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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission file number 0-18552
Pennichuck Corporation
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(Exact name of registrant as specified in its charter)
New Hampshire 02-0177370
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Four Water Street, Nashua, New Hampshire 03061
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(Address of principal executive offices) (Zip Code)
(603) 882-5191
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(Registrant's telephone number)
Not applicable
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(Former name, former address and former fiscal year
if changed since last report)
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 past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $1 Par Value-2,391,439 shares as of August 1, 2002
INDEX
PENNICHUCK CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------- -----------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets--
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Income--
Three and six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows--
Six months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements--
June 30, 2002 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities and Use of Proceeds Not Applicable
Item 3. Defaults upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002
(Unaudited) December 31, 2001
------------- -----------------
(In thousands)
ASSETS
Property, plant and equipment, at cost $ 99,970 $ 98,647
Construction work in progress 712 260
-------- --------
100,682 98,907
Less accumulated depreciation (26,326) (24,947)
-------- --------
74,356 73,960
Current Assets
Cash 2,591 3,272
Restricted cash 151 151
Accounts receivable, net 1,438 1,246
Unbilled revenue 1,662 1,349
Notes receivable 1,062 100
Refundable income taxes -- 125
Inventory 390 365
Prepaid expenses and other current assets 378 480
-------- --------
7,672 7,088
Other Assets
Deferred land costs 785 2,391
Deferred charges and other assets 3,619 3,676
Notes receivable -- 726
-------- --------
4,404 6,793
TOTAL ASSETS $ 86,432 $ 87,841
======== ========
STOCKHOLDERS' EQUITY AND LIABILITIES
Stockholders' Equity
Common stock-par value $1 per share $ 2,393 $ 2,389
Paid in capital 15,208 15,098
Retained earnings 12,534 13,545
Accumulated Other Comprehensive Income (370) (308)
Less treasury stock, at cost (144) (129)
-------- --------
29,621 30,595
Long Term Debt, less current portion 27,001 27,072
Current Liabilities
Current portion of long term debt 348 348
Accounts payable 680 1,373
Accrued interest payable 370 368
Other accrued expenses 1,647 1,467
-------- --------
3,045 3,556
Deferred Credits and Other Reserves
Contributions in aid of construction 17,259 17,251
Deferred income taxes 6,211 6,166
Other liabilities and deferred credits 3,295 3,201
-------- --------
TOTAL STOCKHOLDERS' EQUITY & LIABILITIES $ 86,432 $ 87,841
======== ========
See notes to condensed consolidated financial statements
3
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share amounts
and weighted average number of shares)
Revenues
Water utility operations $ 4,462 $ 4,445 $ 8,414 $ 8,058
Real estate operations 194 761 2,772 1,338
Contract operations and other 397 367 732 587
---------- ---------- ---------- ----------
5,053 5,573 11,918 9,983
Operating expenses
Water utility operations 3,241 3,029 6,400 5,944
Real estate operations and other 42 218 1,782 400
Contract operations and other 311 252 605 436
---------- ---------- ---------- ----------
3,594 3,499 8,787 6,780
Operating income 1,459 2,074 3,131 3,203
Merger and related expenses (1,396) -- (1,571) --
Other income 35 70 77 132
Interest expense (500) (498) (993) (993)
---------- ---------- ---------- ----------
Income (Loss) before income taxes (402) 1,646 644 2,342
Provision for income taxes 307 636 723 904
---------- ---------- ---------- ----------
Net income (loss) before minority
interest (709) 1,010 (79) 1,438
Minority interest in earnings
of Westwood Park LLC -- 44 -- 57
---------- ---------- ---------- ----------
Net income (loss) $ (709) $ 966 $ (79) $ 1,381
========== ========== ========== ==========
Basic and diluted earnings (loss)
per common share: $ (.30) $ .41 $ (.03) $ .58
Weighted average common shares:
Basic 2,391,439 2,379,873 2,390,283 2,377,088
Diluted 2,391,439 2,389,799 2,390,283 2,387,013
Dividends paid per common share $ .195 $ .188 $ .390 $ .375
See notes to condensed consolidated financial statements
4
PENNICHUCK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
----------------------
2002 2001
(In thousands)
CASH PROVIDED (USED) BY:
Operating Activities
Net income (loss) $ (79) $ 1,381
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,382 1,176
Allocation of land costs 1,662 292
Deferred income taxes 45 45
Change in working capital (893) (294)
------- -------
2,117 2,600
Investing Activities:
Purchase of property, plant and
equipment and other assets (1,860) (2,744)
Increase in contributions in aid of
construction 153 155
Decrease (Increase) in other (187) 1,183
------- -------
(1,894) (1,406)
Financing Activities:
Payments on long-term debt (71) --
Payment of common dividends (932) (891)
Proceeds from dividend reinvestment plan
and other 99 146
------- -------
(904) (745)
INCREASE (DECREASE) IN CASH (681) 449
CASH AT BEGINNING OF PERIOD 3,272 3,732
------- -------
CASH AT END OF PERIOD $ 2,591 $ 4,181
======= =======
Supplemental Cash Flow Information: Interest paid was $965,000 and $817,000
for the six months ended June 30, 2002 and 2001, respectively. Income taxes
paid were $97,000 and $296,000 for the six months periods ended June 30,
2002 and 2001, respectively.
See notes to condensed consolidated financial statements.
5
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
NOTE A -- BACKGROUND
The financial statements include the accounts of Pennichuck Corporation (the
"Company") and its wholly-owned subsidiaries, Pennichuck Water Works, Inc.
("Pennichuck"), Pittsfield Aqueduct Company, Inc. ("Pittsfield"), Pennichuck
East Utility, Inc. ("Pennichuck East"), The Southwood Corporation
("Southwood") and Pennichuck Water Service Corporation (the "Service
Corporation"). The financial statements also include the accounts of
Westwood Park LLC ("Westwood") in which Southwood owns a 60% majority
interest. All significant intercompany accounts have been eliminated in
consolidation.
NOTE B -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months and
six months periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. The
Balance Sheet amounts shown under the December 31, 2001 column have been
derived from the audited financial statements of the Company as contained in
its Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
NOTE C -- NEW ACCOUNTING PRONOUNCEMENTS
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 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 has adopted this new standard
and it did not have any significant impact on its financial position and
results of operations.
In April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145, among other things, rescinds SFAS No.
4, which required all gains and losses from the extinguishment of debt to be
classified as an extraordinary item and amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to sale-
leaseback transactions be accounted for in the same manner as sale-leaseback
transactions. This statement is not expected to have a material impact on
the Company's results of operations and financial position.
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement replaces the previous accounting guidance provided in
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities that are initiated after December
31, 2002. The Company is currently evaluating the provisions of this
statement and has not yet determined the effect of adoption on its results
of operations and financial position.
6
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002 (Continued)
NOTE D - SUBSEQUENT EVENT
On April 29, 2002, the Company entered into a definitive agreement with
Philadelphia Suburban Corporation ("PSC") to merge into a wholly-owned
subsidiary of PSC with shareholders of the Company receiving shares of PSC
in the merger (as more fully discussed in the next paragraph). The merger is
subject to several conditions, including, among other things, the
satisfaction of the applicable requirements under the Hart-Scott-Rodino
Antitrust Improvements Act, approval by the shareholders of the Company and
approval by the New Hampshire Public Utilities Commission ("NHPUC"). The
timetable set for review of the merger by the NHPUC suggests that, once all
the requisite conditions to closing have been met, the merger could close in
the first half of 2003. In June 2002, the Federal Trade Commission granted
early termination of the 30-day waiting period under the Antitrust
Improvements Act.
Under the terms of the agreement, the Company's stockholders will receive a
number of shares of PSC common stock based upon the average closing price of
PSC common stock for a 20-trading day period ending shortly before the
closing of the merger. If the average PSC closing price is greater than
$25.00, the Company's stockholders will receive 1.320 shares of PSC common
stock for each share of Company common stock. If the average closing price
is less than $23.00, the Company's stockholders will receive 1.435 shares of
PSC common stock for each share of Company common stock. If the average
closing price is not greater than $25.00 and not less than $23.00, the
exchange ratio will be equal to $33.00 divided by the average closing price
of PSC stock. After the merger, the Company will be a wholly-owned
subsidiary of PSC. Total expenses associated with this merger transaction
amounted to approximately $1,396,000 for the second quarter of this year,
and $1,571,000 for the first six months of 2002. Further details of these
merger expenses are discussed in Part I. Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations -- Three Months Ended June 30, 2002 Compared to Three
Months Ended June 30, 2001
For the three months ended June 30, 2002, the Company's consolidated
net loss was $709,000, or $.30 per share compared to net income of $966,000,
or $.41 per share for the same period in 2001. This $1.7 million decrease
was primarily due to expenses related to the proposed merger with PSC,
principally for investment banking and legal fees incurred in the second
quarter of 2002. Total expenses associated with the pending PSC merger
transaction amounted to approximately $1,396,000 for the three months ended
June 30, 2002 and are disclosed separately in the accompanying Condensed
Consolidated Statements of Income. Net income excluding the merger and
related expenses for the three months ended June 30, 2002 was approximately
$630,000, or $.26 per share.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations -- Three Months Ended June 30, 2002 Compared to Three
Months Ended June 30, 2001 (Continued)
Consolidated revenues for the second quarter of 2002 decreased to
$5.05 million from $5.57 million in 2001. The decrease in consolidated
revenues was principally a result of (1) a 10.8% decline in billed water
consumption within our water utility operations reflecting damper weather
conditions in April and May of 2002, (2) offset by the positive effect of a
14.43% overall rate increase discussed below and (3) decreased revenues from
real estate activities.
On March 1, 2002, the NHPUC issued an order in which it granted final
approval of an overall 14.43% rate increase for Pennichuck Water Works, Inc.
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% for
service rendered on or after March 1, 2002. The combined rate increases
represent additional annual revenues of approximately $1.8 million based on
comparable consumption levels experienced during the past two years. During
the second quarter of 2002, there were no other rate filings made by the
Company's other regulated utilities.
Our consolidated revenues are generally seasonal due to the overall
significance of the water sales of Pennichuck, Pennichuck East and
Pittsfield as a percentage of consolidated revenues. Water revenues are
typically at their lowest point during the first and fourth quarters of the
calendar year while water revenues in the second and third quarters tend to
be greater as a result of increased water consumption during the late spring
and summer months. In addition, the Company's consolidated revenues may be
significantly affected by sales of major real estate parcels, which may
occur from time to time (see discussion below under "Real Estate
Operations").
Water Utility Operations
The Company's water utility operations include the activities of
Pennichuck, Pennichuck East and Pittsfield, each of which is regulated by
the NHPUC. For the three months ended June 30, 2002, approximately 82%, 16%
and 2% of the total utility operating revenues of $4,462,000 were generated
by Pennichuck, Pennichuck East and Pittsfield, respectively. The
contribution percentage of each utility in 2002 was not materially different
from the same quarter last year. The revenue generated by our water utility
operations contributed 88% of our total revenue for the three months ended
June 30, 2002 compared to 80% for the same period last year, reflecting a
decrease in our real estate operations.
Utility operating revenues for the three months ended June 30, 2002
increased to $4.46 million, a slight increase from the same period in 2001
as shown in the table below broken out by each regulated water utility:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
Pennichuck $3,642,000 $3,575,000 $ 67,000
Pennichuck East 719,000 764,000 (45,000)
Pittsfield 101,000 106,000 (5,000)
---------- ---------- --------
Total $4,462,000 $4,445,000 $ 17,000
========== ========== ========
The increase in water revenues is a net result of (i) a 14.43% overall
rate increase granted to Pennichuck by the NHPUC and (ii) a 2.1% increase in
the utilities' customer base over last year, offset by an overall decrease in
billed consumption of 10.8% resulting from damper weather conditions
experienced during the second quarter of 2002 compared to the same period
last year.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations -- Three Months Ended June 30, 2002 Compared to Three
Months Ended June 30, 2001 (Continued)
Total utility operating expenses, which include production,
distribution system maintenance, administration, depreciation and taxes
other than income taxes, were $3.24 million for the three months ended June
30, 2002, an increase of $212,000 or 7%, over the same period last year. The
increase in utility operating expenses was primarily due to:
* $34,000 of additional depreciation expense resulting from
additional investment in plant assets during 2001 and 2002,
* a $149,000 increase in salaries and benefits, reflecting new
hires, cost of living adjustments and increased health care
premiums,
* an increase of approximately 40% in our overall business
insurance premiums due to the impact of September 11, and
* a $70,000 increase in management fee allocation to our three
utilities,
* offset by a $74,000 decrease in purification and pumping
expenses as a direct result of lower consumption during the
second quarter.
For the three months ended June 30, 2002, the combined pretax
operating income of our three water utilities was $1,221,000, a decrease of
$195,000, or 14% from the same quarter in 2001, primarily due to the 7%
increase in our operating expenses over the same period last year.
Real Estate Operations
For the three months ended June 30, 2002, revenues from real estate
activities were $194,000. The second quarter revenues in 2002 were comprised
of (i) approximately $168,000 from the sale of a 50% interest in a 6 acre
parcel of land to be used for a future office building site and (ii) $21,000
of net rental income from Southwood's 50% interest in three office buildings
located in Merrimack, New Hampshire. During the second quarter of 2001,
Southwood realized revenues of $761,000 principally from:
* $260,000 representing Southwood's 50% share of pretax income
from the sale of 12 homes in its Heron Cove residential joint
venture,
* $158,000 from the sale of one lot in Southwood Corporate Park,
and
* $182,000 from Southwood's share of pretax operating profits in
four commercial joint ventures.
Southwood has a 50% interest in three limited liability companies
known as HECOP I, HECOP II and HECOP III, each of which owns land and a
commercial office building, subject to a mortgage note with a local bank.
The mortgage notes, totaling $9.5 million, which are not included in the
accompanying Condensed Consolidated Balance Sheets, are each secured by the
underlying real property. In addition, Southwood has provided a guarantee on
one-half of the total outstanding balance of these notes.
Operating expenses of $42,000 associated with real estate activities
for the second quarter of 2002 are comprised primarily of property taxes and
intercompany corporate charges. Last year's real estate expenses of $218,000
included $128,000 of allocated land costs associated with the land sale in
Southwood Corporate Park in the second quarter of 2001.
Contract Operations and Other
Revenues from our contract operations and other activities were
$397,000 and $367,000 for the three months ended June 30, 2002 and 2001,
respectively, consisting chiefly of fees charged by our Service Corporation
under various operations and billing contracts as well as rental income from
several tower leases. The $30,000 increase in 2002 revenues over 2001 is a
result of a new multi-year operating contract
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations -- Three Months Ended June 30, 2002 Compared to Three
Months Ended June 30, 2001 (Continued)
with the Town of Salisbury, Massachusetts, which was entered into in
September 2001. Under the terms of that contract, the Service Corporation
will operate and maintain that municipality's water system, including all
meter reading and billing functions. The Service Corporation earned
approximately $103,000 of revenues during the second quarter of 2002 from
that contract.
The following table shows the breakdown of the revenue from Contract
Operations and Other for the second quarter of 2002 and 2001:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
Service Corporation $ 384,000 $ 208,000 $ 176,000
Other 13,000 159,000 (146,000)
--------- --------- ---------
Total $ 397,000 $ 367,000 $ 30,000
========= ========= =========
Other revenue in the second quarter of 2001 includes approximately
$145,000 from timber harvesting activities on raw land owned by Pennichuck
Corporation. In 2002, there have been no such timber sales.
Operating expenses associated with our Contract operations and other
activities were $255,000 and $56,000, respectively, for the second quarter
of 2002 as compared to $187,000 and $65,000, respectively, for the same
period in 2001. The increase in contract operations expenses resulted
principally from maintenance and administrative expenses associated with the
operations contract with the Town of Salisbury, Massachusetts.
Merger and Other Related Expenses
For the three months ended June 30, 2002, the Company incurred
$1,396,000 in expenses related to the proposed merger with PSC. Those
expenses are primarily for legal and investment banking fees and may be
broken down as follows:
Legal fees $ 310,000
Investment banking fees 1,054,000
Other fees 32,000
----------
Total merger costs $1,396,000
==========
The Company is expected to pay no more than $2.6 million in investment
banking fees to its financial adviser. The first installment of
approximately $1.0 million was paid in May 2002 and the remaining balance is
payable upon the completion of the merger. If the merger is ultimately
consummated, the Company estimates that $1.22 million of certain merger-
related costs incurred in the second quarter of 2002 would not be deductible
for federal or state income tax purposes. In the event the merger is
terminated under certain conditions as set forth in the merger agreement,
the Company could be required to pay PSC a termination fee of $2.5 million.
Results of Operations -- Six Months Ended June 30, 2002 Compared to Six
Months Ended June 30, 2001
For the six months ended June 30, 2002, the Company's consolidated net
loss was $79,000, compared to net income of $1,381,000 for the same period
in 2001. On a per share basis, basic loss per share was $.03 for the six
months ended June 30, 2002, representing a $.61 per share decrease from the
same period last year. The $1.46 million decrease in net income was
principally due to the merger expenses incurred in the first six months of
2002 as discussed earlier.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations -- Six Months Ended June 30, 2002 Compared to Six
Months Ended June 30, 2001 (Continued)
Excluding the effect of the merger expenses, consolidated net income
would have been approximately $1.34 million, or $ 0.57 per share for the six
months ended June 30, 2002. Year-to-date consolidated revenues in 2002 were
$11.92 million, an increase of $1,935,000, or 19%, from last year. As
discussed below, this revenue growth occurred primarily in the Company's
real estate segment due to the sale of land in Southwood Corporate Park in
the first quarter of this year.
Water Utility Operations
Utility operating revenues for the six months ended June 30, 2002
increased to $8.41 million, or 4%, from the same period in 2001 as shown in
the table below broken out by each of our regulated water utilities:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
Pennichuck $6,880,000 $6,488,000 $392,000
Pennichuck East 1,332,000 1,369,000 (37,000)
Pittsfield 202,000 201,000 1,000
---------- ---------- --------
Total $8,414,000 $8,058,000 $356,000
========== ========== ========
For the six months ended June 30, 2002, 77%, 20% and 3% of the
combined utilities' operating income was provided by Pennichuck, Pennichuck
East and Pittsfield, respectively, which was not a material change from
2001.
The increase in overall water revenues was derived primarily from our
core system, Pennichuck. Although year-to-date billed consumption within the
core system declined 5.7% from the same period last year, that adverse
impact was partially offset by the positive effect of the rate increase
implemented by Pennichuck in March 2002. Accordingly, the billed revenue of
Pennichuck's core system for the first six months of 2002 increased 7.4%
over the same period last year. Additionally, water revenues reflect a 2.1%
increase in the combined utilities' customer base from June 30, 2001 to June
30, 2002.
For the six months ended June 30, 2002, utility operating expenses
increased by $456,000, or 8%, to $6,400,000. That increase is primarily
comprised of :
* Approximately $90,000 of additional depreciation expense
recognized by our three utilities for the first half of 2002 as
a result of their additional investment in plant assets during
2001 and 2002,
* $48,000 increase in Pennichuck's production and distribution
maintenance costs, the result of more sludge removed and our
focus on curb-side box repair this year,
* $212,000 increase in corporate insurance expenses, salary and
related employee benefit costs,
* $87,000 increase in the Company's pension costs due to increased
payroll levels and declining investment returns on pension plan
assets,
* Offset by approximately $77,000 for lower pumping, power and
purification expenses associated with the decreased water
consumption discussed earlier.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations -- Six Months Ended June 30, 2002 Compared to Six
Months Ended June 30, 2001 (Continued)
Real Estate Operations
For the six months ended June 30, 2002, revenues from Southwood's real
estate activities were $2,772,000 compared to $1,338,000 for the same period
last year. This increase in revenue was primarily due to the sale of the
remaining 40 acres in Southwood Corporate Park to one of Southwood's joint
venture partners in January of this year. The net sales price of $2.43
million was offset by approximately $1.66 million of remaining
infrastructure costs which are included in "Operating Expenses - Real estate
operations" in the accompanying Condensed Consolidated Statements of Income.
For the six months ended June 30, 2001, revenues from real estate
operations totaled $1,338,000 principally as a result of the following
activity:
* $305,000 from the sale of 14 homes in Southwood's Heron Cove
joint venture,
* $424,000 from the sale of two lots in Southwood Corporate Park,
* $155,000 from the sale of a land parcel to HECOP III, and
* $230,000 as Southwood's share of profits in its four commercial
joint ventures.
Operating expenses associated with our real estate activities for the
first six months of 2001 totaled $400,000, comprised chiefly of the
allocated infrastructure costs charged against the two land sales in
Southwood Corporate Park in 2001.
Contract Operations and Other
Revenues from contract and other operating activities totaled $732,000
for the six months ended June 30, 2002 and relate to contract operations and
other services performed by the Service Corporation. The $145,000 increase
over last year includes (i) additional contract work of $211,000 billed by
the Service Corporation under the operating contract with the Town of
Salisbury, Massachusetts which began in October 2001, (ii) additional
contract revenues of $32,000 from 18 new operating contracts for non-
transient, community water systems and (iii) $54,000 from additional
Watertight revenues. Last year's other revenues, however, included
approximately $145,000 of timber harvesting revenues on land owned by the
Company. No timber harvesting activities were undertaken during the first
half of 2002.
The following table shows the breakdown of the revenue from Contract
Operations and Other for the first six months of 2002 and 2001:
June 30, 2002 June 30, 2001 Change
------------- ------------- ------
Service Corporation $707,000 $415,000 $ 292,000
Other 25,000 172,000 (147,000)
-------- -------- ---------
Total $732,000 $587,000 $ 145,000
======== ======== =========
Operating expenses associated with our contract operations and other
activities were $544,000 and $61,000, respectively, for the first six months
of 2002 compared to $362,000 and $74,000, respectively, for the same period
in 2001. Operating expenses for our contract operations increased $182,000
compared to the prior year principally from additional maintenance expenses
of $175,000 relating to the Town of Salisbury contract. Other contract
operations incurred approximately the same level of expenses during the
first six months of 2002 compared with the same period last year.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Liquidity and Financial Condition
For the first six months ended June 30, 2002, the Company's cash and
cash equivalents decreased by $681,000 to $2.59 million, which is currently
held in short-term money market investments. This cash is expected to be
used for funding our capital investment program during 2002 and any
operating cash flow deficiencies. The Company also maintains a revolving
line of credit agreement with a local bank. This line of credit 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. At December 31, 2001 and June 30, 2002, there were no outstanding
borrowings under this line of credit agreement. The Company believes its
operating cash flow for the second half of 2002, together with available
short-term investments, will be sufficient to fund the remaining 2002
capital expenditure program, cash dividends and required principal payments.
The major changes in our financial position from December 31, 2001 to
June 30, 2002 were:
* a decrease in retained earnings from $13,545,000 at the end of
2001 to $12,534,000 at June 30, 2002 reflecting the Company's
net loss of $79,000 for the first half of 2002 and payment of
common dividends totaling $932,000 during the same period,
* an increase of $313,000 in unbilled revenues during the first
half of 2002, reflecting the higher consumption during the
second quarter of 2002 over the fourth quarter of 2001,
* a decrease in deferred land costs of $1.6 million reflecting
the write-off of the remaining basis of 40 acres in Southwood
Corporate Park for the land sale which occurred in the first
quarter of 2002,
* a decrease of $693,000 in accounts payable resulting from the
payment of $322,000 for a source development charge and $255,000
for outstanding amounts due on various capital projects, and
* an increase of $236,000 in Notes receivable to $1,062,000 at
June 30, 2002 representing amounts loaned by Southwood to an
unrelated third party to fund the development and construction
of a five unit residential development. These notes are secured
by a mortgage and are due within the next twelve months.
Security Issues
Since the September 11th events last year, water utilities have been
advised to increase security at key facilities in order to avoid
contamination of water supplies and other disruptions of service. We have
implemented a number of steps to address this concern. Although we have not
experienced any material increase in costs relating to new security
measures, we are unable to predict what, if any, additional measures will
need to be implemented and what such measures may cost. There is no
guarantee that the NHPUC will authorize recovery of any or all of these
costs.
Forward Looking Information
This report, including management's discussion and analysis, contains
certain forward looking statements regarding the Company's results of
operations and financial position. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to
be forward looking statements. These forward looking statements are based on
current information and expectations, and are subject to factors and
uncertainties that could cause the Company's actual results to differ
materially from those expressed or implied by such forward looking
statements. Such statements address the following subjects, among others:
timeliness and extent of water utility rate increase, if any; future
operating results in the water utility and real estate sectors; earning
growth and expectations; corporate spending and liquidity; and the proposed
merger with PSC. The following factors, among others, could cause actual
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Forward Looking Information (Continued)
results to differ materially from those described in the forward looking
statements: with respect to regulated water utility rate relief, risk
associated with the timing and amount of rate increases as well as general
regulatory lag in realizing changes; with respect to water utility
operations, the impact of weather, such as the amount of rainfall and
temperature; with respect to real estate development, continued generally
beneficial economic conditions in the local and national economy; with
respect to corporate spending and liquidity, any enhanced security measures
required to be implemented as a result of September 11th concerns and
expenses related to the proposed merger with PSC; and with respect to the
merger with PSC, the satisfaction of all of the conditions to closing
including, among other things, shareholder approval and NHPUC approval.
PART I. FINANCIAL INFORMATION
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has entered into two interest rate swap agreements at a
fixed rate of 6.5% in order to mitigate interest rate risks associated with
its floating-rate loans. The agreements provide for the exchange of fixed
interest rate payments for floating interest rate payment obligations on
notional amounts of principal totaling $6,000,000. The Company has
designated these interest rate swaps as a cash flow hedge against the
variable future cash flows associated with the interest payments due on
$6,000,000 of notes. As of June 30, 2002, the Company has recorded a
liability of $370,000 in "Other liabilities and deferred credits" associated
with these swap agreements with the offsetting amount in "Accumulated Other
Comprehensive Income" in the accompanying Condensed Consolidated Balance
Sheets.
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.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Disclosure concerning the Company's annual meeting of shareholders
held on May 3, 2002, was provided in Part II, Item 4 of the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
Exhibit 2.1 Agreement and Plan of Merger dated as of April 29,
2002 by and between Pennichuck and PSC
incorporated by reference to Exhibit 99.1 to
Pennichuck Corporation's Current Report on Form
8-K filed with the Securities and Exchange
Commission on April 29, 2002).
14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
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)
Exhibit 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)
Exhibit 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)
Exhibit 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)
Exhibit 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)
Exhibit 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)
Exhibit 4.1 Rights Agreement dated as of April 20, 2000 by and
between Pennichuck Corporation and Fleet National
Bank as Rights Agent (incorporated by reference to
Exhibit 3.2 to Pennichuck Corporation's
Registration Statement on Form 8-A12G filed with
the Securities and Exchange Commission on April
21, 2000).
Exhibit 4.2 Amendment to Rights Agreement dated October 10,
2001 by and between Pennichuck Corporation and
Fleet National Bank (incorporated by reference to
Exhibit 4.1 to Pennichuck Corporation's
Registration Statement on Form 8-A12G/A filed with
the Securities and Exchange Commission on April
30, 2002).
Exhibit 4.3 Second Amendment to Rights Agreement dated January
14, 2002 by and between Pennichuck Corporation and
EquiServe Trust Company, N.A. (incorporated by
reference to Exhibit 4.2 to Pennichuck
Corporation's Registration Statement on Form
8-A12G/A filed with the Securities and Exchange
Commission on April 30, 2002).
Exhibit 4.4 Agreement of Substitution and Amendment of Common
Shares Rights Agreement dated January 15, 2002 by
and between the Company and American Stock
Transfer & Trust Company (incorporated by
reference to Exhibit 4.3 to Pennichuck
Corporation's Registration Statement on Form
8-A12G/A filed with the Securities and Exchange
Commission on April 30, 2002).
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
Exhibit 4.5 Amendment to Rights Agreement dated April 29, 2002
by and between Pennichuck Corporation and American
Stock Transfer & Trust Company (incorporated by
reference to Exhibit 99.2 to Pennichuck
Corporation's Current Report on Form 8-K filed
with the Securities and Exchange Commission on
April 29, 2002).
Exhibit 99.1 Statement(s) under Section 906 of the Sarbanes -
Oxley Act of 2002 furnished by Maurice L. Arel,
Chief Executive Officer, and Charles J. Staab,
Vice President, Treasurer and Principal Financial
Officer.
(b) The following report on Form 8-K was filed during the second
quarter of 2002:
Form 8-K Filed on April 29, 2002 with respect to the
Agreement and Plan of Merger dated as of April 29,
2002 by and between Pennichuck Corporation and PSC
together with the Amendment to Rights Agreement
dated April 29, 2002 by and between Pennichuck
Corporation and American Stock Transfer & Trust
Company.
SIGNATURES
In accordance with the requirements 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: August 14, 2002 /s/ Maurice L. Arel
--------------- ------------------------------------
Maurice L. Arel, President and
Principal Executive Officer
Date: August 14, 2002 /s/ Charles J. Staab
--------------- ------------------------------------
Charles J. Staab, Vice President,
Treasurer and Principal Financial
Officer
16