use of a non-amortization approach to
account for purchased goodwill and certain intangibles, effective January
1, 2002. Under the non-amortization approach, goodwill and certain
intangibles will not be amortized into the results of operations, but
instead will be reviewed for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. The Company
does not have any goodwill recorded on its books and therefore, this
statement is not expected to affect the Company.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations "("SFAS No. 143"). This statement requires that the
fair value of the liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amounts of the long-lived assets. SFAS
No. 143 is effective for all fiscal years beginning after June 15, 2002.
The Company believes that the effect of adopting SFAS No. 143 will not be
material to its financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. Although SFAS No. 144
supercedes SFAS No. 121, it retains the fundamental provisions of SFAS No.
121 regarding recognition/measurement of impairment of long-lived assets to
be held and used and measurement of long-lived assets to be disposed of by
sale. Under SFAS
21
No. 144, asset write-downs from discontinuing a business segment will be
treated the same as other assets held for sale. The new standard also
broadens the financial statement presentation of discontinued operations to
include the disposal of an asset group (rather than a segment of a
business). SFAS No. 144 is effective beginning January 1, 2002 and,
generally is to be applied prospectively. The Company is studying the
potential financial impact of adopting this new standard; it does not
expect any significant impact on its financial position and results of
operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding market risk of the Company and its subsidiaries
is presented in "Note C - Debt" and "Note D - Fair Value of Instruments" in
the Notes to the Consolidated Financial Statements included in Item 8 of this
Form 10-K Report.
22
Item 8. FINANCIAL STATEMENTS
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, 2001 and 2000, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. 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 auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pennichuck
Corporation and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 15, 2002
23
CONSOLIDATED BALANCE SHEETS
PENNICHUCK CORPORATION AND SUBSIDIARIES
December 31
2001 2000
------------------------------
ASSETS
Property, Plant and Equipment
Land $ 1,224,557 $ 1,211,903
Buildings 17,986,453 23,201,005
Equipment 79,435,709 65,948,723
Construction work in progress 260,007 528,542
------------------------------
98,906,726 90,890,173
Less accumulated depreciation (24,946,682) (22,452,617)
------------------------------
73,960,044 68,437,556
Current Assets
Cash 3,272,240 3,731,634
Restricted cash 151,142 1,002,855
Accounts receivable, net of reserves of
$83,998 in 2001 and $37,000 in 2000 1,245,636 1,395,606
Unbilled revenue 1,349,277 1,198,000
Note receivable 100,000 --
Refundable income taxes 124,935 370,134
Materials and supplies, at cost 364,487 354,002
Prepaid expenses and other current assets 479,900 400,896
------------------------------
7,087,617 8,453,127
Other Assets
Deferred land costs 2,390,576 2,521,560
Deferred charges and other assets 3,676,554 2,751,353
Investment in real estate partnerships -- 716,410
Notes receivable 725,750 --
------------------------------
6,792,880 5,989,323
$ 87,840,541 $ 82,880,006
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED BALANCE SHEETS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
December 31
2001 2000
------------------------------
Stockholders' Equity and Liabilities
Stockholders' Equity
Common stock - $1 par value - authorized
11,500,000 shares in 2001 and 2000;
issued 2,389,019 shares in 2001 and
2,358,847 shares in 2000 $ 2,389,019 $ 2,358,847
Additional paid in capital 15,098,088 14,667,282
Retained earnings 13,544,696 11,753,399
Accumulated Other Comprehensive
Income - Derivative Instruments (308,216) --
------------------------------
30,723,587 28,779,528
Less cost of 1,385 shares of
common stock in treasury in 2001
and 7,346 shares in 2000 (128,488) (183,895)
------------------------------
30,595,099 28,595,633
Minority Interest -- 1,149,673
Preferred stock, no par value, 100,000
shares authorized, no shares issued in
2001 and 2000 -- --
Long-term Debt, less current portion 27,071,798 26,917,860
Current Liabilities
Current portion of long-term debt 348,207 319,155
Accounts payable 1,373,120 724,832
Accrued interest payable 367,757 415,685
Other current liabilities 1,467,184 1,013,280
------------------------------
3,556,268 2,472,952
Deferred Credits and Other Reserves
Deferred income taxes 6,166,117 5,320,538
Deferred investment tax credits 1,032,210 1,065,246
Regulatory liability 1,169,658 1,179,689
Post-retirement health benefit
obligation 690,723 593,267
Other liabilities 308,216 258,304
------------------------------
9,366,924 8,417,044
Contributions in Aid of Construction 17,250,452 15,326,844
------------------------------
$ 87,840,541 $ 82,880,006
==============================
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED STATEMENTS OF INCOME
PENNICHUCK CORPORATION AND SUBSIDIARIES
Year Ended December 31
2001 2000 1999
---------------------------------------------
Revenues
Water utility operations $17,411,760 $15,963,540 $16,331,633
Real estate operations 4,156,556 6,989,006 860,103
Contract operations and other 1,186,022 718,930 617,522
---------------------------------------------
$22,754,338 $23,671,476 $17,809,258
Operating Expenses
Water utility operations 12,408,777 11,614,329 11,005,271
Real estate operations 912,094 2,356,602 268,216
Contract operations and other 881,325 484,625 459,867
---------------------------------------------
14,202,196 14,455,556 11,733,354
Operating Income 8,552,142 9,215,920 6,075,904
Other income 221,152 183,086 170,305
Interest expense (1,980,926) (1,991,488) (2,024,601)
---------------------------------------------
Income Before Provision for Income Taxes 6,792,368 7,407,518 4,221,608
Provision for Income Taxes 2,657,420 2,869,993 1,625,212
---------------------------------------------
Net Income Before Minority Interest 4,134,948 4,537,525 2,596,396
Minority Interest in Loss (Earnings) of
Westwood Park LLC (523,244) (854,864) 19,269
---------------------------------------------
Net Income $ 3,611,704 $ 3,682,661 $ 2,615,665
=============================================
Earnings Per Common Share:
Basic $ 1.52 $ 1.56 $ 1.12
Diluted $ 1.50 $ 1.55 $ 1.12
Weighted Average Shares Outstanding:
Basic 2,382,389 2,360,767 2,327,597
Diluted 2,400,088 2,369,272 2,340,879
The accompanying notes are an integral part of these consolidated financial
statements.
26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PENNICHUCK CORPORATION AND SUBSIDIARIES
Accumulated
Common Common Additional Other
Stock- Stock- Paid - in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Income
----------------------------------------------------------------------------------------
Balances at December 31. 1998 2,284,847 $2,284,847 $13,820,759 $ 8,746,303 $ (59,240) $ --
Net income 2,615,665
Dividend reinvestment plan 16,800 16,800 268,169
Common dividends
declared - $.69 per share (1,590,041)
Exercise of stock options 45,645 45,645 347,946 (279,783)
Common equity issuance costs (10,000)
Directors' fees and other deferred
compensation plan 30,912 16,438
---------------------------------------------------------------------------------------
Balances at December 31, 1999 2,347,292 $2,347,292 $14,457,786 $ 9,771,927 $(322,585) $ --
Net income 3,682,661
Dividend reinvestment plan 5,407 5,407 134,490 142,432
Common dividends
declared - $.73 per share (1,701,189)
Exercise of stock options 6,148 6,148 50,786 (44,953)
Directors' fees and other deferred
compensation plan 24,220 41,211
---------------------------------------------------------------------------------------
Balances at December 31, 2000 2,358,847 $2,358,847 $14,667,282 $11,753,399 $(183,895) $ --
Net income 3,611,704
Dividend reinvestment plan 110,450 141,636
Common dividends
declared - $.76 per share (1,812,864)
Exercise of stock options 8,468 8,468 103,221 (2,117) (86,229)
Other Comprehensive Income (308,216)
Directors' fee and other
deferred compensation plan 21,704 21,704 217,135 (5,426)
---------------------------------------------------------------------------------------
Balances at December 31, 2001 2,389,019 $2,389,019 $15,098,088 $13,544,696 $(128,488) $(308,216)
=======================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
PENNICHUCK CORPORATION AND SUBSIDIARIES
Years Ended December 31
2001 2000 1999
---------------------------------------------
Operating Activities:
Net income $ 3,611,704 $ 3,682,661 $ 2,615,665
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,046,962 3,171,766 2,141,767
Amortization of deferred
investment tax credits (33,036) (33,036) (33,036)
Provision for doubtful debt 46,998 -- --
Provision for deferred
income taxes 930,639 944,895 926,574
Changes in assets and liabilities:
Accounts receivable and
unbilled revenue (48,305) (84,579) (177,698)
Refundable income taxes 245,199 (98,822) (219,793)
Materials and supplies (10,485) (42,290) 8,032
Prepaid expenses (79,004) 322,670 2,765
Deferred charges and
other assets (1,422,568) (176,809) (865,345)
Accounts payable and
accrued expenses 896,621 (79,755) 403,258
Other 87,425 78,796 96,166
---------------------------------------------
Net cash provided by operating activities 7,272,150 7,685,497 4,898,355
Investing Activities:
Purchases of property, plant & equipment (8,211,156) (7,740,316) (6,735,185)
Contributions in aid of construction 2,193,665 4,191,247 2,012,082
(Increase) decrease in restricted cash 851,713 (1,001,958) (258)
(Increase) decrease in investment in real
estate partnerships 764,103 (322,081) (231,148)
---------------------------------------------
Net cash (used) in investing activities (4,401,675) (4,873,108) (4,954,509)
Financing Activities:
Payments on long-term debt (319,155) (1,041,816) (182,224)
Proceeds from long-term borrowings 502,145 12,860 263,198
Net (increase) in notes receivable to a
third party (825,750) -- --
Minority interest (1,149,673) 854,864 (19,269)
Proceeds from dividend reinvestment
plan and other, net 275,428 356,852 420,516
Dividends paid (1,812,864) (1,701,189) (1,590,041)
---------------------------------------------
Net cash (used in) provided by
financing activities (3,329,869) (1,518,429) (1,107,820)
Increase (decrease) in cash (459,394) 1,293,960 (1,163,974)
Cash at beginning of year 3,731,634 2,437,674 3,601,648
---------------------------------------------
Cash at end of year $ 3,272,240 $ 3,731,634 $ 2,437,674
=============================================
The accompanying notes are an integral part of these consolidated financial
statements.
28
PENNICHUCK CORPORATION AND SUBSIDIARIES
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"), Pennichuck Water Service
Corporation (the "Service Corporation") and The Southwood Corporation
("Southwood").
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 27,700 customers in southern and central New Hampshire. 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." The Service Corporation is involved in
providing non-regulated, water-related services to over 5,000 customers
while 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 6 to 90 years and the average composite depreciation
rate was 2.55% in 2001 and 2000.
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 2001, 2000 and 1999.
Revenues: Standard charges for water utility services to customers are
recorded as revenue, based upon meter readings and contract service, as
services are provided. 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. Revenues recognized under
the WaterTight program are amortized over twelve months.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. 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.
Deferred charges and other assets consist of the following:
2001 2000
--------------------------
Regulatory assets $1,654,175 $ 818,650
Financing costs 577,524 632,615
Other 1,444,855 1,300,088
--------------------------
Total $3,676,554 $2,751,353
==========================
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: During 2001, Southwood was a 50% general partner
in a residential development project and had sold a certain parcel of land
to the partnership in exchange for promissory note. Revenues relating to the
sale of that parcel are deferred until the lots are ultimately sold to third
parties. Real estate transactions are presented using the cost recovery
method. Under this method, any deferred gain and related note receivable are
offset for financial statement purposes. Southwood's investment in this
partnership is recorded using the equity method of accounting. As of
December 31, 2001, all of the lots had been sold and the remaining balance
on the original note receivable from that partnership was paid in full. At
December 31, 2000, the note receivable balance was $172,500, which was
offset by the deferred gain of approximately $170,000.
Notes Receivable: During the fourth quarter of 2001, Southwood sold a parcel
of land to a local developer in exchange for a note which is secured by a
first mortgage interest in the property. The note, totaling $100,000 at an
interest rate of 10.5% per year, is due in October 2002 and is included
under Current Assets in the accompanying Consolidated Balance Sheet.
Included in Other Assets are two notes receivable from the same local
developer totaling $725,750. That amount represents funds loaned by
Southwood to the developer for land acquisition and house construction costs
for a 5 unit residential development. The term of the notes is eighteen
months at an annual interest rate of 10.5% and is secured by a first
mortgage interest in the land and buildings.
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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Contributions in Aid of Construction ("CIAC"): Under construction contracts
with real estate developers and others, the Company's regulated subsidiaries
receive 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. The regulated subsidiaries also credit 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.
Other Comprehensive Income (OCI): The Company follows SFAS No. 130,
"Reporting Comprehensive Income." This Statement requires presentation of
the components of other comprehensive earnings. The components of other
comprehensive income, as shown in the consolidated statements of
stockholders' equity as of December 31, 2001 are unrealized losses on the
Company's derivatives of $308,216. The change in unrealized loss for the
year ended December 31, 2001 was $156,216.
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, 2001, 2000 and 1999.
Years Ended
2001 2000 1999
------------------------------------------
Basic earnings per share $ 1.52 $ 1.56 $ 1.12
Dilutive effect of unexercised stock (.02) (.01) --
------------------------------------------
Diluted earnings per share $ 1.50 $ 1.55 $ 1.12
==========================================
Numerator:
Basic net income $3,611,704 $3,682,661 $2,615,665
==========================================
Diluted net income $3,611,704 $3,682,661 $2,615,665
==========================================
Denominator:
Basic weighted average shares outstanding 2,382,389 2,360,767 2,327,597
Dilutive effect of unexercised stock options 17,699 8,505 13,282
------------------------------------------
Diluted weighted average shares outstanding 2,400,088 2,369,272 2,340,879
==========================================
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE B - INCOME TAXES
The components of the federal and state income tax provision at December 31
are as follows:
2001 2000 1999
------------------------------------------
Federal $2,113,104 $2,309,552 $1,320,519
State 577,352 593,477 337,729
Amortization of investment tax credits (33,036) (33,036) (33,036)
------------------------------------------
$2,657,420 $2,869,993 $1,625,212
==========================================
Currently payable $1,836,144 $2,220,703 $ 816,062
Deferred 821,276 649,290 809,150
------------------------------------------
$2,657,420 $2,869,993 $1,625,212
==========================================
The following is a reconciliation between the statutory federal income tax
rate and the effective income tax rate for 2001, 2000 and 1999:
2001 2000 1999
--------------------------
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.6 5.3 5.3
Amortization of investment tax credits (.5) (.6) (.8)
--------------------------
Effective tax rate 39.1% 38.7% 38.5%
==========================
The Company made income tax payments of $1,214,973, $1,349,149 and $858,892
in 2001, 2000 and 1999, respectively.
The Company did not have any alternative minimum tax credits available at
December 31, 2001 and 2000 compared to $65,522 available at the end of 1999.
The Company has a regulatory liability related to income taxes of
$1,169,658, $1,179,689 and $1,194,870 at December 31, 2001, 2000 and 1999,
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 rate-making treatment.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE B - INCOME TAXES (Continued)
The temporary items that give rise to the net deferred tax liability at
December 31, 2001 and 2000 are as follows:
2001 2000
--------------------------
Liabilities:
Property related $7,653,446 $6,887,537
Other 720,438 585,749
--------------------------
8,373,884 7,473,286
Assets:
Investment tax credits 662,961 672,992
Regulatory liability 506,697 506,697
Taxes on contributions in aid of
construction 682,962 766,187
Other 355,147 206,872
--------------------------
2,207,767 2,152,748
Net Deferred Tax Liabilities $6,166,117 $5,320,538
==========================
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE C - DEBT
Long-term debt at December 31 consists of the following:
2001 2000
----------------------------
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 1,105,000 1,170,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series A), 6.35%,
due December 1, 2019 2,750,000 2,880,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series B), 6.45%,
due December 1, 2016 1,550,000 1,670,000
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
Unsecured New Hampshire State Revolving
Fund Loan, 3.8%, due November 1, 2020 445,000 12,860
Capitalized lease obligation -- 4,155
Secured loan, 5%, due October 1, 2005 70,005 --
----------------------------
27,420,005 27,237,015
Less current portion 348,207 319,155
----------------------------
$27,071,798 $26,917,860
============================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE C - DEBT (Continued)
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, 2001 are
as follows:
2002 $ 348,207
2003 354,223
2004 355,091
2005 9,855,922
2006 337,250
2007 and thereafter 16,169,312
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, 2001, approximately $3,863,000 of
Pennichuck's retained earnings was unrestricted for payment or declaration
of common dividends.
During 2001, 2000 and 1999, the Company paid interest of $1,972,283,
$1,905,473 and $1,967,318 respectively.
The Company has available a $2,500,000 unsecured, revolving credit facility
with a bank and during 2001 and 2000, there were no outstanding borrowings
under this facility.
The Company's wholly-owned real estate subsidiary, The Southwood
Corporation, has a 50 percent ownership interest in three limited liability
companies (LLC's). The LLC's, which are not included in the accompanying
Consolidated Financial Statements, own certain commercial office buildings on
which there are outstanding mortgage notes totaling $9.6 million. Southwood,
along with other members of the LLC's, has issued a guarantee on those
mortgages on which it is jointly and severally liable.
The Company has entered into two 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. The two interest rate exchange agreements
have 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, 2001 and 2000.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Deferral of the Effective Date of
SFAS No. 133" and SFAS No. 138, "An amendment to SFAS No. 133," establishes
certain accounting and reporting standards requiring every derivative
instrument to
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE C - DEBT (Continued)
be recorded in the Company's balance sheet as either an asset or liability
measured at its fair value. These Statements require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting treatment for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that the
Company must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company
completed its review and implementation of SFAS No. 133, effective January
1, 2001. The Company has taken an inventory of its contracts and determined
that the interest rate swap contracts mentioned above represent derivatives
under SFAS No. 133. These contracts qualify for hedge accounting under SFAS
No. 133. At December 31, 2001, the Company has recorded a liability of
$308,216 associated with these two interest rate swap agreements while the
offset amount was reflected in Accumulated Other Comprehensive Income.
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, 2001 is as follows:
Carrying Value Fair Value
-------------- ----------
Long-term debt $27,420,005 $29,597,000
Interest rate swaps $ -0- $ (308,216)
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 loss to terminate these agreements based upon current interest
rates.
The carrying values of the Company's cash, restricted cash, and short term
notes receivable approximate their fair values because of the short maturity
dates of those financial instruments. There is no market information
available for the Company's long-term notes receivable; however, management
believes their carrying value reflects market value.
NOTE E - BENEFIT PLANS
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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE E - BENEFIT PLANS (Continued)
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
2001 2000
----------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$3,044,730 in 2001 and
$2,737,758 in 2000 $ 3,108,648 $ 2,772,035
============================
Projected benefit obligation for service
rendered to date (3,650,659) (3,299,694)
Plan assets at a fair value (insurance contracts) 3,234,454 3,294,074
----------------------------
Plan assets less than projected
benefit obligation (416,205) (5,620)
Prior service costs 5,166 5,951
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions 884,927 454,327
Unrecognized net transition asset (69,451) (83,258)
----------------------------
Prepaid pension cost included in
deferred charges and other assets $ 404,437 $ 371,400
============================
Net pension cost for 2001, 2000 and 1999 includes the following components:
2001 2000 1999
---------------------------------------
Service cost - benefits earned
during the period $ 205,929 $ 189,730 $ 186,006
Interest cost on projected
benefit obligation 243,155 219,624 201,832
Expected return on plan assets (300,727) (277,061) (255,738)
Amortization of (gains)
and deferrals (6,711) (11,374) (1,536)
---------------------------------------
Net periodic pension cost $ 141,646 $ 120,919 $ 130,564
=======================================
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE E - BENEFIT PLANS (Continued)
For the years ended December 31, 2001, 2000 and 1999, the actuarial present
value of the projected benefit obligation was determined using a discount
rate of 7.5% and an assumed rate of increase in future compensation levels
of 5 percent. The expected long-term rate of return on plan assets was 9
percent in 2001, 2000 and 1999.
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 $109,325, $101,644 and $91,469, respectively,
for 2001, 2000 and 1999.
OTHER POST-RETIREMENT BENEFITS
The Company provides post-retirement 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 post-retirement benefit cost for the
years ended December 31, 2001 and 2000 are as follows:
2001 2000
-------------------------
Accumulated postretirement benefit
obligation:
Total current employees
and retirees $(808,273) $(653,703)
Plan assets at fair value 203,802 145,052
-------------------------
Funded status (underfunded) (604,471) (508,651)
Unrecognized net loss (gain) 13,100 (109,844)
Unrecognized prior service cost 81,100 95,600
Unrecognized transition obligation 29,900 60,800
-------------------------
Accrued (prepaid) post-retirement
benefit cost, net $(480,371) $(462,095)
=========================
Service cost $ 29,993 $ 28,538
Interest cost 54,777 40,583
Amortization of prior service cost 14,500 14,500
Amortization of transition obligation 30,900 30,900
Amortization of unrecognized gains (11,413) (2,826)
-------------------------
$ 118,757 $ 111,695
=========================
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE E - BENEFIT PLANS (Continued)
The Company is presently allowed to recover a portion of the post-retirement
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 7.5% in 2001 and 7.75% in 2000, and a maximum
medical care cost trend rate of 5% in 2001 and 2000, which is the projected
annual increase in future compensation levels. A one percent increase in
the assumed health care cost trend rate would not have had a material effect
on the postretirement benefit cost or the accumulated postretirement benefit
obligation in 2001.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
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."
2001 2000 1999
------------------------------------------
Net income:
As reported $3,611,704 $3,682,661 $2,615,665
Pro forma $3,468,332 $3,461,126 $2,586,364
Basic earnings per share:
As reported $ 1.52 $ 1.56 $ 1.12
Pro forma $ 1.46 $ 1.47 $ 1.11
Diluted earnings per share:
As reported $ 1.50 $ 1.55 $ 1.12
Pro forma $ 1.45 $ 1.46 $ 1.10
At December 31, 2001, all options which had been granted were exercisable
and 195,947 shares were available for future grants. The following table
shows the option plan activity for 1999, 2000 and 2001:
Options Price Per
Outstanding Share
----------- ---------
Balance at December 31, 1998 59,527 $7.50-$9.50
Granted 13,200 $15.75
Canceled (367) $7.50
Exercised (45,645) $7.50-$15.75
-------
Balance at December 31, 1999 26,715 $7.50-$15.75
Granted 29,667 $23.25
Canceled -- --
Exercised (6,148) $7.50-$15.75
-------
Balance at December 31, 2000 50,234 $8.12-$23.25
Granted 29,704 $20.39
Canceled (1,667) $20.39-$23.25
Exercised (8,468) $8.12-$15.75
-------
Balance at December 31, 2001 69,803 $8.12-$23.25
Of the 69,803 options outstanding at December 31, 2001, 802 have an exercise
price of $8.63 and a remaining contractual life of 4 years; 2,052 shares
have an exercise price of $8.12 and a remaining
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE F - STOCK BASED COMPENSATION PLANS (Continued)
contractual life of 5 years; 3,352 shares have an exercise price of $9.50
and a remaining life of 6 years; and 5,894 shares have an exercise price of
$15.75 and a remaining life of 7 years; 28,666 shares have an exercise
price of $23.25 and a remaining life of 8 years; and 29,037 shares have an
exercise price of $20.39 and a remaining life of 9 years. 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 2001,
2000 and 1999, respectively: risk-free interest rates of 5.08%, 6.59% and
4.9%; expected dividend yields of 4.7%, 5.3% and 5.3%; expected lives of 5
years; and expected volatility of 34%, 53% and 35%.
In 2001, the Company amended its 1995 and 2000 Stock Option Plans to allow
for grant of non-qualified stock options in addition to incentive stock
options.
NOTE G - SHAREHOLDER RIGHTS PLAN
On April 20, 2000, the Company's Board of Directors adopted a Rights
Agreement and declared a dividend of one preferred share purchase right
("Right") for each outstanding share of common stock, $1.00 par value. Each
Right entitles the shareholder to purchase one one-hundredth of a share of
Series A Junior Participating Preferred Stock of the Company at an exercise
price of $85.00 per share, subject to adjustment. The Rights become
exercisable in the event that a person or group acquires, or commences a
tender or exchange offer to acquire, more than 10% of the Company's
outstanding common stock. In that event, each Right will entitle the holder,
other than the acquiring party, to purchase a number of common shares of the
Company having a market value equal to two times the Right's exercise price.
If the Company is acquired in a merger or other business combination at any
time after the Rights become exercisable, the Rights will entitle the holder
to purchase a certain number of shares of common stock of the acquiring
company having a market value equal to two times the Right's exercise price.
The Rights are redeemable by the Company at a redemption price of $.01 per
Right at any time before the Rights become exercisable. The Rights will
expire on April 19, 2010, unless previously redeemed.
NOTE H -SUBSEQUENT EVENTS
In January 2002, Southwood sold its remaining 40 acres in Southwood
Corporate Park to a regional developer for approximately $2.7 million in
cash. That sale, less selling and allocable infrastructure costs, is
expected to result in approximately $1.04 million in pretax earnings for
Southwood in the first quarter of 2002.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE I - BUSINESS 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, 2001, 2000 and
1999.
2001 2000 1999
---------------------------------------------
Operating revenues:
Water utility $17,411,760 $15,963,540 $16,331,633
Real estate 4,156,556 6,989,006 860,103
Contract operations & other 1,186,022 718,930 617,522
---------------------------------------------
Total operating revenues $22,754,338 $23,671,476 $17,809,258
=============================================
Operating income:
Water utility $ 5,002,983 $ 4,349,211 $ 5,326,362
Real estate 3,244,462 4,632,404 591,887
Contract operations & other 304,697 234,305 157,655
---------------------------------------------
Total operating income $ 8,552,142 $ 9,215,920 $ 6,075,904
=============================================
Capital additions:
Water utility $ 8,210,756 $ 7,735,483 $ 6,717,877
Real estate -- -- --
Contract operations & other 400 4,833 17,308
---------------------------------------------
Total capital additions $ 8,211,156 $ 7,740,316 $ 6,735,185
=============================================
Identifiable assets:
Water utility $79,668,690 $73,547,121 $68,337,550
Real estate 3,524,382 4,053,620 4,243,177
Contract operations & other 4,647,469 5,279,265 3,000,117
---------------------------------------------
Total identifiable assets $87,840,541 $82,880,006 $75,580,844
=============================================
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE I - BUSINESS SEGMENT INFORMATION (Continued)
Depreciation and amortization
expense:
Water utility $ 2,590,524 $ 2,225,329 $ 2,068,180
Real estate 412,742 912,221 --
Contract operations & other 43,696 34,216 73,587
---------------------------------------------
Total depreciation and
amortization expense $ 3,046,962 $ 3,171,766 $ 2,141,767
=============================================
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 below.
2001 2000 1999
------------------------------------
Allocated parent expenses:
Water utility $522,180 $522,231 $477,156
Real estate 58,581 5,615 5,186
Contract operation 25,960 33,692 36,305
------------------------------------
Total allocated parent expenses $606,721 $561,538 $518,647
====================================
Within the water utility business segment, one customer accounted for over
10 percent of total operating revenues. During 2001, 2000 and 1999, the
water utility recorded $1,809,000, $1,755,000 and $1,784,000, respectively,
in water revenues which were derived from fire protection and other billings
to the City of Nashua.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
(In thousands of dollars, except per share amounts)
2001
Operating Revenues $4,410 $5,573 $5,654 $7,117
Operating Income 1,129 2,074 2,122 3,227
Net Income 415 966 1,008 1,223
Basic Earnings Per Share $ .18 $ .41 $ .42 $ .51
2000
Operating Revenues $4,135 $4,453 $5,945 $9,138
Operating Income 1,197 1,383 2,516 4,120
Net Income 460 596 1,150 1,477
Basic Earnings Per Share $ .19 $ .26 $ .49 $ .62
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
Basic Earnings Per Share $ .19 $ .34 $ .37 $ .22
44
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On March 26, 2002, the Company determined not to renew the engagement
of its independent accountants, Arthur Andersen LLP, and to appoint
PricewaterhouseCoopers LLP as its new independent accountants, subject to
ratification of the Company's shareholders at its annual meeting of
shareholders. The determination not to renew the engagement of Arthur
Andersen LLP and to retain PricewaterhouseCoopers LLP was approved by the
Board of Directors upon recommendation of its Audit Committee. Arthur
Andersen was dismissed effective as of March 31, 2002.
Arthur Andersen LLP's reports on the Company's financial statements
in the last two years did not contain an adverse opinion or a disclaimer of
opinion, nor were such reports qualified or modified as to uncertainty,
audit scope, or accounting principles. During the Company's two most
recent fiscal years ended December 31, 2001, and the subsequent interim
period through March 26, 2002, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Arthur Andersen LLP, would have
caused them to make reference to the subject matter of the disagreements in
connection with their reports. None of the reportable events described
under Item 304 (a)(1)(v) of Regulation S-K occurred within the Company's
two most recent fiscal years and the subsequent interim period through
March 26, 2002.
During the Company's two most recent fiscal years ended December 31,
2001, and the subsequent interim period through March 26, 2002, the Company
did not consult with PricewaterhouseCoopers LLP regarding any of the
matters or events set forth in Item 304 (a)(2)(i) and (ii) of Regulation
S-K.
45
PART III:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the persons
serving on the Board of Directors of the Company as of March 11, 2002:
Director Year Present Position
of Company Term Will With
Name (1) Age Since Expire Company
- -------- --- ---------- ------------ -------
Stephen J. Densberger 51 1986 2002 Executive
Vice President
Hannah M. McCarthy 55 1994 2002 ---
Charles J. Staab 52 1986 2002 Vice President,
Treasurer and
Chief Financial
Officer
Maurice L Arel 64 1984 2003 President and Chief
Executive Officer
Joseph A. Bellavance 62 1983 2003 ---
Robert P. Keller 64 1983 2003 ---
Charles E. Clough 71 1968 2004 ---
John R. Kreick 57 1998 2004 ---
Martha E. O'Neill 44 1998 2004 ---
___________________
Except for Messrs. Densberger and Staab, all Directors are also
Directors of the Company's wholly owned subsidiaries, Pennichuck
Water Works, Inc. and The Southwood Corporation. Mr. Densberger is a
director of Pennichuck Water Works, Inc. Messrs. Arel, Densberger
and Staab are also directors and officers of the Company's other
wholly-owned subsidiaries, Pennichuck Water Service Corporation,
Pennichuck East Utility, Inc. and Pittsfield Aqueduct Company, Inc.
The business experience of each of the Directors and of the executive
officers of the Company during the last five years, and certain other
pertinent information, is as follows:
46
Maurice L. Arel - Mr. Arel has served as President, Chief Executive
Officer and a Director of the Company since October 1984. Mr. Arel also
serves as President, Chief Executive Officer and a director of the
Company's subsidiaries, Pennichuck Water Works, Inc., The Southwood
Corporation and Pennichuck Water Service Corporation. He is Chairman and a
director of Pittsfield Aqueduct Company, Inc and Pennichuck East Utility,
Inc.. He is the former Mayor of the City of Nashua, having served from
1977 to 1984. He received his Bachelor of Arts degree in Chemistry from
St. Anselm College and his Master of Science degree in Physical Chemistry
from St. John's University. He is a Commissioner of the Nashua Police
Department, a Trustee of St. Anselm College of Manchester, New Hampshire
and a member of the Board of Trustees of the Public Library of Nashua. He
is past Chairman of the National Association of Water Companies Government
Relations Committee and a member of the American Chemical Society, the
American Water Works Association and the New England Water Works
Association.
Joseph A. Bellavance - Mr. Bellavance is President and General
Manager of Bellavance Beverage Company, Inc. and President of Bellavance
Realty Corporation, both of Nashua. He received his Bachelor of Science
degree in Business Administration from the University of New Hampshire. He
is a director of the New Hampshire Wholesale Beverage Association, "New
Hampshire The Beautiful," and a member of the American Legion and the
Nashua Rotary Club.
Charles E. Clough - Mr. Clough is currently President of Freedom
Partners, LLC. He holds a Master of Business Administration degree from
the Amos Tuck School of Business and was affiliated with Nashua Corporation
from 1957 until 1995. Mr. Clough also serves as a director of Hitchiner
Manufacturing Company, Inc. of Milford, New Hampshire.
Stephen J. Densberger - Mr. Densberger is Executive Vice President of
the Company and has been affiliated with the Company since 1974. Mr.
Densberger was the Treasurer of the Company from 1978 to 1983. Mr.
Densberger also serves as Executive Vice President of Pennichuck Water
Works, Inc. and as Vice President of The Southwood Corporation and
Pennichuck Water Service Corporation. He is a director and President of
Pittsfield Aqueduct Company, Inc. and of Pennichuck East Utility, Inc. and
a director of Pennichuck Water Service Corporation. He holds a Master of
Business Administration degree from the Whittemore School of Business and
Economics of the University of New Hampshire. He is past President of the
New Hampshire Water Works Association, past President of the New England
Water Works Association, and a past member of the City of Nashua Board of
Aldermen.
Robert P. Keller - Mr. Keller is a Certified Public Accountant. In
March 2002, he became Chairman and Chief Executive Officer of InStar
Services Group, Inc. headquartered in Fort Worth, Texas. From June 1995
to June 2001, he served as President and Chief Executive Officer of
Dartmouth Capital Group, Inc., as President and Chief Executive Officer of
Eldorado Bancshares, Inc. and as Chairman, President and Chief Executive
Officer of Eldorado Bank of Laguna Hills, California and Chairman and Chief
Executive Officer of Antelope Valley Bank of Lancaster, California.
47
John R. Kreick - Dr. Kreick served as President of Sanders Associates
and as a Vice President of the Lockheed Martin Corporation from January
1988 until March 1998. Dr. Kreick received his Bachelor of Science degree
in physics from the University of Michigan in 1965. As a Rackman graduate
fellow, he worked at the University's Space Physics Research Laboratory and
received his Masters of Science degree in physics in 1966. He received his
Ph.D. in theoretical physics from the University of Michigan in 1969 and he
holds eight patents in infrared and electro-optical technology. Dr. Kreick
is a member of the National Research Council's Commission of Physical
Sciences, Mathematics and Applications; a trustee of Rivier College; a
member of the Board of Directors of the New England Council and the
Southern New Hampshire Regional Medical Center; and has served on numerous
Department of Defense panels and committees. He has been the Chairman of
the Board of Draper Labs since October 2001. In 1993, Dr. Kreick received
the Electronic Warfare Association's highest award - the Gold Medal of
Electronic Warfare and is a recipient of Aviation Week magazine's Aerospace
Laurels Award for his long-term contributions to electronic warfare.
Hannah M. McCarthy - Ms. McCarthy is President of Daniel Webster
College in Nashua, New Hampshire, a position that she has held since June,
1980. She earned her B.A. at Simmons College, and has done graduate work
at Rivier College and New Hampshire College. Ms. McCarthy serves as the
Chairperson of New Hampshire Post-Secondary Education Commissioner and a
director of the New Hampshire College and University Council and the Boys &
Girls Club of Nashua.
Martha E. O'Neill - Ms. O'Neill has been practicing as an attorney
with the law firm of Clancy & O'Neill, P. A. in Nashua since 1982. She is a
graduate of Wellesley College and Georgetown University Law Center. Ms.
O'Neill serves on the Rivier College Board of Trustees, Rivier College
Paralegal Department Advisory Board, Mary A. Sweeney Home Board of
Trustees, Charles H. Nutt Surgical Hospital Board, the Boys & Girls Club of
Greater Nashua, Inc. Charitable Foundation Board of Trustees and the
Currier Gallery of Art Advisory Council.
Charles J. Staab - Mr. Staab is Vice President, Treasurer and Chief
Financial Officer of the Company and has been Treasurer since 1983. Mr.
Staab also serves as Vice President and Treasurer of Pennichuck Water
Works, Inc. and The Southwood Corporation. He is Treasurer and a director
of Pennichuck Water Service Corporation, Pennichuck East Utility, Inc. and
Pittsfield Aqueduct Company, Inc. He holds a Master of Business
Administration degree from Rivier College and is a Certified Public
Accountant. He is a member of the Finance Committee of the National
Association of Water Companies, a member of the Board of Directors of the
Nashua YMCA and the Home Health & Hospice Care. He is a past director of
the Nashua Children's Association and the United Way of Greater Nashua, and
former President of the Northern New England chapter of the Financial
Executives Institute.
Bonalyn J. Hartley - Ms. Hartley has been with the Company since 1979
and was elected Vice President-Administration of the Company, Pennichuck
Water Works, Inc. and The Southwood Corporation in 2001. Formerly, she
served as Vice President - Controller for the Company and its subsidiaries.
She is also Vice President - Administration and a director of Pennichuck
Water Service Corporation, Pennichuck East Utility, Inc. and Pittsfield
Aqueduct Company, Inc. She is a graduate of Rivier College with a Bachelor
of Science Degree in
48
Business Management. Ms. Hartley serves as a Trustee and Vice Chairperson
of the Southern New Hampshire Medical Center and as a member of the
Community Hospice Home Endowment Committee. She is a Director and past
Chairperson of the Rivier College Alumni Association. She is also a member
of the New England Chapter of the National Association of Water Companies
and a member of the New England Water Works Association. Ms. Hartley is 57
years old.
Donald L. Ware - Mr. Ware is Vice President of Engineering for the
Company. He joined the Company in April 1995 and also serves as the Vice
President of Engineering for Pennichuck Water Works, Inc. and The Southwood
Corporation. He is also a Vice President and director of Pennichuck Water
Service Corporation, Pennichuck East Utility, Inc. and Pittsfield Aqueduct
Company, Inc. Prior to joining the Company, Mr. Ware was the general
manager of the Augusta Water District in Augusta, Maine. He holds a
Bachelor of Science degree in Civil Engineering from Bucknell University
and is a licensed professional engineer in New Hampshire, Massachusetts and
Maine. Mr. Ware is 45 years old.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and beneficial owners of more than ten
percent of the Company's common stock, to file reports of ownership and
changes in ownership of such common stock with the Securities and Exchange
Commission ("SEC"). Generally, these persons must file such reports at the
time they first become subject to Section 16(a) reporting, and thereafter
on a monthly basis following a change in ownership, if any. Officers,
Directors and such greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a)
reports they file. The Company is required by SEC regulation to identify
in its proxy statement those individuals for whom one of the referenced
reports was not filed on a timely basis during the most recent fiscal year
or prior fiscal years.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations from each
of such persons that no other reports were required, the Company believes
that during the fiscal year ended December 31, 2001, all Section 16(a)
filing requirements applicable to its officers, Directors and greater than
ten percent beneficial owners were complied with on a timely basis.
Item 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
Executive Officers
The following table sets forth information for the fiscal years ended
December 31, 2001, 2000 and 1999 concerning the compensation paid to the
Chief Executive Officer and the other executive officers ("Named Executive
Officers") for services performed in all capacities.
49
Long-Term
Compensation
------------
Annual Compensation Securities
Name and Principal Fiscal Year ------------------------------- Underlying All Other
Position End Dec 31 Salary Bonus (1) Other (2) Options Compensation (3)
- ------------------ ----------- ------ --------- --------- ---------- ----------------
Maurice L. Arel, 2001 $213,125 $71,044 -0- 8,000 $46,722
President and Chief 2000 $180,750 $79,550 -0- 8,000 $46,520
Executive Officer 1999 $166,000 $45,864 -0- 4,000 $43,647
Stephen J. Densberger, 2001 $118,985 $25,151 -0- 4,000 $ 5,892
Executive Vice President 2000 $112,970 $33,955 -0- 4,000 $ 5,312
1999 $105,306 $20,622 -0- 2,000 $ 5,524
Charles J. Staab, 2001 $106,602 $20,780 -0- 4,000 $ 5,218
Vice President, Treasurer 2000 $100,059 $25,487 -0- 4,000 $ 4,754
and Chief Financial 1999 $ 93,271 $16,377 -0- 2,000 $ 4,158
Officer
Bonalyn J. Hartley, 2001 $ 96,842 $19,293 -0- 4,000 $ 4,442
Vice President, 2000 $ 87,148 $22,198 -0- 4,000 $ 3,973
Administration 1999 $ 81,236 $12,528 -0- 2,000 $ 3,762
Donald L. Ware, 2001 $ 95,135 $19,283 -0- 4,000 $ 4,152
Vice President, 2000 $ 87,148 $22,198 -0- 4,000 $ 3,678
Engineering 1999 $ 81,236 $12,528 -0- 2,000 $ 2,939
___________________
Bonus awards for services rendered during such year and paid in the
following year.
No information is given with respect to other compensation paid to or
distributed in kind where such compensation did not exceed the lesser
of $50,000 or 10% of the total reported salary and bonus for the
named officer.
For the fiscal years ended December 31, 2001, 2000 and 1999,
respectively, for Mr. Arel includes (i) the cost to the Company for
the purchase of a term life insurance policy ($8,393, $8,393 and
$6,214), (ii) Company contributions to the Elective Savings Plan for
Employees of Pennichuck Corporation ($6,473, $6,798 and $6,480) and
(iii) Company contributions to insurance premium paid with respect to
Insurance Funded Deferred Compensation Agreement ($31,856, $31,329
and $30,953). For fiscal years ended December 31, 2001, 2000 and
1999, respectively, for Mr. Densberger includes (i) the cost to the
Company for the purchase of a term life insurance policy ($1,304,
$1,304 and $1,813) and (ii) Company contributions to the Elective
Savings Plan for Employees of Pennichuck Corporation ($4,588, $4,008
and $3,738). For fiscal years ended December 31, 2001, 2000 and 1999,
respectively, for Mr. Staab includes (i) the cost to the Company for
the purchase of a term life insurance policy ($1,261, $1,261 and
$971) and (ii) Company contributions to the Elective Savings Plan for
Employees of Pennichuck Corporation ($3,957, $3,493 and
50
$3,230). For fiscal years ended December 31, 2001, 2000 and 1999,
respectively, for Ms. Hartley includes (i) the cost to the Company
for the purchase of a term life insurance policy ($930, $930 and
$949) and (ii) Company contributions to the Elective Savings Plan for
Employees of Pennichuck Corporation ($3,512, $3,042 and $2,813). For
fiscal years ended December 31, 2001, 2000 and 1999, respectively,
for Mr. Ware includes (i) the cost to the Company for the purchase of
a term life insurance policy ($632, $632 and $500) and (ii) Company
contributions to the Elective Savings Plan for Employees of
Pennichuck Corporation ($3,520, $3,046 and $2,439).
Stock Option Grants During the Fiscal Year Ended December 31, 2001
The following table sets forth information concerning the grant of
stock options to acquire shares of the Company's common stock under the
2000 Stock Option Plan to the Chief Executive Officer and the Named
Executive Officers during the fiscal year ended December 31, 2001.
Individual Grants (1)
------------------------------------------------ Potential Realizable
Percent Value At Assumed
of Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term (2)
Options in Fiscal Price Expiration --------------------
Name Granted Year ($/Share) Date 5% 10%
---- ---------- ---------- --------- ---------- --------------------
Maurice L. Arel 8,000 28% $20.39 Jan 12, 2011 $102,585 $259,971
Stephen J. Densberger 4,000 14% $20.39 Jan 12, 2011 $ 51,293 $129,986
Charles J. Staab 4,000 14% $20.39 Jan 12, 2011 $ 51,293 $129,986
Bonalyn J. Hartley 4,000 14% $20.39 Jan 12, 2011 $ 51,293 $129,986
Donald L. Ware 4,000 14% $20.39 Jan 12, 2011 $ 51,293 $129,986
___________________
The exercise price of the options granted is equal to the fair market
value of the Company's common stock on the date of grant. The options
are exercisable on the date of the grant and expire ten years
thereafter.
Potential realizable values are calculated on the assumption that the
market value of the underlying stock increases from the date of grant
at an annualized rate of return of 5% and 10% compounded annually for
the ten-year term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price.
Stock Option Exercises and Fiscal Year End Values
The following table sets forth information concerning the
exercise of stock options by the Chief Executive Officer and the Named
Executive Officers during the fiscal year ended December 31, 2001, and the
number and value of unexercised options held by those officers
51
at fiscal year end. The value realized on the shares acquired on exercise
is the difference between the exercise price and the fair market value on
the date of exercise. The value of unexercised, in-the-money options at
December 31, 2001, is the difference between its exercise price and the
fair market value of the underlying stock on such date. These values have
not been, and may never be, realized. The underlying options have not
been, and may never be, exercised; and actual gains, if any, on exercise
will depend on the value of Company common stock on the date of exercise.
Value of
Number Of Unexercised Unexercised In-the-Money
Shares Options At Fiscal Year End Options At Fiscal Year End (1)
Acquired Value --------------------------- ------------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Maurice L. Arel 2,000 $19,260 16,000 -0- $ 82,880 -0-
Stephen J. Densberger 750 $14,348 13,000 -0- $117,820 -0-
Charles J. Staab - - 10,000 -0- $ 63,940 -0-
Bonalyn J. Hartley - - 8,000 -0- $ 41,440 -0-
Donald L. Ware - - 8,094 -0- $ 42,498 -0-
___________________
The closing price of the Company's common stock as reported on the
Nasdaq National Market System on December 31, 2001 was $27.00 per
share and is used in calculating the value of unexercised options.
Pension Plan
The Company maintains a qualified, non-contributory defined-benefit
pension plan for all qualifying employees of the Company and its
subsidiaries. In general, the pension plan provides for monthly payments
to or on behalf of each covered employee based upon such employee's career
averaged annual compensation prior to retirement and the employee's covered
years of service. Directors who are not employees are not eligible to
participate in the plan. The pension plan includes optional early
retirement benefits, provided a participant has attained age 55 and has
completed ten or more years of covered service. Under the pension plan,
the Company makes an annual contribution for the benefit of eligible
employees computed on an actuarial basis. All contributions to the fund
and expenses of administering the fund are paid by the Company.
The following table shows the estimated annual benefits payable under
the pension plan for specified averaged career salaries and covered years
of service. Benefits shown in the table are computed on a straight life
annuity basis and are not subject to any deduction for Social Security or
other offset amounts.
52
Annual Pension Benefit Based on Years of Service (1)
Estimated Annual Pension Benefit Based on Service of
Career Averaged -------------------------------------------------------------------------
Salary 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
- --------------- ------- -------- -------- -------- -------- --------
$ 60,000 7,000 14,000 18,800 23,300 27,800 32,700
80,000 9,300 18,700 24,900 31,000 37,300 43,700
100,000 11,700 23,500 31,200 38,900 46,700 54,700
120,000 14,000 28,000 37,300 46,900 56,100 65,400
140,000 16,300 32,700 43,700 54,500 65,100 75,300
160,000 18,700 37,300 49,700 61,700 73,000 83,500
180,000 21,000 42,000 55,500 67,900 79,700 91,500
200,000 23,300 46,700 60,000 73,200 86,400 99,600
___________________
Calculation of Normal Retirement Benefit at age 65.
Years of service at December 31, 2001 and 2001 compensation covered
by the pension plan, for the Chief Executive Officer and the Named
Executive Officers: Mr. Arel, 17 years, $292,675; Mr. Densberger, 27
years, $152,940; Mr. Staab, 18 years, $132,089; Ms. Hartley, 21 years,
$119,040; and Mr. Ware, 6 years, $117,333. Pursuant to the provisions of
the pension plan, these covered compensation figures represent total cash
compensation received during 2001 (including salary plus bonus for services
rendered during 2000) and therefore differ from the salary reported in the
Cash Compensation Table set forth above.
Compensation of Directors
Each of the independent members of the Board of Directors of the
Company currently receives a fee of $8,000 annually. Additionally, each
independent Board member receives $600 for each Board and committee meeting
they attend while each Committee chairman also receives an additional
$1,500 annually. Directors who are also salaried employees of the Company
do not receive any separate compensation for services as a Director of the
Company or of its subsidiaries.
Executive Agreements
The Company is party to an Employment Agreement with Maurice L. Arel
pursuant to which Mr. Arel serves as President and Chief Executive Officer
of the Company and its principal subsidiaries, Pennichuck Water Works,
Inc., The Southwood Corporation and Pennichuck Water Service Corporation.
This agreement provides for a continuously renewing three-year term and for
the payment of a base salary as well as participation in any bonus and
incentive compensation, stock option and employee benefit programs
available to the Company's executive officers, together with life insurance
in the amount of four (4) times his annual salary. In the event the
Company terminates Mr. Arel's employment other than for "cause" or within
six (6) months of an event constituting a "change of control," he will be
entitled to a severance payment equal to two (2) times his then current
salary and fringe benefits. For purposes of Mr. Arel's agreement, cause
shall be deemed to exist if Mr. Arel is subject to a finding by the Board
53
of Directors that (a) with respect to his actions or failure to act
concerning the Company and its affairs, he has been personally dishonest,
engaged in willful misconduct or fraud or breached a fiduciary duty, or (b)
he has intentionally failed to perform the duties reasonably assigned to
him. A change of control is defined as (i) a merger or consolidation which
results in the Company's then existing shareholders holding less than 50%
of the outstanding stock of the surviving corporation in the merger, (ii)
the sale of substantially all of the assets of the Company, or (iii) a
transaction or series of related transactions in which more than 50% of the
voting power of the Company is disposed of.
Mr. Arel is also party to an Insurance Funded Deferred Compensation
Agreement with the Company designed to provide him with supplemental
benefits such that upon retirement he will receive at least sixty percent
(60%) of the average of his last three years' annual base salary
compensation. In order to fund this supplemental benefit, the Company has
purchased and agreed to maintain a Company-owned cash value life insurance
policy that, together with funds available under the Company's defined
benefit pension plan annuity, the annuity value of the Company's
contributions to Mr. Arel's 401(k) plan and fifty percent (50%) of his
projected social security benefits, will equal the Company's obligations
under the agreement.
Messrs. Densberger, Staab and Ware and Ms. Hartley are each party to
a Change of Control Agreement with the Company intended to ensure
continuity in the management of the Company in the event of a 'change of
control' of the Company. Each such agreement provides for a continuously
renewing three-year term and for the payment of the respective executive's
then current base salary and continuation of health and life insurance
benefits for a twelve month period upon the occurrence of both (a) a change
of control and (b) a termination of employment or substantial reduction or
alteration in the executive's responsibility, authority or compensation for
reasons other than good cause. For purposes of these agreements, a change
of control is deemed to have occurred if (i) any person or group acting in
concert acquires fifty-one percent (51%) or more of the Company's voting
power, (ii) a merger or share exchange occurs which results in the
Company's shareholders holding less than fifty percent (50%) of the total
voting power after such transaction, (iii) there is a change in the
majority of the Board of Directors of the Company other than by nominations
approved by the then current Board of Directors, or (iv) there shall be a
sale or other transfer of all or substantially all of the assets of the
Company or its subsidiaries to a non-affiliated party.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEE
General
The Compensation and Benefits Committee of the Board of Directors
(the "Compensation Committee") is comprised entirely of independent, non-
employee Directors. The Compensation Committee is responsible for
establishing the Company's executive compensation program, including
matters relating to the grant of options to purchase Company stock and any
performance-based compensation for Company executives, subject to the
concurrence of the Board of Directors.
54
Compensation Philosophy
The Compensation Committee aims to ensure that the Company's
executive compensation program enables the Company to attract, retain,
motivate and reward the talented executives it needs to achieve the
Company's goals of increasing shareholder value and maintaining a
leadership position within the water utility industry. From time to time
the Committee retains independent consultants to advise them whether the
total compensation opportunity available to Company executives is
competitive with the median remuneration received by those in positions of
similar responsibilities in other comparable companies. During 2001 the
Committee employed Arthur Andersen LLP to conduct an analysis of the
Company's compensation program.
The Compensation Committee's intent is to motivate its senior
executives to achieve the Company's goals of providing its customers with
high quality, cost-effective, reliable water services; managing the
Company's real estate and other water service related activities; and
providing the Company's shareholders with a market-based return on their
investment.
Toward that end, the compensation program:
* Provides compensation levels that are competitive with those
provided by companies with which the Company may compete for
executive talent.
* Motivates senior executives to meet and exceed certain
corporate financial goals and to achieve the Company's
strategic business initiatives, and rewards them in the form of
incentive compensation for the Company's achievements.
* Creates a strong link between stockholder and financial
performance in the form of equity compensation for the
Company's executive officers.
Compensation Program
The compensation program for the Company's executive officers is
comprised of a base salary, an annual incentive opportunity and a long-term
equity incentive opportunity. Executive officers may also participate in
the Company's Savings Plan for Employees and other benefit plans generally
available to all levels of salaried employees.
Base Salary
The President, with the concurrence of the Compensation Committee,
annually sets the salary for each executive officer other than himself
based on the assessment of that executive officer's responsibilities,
performance and accomplishments over the prior years and the established
goals and objectives for that executive for the upcoming year.
The performance of each executive officer is reviewed annually. The
Compensation Committee reviews and approves all executive officer salary
adjustments as recommended by the President. The Compensation Committee
reviews the President's performance and establishes his base salary.
55
Incentive Compensation
The Compensation Committee has established an annual incentive bonus
program that provides an opportunity to earn an annual cash incentive award
when certain corporate financial goals are achieved. Cash bonuses for
executive officers are paid once a year in the year following the fiscal
year for which the stated goals were met. The bonus awards paid to the
executive officers in 2002 were based on incentive compensation goals, both
earnings per share and return on equity, established in the beginning of
the 2001 fiscal year. The stronger the Company's performance under these
criteria, the larger the incentive payment to each of the officers. Annual
incentive awards made to the executive officers are shown in the
Compensation Table of this Proxy Statement.
Equity-Based Program
The Company's equity-based awards consist principally of stock
options that are granted from time to time under the Company's stock option
plans and are designed to align management interests with those of
shareholders. The Committee bases grants of equity-based awards on various
factors, including each executive officer's ability to contribute to the
Company's future success and the other elements of such officers'
compensation. The exercise price of stock options is equal to the fair
market value of the stock when granted, and will result in an award for the
executive only in the event of appreciation in the stock price. The
Compensation Committee believes that stock options enable the Company to
compete in the marketplace for executive talent and further align the
interests of executives with those of shareholders. The Company's stock
options generally vest on the date of grant, immediately tying the
executive to the Company's stock performance.
President's Compensation
Mr. Arel's compensation for fiscal 2001 consisted of a base salary, a
bonus for corporate financial goals achieved in fiscal 2001, and equity
compensation in the form of stock options (both incentive and non-qualified
options). When determining the components of Mr. Arel's compensation for
fiscal 2001, the Compensation Committee gave consideration to the
compensation paid to chief executive officers of other similarly sized
publicly owned companies in comparable industries, taking into account the
performance of both the water-utility segment and Mr. Arel's particular
responsibility over the real estate development segment. Mr. Arel's base
salary effective as of January 1, 2001 was $222,500, an increase over the
previous year attributed to his extraordinary efforts on behalf of the
Company, including the sale of material parcels of commercial real estate,
in fiscal 2000. Mr. Arel received an incentive compensation bonus in 2002
in the amount of $71,044 based on the achievement of the Company's
corporate financial targets in fiscal 2001. He also received options to
acquire 8,000 shares of common stock under the Company's option plans in
2001, with an exercise price based on the fair market value of the stock on
the date of grant; these options vested immediately.
The Internal Revenue Code generally imposes a limitation on the
deduction for federal income tax purposes of compensation paid in any one
year, subject to certain specified exceptions. The Company's policy is to
have all compensation fully deductible. Given the level
56
of compensation paid to the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table, the deduction limitation
is presently inapplicable to the Company. The Company will address this
limitation if and when it becomes applicable to the Company's compensation
program.
Respectfully submitted,
Charles E. Clough (Chairman)
Robert P. Keller
John R. Kreick
The foregoing "Report of the Compensation and Benefits Committee"
shall not be deemed incorporated by reference by any general statement
incorporating this Proxy Statement into any filing under the Securities Act
of 1933 or under the Securities Exchange Act of 1934, except to the extent
that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
COMPARATIVE STOCK PERFORMANCE
The following table provides a comparison of the yearly cumulative
total shareholder return on the common stock of the Company for the last
five years with the yearly cumulative total return on the Standard & Poor's
500 Index and the average yearly cumulative total return of an industry
peer group over the same period, assuming a $100 investment on December 31,
1996. All of these cumulative returns are computed assuming the
reinvestment of dividends at the frequency with which dividends were paid
during applicable years. Historical stock performance during this period
may not be indicative of future stock performance.
Company
Name/Index 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
- ---------- -------- -------- -------- -------- -------- --------
Pennichuck Corporation 100 123.68 219.67 345.75 311.15 406.95
S&P 500 Index 100 133.36 171.48 207.56 188.66 166.24
Peer Group* 100 138.24 172.25 145.61 186.35 240.44
___________________
* The Peer Group companies consist of American States Water Co.,
American Water Works Company, Inc., Artesian Resources Corporation,
Birmingham Utilities Inc., California Water Service Group,
Connecticut Water Service Inc., Middlesex Water Company, Pennichuck
Corporation, Philadelphia Suburban Corporation, SJW Corporation,
Southwest Water Company and The York Water Company.
57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
To the best knowledge of the Company, and except as otherwise
indicated below under the section entitled "Security Ownership of
Management", the following are the only person(s) or entity to beneficially
own more than 5% of the outstanding shares of our Common Stock as of March
11, 2002.
Name and Address of Amount and Nature of %Common Stock
Beneficial Owner Beneficial Ownership Outstanding (2)
- ------------------- -------------------- ---------------
Banknorth Investment (1) 135,465 5.5%
Management Group
143 North Main Street
Concord, New Hampshire 03301
___________________
The Banknorth Investment Management Group claims sole power to vote
or to direct the vote over 113,533 shares; shared power to vote or to
direct the vote over 0 shares; sole power to dispose or to direct the
disposition of 40,944 shares; and shared power to dispose or to
direct the disposition of 94,521 shares.
Calculation of percentage is based upon a total of 2,476,834 shares,
which total includes shares outstanding and entitled to vote of
2,390,339 plus 86,495 shares which have not been issued but which may
be issued with 60 days of March 11, 2002 if persons having rights to
exercise stock options within such period exercise such rights.
Security Ownership of Management
To the best knowledge of the Company, the following table sets forth
information as of March 11, 2002 with respect to outstanding shares of our
Common Stock beneficially owned by each Director and executive officer, and
by all Directors and executive officers as a group:
58
Amount and % of Common
Nature of Stock Out-
Beneficial standing (if
Name of Beneficial Owner Ownership(1)(3) more than 1%)(2)
------------------------ --------------- ----------------
Maurice L. Arel(3)(5) 52,546 2.1%
Joseph A. Bellavance (3)(4) 13,469 -
Charles E. Clough 24,353 1.0%
Stephen J. Densberger (3)(5) 25,089 1.0%
Bonalyn J. Hartley (3)(5) 17,493 -
Robert P. Keller 2,412 -
John R. Kreick 669 -
Hannah M. McCarthy(3) 654 -
Martha E. O'Neill 12,200 -
Charles J. Staab(3)(5) 22,334 -
Donald L. Ware (5) 13,401 -
All Directors and executive
officers as a group
(11 persons) (3)(5) 184,620 7.5%
___________________
Shares beneficially owned means shares over which a person exercises
sole or shared voting or investment power or shares of which a
person has the right to acquire beneficial ownership within 60 days
of March 11, 2002. Unless otherwise noted, the individuals and group
above have sole voting and investment power with respect to shares
beneficially owned.
Calculation of percentages is based upon a total of 2,476,834 shares,
which total includes shares outstanding and entitled to vote of
2,390,339 plus 86,495 shares which have not been issued but which may
be issued within 60 days of March 11, 2002 if persons having rights
to exercise stock options within such period exercise such rights.
The individuals and group noted above have sole voting and investment
power with respect to shares beneficially owned, except as stated in
notes (4) through (5) below and except that voting and investment
power is shared as follows: Mr. Bellavance - 5,742 shares, Mr.
Densberger - 9,589 shares, Ms. Hartley - 6,993 shares, Mr. Kreick -
669 shares and Ms. McCarthy - 654 shares.
Mr. Bellavance disclaims beneficial ownership of 1,777 of these
shares.
Includes shares subject to unexercised stock options previously
granted which officers have a right to acquire within 60 days of
March 11, 2002. Mr. Arel holds options to acquire 20,000 shares, Mr.
Densberger holds options to acquire 15,500 shares, Ms. Hartley holds
options to acquire 10,500 shares, Mr. Staab holds options to acquire
12,500 shares and Mr. Ware holds options to acquire 10,594 shares.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
59
PART IV:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) The following Consolidated Financial Statements of Pennichuck
Corporation and subsidiaries for the year ended December 31, 2001 are
included in Part II, Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets at
December 31, 2001 and 2000
Consolidated Statements of Income for each of
the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders'
Equity for each of the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows for each
of the years ended December 31, 2001, 2000
and 1999
Notes to Consolidated Financial Statements
(2) The following Financial Statement Schedules of Pennichuck
Corporation for each of the years 2001, 2000 and 1999 are included in this
report:
Report of Independent Public Accountants
on Schedules for the years ended
December 31, 2001, 2000 and 1999
I - Condensed Financial Information of Registrant
All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements or notes thereto.
60
(3) Exhibit Index:
Exhibit
Number Description of Exhibit
- ------- ----------------------
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 2001 second quarter Form 10-Q
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)
3.5 Articles of Amendment to the Articles of Incorporation of
Pennichuck Corporation (Filed as Exhibit 3.5 to the Company's
2000 second quarter Form 10-QSB Report and incorporated herein
by reference)
3.6 Certificate of Designation of Series A Junior Participating
Preferred Stock of Pennichuck Corporation (Filed as Exhibit
3.6 to the Company's 2000 second quarter Form 10-QSB Report
and incorporated herein by reference)
4.1 Rights Agreement dated as of April 20, 2000 between Pennichuck
Corporation and Fleet National Bank, as Rights Agent (Exhibit
3.2 to the Company's Registration Statement on Form 8-A12G,
filed on April 21, 2000 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)
61
Exhibit
Number Description of Exhibit
- ------- ----------------------
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 Stock Option Plan (Filed as Exhibit 4.1
to the Company's Post-Effective Amendment No. 1 to
Registration Statement on Form S-8, filed September 17,
2001, No. 333-57352, 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)
62
Exhibit
Number Description of Exhibit
- ------- ----------------------
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)
10.15 2000 Stock Option Plan (Exhibit 4.1 to the Company's Post-
Effective Amendment No. 1 to Registration Statement on Form
S-8, No. 333-57354, filed on September 17, 2001 and
incorporated herein by reference)
16.1 Letter of Arthur Andersen LLP (included in this Form 10-K
Report)
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-K Report)
63
Exhibit
Number Description of Exhibit
- ------- ----------------------
99.1 Dividend Reinvestment and Common Stock Purchase Plan, as
amended (Filed as Exhibit 4.1 to Post-effective Amendment No.
2 to Registration Statement on Form S-3 filed on February 6,
2002 and incorporated herein by reference)
99.2 Letter to Securities and Exchange Commission pursuant to
Temporary Note 3T to Article 3 of Regulation S-X (Included in
this Form 10-K Report)
(b) Reports on Form 8-K: On October 12, 2001, Pennichuck Corporation
filed a report on Form 8-K reporting the Board of Directors approval
of a four-for-three stock split on its common shares effected in the
form of a stock dividend.
64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Pennichuck Corporation
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in
Pennichuck Corporation's report on this Form 10-K, and have issued our report
thereon dated February 15, 2002. 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-K 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 15, 2002
65
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
December 31
--------------------------
2001 2000
---- ----
ASSETS
Current Assets:
Cash $ 3,255,130 $ 3,677,583
Refundable Income Taxes 312,285 412,046
Prepaid Expenses 70,433 62,688
----------------------------
Total Current Assets 3,637,848 4,152,587
Property and Equipment 1,251,202 1,250,801
Less Allowances for Depreciation (591,998) (569,466)
----------------------------
659,204 681,335
Other Assets 20,133 8,119
Investment in Subsidiaries 28,210,490 25,289,329
----------------------------
$32,527,675 $30,431,370
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable and Other Current
Liabilities $ 189,399 $ 131,008
Long Term Debt 1,500,000 1,500,000
Other Long Term Liabilities 408,431 284,923
Stockholders' Equity 30,429,845 28,515,439
----------------------------
$32,527,675 $30,431,370
============================
66
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Condensed Statements of Income
Year Ended December 31
------------------------------------------
2001 2000 1999
---- ---- ----
Operating Revenues $ 228,497 $ 57,395 $ 56,764
Operating Expenses 67,021 --- ---
------------------------------------------
Operating Income 161,476 57,395 56,764
Interest Income & Other 152,918 198,104 181,459
Interest (Expense) (173,911) (88,277) (39,979)
------------------------------------------
Income (Loss) Before Income
Taxes and Equity in Net Income
of Subsidiaries 140,483 167,222 198,244
Income Tax (Provision) (55,645) (65,685) (77,871)
------------------------------------------
Income (Loss) Before Equity
in Earnings of Subsidiaries 84,838 101,537 120,373
Equity in Earnings of Subsidiaries 3,526,866 3,581,124 2,495,292
------------------------------------------
NET INCOME $3,611,704 $3,682,661 $2,615,665
==========================================
Condensed Statements of Cash Flows
Year Ended December 31
--------------------------------------------
2001 2000 1999
---- ---- ----
OPERATING ACTIVITIES $ 221,425 $ (99,797) $ 62,010
---------------------------------------------
INVESTING ACTIVITIES:
Equity Transfer to Subsidiary (1,252,087) (944,844) (429,550)
Net (increase) decrease in Property
and Equipment and Other Assets (12,414) --- 179,768
---------------------------------------------
(1,264,501) (944,884) (249,782)
---------------------------------------------
FINANCING ACTIVITIES:
Increase(decrease) in Notes Payable --- --- ---
Advances from Subsidiaries 2,157,789 3,836,929 ---
Payment of Dividends (1,812,864) (1,701,189) (1,590,041)
Proceeds from Dividend Reinvestment
and Other, net 275,428 356,851 420,516
---------------------------------------------
620,353 2,492,591 (1,169,525)
(DECREASE)INCREASE IN CASH (422,723) 1,447,910 (1,357,297)
Cash at Beginning of Year 3,677,853 2,229,943 3,587,240
---------------------------------------------
CASH AT END OF YEAR $ 3,255,130 $ 3,677,853 $ 2,229,943
=============================================
67
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, 2001.
NOTE B -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its
subsidiaries were as follows:
2001 2000 1999
---- ---- ----
Pennichuck Water Works, Inc. $1,731,129 $1,631,039 $1,521,587
Pittsfield Aqueduct Company, Inc. --- --- ---
Pennichuck East Utility, Inc. 71,385 70,150 68,454
------------------------------------------
TOTAL $1,802,514 $1,701,189 $1,590,041
==========================================
A cash dividend of $10,350 was paid by Pennichuck Corporation for
fractional shares due to a stock split in December 2001.
68
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 28, 2001
-----------------------------
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.
Signature Title Date
--------- ----- ----
/s/ Maurice L. Arel President and Director (Principal March 28, 2002
- -------------------------- Executive Officer)
Maurice L. Arel
/s/ Stephen J. Densberger Executive Vice President March 28, 2002
- -------------------------- and Director
Stephen J. Densberger
/s/ Charles J. Staab Vice President, Treasurer March 28, 2002
- -------------------------- Chief Financial Officer
Charles J. Staab and Director (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Joseph A. Bellavance Director March 28, 2002
- --------------------------
Joseph A. Bellavance
/s/ Charles E. Clough Director March 28, 2002
- --------------------------
Charles E. Clough
/s/ Robert P. Keller Director March 28, 2002
- --------------------------
Robert P. Keller
/s/ John R. Kreick Director March 28, 2002
- --------------------------
John R. Kreick
/s/ Hannah M. McCarthy Director March 28, 2002
- --------------------------
Hannah M. McCarthy
/s/ Martha E. O'Neill Director March 28, 2002
- --------------------------
Martha E. O'Neill
69