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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, 2002
[ ] 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 (I.R.S. Employer
of 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 preceding 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 pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of 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 June 28, 2002
of the registrant's Common Stock as reported on the Nasdaq National Market
System was $63,748,323. 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 31, 2003 was 2,391,439.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated by
reference to the registrant's definitive proxy statement for the 2003 annual
meeting of the registrant's shareholders to be filed with the Commission; or,
will be filed by amendment to this report.
TABLE OF CONTENTS
PART I:
Page
Item 1. BUSINESS 3
Item 2. PROPERTIES 9
Item 3. LEGAL PROCEEDINGS 11
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 12
PART II:
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 13
Item 6. SELECTED FINANCIAL DATA 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 55
PART III:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 57
Item 11. EXECUTIVE COMPENSATION 57
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 58
Item 14. CONTROLS AND PROCEDURES 58
PART IV:
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 59
2
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 28,800 residential and
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 21,900
customers, accounts for 95% of Pennichuck's revenues. Its franchises in the
remaining towns consist of stand-alone satellite water systems serving over
1,900 customers. Pennichuck has no competition in its core franchise area.
Currently, approximately 24% of its water revenues are derived from
commercial and industrial customers and approximately 55% 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's annual water revenues were
approximately $14.74 million for calendar year 2002.
Pennichuck East was organized in 1998 to acquire certain water utility
assets from the Town of Hudson, New Hampshire ("Hudson"), following its
acquisition of those assets from an investor-owned water utility which
previously served Hudson and surrounding communities. Pennichuck East is
franchised to gather and distribute water in the New Hampshire towns of
Litchfield, Pelham, Windham, Londonderry, Derry, Raymond and Hooksett, which
are areas adjacent to the service franchise served by Pennichuck. Pennichuck
East has no competition in its core franchise area. The water utility assets
owned by Pennichuck East consist principally of
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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 4,300 customers and annual water
revenues were approximately $3.09 million for calendar year 2002.
Pittsfield was acquired by the Company in 1998 and serves approximately
640 customers in and around Pittsfield, New Hampshire with annual water
revenues of approximately $390,000. Pittsfield has no competition in its
franchise area.
Regulation
The Company's water utilities are regulated by the NHPUC with respect
to their water rates, financings and provision of 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, contributed capital and deferred income
taxes ("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 2002 were based on a March 2002 NHPUC order in which
Pennichuck was granted an overall permanent 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 standard and it expects to
determine what modifications will be required to its filtration plant by the
end of 2003.
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 and Pennichuck East'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.
4
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. During 2002, the Service Corporation
provided such services pursuant to 52 operating contracts.
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 option agreement between Southwood and the Developer.
Under that 1995 agreement, 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 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 holds a 50% ownership interest in HECOP I, LLC, HECOP II, LLC
and HECOP 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, 2002, approximately 121,000 square feet had
been leased to third parties under long-term lease agreements. Southwood also
holds a 50%
5
ownership interest in HECOP IV, LLC formed in May 2002. As of December 31,
2002, HECOP IV's principal asset was approximately 9.1 acres of raw land
available for future commercial development.
In July 1998, Southwood entered into a joint venture known as Heron
Cove at Bowers Pond 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% ownership
interest in this joint venture. As of December 31, 2001, all 87 units had
been constructed and sold to third parties and this LLC was closed out 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 12 - Business Segment Information"
in the accompanying Notes to the Consolidated Financial Statements included
in Item 8 of this Form 10-K Report.
Employees
The Company, through its principal subsidiary Pennichuck, employs 81
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.
RISK FACTORS
Risks Related to the Company's Business
The City of Nashua's use of power of eminent domain to acquire certain of the
water utility assets of the Company may result in material, adverse
consequences to the Company and its shareholders.
The Company is involved in ongoing proceedings with the City of Nashua
regarding the City's desire to acquire all or a portion of the Company's
water utility assets. The City has determined to pursue such acquisition
pursuant to its power of eminent domain. Separately, several other
communities whose residents are served by one or more of the Company's
subsidiaries have expressed interest in forming a regional water authority
for the purposes of acquiring and operating a substantial portion of the
Company's water related assets. The acquisition of Company assets by eminent
domain would be highly uncertain and likely involve protracted proceedings
before the New Hampshire Public Utilities Commission ("NHPUC"). The Company's
shareholders are not required to ratify or approve any such forced sale of
assets, or the price thereof, if so approved by the NHPUC. Given the highly
integrated nature of the Company's businesses, a forced sale of some or all
of the Company's water related assets may
6
result in increased costs and operating inefficiencies borne by the remaining
assets of the Company not so acquired. Additionally, the Service
Corporation's ability to service its existing contracts as well as pursue
additional operating contracts may be impaired. There is no assurance that
the City of Nashua or a regional water authority, if any, would be successful
in acquiring some or all of the Company's assets by eminent domain, nor in
such case is there any assurance as to the price determined by the NHPUC to
be paid for those assets.
Risks Related to 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.
Dam Safety. Pennichuck initiated an engineering study of two of its eight
dams in 2002. The two dams being studied, the Supply and Harris Pond dams,
were the last ones remaining to be studied to insure that the dams, crucial
to the operation of Pennichuck, meet all current dam safety standards. The
results of the completed study indicated that certain upgrades to the dams'
spillways and earthen embankments were required in order to meet current
NHDES and Federal standards. The engineering plans and permitting will be
completed by the fall of 2003 and the required construction will be completed
in 2004. The estimated cost of the required dam repairs and upgrades is
estimated to be about $1.12 million.
The proposed dam and repair upgrade time frame has been accepted by the
NHDES. Pennichuck could face adverse regulatory actions in the event it is
unable to remedy the dam deficiencies within this time period.
7
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. The EPA recently issued a
set of instructions to describe what community water systems must do to
comply with the Public Health Security and Bioterrorism Preparedness and
Response Act of 2002. The Act requires all community drinking water systems
that serve more than 3,300 people to certify and submit assessments to the
EPA no later than June 2004. 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 are not aware of any
specific threats to our water utility businesses or other operations.
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 $3.46 million of
our operating revenues are derived from commercial and industrial customers.
Pennichuck's largest water customer, Anheuser Busch ("AB"), is responsible
for about 15.6% of its daily average demand. In the short term, our
profitability would be adversely impacted were AB to significantly reduce its
water requirements in the future or if our other commercial and industrial
customers materially reduce their use of our water.
Pennichuck and AB have entered into a ten-year contract that provides the
terms and conditions under which AB receives service from Pennichuck. The
contract provides for a supply of up to 2 million gallons per day for the AB
plant in Merrimack, New Hampshire. AB pays a cost-of-service based rate that is
approximately 52% of the retail volumetric rate. The contract contains a
"minimum payment obligation" clause that requires AB to pay, each year, at
least 90% of the volumetric charges of the prior year. The contract provides
that, should AB opt for early termination, there is a minimum annual charge
to AB of 90%, 66.67% and 33.3% in the first, second and third year following
the year of notification of early termination, respectively, based on the
annual charge in the year of notification. In such 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 a major industrial customer.
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.
Risks Related to 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.
8
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.
Building Vacancies. Southwood has a 50% ownership interest in three separate
joint ventures owning commercial office buildings located in Merrimack, New
Hampshire. Southwood's share of the net operating income from leases
associated with those buildings could be adversely impacted by a downturn in
the local economy and commercial real estate market.
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 3 -
Debt" in the accompanying 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, New Hampshire. 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.
9
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.
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 a .5 mgd water filtration
plant 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) 406 114 13
Services 23,348 4,475 640
Meters 24,212 4,136 667
Hydrants 2,264 383 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 836 acres of land to third
parties or to participating joint ventures.
Based on vegetation, topographical, wetland and hydrological studies,
the Company and Southwood have designated their remaining 592 acres into
buffer (non-developable) and alternate use (developable) designations,
resulting in an approximate breakout of 283 and 309 acres, respectively. Of
the approximately 309 acres of alternate use land, 36 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 at December 31, 2002:
10
Nashua, NH Merrimack, NH Total
---------- ---------- --------
Residential 36 168 204
Industrial -- 105 105
Total Alternate Use Acreage 36 273 309
In January 2003, Southwood sold a 66.8 acre tract of undeveloped land
located in Merrimack, New Hampshire to a third party. The remainder of the
Company's and Southwood's landholdings in Nashua and Merrimack are classified
under "Current Use" status, resulting in an assessment that is based on the
property's actual use and not its highest or best use.
Item 3. LEGAL PROCEEDINGS
Pending Regulatory Investigation
- --------------------------------
The Company has been informed by the Securities and Exchange Commission
and the New Hampshire Bureau of Securities Regulation that it is the subject of
related investigations by each agency. The Company understands that those
investigations relate to various real estate development joint ventures, and
include a real estate transaction between one of those joint ventures and
Maurice L. Arel, the Company's President, and the Company's previous public
disclosure regarding that transaction. The Company's board of directors has
retained legal counsel to conduct an independent review of such matters,
under the direction of the Company's Audit Committee, and has instructed the
Company and counsel to cooperate fully with both investigations. The
independent review is ongoing with the cooperation of all executive officers.
Note A to the Company's 1998 financial statements, which were included in
the Company's annual report to shareholders and incorporated into its Annual
Report on Form 10-KSB for that year, disclosed that an executive officer had
purchased a home in 1998 from a joint venture between a Pennichuck subsidiary
and an unaffiliated real estate developer. Note A stated that the terms of
the home purchase "were the same as the terms which would be given to any
independent third-party purchaser." Mr. Arel is the executive referenced in
that disclosure. The Audit Committee has obtained information indicating that
Mr. Arel's 1998 home purchase in fact was not on terms that would have been
available then to any independent third-party purchaser. The Audit Committee
is continuing to investigate the matter to determine, among other things, the
financial impact of the transaction on the Company, the value of any benefits
received by Mr. Arel in that transaction, the circumstances surrounding the
preparation of the disclosure in Note A to the 1998 financial statements, and
what, if any, action the Company should take against Mr. Arel or others.
Although the Company is cooperating fully with the regulatory
investigations, the SEC and the New Hampshire Bureau of Securities Regulation,
upon the completion of their respective investigations, could seek to impose
fines, penalties or other sanctions upon the Company.
11
Eminent Domain Proceeding
- -------------------------
The Company has been involved in ongoing proceedings with the City of
Nashua regarding the City's desire to acquire all or a portion of the Company's
water utility assets. By letters dated March 25, 2003, each of the Company's
water utility subsidiaries informed the City of Nashua that it would not
voluntarily sell its plant and property to the City and that it believed such
a sale would not be in the interest of the Company's customers, its employees
or its shareholders. By letter dated March 26, 2003, the City indicated its
intent to pursue acquisition of all or a portion of the Company's water
utility assets before the NHPUC pursuant to its power of eminent domain.
Other Proceedings
- -----------------
The Company and its subsidiaries are not otherwise 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.
12
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, 2002, there were
approximately 700 holders of record of the 2,391,439 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.
Dividends
Period High Low Declared
- ------ ---- --- ---------
2002:
Fourth Quarter $29.58 $27.10 $.195
Third Quarter 28.34 23.65 .223 (1)
Second Quarter 31.54 24.55 .195
First Quarter 26.44 24.21 .195
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
- --------------------
Includes a special one-time dividend of $.033 per share.
13
Certain bond and note agreements involving the Company's subsidiary,
Pennichuck Water Works, Inc. ("Pennichuck"), require, among other things,
restrictions on the payment or declaration of dividends by Pennichuck to the
Company. Under Pennichuck's most restrictive covenant, approximately $4.15
million of its retained earnings was unrestricted for payment or declaration
of common dividends to the Company at December 31, 2002.
Item 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operating revenues
(in $000's) $23,422 $22,754 $23,671 $17,809 $17,395
Net income (in $000's) $ 2,341 $ 3,612 $ 3,683 $ 2,616 $ 2,106
Earnings per share - basic $ .98 $ 1.52 $ 1.56 $ 1.12 $ 1.21
Cash dividends declared per share of common stock $ .813 $ 0.76 $ 0.73 $ 0.69 $ 0.59
Total assets (in $000's) $90,982 $87,630 $82,880 $75,581 $70,838
Long-term debt (in $000's) $27,214 $27,420 $27,237 $28,266 $28,185
Prior year per share amounts have been restated to reflect the three-
for-two stock split in September 1998 and the four-for-three stock split in
December 2001.
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, principally through real estate
joint ventures.
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.
14
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 available to management at the time the
statements are made, 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: likely commencement of eminent domain
proceedings before the NHPUC to acquire all or a portion of the Company's
water utility assets, and impact thereof on the Company's consolidated
business operations and planning; timeliness and extent of water utility rate
increases, if any; future operating results in the water utility and real
estate sectors; and, corporate spending and liquidity. The following factors,
among others, could cause actual results to differ materially from those
described in the forward looking statements: with respect to eminent domain
proceedings, the timeframe in which proceedings occur, and the results
thereof; with respect to regulated water utility rate relief, 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, the impact of overall economic conditions in the local and
national economy; with respect to corporate spending and liquidity, changes
in capital requirements that may affect the Company's level of capital
expenditures and any enhanced security measures that may be required to be
implemented by water utility companies.
Terminated Merger With Philadelphia Suburban Corporation
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. Total expenses associated with the pending PSC merger transaction
were approximately $1,946,000 for the twelve months
ended December 31, 2002. Those expenses are broken down as follows:
Legal fees $ 759,000
Investment banking fees 1,086,000
Other fees 101,000
----------
Total merger costs $1,946,000
==========
As discussed in Note 9 - Commitments and Contingencies in the
accompanying Notes to the Consolidated Financial Statements, the Company and
PSC mutually decided to terminate the merger agreement on February 4, 2003
following a January 14, 2003 referendum by the City of Nashua. The referendum
authorized the City of Nashua to pursue the acquisition, by an eminent domain
proceeding or otherwise, of all or a portion of the Company's water works
systems serving the residents of Nashua and other communities in which the
Company's three regulated utilities operate.
15
Under current Internal Revenue Code regulations, certain merger-
related costs would not have been deductible for Federal income tax purposes
if the merger had been ultimately consummated. Accordingly, throughout the
first three quarters of 2002, the Company calculated its tax provision based
on the assumption that these merger-related expenses would not be deductible
for tax purposes either currently or in the future. However, as a result of
the subsequent termination of the merger agreement, these merger-related
costs are deductible for tax purposes. The Company's 2002 tax provision
reflects the tax benefit resulting from the change in treatment of these
costs.
Results of Operations
In this section, we discuss our 2002, 2001 and 2000 results of
operations and the factors affecting them. 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 disclosure of operative Risk Factors contained elsewhere in this
report). 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 - 2002 Compared to 2001
- ---------------------------------------------
For the year ended December 31, 2002, the Company's consolidated net
income was $2.34 million, compared to net income of $3.61 million in 2001, a
decrease of 35%. On a per share basis, basic income per share was $.98 for
the twelve months ended December 31, 2002, a $.54 per share decrease from
last year. The decrease in consolidated net income was principally due to the
transaction expenses incurred during 2002 relating to the proposed merger
with PSC which was subsequently terminated in February 2003. Excluding the
effect of those merger expenses, consolidated net income for 2002 was $3.53
million, or $1.48 per share.
Consolidated revenues in 2002 were $23.42 million, a 3% increase over
last year. As discussed below, increased revenues resulted primarily in the
Company's regulated water and contract operations businesses offset by
decreased revenues from land sales in 2002.
Water Utility Operations
- ------------------------
Utility operating revenues for 2002 increased to $18.83 million, or 8%,
from 2001. For 2002, 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 2001 as shown in the following table:
2002 2001 Change
---- ---- ------
Pennichuck $15,344,000 $14,102,000 $ 1,242,000
Pennichuck East 3,097,000 2,895,000 202,000
Pittsfield 388,000 415,000 (27,000)
-----------------------------------------
Total $18,829,000 $17,412,000 $ 1,417,000
=========================================
16
The $1.24 million increase in Pennichuck's revenues from 2001 to 2002
is principally due to the positive effect of an 8.67% rate increase granted
to Pennichuck in September 2001 and an additional 5.76% rate increase granted
to Pennichuck in March 2002. The annualized effect of those two rate
increases was estimated to be approximately $1.8 million. However, the
positive effect of those rate increases in 2002 was partially offset by a
4.6% decline in billed consumption within the core system from 2001. Through
the first nine months of 2002, rainfall in the region in which the utilities
operate was 16.2% greater than in the same period of 2001 thus contributing
to the overall decline in consumption for the year. In addition to the core
system rate increases, water revenues reflect a 2.1% growth (approximately
600 customers) in the combined utilities' customer base from December 31,
2001 to December 31, 2002.
During 2002, there were no new rate filings made by the Company's three
regulated water utilities and no such rate proceedings are pending with the
NHPUC.
The operating expenses of our water utility business include such
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 payroll and property
taxes)
Our utilities' operating expenses increased by $377,000, or 3%, to
$12.8 million for the year ended December 31, 2002. The primary reasons for
the increased utility operating costs from 2001 to 2002 were:
* $196,000 of additional depreciation expense reflecting new
investment in plant assets during 2002 and 2001 totaling $5.12 and
$6.02 million for each year, respectively, net of contributions in
aid of construction;
* an increase of approximately $106,000 in local property taxes
reflecting higher assessed values on utility property;
* a $128,000 increase in pension expense as a result of declining
investment returns on pension plan assets and increased payroll
costs;
* a $74,000 increase, or 38%, in property and liability premiums
paid, consistent with recent changes in the insurance market;
* offset by approximately $36,000 in lower power and purification
expenses as a result of the decrease in consumption discussed
earlier and $65,000 in additional capitalized overhead on new
plant placed in service during 2002.
The utilities' combined operating income (operating revenues less
operating expenses) for the year ended December 31, 2002 increased to $6.04
million, or 21%, over 2001, resulting in an operating margin of 32% in 2002
compared to an operating margin of 29% in 2001.
17
Real Estate Operations
For the year ended December 31, 2002, operating income from real estate
activities conducted by Southwood was $1.34 million compared to $3.24 million
in 2001. The following table summarizes the major sales and other
transactions that occurred in 2002 and 2001 which are discussed further in
this section.
Year ended December 31,
Revenues: 2002 2001
---- ----
Land sales:
Southwood Corporate Park $2,427,000 $ 422,000
HECOP IV 168,000
HECOP III 155,000
Westwood Park LLC -- 2,000,000
Other -- 100,000
-------------------------------
2,595,000 2,677,000
Equity interest in partnerships 314,000 1,313,000
Other 179,000 167,000
-------------------------------
Total Revenues 3,088,000 4,157,000
Expenses:
Allocated infrastructure costs associated with land sales 1,662,000 396,000
Other expenses 88,000 516,000
-------------------------------
Total Expenses 1,750,000 912,000
Operating Income (1) $1,338,000 $3,245,000
===============================
- --------------------
Included in operating income for 2001 is the 40% minority interest
share, or approximately $800,000, relating to the sale of land by
Westwood Park LLC
For 2002, real estate revenues included the following:
* Net cash proceeds of $2.43 million from the sale of the remaining
40 acres in Southwood Corporate Park during the first quarter of
2002 to one of Southwood's existing joint venture partners;
* $314,000 from Southwood's 50% ownership interest in HECOP I, II
and III;
* $168,000 cash from the sale of a one-half interest in a 9.1 acre
tract of land to a local developer who also holds an ownership
interest in HECOP I, II and III for the creation of HECOP IV, LLC;
and
* $91,000 of interest income earned on outstanding notes receivable
due from a local developer.
In connection with the HECOP I, II, III, and IV LLC's, Southwood holds
a 50% ownership interest in each of those limited liability companies
(LLC's). Revenues recorded by Southwood during 2002 and 2001 represent its
50% share of the net operating income resulting from the leasing activities of
HECOP's I, II and III. Each of those three LLC's owns land and a commercial
office building, all of which are subject to a mortgage note with a local
bank. The outstanding mortgage note balances at December 31, 2002 totaled
approximately $9.45 million as discussed in Note 4 - Equity Investments in
Unconsolidated Companies in the accompanying Notes to the Consolidated
Financial Statements. As of December 31, 2002, the principal asset of HECOP
IV was approximately 9.1 acres of land held for future development.
18
During 2002, a major tenant occupying one of the buildings owned by an
LLC filed for bankruptcy protection. However, the tenant's bank has issued a
letter of credit for the benefit of the LLC guaranteeing the tenant's full
lease payments over the remaining term of its lease which expires on March 31,
2005. The LLC is actively looking for a new party to occupy the portion of
office space (approximately 26,000 square feet) that is no longer utilized by
the tenant.
Revenues from real estate operations during 2001 consisted chiefly of
the following :
* Proceeds of $2 million from the sale of land to the City of Nashua
by Westwood Park LLC ("Westwood") in which Southwood has a 60%
ownership interest;
* $524,000 from Southwood's share of pretax profit from its
residential joint venture, Heron Cove at Bowers Pond LLC;
* $422,000 from the sale of two land parcels in Southwood Corporate
Park;
* $155,000 cash from the sale of a one-half interest in a 4 acre
tract of land to a local developer who also holds an ownership
interest in HECOP I and II for the creation of HECOP III, LLC;
* $100,000 from the sale of a residential land parcel to a local
developer; and
* $141,000 from Southwood's 50% ownership in HECOP I, II and III
Expenses associated with our real estate operations during 2002
increased by $838,000 to $1.75 million for the year ended December 31, 2002.
Included in 2002 and 2001 real estate expenses was approximately $1.66
million and $396,000, respectively, of direct infrastructure costs allocable
to the Southwood Corporate Park land sales in those years. Excluding
allocated infrastructure costs, Southwood's 2002 operating expenses were
approximately $89,000 consisting primarily of property taxes and intercompany
allocation charges. For 2001, real estate operating expenses were comprised
of (i) $47,000 of bad debt expense relating to accrued interest on certain
notes receivable, (ii) $108,000 of property taxes and property maintenance
expenses associated with Southwood's remaining landholdings, and (iii)
$273,000 for allocated intercompany charges.
In January 2003, Southwood sold a 66.8 acre tract of land in Merrimack, New
Hampshire to another local developer for approximately $1.5 million. Under
the terms of that sale, Southwood received cash of approximately $260,000 and
a $1.224 million note, maturing in October 2005. The note carries a floating
interest rate of prime plus 1.5% and is secured by a first mortgage on the
property. The pretax gain on that sale is approximately $1.48 million.
Contract Operations and Other
- -----------------------------
For the year ended December 31, 2002, operating income from our
contract operations was $200,000, an increase of $57,000, or 40% from 2001.
19
The following table provides a breakdown of contract operations
revenues for 2002 and 2001:
2002 2001 Change
---- ---- ------
Service Corporation:
Municipal contracts $1,011,000 $666,000 $345,000
Community system
Contracts 249,000 188,000 61,000
Watertight program 165,000 74,000 91,000
Miscellaneous 34,000 30,000 4,000
---------- -------- --------
Total Service Corporation $1,459,000 $958,000 $501,000
========== ======== ========
More than half of the $501,000 increase in the Service Company's
revenue over 2001 resulted from additional contract fees of $331,000 billed
by the Service Corporation under an operating contract with the Town of
Salisbury, Massachusetts which began in October 2001 and was in effect during
all of 2002. Under the terms of that multi-year contract, the Service
Corporation operates and maintains that municipality's water system,
including all meter reading and billing functions. The contract provides for
annual adjustments to contract fees based on changes in the Consumer Price
Index. During 2002, other Service Corporation revenues included (i) $165,000
earned under its Watertight program, which provides maintenance service to
residential customers and (ii) contract revenues of approximately $249,000
from 52 operating contracts for non-transient, non-community water systems. At
the end of 2001, the Service Corporation had 40 such operating contracts.
Under these contracts, the Service Corporation performs various water-related
monitoring, maintenance, testing and compliance reporting services for water
systems throughout southern and central New Hampshire.
Other operating revenues not related to contract operations in 2001
totaled $228,000 which included approximately $175,000 from timber harvesting
activities on forested land owned by the Company. No timber harvesting
activities were undertaken during 2002.
Expenses associated with our Service Corporation activities were
$1,258,000 and $814,000 for 2002 and 2001, respectively, primarily comprised
of direct costs for servicing its various operating contracts and allocated
intercompany charges. The increased expenses from 2001 to 2002 resulted
principally from (i) additional annualized direct expenses of $224,000
relating to the Town of Salisbury contract, (2) $36,000 in increased
Watertight program related expenses, (3) an increase of $139,000 in allocated
intercompany charges due to additional Company and Pennichuck resources
utilized for the operation and development of the Service Corporation's
various activities and (4) $39,000 of amortization charges reflecting the
write-off of certain deferred charges related to non-transient, non-community
water systems.
20
Results of Operations - 2001 Compared to 2000
- ---------------------------------------------
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. 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
2000.
Water Utility Operations
- ------------------------
On a combined basis, operating income of our three utilities in
calendar year 2001 was approximately $5.0 million compared to $4.35 million
in 2000.
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 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 2001 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 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.
Combined utility operating expenses increased by $794,000, or 6.8%, to
$12.4 million for the year 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 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
21
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.
Real Estate Operations
- ----------------------
Operating income from our real estate operations was approximately
$3.24 million and $4.63 million for the year 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 2001,
Westwood sold a parcel of land to the City of Nashua for $2 million while 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 $.56 per 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 at Bowers Pond 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.
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 were comprised of (i) $79,000 of property taxes on
Southwood's landholdings, (ii) $396,000 of direct infrastructure costs
allocable to the Southwood Corporate Park land sales and (iii) $164,000 for
allocated intercompany charges.
Contract Operations and Other
- -----------------------------
Revenues from contract operations and other increased $467,000, or 65%,
to $1,186,000 in 2001 from the previous year. Of that increase, nearly
$296,000 was generated by the Service Corporation as a result of (i) an
additional 16 operating contracts signed during 2001 and (ii) a new multi-
year operating contract with a Massachusetts' municipality which was entered
into in September 2001. The Service Corporation 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.
22
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 an increase in allocated intercompany charges; and
* a $63,000 increase in costs relating to shareholder and other
administrative matters accrued by the Company.
Liquidity and Financial Condition
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, the Company has borrowed funds under a revolving loan facility
(the "Loan Agreement") with its 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. At December 31, 2002
and 2001, the interest rates under the Loan Agreement were 2.28% and 2.84%,
respectively. During 2002, 2001 and 2000, there were no borrowings
outstanding under this Loan Agreement.
As disclosed in Note 3 - Debt in the accompanying Notes to the
Consolidated Financial Statements, the Company has certain debt instruments
that contain annual sinking fund or other required principal payments. The
Company believes that it will be able to refinance debt instruments at their
maturity through public issuance, or private placement, of debt or equity.
At December 31, 2002 and 2001, the Company's cash and cash equivalents,
primarily short-term investments, totaled approximately $2.44 million and
$3.27 million, respectively, which were available to fund any operating cash
flow deficiencies and capital expenditures of the Company and its subsidiaries.
Throughout 2002 and 2001, excess cash was invested in short-term money market
funds and as a result, the Company realized approximately $56,000 in interest
income in 2002 and $153,000 in 2001.
Our capital expenditures in 2002 totaled $5.12 million, net of
approximately $3.32 million in the form of contributions in aid of
construction from state grants and area developers. Practically all of our
capital expenditures in 2002 were for projects relating to our water utility
business. In 2002, the more significant projects included:
* $1.65 million for replacing aging distribution mains in Nashua,
New Hampshire;
* $1.18 million for various distribution main upgrades in
Pennichuck's and Pennichuck East's community water systems; and
* $420,000 for the replacement and installation of new radio read
meters which is part of an ongoing replacement program in
Pennichuck's and Pennichuck East's service territories.
23
The remaining items in the Company's 2002 capital program reflect
expenditures for ongoing, routine investment in additional pump stations,
services, distribution mains and hydrants, vehicles and sundry system
improvements. For 2003, we expect that our total expenditures for capital
projects will be approximately $7.84 million, of which $1.34 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 five years, the Company expects to spend approximately $6
million to $7 million annually for capital expenditures, primarily for
utility related projects. 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 ("USEPA")
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 4 years, Pennichuck
has spent approximately $4 million replacing its aged mains and its 2003
capital budget includes approximately $1.1 million for similar work. It is
likely that Pennichuck will continue to spend $1 to $2 million annually on
replacing its aging infrastructure within Nashua. Historically, these capital
costs have been recovered through increased water rates as approved by the
NHPUC.
There were several significant changes in our consolidated financial
position from December 31, 2001 to December 31, 2002, principally in certain
asset accounts of the Company and its subsidiaries. Those significant changes
were:
* a net decrease of $221,250 in notes receivable, representing cash
collected on amounts due from a local developer as further
discussed below and previously classified under Other Assets at
December 31, 2001;
* a decrease in deferred land costs of $1.6 million as a result of
the write-off of the remaining basis of 40 acres in Southwood
Corporate Park in connection with the land sale which occurred in
the first quarter of 2002; and
a net decrease in Deferred charges and other assets of $620,000
reflecting the Company's transition in its pension plan funding
status from a $404,000 prepaid balance at December 31, 2001 to a
$615,000 accrued liability at the end of 2002 as discussed below.
The aforementioned notes receivable balance at December 31, 2002
represents the remaining amounts due from a local developer for the
acquisition of land from Southwood and the construction of five homes in a
residential development. During 2002, two homes had been sold to third
parties resulting in a repayment of $555,000 of principal on the development
and construction loans. The notes carry an annual interest rate of 10.5% and
mature in April 2003. The loans are secured by a first mortgage interest in
the land and houses.
24
At December 31, 2001, the $100,000 note receivable balance included
under Current Assets related to an amount due from a local developer from the
sale of a residential land parcel in October 2001 that was repaid in August
2002.
Additional Minimum Pension Liability
- ------------------------------------
The Company maintains a defined benefit pension plan covering
substantially all of its employees. The accounting for this plan under FASB
87, "Employer's Accounting for Pensions," requires that the Company use key
assumptions when computing the estimated annual pension expense. These
assumptions are (i) the long-term return on plan assets, (ii) the discount
rate applied to the projected benefit obligation and (iii) the long-term rate
of future increases in compensation. These key assumptions are reviewed
annually with our actuary and investment advisor and are discussed further in
Note 6 - Benefit Plans - Pension Plan in the accompanying Notes to the
Consolidated Financial Statements. Any differences between the assumptions
used by the Company and actual results will impact the amount of pension
expense the Company recognizes in the future. Future changes resulting from
any such differences are expected to be recoverable through rate relief filed
by the utilities with the NHPUC.
At December 31, 2001, the Company had a prepaid pension asset of
approximately $404,000, representing the excess of its plan assets over its
pension liabilities. The decline in investment returns on pension assets and
in the discount rate during 2002 resulted in the Company recording an
additional minimum pension liability adjustment of approximately $1.02
million. As a result, the Company has recorded an accrued pension liability of
approximately $615,000 at December 31, 2002 and a net charge of approximately
$624,000 against Other Comprehensive Income. Future adjustments to Other
Comprehensive Income will be affected by changes in realized returns on
pension plan assets and changes in discount rates.
Critical Accounting Policies
- ----------------------------
The Company has identified the accounting policies below as those
policies critical to its business operations and the understanding of the
results of operations. The preparation of financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and revenues and expenses. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Changes in the estimates
or other judgments included within these accounting policies could result in
significant changes to the financial statements. Our critical accounting
policies are as follows:
Statement of Financial Accounting Standards No. 71 ("SFAS 71"),
"Accounting for the Effects of Certain Types of Regulation" stipulates
generally accepted accounting principles for companies whose rates are
established by or are subject to approval by an independent third-party
regulator. In accordance with SFAS No. 71, we defer costs and credits on the
balance sheet as regulatory assets and liabilities when it is probable that
these costs and credits will be recognized in the rate-making process in a
period different from when the costs and credits were incurred. These
deferred amounts, both assets and liabilities, are then recognized in the
income statement in the same period that they are reflected in rates charged
to our water utilities'
25
customers. In the event that future recovery of deferred costs ceases to be
probable, the Company would be required to charge these assets against
current earnings.
Accrued unbilled revenue - We read our residential customer meters
generally on a quarterly basis and record our revenue based on our meter
reading results. Unbilled revenues from the last meter-reading date to the
end of the accounting period are estimated based on historical usage patterns
and the effective tariff rates. The estimate of the unbilled revenue is a
management estimate utilizing certain sets of assumptions and conditions.
Actual results could differ from those estimates.
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 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 . The quality of our treated water currently meets or exceeds all
standards set by the USEPA and the NHDES. However, increased monitoring and
reporting standards have led to additional operating costs for us. Any
additional monitoring and testing costs arising from future USEPA and NHDES
mandates should eventually be recovered through water rates in our utilities'
next rate filings.
Pennichuck's water treatment plant in Nashua is impacted by the USEPA's
Interim Enhanced Surface Water Treatment Rule ("IESWTR") which established a
new turbidity standard of 0.3 NTU. Pennichuck is in the process of performing
an evaluation of upgrades to its water treatment plant that will insure
compliance with the promulgated IESWTR turbidity standard, the Filter
Backwash Recycle Rule, The Long Term One Enhanced Surface Water Treatment
Rules and the future Long Term Two Enhanced Surface Water Treatment Rule. The
evaluation will determine what modifications will be required to Pennichuck's
water treatment plant by the end of 2003. Construction of the required
modifications to the water treatment plant is expected to begin in late 2004.
The expected cost for any modifications required under these standards will
not be determinable until completion of the above referenced evaluation.
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.
26
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.
Pending Regulatory Investigation
- --------------------------------
The Company has been informed by the Securities and Exchange Commission
and the New Hampshire Bureau of Securities Regulation that it is the subject
of related investigations by each agency. The Company understands that those
investigations relate to various real estate development joint ventures, and
include a real estate transaction between one of those joint ventures and
Maurice L. Arel, the Company's President, and the Company's previous public
disclosure regarding that transaction. The Company's board of directors has
retained legal counsel to conduct an independent review of such matters,
under the direction of the Company's Audit Committee, and has instructed the
Company and counsel to cooperate fully with both investigations. The
independent review is ongoing with the cooperation of all executive officers.
Note A to the Company's 1998 financial statements, which were included
in the Company's annual report to shareholders and incorporated into its
Annual Report on Form 10-KSB for that year, disclosed that an executive
officer had purchased a home in 1998 from a joint venture between a
Pennichuck subsidiary and an unaffiliated real estate developer. Note A
stated that the terms of the home purchase "were the same as the terms which
would be given to any independent third-party purchaser." Mr. Arel is the
executive referenced in that disclosure. The Audit Committee has obtained
information indicating that Mr. Arel's 1998 home purchase in fact was not on
terms that would have been available then to any independent third-party
purchaser. The Audit Committee is continuing to investigate the matter to
determine, among other things, the financial impact of the transaction on the
Company, the value of any benefits received by Mr. Arel in that transaction,
the circumstances surrounding the preparation of the disclosure in Note A to
the 1998 financial statements, and what, if any, action the Company should
take against Mr. Arel or others.
Although the Company is cooperating fully with the regulatory
investigations, the SEC and the New Hampshire Bureau of Securities
Regulation, upon the completion of their respective investigations, could
seek to impose fines, penalties or other sanctions upon the Company.
New Accounting Standards
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 and depreciated over the life
of the asset. SFAS No. 143 is effective for all fiscal years beginning after
June 15, 2002. The Company does not believe
27
that adoption of SFAS No. 143 will have a material impact on its financial
position or results of operations.
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 and 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 became effective on January 1, 2002 and generally is to be
applied prospectively. The adoption of this standard did not impact the
Company's financial position or results of operation in 2002. The Company
does not expect that the adoption of this Statement will have any significant
impact on its financial position and results of operations in the future.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146") that requires entities to record a
liability for costs related to exit or disposal activities when the costs are
incurred. Previous accounting guidance required the liability to be recorded
at the date of commitment to an exit or disposal plan. The Company is
required to comply with SFAS 146 beginning January 1, 2003 and it does not
expect that the implementation of this standard will have an adverse impact
on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation- Transition and Disclosure- an amendment to FASB Statement
No. 123" (SFAS 148) which provides for alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS 148 requires prominent
disclosures in both interim and annual financial statements about the method
of accounting for stock-based employee compensation. See Note 7 - Stock
Based Compensation Plans in the accompanying Notes to the Consolidated
Financial Statements for further discussion and analysis of SFAS 123.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding market risk of the Company and its subsidiaries
is presented in "Note 3 - Debt" and "Note 5 - Fair Value of Instruments" in
the accompanying Notes to the Consolidated Financial Statements included in
Item 8 of this Form 10K report.
28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of PricewaterhouseCoopers LLP
Independent Public Accountants
To the Board of Directors and Shareholders of Pennichuck Corporation:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, stockholders' equity and other
comprehensive income present fairly, in all material respects, the financial
position of Pennichuck Corporation and its subsidiaries at December 31, 2002,
and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the
United States of America. 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 audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. The financial statements of Pennichuck Corporation as of December
31, 2001, and for each of the two years in the period ended December 31,
2001, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated February 15, 2002.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2003
29
CONSOLIDATED BALANCE SHEETS
PENNICHUCK CORPORATION AND SUBSIDIARIES
December 31
2002 2001
----------------------------
ASSETS
Property, Plant and Equipment
Land $ 1,142,479 $ 1,224,557
Buildings 19,072,791 17,986,453
Equipment 86,220,909 79,435,709
Construction work in progress 515,442 260,007
------------ -----------
106,951,621 98,906,726
Less accumulated depreciation (27,279,416) (24,946,682)
------------ -----------
79,672,205 73,960,044
Current Assets
Cash and cash equivalents 2,443,888 3,272,240
Restricted cash 151,281 151,142
Accounts receivable, net of reserves of
$40,465 in 2002 and $83,998 in 2001 1,339,313 1,245,636
Unbilled revenue 1,513,417 1,349,277
Notes receivable 604,500 100,000
Refundable income taxes 334,034 124,935
Materials and supplies, at cost 589,613 364,487
Prepaid expenses and other current assets 490,196 479,900
------------ -----------
7,466,242 7,087,617
Other Assets
Deferred land costs 791,499 2,390,576
Deferred charges and other assets 2,845,888 3,466,202
Investment in real estate partnerships 206,080 --
Notes receivable -- 725,750
3,843,467 6,582,528
------------ -----------
$ 90,981,914 $87,630,189
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CONSOLIDATED BALANCE SHEETS - CONTINUED
PENNICHUCK CORPORATION AND SUBSIDIARIES
December 31
2002 2001
----------------------------
Stockholders' Equity and Liabilities
Stockholders' Equity
Common stock - $1 par value - authorized 11,500,000
shares in 2002 and 2001; 2,393,391 shares issued in
2002 and 2,389,019 shares in 2001 $ 2,393,391 $ 2,389,019
Additional paid in capital 15,169,904 15,098,088
Retained earnings 13,941,337 13,544,696
Accumulated other comprehensive income (927,233) (308,216)
------------ -----------
30,577,399 30,723,587
Less cost of 1,952 shares of
common stock in treasury in 2002
and 1,385 shares in 2001 (143,858) (128,488)
------------ -----------
30,433,541 30,595,099
Minority Interest -- --
Preferred stock, no par value, 100,000 shares
authorized, no shares issued in 2002 and 2001 -- --
Commitments and Contingencies (Note 9)
Long-term Debt, less current portion 26,859,795 27,071,798
Current Liabilities
Current portion of long-term debt 353,769 348,207
Accounts payable 673,114 1,373,120
Accrued interest payable 370,117 367,757
Other current liabilities 1,533,547 1,467,184
------------ -----------
2,930,547 3,556,268
Deferred Credits and Other Reserves
Deferred income taxes 6,633,604 6,166,117
Deferred investment tax credits 999,174 1,032,210
Regulatory liability 1,138,090 1,169,658
Post-retirement health benefit obligation 570,419 480,371
Accrued pension liability 614,669 --
Other liabilities 540,720 308,216
------------ -----------
10,496,676 9,156,572
Contributions in Aid of Construction 20,261,355 17,250,452
------------ -----------
$ 90,981,914 $87,630,189
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
31
CONSOLIDATED STATEMENTS OF INCOME
PENNICHUCK CORPORATION AND SUBSIDIARIES
Year Ended December 31
2002 2001 2000
-------------------------------------------
Revenues
Water utility operations $18,829,418 $17,411,760 $15,963,540
Real estate operations 3,088,007 4,156,556 6,989,006
Contract operations and other 1,504,131 1,186,022 718,930
----------- ----------- -----------
23,421,556 22,754,338 23,671,476
Operating Expenses
Water utility operations 12,785,306 12,408,777 11,614,329
Real estate operations 1,750,402 912,094 2,356,602
Contract operations and other 1,238,576 881,325 484,625
----------- ----------- -----------
15,774,284 14,202,196 14,455,556
Operating Income 7,647,272 8,552,142 9,215,920
Merger and related expenses (1,946,192) -- --
Other income 65,244 221,152 183,086
Interest expense (1,977,646) (1,980,926) (1,991,488)
----------- ----------- -----------
Income Before Provision for Income Taxes 3,788,678 6,792,368 7,407,518
Provision for Income Taxes 1,450,301 2,657,420 2,869,993
----------- ----------- -----------
Net Income Before Minority Interest 2,338,377 4,134,948 4,537,525
Minority Interest in Loss (Earnings) of
Westwood Park LLC, net of tax 2,202 (523,244) (854,864)
----------- ----------- -----------
NET INCOME $ 2,340,579 $ 3,611,704 $ 3,682,661
=========== =========== ===========
Earnings Per Common Share:
Basic $ .98 $ 1.52 $ 1.56
Diluted $ .97 $ 1.50 $ 1.55
Weighted Average Shares Outstanding:
Basic 2,390,942 2,382,389 2,360,767
Diluted 2,411,781 2,400,088 2,369,272
The accompanying notes are an integral part of these consolidated financial
statements.
32
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, 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
for 2001 (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)
Net income 2,340,579
Dividend reinvestment plan 1,789 1,789 45,136
Common dividends
declared - $.813 per share (1,943,938)
Exercise of stock options 2,583 2,583 26,680 (15,370)
Other comprehensive income
for 2002 (619,017)
-----------------------------------------------------------------------------------------
Balances at December 31, 2002 2,393,391 $2,393,391 $15,169,904 $13,941,337 $(143,858) $(927,233)
-----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
33
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
PENNICHUCK CORPORATION AND SUBSIDIARIES
Years Ended December 31
2002 2001 2000
-----------------------------------------
Net income $ 2,340,579 $3,611,704 $3,682,661
Other comprehensive income:
Additional minimum pension liability
adjustment (1,019,527) -- --
Unrealized (loss) on
derivatives (476,114) (396,478) --
Reclassification of net losses
realized in net income 243,610 88,262 --
Income tax benefit relating
to other comprehensive
loss 633,014 -- --
-----------------------------------------
(619,017) (308,216)
Comprehensive Income $ 1,721,562 $3,303,488 $3,682,661
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
PENNICHUCK CORPORATION AND SUBSIDIARIES
Years Ended December 31
2002 2001 2000
-------------------------------------------
Operating Activities:
Net income $ 2,340,579 $ 3,611,704 $ 3,682,661
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,775,889 3,046,962 3,171,766
Gain on sale of land (764,664)
Amortization of deferred
investment tax credits (33,036) (33,036) (33,036)
Provision for deferred
income taxes 862,701 930,639 944,895
Changes in assets and liabilities:
Accounts receivable and
unbilled revenue (257,817) (1,307) (84,579)
Refundable income taxes (209,099) 245,199 (98,822)
Materials and supplies (225,126) (10,485) (42,290)
Prepaid expenses (10,296) (79,004) 322,670
Deferred charges and
other assets (139,413) (1,363,818) (104,092)
Accounts payable and
accrued expenses (631,283) 896,621 (79,755)
Other 291,478 28,675 6,079
----------- ----------- -----------
Net cash provided by operating activities 3,999,913 7,272,150 7,685,497
Investing Activities:
Purchases of property, plant & equipment (5,274,332) (6,133,919) (4,423,789)
Contributions in aid of construction 156,856 116,428 874,720
(Increase) decrease in restricted cash (139) 851,713 (1,001,958)
Proceeds from sale of land 2,426,815 --- ---
(Increase) decrease in investment in real
estate partnerships and deferred land
costs (269,154) 764,103 (322,081)
----------- ----------- -----------
Net cash used in investing activities (2,959,954) (4,401,675) (4,873,108)
Financing Activities:
Payments on long-term debt (351,441) (319,155) (1,041,816)
Proceeds from long-term borrowings 145,000 502,145 12,860
Net decrease (increase) in notes receivable 221,250 (825,750) ---
Minority interest --- (1,149,673) 854,864
Proceeds from dividend reinvestment
plan and other, net 60,818 275,428 356,852
Dividends paid (1,943,938) (1,812,864) (1,701,189)
----------- ----------- -----------
Net cash used in financing activities (1,868,311) (3,329,869) (1,518,429)
Increase (decrease) in cash (828,352) (459,394) 1,293,960
Cash at beginning of year 3,272,240 3,731,634 2,437,674
----------- ----------- -----------
Cash at end of year $ 2,443,888 $ 3,272,240 $ 3,731,634
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
35
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies of Pennichuck Corporation and
subsidiaries are as follows:
Basis of Presentation: The consolidated financial statements are
presented in accordance with generally accepted accounting principles and
include the accounts of Pennichuck Corporation, an investor-owned holding
company (the "Company") and its wholly-owned 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"). All significant intercompany transactions have been
eliminated in consolidation.
Southwood uses the equity method of accounting for its investments in joint
ventures in which it does not have a controlling interest. Under this
method, Southwood records its proportionate share of pretax earnings or
losses which are included under "Revenues-real estate operations" with a
corresponding increase or decrease in the carrying value of the investment.
The investment is reduced as cash distributions are received from the joint
venture. See Note 4 for further discussion of its equity investments.
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 28,800 customers in southern and central New Hampshire. The
Company's utility subsidiaries, which are regulated by the New Hampshire
Public Utilities Commission (the "NHPUC"), 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 7,900
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.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks,
demand deposits and investments in short-term money market funds with
initial maturities of three months or less when purchased.
Restricted Cash: Restricted cash consists primarily of funds escrowed by
one of Southwood's joint ventures for the payment of certain traffic
improvements relating to an industrial park.
Inventory: Inventory is stated at cost using the average cost method.
36
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment: Property, plant and equipment, which
principally includes the water utility assets of the Company's utility
subsidiaries, is recorded at cost plus an allowance for funds used during
construction on major, long-term projects. The provision for depreciation
is computed using 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 5 to 84 years and the average
composite depreciation rate was 2.69% in 2002, 2.67% in 2001 and 2.71% in
2000. Depreciation expense in 2002, 2001 and 2000 was $2,730,486,
$2,489,910 and $2,307,533, respectively. The components of Property, Plant
and Equipment at December 31, 2002 and 2001 are as follows:
2002 2001 Useful Lives
---- ---- ------------
Utility Property:
Land $ 1,082,861 $ 1,164,939 -
Source of supply 18,659,486 18,390,544 34 - 75
Pumping and purification 9,060,123 8,047,584 15 - 35
Transmission and distribution 53,749,501 48,623,225 40 - 84
General, including services, meters,
hydrants and other equipment 22,609,793 21,163,862 7 - 75
Construction work in progress 515,442 260,007
------------ -----------
Total Utility Property 105,677,206 97,650,161
Non-utility Property 1,274,415 1,256,565 5 - 40
------------ -----------
Total Property, Plant and Equipment $106,951,621 $98,906,726
============ ===========
Maintenance, repairs and minor improvements are charged to expense as
incurred. Improvements which significantly increase the value of property,
plant and equipment are capitalized.
Treasury Stock: Treasury stock held by the Company represents shares
tendered by employees as payment for exercising outstanding stock options.
Treasury stock received is recorded at its fair market value when tendered.
Any such treasury stock held by the Company is not retired but instead is
held until its ultimate disposition has been decided.
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. There were no
AFUDC amounts credited to income during 2002, 2001 and 2000.
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.
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
37
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
through authorized rates. Deferred financing costs are amortized over the
term of the related bonds and notes. The Company's utility subsidiaries
have recorded certain regulatory assets in cases where the NHPUC has
permitted, or is expected to permit, recovery of these costs over future
periods. Currently, these regulatory assets are being amortized over
periods ranging from 3 to 25 years. Deferred charges and other assets
consist of the following at December 31:
2002 2001
---- ----
Regulatory assets:
Source development charges $ 626,725 $ 674,815
Miscellaneous studies 701,453 756,413
Supplemental retirement plan asset 225,359 194,958
Other 43,618 27,989
---------- ----------
1,597,155 1,654,175
Financing costs 542,327 577,524
Prepaid pension -- 404,437
Franchise fees and other 405,622 511,486
Filtration grant receivable 300,784 318,580
---------- ----------
Total $2,845,888 $3,466,202
========== ==========
Deferred Land Costs: Included in deferred land costs is Southwood's
original basis in its landholdings which is 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 a $1 million, non-interest
bearing promissory note. Recognition of the gain relating to the sale of
that parcel was deferred until the lots were 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.
Notes Receivable: Included in Current Assets are two notes receivable from
a local developer totaling $604,500 representing funds loaned by Southwood
to the developer for land acquisition and construction of 3 residential
homes. The notes, which are due in April 2003, provide for an annual
interest rate of 10.5% and are secured by a first mortgage interest in the
land and buildings.
38
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income taxes are recorded using the accrual method and 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. A valuation
allowance is provided to offset any net deferred tax assets if, based upon
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Investment credits previously
realized for income tax purposes are amortized for financial statement
purposes over the life of the property, giving rise to the credit.
Contributions in Aid of Construction ("CIAC"): Under construction
contracts with real estate developers and others, the Company's regulated
subsidiaries receive non-refundable advances for the costs of new main
installation. The regulated subsidiaries also credit to Plant and 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. The CIAC account and related plant asset are amortized over the
life of the property.
Reclassifications: Certain amounts in 2001 have been reclassified to
conform with the 2002 financial statement presentation. These
reclassifications had no effect on net income and were primarily related to
post-retirement plan assets that were previously included in "Deferred
charges and other assets" which have been reclassified in the current
financial statement presentation as a reduction of the Company's "Post-
retirement health obligation."
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, 2002, 2001, and 2000:
Years Ended
2002 2001 2000
---- ---- ----
Basic earnings per share $ .98 $ 1.52 $ 1.56
Dilutive effect of unexercised stock options (.01) (.02) (.01)
---------- ---------- ----------
Diluted earnings per share $ .97 $ 1.50 $ 1.55
========== ========== ==========
Numerator:
Basic net income $2,340,579 $3,611,704 $3,682,661
========== ========== ==========
Diluted net income $2,340,579 $3,611,704 $3,682,661
========== ========== ==========
Denominator:
Basic weighted average shares outstanding 2,390,942 2,382,389 2,360,767
Dilutive effect of unexercised stock options 20,839 17,699 8,505
---------- ---------- ----------
Diluted weighted average shares outstanding 2,411,781 2,400,088 2,369,272
========== ========== ==========
39
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards
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 does not believe that adoption of SFAS No. 143 will have a
material impact on its financial position or results of operations.
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 and 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 became effective
on January 1, 2002 and generally is to be applied prospectively. The
adoption of this standard did not impact the Company's financial position
or results of operations in 2002. The Company does not expect that the
adoption of this Statement will have any significant impact on its
financial position and results of operations in the future.
The FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") that requires entities to record a
liability for costs related to exit or disposal activities when the costs
are incurred. Previous accounting guidance required the liability to be
recorded at the date of commitment to an exit or disposal plan. The Company
is
required to comply with SFAS 146 beginning January 1, 2003 and it does not
expect that the implementation of this standard will have an adverse impact
on its financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure- an amendment to FASB Statement No.
123" (SFAS 148) which provides for alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-
based employee compensation. In addition, SFAS 148 requires prominent
disclosures in both interim and annual financial statements about the
method of accounting for stock-based employee compensation. At this time,
the Company does not intend to change to the fair value based method of
accounting for stock-based compensation. See Note 7 for further discussion
and analysis of SFAS 123. On a pro forma basis, the Company's net
40
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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."
2002 2001 2000
---- ---- ----
Net income:
As reported $2,340,579 $3,611,704 $3,682,661
Deduct total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects ( 145,291) ( 143,372) (221,535)
---------- ---------- ----------
Pro forma $2,195,288 $3,468,332 $3,461,126
Basic earnings per share:
As reported $ .98 $ 1.52 $ 1.56
Pro forma $ .92 $ 1.46 $ 1.47
Diluted earnings per share:
As reported $ .97 $ 1.50 $ 1.55
Pro forma $ .91 $ 1.45 $ 1.46
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (the Interpretation). The
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. For Pennichuck Corporation, disclosure
requirements are effective with the 2002 financial statements contained in
this report. The application of this Interpretation is not expected to
materially impact the financial condition, results of operations, and cash
flows of Pennichuck Corporation.
NOTE 2 - INCOME TAXES
The components of the federal and state income tax provision at December 31
are as follows:
2002 2001 2000
---- ---- ----
Federal $1,180,417 $2,113,104 $2,309,552
State 302,920 577,352 593,477
Amortization of investment tax credits (33,036) (33,036) (33,036)
---------- ---------- ----------
$1,450,301 $2,657,420 $2,869,993
========== ========== ==========
Currently payable $ 435,917 $1,836,144 $2,220,703
Deferred 1,014,384 821,276 649,290
---------- ---------- ----------
$1,450,301 $2,657,420 $2,869,993
========== ========== ==========
The following is a reconciliation between the statutory federal income tax
rate and the effective income tax rate for 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Statutory federal rate 34.0% 34.0% 34.0%
State tax rate, net of federal benefit 5.6 5.6 5.3
Amortization of investment tax credits (.9) (.5) (.6)
---- ---- ----
Effective tax rate 38.7% 39.1% 38.7%
==== ==== ====
The Company did not have any alternative minimum tax credits available at
December 31, 2002, 2001, and 2000.
41
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - INCOME TAXES (Continued)
The Company has a regulatory liability related to income taxes of
$1,138,090 and $1,169,658 at December 31, 2002 and 2001, 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 over an average
remaining life of 30 years consistent with the Company's rate-making
treatment.
The temporary items that give rise to the net deferred tax liability at
December 31, 2002 and 2001 are as follows:
2002 2001
---- ----
Liabilities:
Property related $9,264,047 $7,653,446
Other 705,968 720,438
---------- ----------
9,970,015 8,373,884
---------- ----------
Assets:
Investment tax credits 631,393 662,961
Regulatory liability 506,697 506,697
Taxes on contributions in aid of
construction 580,401 682,962
Merger-related and other 1,917,920 355,147
---------- ----------
3,636,411 2,207,767
Valuation allowance (300,000) --
---------- ----------
Net Deferred Tax Liabilities $6,633,604 $6,166,117
========== ==========
The Company has recorded a valuation allowance of approximately $300,000
relating to contribution deductions expected to be taken within the next
four years, the statutory carryforward period for federal tax purposes.
However, there is no assurance that future taxable income will be
sufficient to realize such tax benefits given current Internal Revenue Code
limitations. Furthermore, in the event that the Internal Revenue Service
examines any of the years affected by this carryforward, the Company's
ability to utilize such deductions could be altered as well. When the
Company is able to determine that it is probable these benefits will be
realized in full or in part, the related valuation allowance will be
reduced accordingly.
42
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DEBT
Long-term debt at December 31 consists of the following:
2002 2001
---- ----
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 1,040,000 1,105,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series A), 6.35%,
due December 1, 2019 2,615,000 2,750,000
Unsecured Business Finance Authority
1994 Revenue Bond (Series B), 6.45%,
due December 1, 2016 1,435,000 1,550,000
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 May 1, 2022 428,312 445,000
Loan, 2.315%, due April 1, 2013 145,000 ---
Secured loan, 5%, due October 1, 2005 50,252 70,005
----------- -----------
27,213,564 27,420,005
Less current portion 353,769 348,207
----------- -----------
$26,859,795 $27,071,798
=========== ===========
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, 2002 are as follows:
2003 $ 353,769
2004 368,357
2005 9,866,264
2006 351,144
2007 351,469
2008 and thereafter $15,922,561
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, 2002, approximately $4.15
million of Pennichuck's retained earnings was unrestricted for payment or
declaration of common dividends. Substantially all of the assets owned by
Pennichuck East, totaling approximately $13.8 million and $12.1 million at
43
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - DEBT (Continued)
December 31, 2002 and 2001, respectively, is pledged as collateral under a
certain $4.5 million note with a local bank dated April 8, 1998.
The Company has available a $2.5 million unsecured, revolving credit
facility with a bank. During 2002 and 2001, there were no outstanding
borrowings under this facility.
The Company has two interest rate financial instruments which qualify as
derivatives under Statement of Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). These
financial derivatives have been designated as cash flow hedges under the
provisions of SFAS No. 133. The financial instruments are used to mitigate
interest rate risks associated with the Company's $6 million floating-rate
loans. The floating rates, which are based on LIBOR plus 65 basis points,
were 2.28% and 2.84%, at the end of 2002 and 2001, respectively. The
agreements provide for the exchange of fixed rate interest payment
obligations for floating rate interest payment obligations on notional
amounts of principal. The two derivative 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, 2002
and 2001. Changes in the fair values of those derivatives are deferred in
accumulated other comprehensive income.
NOTE 4 - EQUITY INVESTMENTS IN UNCONSOLIDATED COMPANIES
At December 31, 2002 and 2001, the Company's wholly-owned real estate
subsidiary, The Southwood Corporation, had a 50 percent ownership interest
in four limited liability companies (LLC's). The LLC's, whose assets and
liabilities are not included in the accompanying Consolidated Balance
Sheets, own certain commercial office buildings on which there are
outstanding mortgage notes totaling $9.45 million at the end of 2002 and
$9.64 million at the end of 2001. Southwood is contingently liable on one
half of the outstanding mortgage balances and as such, it has issued a
guarantee to the mortgagee for its share of the guaranteed indebtedness.
Southwood uses the equity method of accounting for its investments in these
three LLC's and accordingly, its investment is adjusted for its share of
earnings or losses and for any distributions or dividends received from the
LLC's. For the years ended December 31, 2002 and 2001, Southwood's share of
earnings in these LLC's was approximately $314,000 and $141,000,
respectively, and a loss of $48,000 for the year ended December 31, 2000.
Southwood's share of earnings and losses are included under Revenues-real
estate operations in the accompanying Consolidated Statement of Income. The
principal assets of the LLC's are the land, buildings and leasehold
improvements, the total of which at December 31, 2002 and 2001 was $9.40
million and $9.63 million, respectively.
During 2002, a major tenant occupying one of the buildings owned by an LLC
filed for bankruptcy protection. However, the tenant's bank has issued a
letter of credit for the benefit of the LLC guaranteeing the tenant's full
lease payments over the remaining term of its lease which expires on March 31,
2005. The LLC is actively looking for a
44
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EQUITY INVESTMENTS IN UNCONSOLIDATED COMPANIES (Continued)
new party to occupy the portion of office space (approximately 26,000
square feet) that is no longer utilized by the tenant.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain financial instruments included in the
accompanying Consolidated Balance Sheet as of December 31, 2002 is as
follows:
Carrying Value Fair Value
-------------- ----------
Long-term debt $27,213,564 $30,953,601
Interest rate swaps $ (540,720) $ (540,720)
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
cost to terminate these agreements as of December 31, 2002 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.
NOTE 6 - BENEFIT PLANS
Pension Plan
The Company has a non-contributory, defined benefit pension plan covering
substantially all full-time employees. The benefits are formula-based,
giving consideration to both past and future service. The Company's
funding policy is to contribute annually up to the maximum amount
deductible for federal tax purposes. Contributions are intended to provide
not only for benefits attributed to service to date but also for those
expected to be earned in the future. The changes in benefit obligation and
plan assets were as follows:
December 31,
2002 2001
---- ----
Change in benefit obligation:
Benefit obligation, beginning of the year $3,650,659 $3,299,694
Service cost 216,226 205,929
Interest cost 270,799 243,155
Actuarial (gain) / loss 496,495 (17,644)
Benefits paid (79,646) (80,475)
---------- ----------
Benefit obligation, end of the year 4,554,533 3,650,659
45
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - BENEFIT PLANS (Continued)
Change in plan assets:
Fair value of plan assets, beginning of the year 3,234,454 3,294,074
Actual loss on plan assets, net (171,543) (125,446)
Expenses (25,246) -
Employer contribution 198,442 174,683
Benefits paid, excluding expenses (79,646) (108,857)
---------- ----------
Fair value of plan assets, end of the year $3,156,461 $3,234,454
========== ==========
The plan's funded status was as follows:
December 31,
2002 2001
---- ----
Funded status (under funded) (1,398,072) (416,205)
Unrecognized net actuarial loss 1,858,574 884,927
Unrecognized transition (asset)/obligation (55,644) (69,451)
Unrecognized prior service cost 4,381 5,166
---------- ----------
Net amount recognized $ 409,239 $ 404,437
========== ==========
Amount recognized in the Consolidated Balance Sheets consisted of:
December 31,
2002 2001
---- ----
Prepaid retirement cost (included in Deferred charges and
other assets -- $ 404,437
Accrued retirement liability $ (614,669)
Accumulated other comprehensive income 1,019,527 --
Intangible asset 4,381 --
---------- ----------
Net amount recognized $ 409,239 $ 404,437
========== ==========
Weighted average assumption were as follows:
2002 2001 2000
---- ---- ----
Discount rate at the end of the year 6.50% 7.50% 7.50%
Expected return of plan assets for the year (net of
investment expenses) 8% 9% 9%
Rate of compensation increase at the end of the year 4% 5% 5%
Components of net periodic benefit cost were as follows:
2002 2001 2000
---- ---- ----
Service cost $ 216,226 $ 205,929 $ 189,730
Interest cost 270,799 243,155 219,624
Expected return on plan assets (296,431) (300,727) (277,061)
Amortization of prior service cost 785 785 785
Amortization of transition (asset) /obligation (13,807) (13,807) (13,807)
Recognized net actuarial loss 30,580 6,311 1,648
--------- --------- ---------
Net periodic benefit cost $ 208,152 $ 141,646 $ 120,919
========= ========= =========
46
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - BENEFIT PLANS (Continued)
The projected benefit obligation, the accumulated benefit obligation and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $4,554,533, $3,771,130 and
$3,156,461, respectively as of December 31, 2002 and $3,650,659, $3,108,648
and $3,234,454, respectively as of December 31, 2001.
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, recorded as operating expenses, were $115,210,
$109,325 and $101,644, respectively, for 2002, 2001 and 2000.
Other Post-retirement Benefits
- ------------------------------
The Company provides post-retirement medical benefits to current and
retired employees through separate post-retirement medical plans for its
union and non-union employees. Future benefits, payable to current
employees upon reaching normal retirement date, are calculated 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, 2002 and 2001 are
as follows:
December 31,
2002 2001
---- ----
Change in benefit obligation:
Benefit obligation, beginning of the year $ 808,273 $ 653,703
Service cost 32,928 29,993
Interest cost 59,286 54,777
Assumption changes 148,635 30,185
Actuarial (gain) / loss (25,052) 71,336
Benefits paid (31,721) (31,721)
--------- ---------
Benefit obligation, end of the year 992,349 808,273
Change in plan assets:
Fair value of plan assets, beginning of the year $ 203,802 $ 145,052
Actual loss on plan assets, net (19,667) (10,010)
Employer contribution 31,721 100,481
Benefits paid, excluding expenses (31,721) (31,721)
--------- ---------
Fair value of plan assets, end of the year $ 184,135 $ 203,802
========= =========
47
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - BENEFIT PLANS (Continued)
The plan's funded status was as follows:
Funded status $(808,214) $(604,471)
Unrecognized net actuarial loss 171,195 13,100
Unrecognized transition (asset)/obligation - 29,900
Unrecognized prior service cost 66,600 81,100
--------- ---------
Accrued (Liability) recorded $(570,419) $(480,371)
========= =========
Weighted average assumption were as follows:
2002 2001 2000
---- ---- ----
Discount rate at the end of the year 6.50% 7.50% 7.75%
Expected return of plan assets for the year (net of
investment expenses) 8% 9% 9%
Rate of compensation increase at the end of the year 4% 5% 5%
Components of net periodic benefit cost were as follows:
2002 2001 2000
---- ---- ----
Service cost $ 32,928 $ 29,993 $ 28,538
Interest cost 59,286 54,777 45,526
Expected return on plan assets (14,845) (11,413) (4,943)
Amortization of prior service cost 14,500 14,500 14,500
Amortization of transition (asset) /obligation 29,900 30,900 30,900
Recognized net actuarial loss - - (2,826)
-------- -------- --------
Net periodic benefit cost $121,769 $118,757 $111,695
======== ======== ========
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 6.5% in 2002 and 7.5% in 2001, and a cost trend
rate of 4% in 2002, which is the projected annual increase in future
compensation levels. A one percent change in the assumed health care cost
trend rate would not have had a material effect on the post-retirement
benefit cost or the accumulated post-retirement benefit obligation in 2002.
NOTE 7 - 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."
48
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK BASED COMPENSATION PLANS (Continued)
2002 2001 2000
---- ---- ----
Net income:
As reported $2,340,579 $3,611,704 $3,682,661
Pro forma $2,195,288 $3,468,332 $3,461,126
Basic earnings per share:
As reported $.98 $1.52 $1.56
Pro forma $.92 $1.46 $1.47
Diluted earnings per share:
As reported $.97 $1.50 $1.55
Pro forma $.91 $1.45 $1.46
At December 31, 2002, all options which had been granted were exercisable
and 177,772 shares were available for future grants. Share option activity
since December 31, 1999 is shown in the following table:
Options Price Per
Outstanding Share
----------- ---------
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
Granted 18,175 27.00
Canceled --- ---
Exercised (2,583) $ 8.12-$15.75
------
Balance at December 31, 2002 85,395 $ 8.12-$27.00
======
At December 31, 2002, outstanding options were exercisable for 85,395
shares at a weighted average exercise price of $21.88 per share. The
corresponding amounts at December 31, 2001 were 69,803 and $20.16,
respectively.
49
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK BASED COMPENSATION PLANS (Continued)
The following table summarizes information about outstanding options as of
December 31, 2002:
Outstanding and Exercise Contractual
Exercisable Price Remaining Life
- --------------- -------- --------------
251 $ 8.63 3
1,501 $ 8.12 4
2,501 $ 9.50 5
5,598 $15.75 6
28,499 $23.25 7
28,870 $20.39 8
18,175 $27.00 9
------
85,395
======
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 2002, 2001, and 2000, respectively: risk-free interest rates
of 4.60%, 5.08%, and 6.59%; expected dividend yields of 2.9%, 4.7%, and
5.3%; expected lives of 5 years in 2002, 2001 and 2000; and expected
volatility of 36%, 34%, and 53%.
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. The Company had granted 7,094 shares of non-qualified stock
options as of December 31, 2002. The tax effects of these non-qualified
stock options granted were immaterial for 2002, 2001, and 2000 for
calculation of pro-forma net income under SFAS No. 148 and SFAS No.123.
None of the non-qualified stock options granted were exercised as of
December 31, 2002.
NOTE 8 - 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
50
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHAREHOLDER RIGHTS PLAN (Continued)
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. Effective immediately prior to the
execution of the merger agreement discussed in Note 9, the Rights Agreement
was amended to provide that neither the merger agreement nor the
transactions contemplated thereby would constitute an event that would
trigger the exercisability of the Rights.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Termination of Merger Agreement
- -------------------------------
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. Under the terms of the agreement, the Company's stockholders
would have received 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. The merger was 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 review of the merger
by the NHPUC and approval by the Company's shareholders was expected to
occur in the first half of 2003.
However, on November 26, 2002, the Board of Aldermen of the City of Nashua,
New Hampshire adopted a resolution calling for a referendum on January 14,
2003 that, if passed, would authorize Nashua to pursue the acquisition, by
an eminent domain proceeding or otherwise, of all or a portion of
Pennichuck's water system serving the residents of Nashua and others. The
voters of Nashua passed the referendum on January 14, 2003 by more than a
three-to-one margin. Subsequently, on February 4, 2003, the Company
announced that it had reached an agreement with PSC to terminate PSC's
pending acquisition of the Company. The decision to terminate the merger
agreement resulted from the ongoing efforts by the City of Nashua (the
"City") to acquire Pennichuck's utility operating assets by eminent domain.
Expenses associated with the pending PSC merger transaction and related
issues total approximately $1,946,192 for the year ended December 31, 2002.
Those expenses are broken down as follows:
Investment banking fees $1,086,000
Legal and other fees relating to
merger and regulatory approval 860,192
----------
Total merger and related costs $1,946,192
==========
51
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Under current Internal Revenue Code regulations, costs relating
specifically to the merger transaction may be deductible for Federal income
tax purposes in the year in which the merger is terminated. As a result,
the Company has recorded a deferred tax asset of approximately $580,000
which is expected to be realized in 2003.
Pending Municipalization Offer
- ------------------------------
In accordance with New Hampshire law, the City formally notified the
Company's utility subsidiaries on February 5, 2003 of its intention to
acquire all or a portion of their operating assets. However, the City was
not required to propose a purchase price for such assets in its initial
notification to the utility subsidiaries. The Company's three regulated
utilities have 60 days in which to respond to the City. On March 25, 2003,
the Company's three utilities notified the City of their decision not to
sell their operating assets. Under New Hampshire statutes, the City has the
right to seek the NHPUC's authorization to compel the sale of those
operating assets through an eminent domain proceeding. By letter dated
March 26, 2003, the City indicated its intent to pursue such an eminent
domain proceeding. It is not certain whether the City will acquire all or
any portion of the three utilities' operating assets even if the NHPUC were
to approve such an acquisition and establish a price for it.
Pending Regulatory Investigation
- --------------------------------
The Company has been informed by the Securities and Exchange Commission and
the New Hampshire Bureau of Securities Regulation that it is the subject of
related investigations by each agency. The Company understands that those
investigations relate to various real estate development joint ventures,
and include a real estate transaction between one of those joint ventures
and Maurice L. Arel, the Company's President, and the Company's previous
public disclosure regarding that transaction. The Company's board of
directors has retained legal counsel to conduct an independent review of
such matters, under the direction of the Company's Audit Committee, and has
instructed the Company and counsel to cooperate fully with both
investigations. The independent review is ongoing with the cooperation of
all executive officers.
Note A to the Company's 1998 financial statements, which were included in
the Company's annual report to shareholders and incorporated into its
Annual Report on Form 10-KSB for that year, disclosed that an executive
officer had purchased a home in 1998 from a joint venture between a
Pennichuck subsidiary and an unaffiliated real estate developer. Note A
stated that the terms of the home purchase "were the same as the terms
which would be given to any independent third-party purchaser." Mr. Arel
is the executive referenced in that disclosure. The Audit Committee has
obtained information indicating that Mr. Arel's 1998 home purchase in fact
52
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
was not on terms that would have been available then to any independent
third-party purchaser. The Audit Committee is continuing to investigate
the matter to determine, among other things, the financial impact of the
transaction on the Company, the value of any benefits received by Mr. Arel
in that transaction, the circumstances surrounding the preparation of the
disclosure in Note A to the 1998 financial statements, and what, if any,
action the Company should take against Mr. Arel or others.
Although the Company is cooperating fully with the regulatory
investigations, the SEC and the New Hampshire Bureau of Securities
Regulation, upon the completion of their respective investigations, could
seek to impose fines, penalties or other sanctions upon the Company.
Operating Leases
- ----------------
The Company leases miscellaneous office equipment through operating leases.
Total rental expense for operating leases was approximately $24,300,
$17,600 and $8,100 for 2002, 2001 and 2000, respectively.
At December 31, 2002, the scheduled minimum lease payments under the
Company's operating leases are as follows:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Operating lease payments $20,407 $18,503 $18,403 $854 $--
NOTE 10 - GUARANTEES
As discussed in Note 4, Southwood has issued a financial guarantee of one-
half of the outstanding mortgage balances associated with HECOP I, LLC,
HECOP II, LLC and HECOP III, LLC (collectively, the "limited liability
companies"). At December 31, 2002, Southwood was contingently liable on
approximately $4.725 million of mortgage indebtedness associated with those
limited liability companies.
53
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTAL DISCLOSURES ON CASH FLOW AND NON-CASH ITEMS
Supplemental cash flow information for the three years ended December 31 is
presented below:
2002 2001 2000
---- ---- ----
Cash paid during the year for:
Interest $1,931,145 $1,972,283 $1,905,473
Income taxes $ 645,070 $1,214,973 $1,349,149
Non-cash items:
Contributions in aid of construction $3,168,315 $2,077,217 $3,316,527
Minimum pension liability adjustment:
Accrued pension liability $ 614,669 $ -- $ --
Deferred tax and other $ 404,858 $ -- $ --
Other comprehensive (loss) $ (619,017) $ -- $ --
NOTE 12 - 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.
54
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - BUSINESS SEGMENT INFORMATION (Continued)
The tables below present information about Pennichuck Corporation's three
primary business segments for the years ended December 31, 2001, 2000 and
1999.
2002 2001 2000
---- ---- ----
Operating revenues:
Water utility $18,829,418 $17,411,760 $15,963,540
Real estate 3,088,007 4,156,556 6,989,006
Contract operations & other 1,504,131 1,186,022 718,930
----------- ----------- -----------
Total operating revenues $23,421,556 $22,754,338 $23,671,476
----------- ----------- -----------
Operating income:
Water utility $ 6,044,113 $ 5,002,983 $ 4,349,211
Real estate 1,337,604 3,244,462 4,632,404
Contract operations & other 265,555 304,697 234,305
----------- ----------- -----------
Total operating income $ 7,647,272 $ 8,552,142 $ 9,215,920
=========== =========== ===========
Capital additions:
Water utility $ 8,412,783 $ 8,210,756 $ 7,735,483
Real estate -- -- --
Contract operations & other 29,864 400 4,833
----------- ----------- -----------
Total capital additions $ 8,442,647 $ 8,211,156 $ 7,740,316
=========== =========== ===========
Identifiable assets:
Water utility $85,713,641 $79,458,338 $73,547,121
Real estate 1,787,346 3,524,382 4,053,620
Contract operations & other 3,480,927 4,647,469 5,279,265
----------- ----------- -----------
Total identifiable assets $90,981,914 $87,630,189 $82,880,006
=========== =========== ===========
Depreciation and amortization expense:
Water utility $ 2,680,898 $ 2,590,524 $ 2,225,329
Real estate -- 412,742 912,221
Contract operations & other 94,991 43,696 34,216
----------- ----------- -----------
Total depreciation and
amortization expense $ 2,775,889 $ 3,046,962 $ 3,171,766
=========== =========== ===========
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.
2002 2001 2000
---- ---- ----
Allocated parent expenses:
Water utility $443,734 $522,180 $522,231
Real estate 49,491 58,581 5,615
Contract operations 33,162 25,960 33,692
-------- -------- --------
Total allocated parent expenses $526,387 $606,721 $561,538
======== ======== ========
55
PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - BUSINESS SEGMENT INFORMATION (Continued)
Within the water utility business segment, one customer accounted for
approximately 10 percent of total operating revenues in 2002 and 2001 and
approximately 11% in 2000. During 2002, 2001 and 2000, the water utility
recorded $1,842,000, $1,809,000 and $1,755,000, respectively, in water
revenues which were derived from fire protection and other billings to the
City of Nashua.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
(In thousands of dollars, except per share amounts)
2002
Operating Revenues $6,865 $5,053 $6,537 $4,967
Operating Income 1,672 1,459 2,910 1,606
Net Income 630 (709) 1,377 1,043
Basic Earnings Per Share $ .26 $ (.30) $ .58 $ .44
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
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 then 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 2002 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.
56
Arthur Andersen LLP's reports on the Company's financial statements for the
fiscal years ended December 31, 2000 and December 31, 2001 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 fiscal years ended December 31, 2000 and
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 fiscal years
ended December 31, 2000 and December 31, 2001 and the subsequent interim
period through March 26, 2002.
During the Company's fiscal years ended December 31, 2000 and 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.
PART III:
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the registrant's definitive proxy statement
for the 2003 annual meeting of the registrant's shareholders to be filed
with the Commission; or, to be filed by amendment to this report.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the registrant's definitive proxy statement
for the 2003 annual meeting of the registrant's shareholders to be filed
with the Commission; or, to be filed by amendment to this report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference to the registrant's definitive proxy statement
for the 2003 annual meeting of the registrant's shareholders to be filed
with the Commission; or, to be filed by amendment to this report.
57
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the registrant's definitive proxy statement
for the 2003 annual meeting of the registrant's shareholders to be filed
with the Commission; or, to be filed by amendment to this report.
Item 14. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company's
financial reports and to other members of senior management and the Board
of Directors.
Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the principal executive officer and
principal financial officer of Pennichuck Corporation have concluded that
Pennichuck Corporation's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934)
are effective to ensure that the information required to be disclosed by
Pennichuck Corporation in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in applicable Securities and
Exchange Commission rules and forms.
There were no significant changes in Pennichuck Corporation's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their most recent evaluation.
58
PART IV:
Item 15. 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, 2002 are
included in Part II, Item 8 hereof and are incorporated herein by
reference:
Report of Independent Public Accountants
Consolidated Balance Sheets at
December 31, 2002 and 2001
Consolidated Statements of Income for each of
the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders'
Equity for each of the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Cash Flows for each
of the years ended December 31, 2002, 2001
and 2000
Notes to Consolidated Financial Statements
(2) The following Financial Statement Schedules of Pennichuck
Corporation for each of the years 2002, 2001 and 2000 are included in this
report:
Report of Independent Public Accountants
on Schedules for the years ended
December 31, 2002, 2001 and 2000
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial
Statements or notes thereto.
59
(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 Bylaws of Pennichuck Corporation (Filed as Exhibit 3.3 to this
Form 10-K Report)
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)
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 the Company's
Registration Statement on Form 8-A12G/A filed with the
Securities and Exchange Commission on April 30, 2002).
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 the
Company's Registration Statement on Form 8-A12G/A filed with
the Securities and Exchange Commission on April 30, 2002).
60
Exhibit
Number Description of Exhibit
- ------- ----------------------
4.4 Agreement of Substitution and Amendment of Common Shares
Rights Agreement dated January 15, 2002 by and between
Pennichuck Corporation and American Stock Transfer & Trust
Company (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form 8-A12G/A filed with
the Securities and Exchange Commission on April 30, 2002).
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
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 29, 2002).
10.1 Deferred Compensation Program for Directors of Pennichuck
Corporation (Filed as Exhibit 10.2 to the Company's 1997 Form
10-KSB Report and incorporated herein by reference)
10.2 Amended Line of Credit Agreement dated October 2, 1991 between
Pennichuck Corporation and Fleet Bank-NH (Filed as Exhibit
10.7 to the Company's 1991 Form 10-K Report and incorporated
herein by reference)
10.3 Second Amendment dated March 23, 1994 to Line of Credit
Agreement between Pennichuck Corporation and Fleet Bank-NH
dated October 2, 1991 (Filed as Exhibit 10.7 to the Company's
1994 first quarter Form 10-QSB Report and incorporated herein
by reference)
10.4 Amended and Restated Revolving Line of Credit Loan Agreement
dated March 23, 1994 between Pennichuck Corporation and Fleet
Bank-NH (Filed as Exhibit 10.8 to the Company's 1994 second
quarter Form 10-QSB Report and incorporated herein by
reference)
10.5 Insurance Funded Deferred Compensation Agreement dated June
13, 1994 (Filed as Exhibit 10.9 to the Company's 1994 second
quarter Form 10-QSB Report and incorporated herein by
reference)
10.6 Amendment Agreement dated May 4, 1995 to Amended and Restated
Revolving Line of Credit Loan Agreement dated March 23, 1994
between Pennichuck Corporation and Fleet Bank-NH (Filed as
Exhibit 10.8 to the Company's 1995 second quarter Form 10-QSB
Report and incorporated herein by reference)
61
Exhibit
Number Description of Exhibit
- ------- ----------------------
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)
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)
62
Exhibit
Number Description of Exhibit
- ------- ----------------------
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)
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 PricewaterhouseCoopers LLP
(Filed as Exhibit 23 to this Form 10-K Report)
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)
99.3 Statement(s) under Section 906 of the Sarbanes-Oxley Act of
2002 furnished by Maurice L. Arel, President and Principal
Executive Officer and Charles J. Staab, Vice President,
Treasurer and Principal Financial Officer (Filed as Exhibit
99.3 to this Form 10-K Report)
(b) Reports on Form 8-K: The Company did not file a report on Form 8-K
during the fourth quarter of the fiscal year covered by this report.
63
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 of America, the consolidated financial
statements included in Pennichuck Corporation's report on this Form 10-K,
and have issued our report thereon dated February 26, 2003. 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/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 26, 2003
64
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Pennichuck Corporation
Condensed Balance Sheets
December 31
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 2,321,301 $ 3,255,130
Refundable income taxes 334,034 312,285
Prepaid expenses and other 6,214 70,433
----------- -----------
Total Current Assets 2,661,549 3,637,848
Property and Equipment 1,269,052 1,251,202
Less allowances for depreciation (614,740) (591,998)
----------- -----------
654,312 659,204
Other assets 8,119 20,133
Deferred tax asset 781,234
Investment in subsidiaries 29,205,052 28,210,490
----------- -----------
$33,310,266 $32,527,675
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other current liabilities $ 313,398 $ 189,399
Long term debt 1,500,000 1,500,000
Other long term liabilities 540,720 408,431
Stockholders' equity 30,956,148 30,429,845
----------- -----------
$33,310,266 $32,527,675
=========== ===========
65
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CON'T)
Pennichuck Corporation
Condensed Statements of Income
Year Ended December 31
-----------------------------------------
2002 2001 2000
---- ---- ----
Operating revenues $ 45,477 $ 228,497 $ 57,395
Operating expenses, including merger
related costs 1,926,885 67,021 ---
----------- ---------- ----------
Operating Income (Loss) (1,881,408) 161,476 57,395
Interest income & other 56,249 152,918 198,104
Interest (Expense) (138,676) (173,911) (88,277)
----------- ---------- ----------
Income (Loss) Before Income
Taxes and Equity in Net Income
of Subsidiaries (1,963,835) 140,483 167,222
Income Tax (Provision) 797,875 (55,645) (65,685)
----------- ---------- ----------
Income (Loss) Before Equity
in Earnings of Subsidiaries (1,165,960) 84,838 101,537
Equity in Earnings of Subsidiaries 3,506,539 3,526,866 3,581,124
----------- ---------- ----------
NET INCOME $ 2,340,579 $3,611,704 $3,682,661
=========== ========== ==========
Condensed Statements of Cash Flows
Year Ended December 31
---------------------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES $(1,544,836) $ 221,425 $ (99,797)
----------- ----------- -----------
INVESTING ACTIVITIES:
Equity Transfer from (to) to Subsidiary 1,896,693 (1,252,087) (944,844)
Net (increase) decrease in Property
and Equipment and Other Assets (17,850) (12,414) ---
----------- ----------- -----------
1,878,843 (1,264,501) (944,884)
FINANCING ACTIVITIES:
Advances from Subsidiaries 615,281 2,157,789 3,836,929
Payment of Dividends (1,943,938) (1,812,864) (1,701,189)
Proceeds from Dividend Reinvestment
and Other, net 60,821 275,428 356,851
----------- ----------- -----------
(1,267,836) 620,353 2,492,591
(DECREASE)INCREASE IN CASH (933,829) (422,723) 1,447,910
Cash at Beginning of Year 3,255,130 3,677,853 2,229,943
----------- ----------- -----------
CASH AT END OF YEAR $ 2,321,301 $ 3,255,130 $ 3,677,853
=========== =========== ===========
66
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, 2002.
NOTE B -- COMMON DIVIDENDS FROM SUBSIDIARIES
Common stock cash dividends paid to Pennichuck Corporation by its
subsidiaries were as follows:
2002 2001 2000
---- ---- ----
Pennichuck Water Works, Inc. $1,829,429 $1,731,129 $1,631,039
Pittsfield Aqueduct Company, Inc. --- --- ---
Pennichuck East Utility, Inc. 114,509 71,385 70,150
---------- ---------- ----------
TOTAL $1,943,938 $1,802,514 $1,701,189
========== ========== ==========
A cash dividend of $10,350 was paid by Pennichuck Corporation for
fractional shares due to a stock split in December 2001.
67
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance
beginning costs and at End
of Period expenses Deductions(1) of Period
---------- ---------- ------------- ---------
Allowance for
doubtful accounts:
2002 $83,998 (13,655) 29,878 $ 40,465
2001 $37,000 73,428 26,430 $ 83,998
2000 $37,000 23,821 23,821 $ 37,000
Amounts include accounts receivable write-offs net of recoveries.
Valuation allowance for
deferred tax asset (2):
2002 $ -- $300,000 $ -- $300,000
2001 $ -- -- -- $ --
2000 $ -- -- -- $ --
See Note 2 in the Notes to the accompanying Consolidated Financial
Statements.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Pennichuck Corporation
----------------------
(Registrant)
Date: March 31, 2003
--------------
By: /s/ Maurice L. Arel
--------------------
Maurice L. Arel, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
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, Chief Executive Officer March 31, 2003
- ------------------------------ and Director (Principal
Maurice L. Arel Executive Officer)
/s/ Stephen J. Densberger Executive Vice President March 31, 2003
- ------------------------------ and Director
Stephen J. Densberger
/s/ Charles J. Staab Vice President, Treasurer, March 31, 2003
- ------------------------------ Chief Financial Officer
Charles J. Staab and Director (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Joseph A. Bellavance Director March 31, 2003
- ------------------------------
Joseph A. Bellavance
/s/ Charles E. Clough Director March 31, 2003
- ------------------------------
Charles E. Clough
/s/ Robert P. Keller Director March 31, 2003
- ------------------------------
Robert P. Keller
/s/ John R. Kreick Director March 31, 2003
- ------------------------------
John R. Kreick
69
/s/ Hannah M. McCarthy Director March 31, 2003
- ------------------------------
Hannah M. McCarthy
/s/ Martha E. O'Neill Director March 31, 2003
- ------------------------------
Martha E. O'Neill
70
SECTION 302 CERTIFICATION OF THE PRESIDENT
AND PRINCIPAL EXECUTIVE OFFICER
I, Maurice L. Arel, certify that:
1. I have reviewed this annual report on Form 10-K of Pennichuck
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
71
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Maurice L. Arel
- -------------------
Maurice L. Arel, President
and Principal Executive Officer
72
SECTION 302 CERTIFICATION OF THE VICE PRESIDENT,
TREASURER AND PRINCIPAL FINANCIAL OFFICER
I, Charles J. Staab, certify that:
1. I have reviewed this annual report on Form 10-K of Pennichuck
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
73
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Charles J. Staab
- --------------------
Charles J. Staab, Vice President, Treasurer
and Principal Financial Officer
74