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 29,400 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 22,100 customers, accounts for 95% of Pennichuck's revenues. Its franchises in the remaining towns consist of stand-alone satellite water systems serving over 2,100 customers. Pennichuck has no competition in its core franchise area. Currently, approximately 25% of its water revenues are derived from commercial and industrial customers and approximately 57% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford. Pennichuck's annual water revenues were approximately $14.75 million for calendar year 2003.
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 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 4,450 customers and annual water revenues were approximately $2.98 million for calendar year 2003.
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 $447,000. Pittsfield has no competition in its franchise area.
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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 2003 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 8.42% 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 established a new turbidity standard of 0.3 NTU. Pennichuck will complete its evaluation of 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 March 2004.
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.
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
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various water-related monitoring, maintenance, testing and compliance reporting services for these systems in New Hampshire. During 2003, the Service Corporation provided such services pursuant to 67 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 Winstanley Enterprises, Inc. ("Winstanley"), a regional real estate developer, under the terms of an option agreement between Southwood and Winstanley. Under that 1995 agreement, Winstanley paid to Southwood an option fee each year equal to the annual carrying costs associated with that land.
In September 1997, Southwood and Winstanley 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, 2003, approximately 121,000 square feet had been leased to third parties under long-term lease agreements. Southwood also holds a 50% ownership interest in HECOP IV, LLC formed in May 2002. As of December 31, 2003, HECOP IV's principal asset was approximately 9.1 acres of raw land available for future commercial development. The remaining 50% ownership interest in each of these four LLC's is held by John Stabile, a local developer, with whom Southwood has participated in four residential joint ventures during the past 10 years.
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. The remaining 50% ownership interest is held by John Stabile, a local developer. 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.
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Employees
The Company, through its principal subsidiary Pennichuck, employs 82 permanent, full-time employees and officers. Of these, there are 43 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.
Additional Information
The Company's Internet address is www.pennichuck.com. The Company's web site provides a hyperlink to a third party web site through which the Company's annual, quarterly and current reports, and amendments to those reports, are available free of charge. The Company believes these reports are made available as soon as reasonably practicable after it electronically files them with, or furnishes them to, the Securities and Exchange Commission ("SEC"). The Company does not maintain or provide any information directly to the third-party web site, and does not check its accuracy. The public can also obtain access to such reports at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC's web site which is www.sec.gov.
RISK FACTORS
Risks Related to the Company's Business
The City of Nashua's use of the 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 (the "City") 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 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 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.
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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 were completed in the fall of 2003 and the required construction will be completed in 2004. The estimated cost of the required dam repairs and upgrades will be about $950,000.
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.
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 USEPA 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 $3.66 million of our operating revenues are derived from commercial and industrial customers. Pennichuck's largest water customer, Anheuser
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Busch ("AB"), was responsible for about 16.1% of its demand in 2003. 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 are planned for development. The demand and prices for Southwood's real estate are dependent upon interest rates and construction costs as well as general economic conditions.
Carrying Costs. Real estate assets are subject to ongoing maintenance costs and property taxes. Reductions in demand for our properties may cause us to continue to incur operating costs without any offsetting income.
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.
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
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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 withdraw 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. This supplemental water supply provides an additional source of water during dry summer periods and will provide a long-term supply for Pennichuck's service area.
4. Approximately 672 acres of land located in Nashua and Merrimack which are owned and held for watershed and reservoir purposes.
5. Eleven water storage reservoirs having a total storage capacity of 20.7 million gallons, six of which are located in Nashua, two in Amherst, one in Bedford, one in Derry and one in Hollis, New Hampshire.
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 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)
Services
23,670
4,597
Meters
23,952
4,352
Hydrants
2,287
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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 525 acres into buffer (non-developable) and alternate use (developable) designations, resulting in an approximate breakout of 283 and 242 acres, respectively. Of the approximately 242 acres of alternate use land, 36 acres are located primarily in the northwestern section of the City of Nashua, New Hampshire and 206 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, 2003:
Nashua, NH
Merrimack, NH
Total
Residential
Industrial
--
Total Alternate Use Acreage
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.
Item 3. LEGAL PROCEEDINGS
Regulatory Investigation
The Company is the subject of an investigation by the New Hampshire Bureau of Securities Regulation (the "Bureau") and the Securities and Exchange Commission (the "SEC"). The scope of the investigation relates generally to the Company's commercialization of real estate through joint ventures involving its Southwood Corporation subsidiary and, in particular, to certain of the Company's public disclosures regarding various joint venture transactions. Specifically, the Bureau and the SEC have alleged that in 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, the Company improperly disclosed the purchase of a home by Maurice L. Arel, the Company's former President who is also a target of the investigation, from one of the Company's real estate joint ventures as being "on the same terms which would be given to any independent third-party". In fact, the purchase was not made on such terms, and the Company believes that Mr. Arel received a benefit in the range of $50,000 to $75,000 in connection with the purchase.
In addition, the Bureau and the SEC have alleged that the Company failed to properly disclose payments from the Company's real estate joint ventures to a landscaping company with which one of Mr. Arel's sons was involved. During the seven-year period from 1996 to 2002, six of the Company's joint ventures engaged for various landscaping projects a company with which one of Mr. Arel's sons was involved. The joint ventures' payments to that landscaping company totaled approximately $517,600 during that period. In three of those years, the aggregate payments for the year exceeded $60,000. In
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1999, the joint ventures paid the landscaping company a total of $259,000, the greatest amount that the joint ventures paid to the landscaping company during a single year.
The regulators have also alleged that the Company failed to disclose the fact that nearly all of its real estate joint ventures had been formed with the same developer, and that the Company did not exercise proper oversight of the activities of those various joint ventures, including by failure to obtain or to keep adequate records, including copies of financial records, contracts, correspondence or other material information.
The Company's board of directors retained legal counsel to conduct an independent review of the allegations, under the direction of the Company's Audit Committee, and instructed the Company's executive officers and counsel to cooperate fully with the investigation by the Bureau and the SEC. That independent review is now substantially complete and the Company's counsel has briefed the regulators on the board's findings. In addition, and as a result of the independent review, Mr. Arel's employment with the Company and its subsidiaries was terminated in early May 2003.
The Bureau and the SEC could seek to impose fines, penalties or other sanctions upon the Company as a result of their respective investigations. In November 2003, the Bureau and the SEC indicated a willingness to consider a global settlement of their claims against the Company and against Mr. Arel. Although no agreement or understanding has been reached, the framework of the settlement that is under consideration would consist of a fund to be established for the benefit of the Company's shareholders, a fine to be paid to the Bureau, and a payment to the Bureau to defray its expenses. In addition to the negotiations with the Bureau and the SEC regarding the proposed settlement, the Company is also engaged in negotiations with Mr. Arel as to what portion, if any, of the settlement amounts he would be responsible for paying. There can be no assurance that a settlement agreement with the regulators and Mr. Arel will in fact be reached.
Municipalization Efforts
The City of Nashua (the "City") formally notified the Company's utility subsidiaries on February 5, 2003 of its intention to acquire all or a portion of their plant and property. The notification letters from the City stated that the City was acting pursuant to New Hampshire's utility municipalization statute. On March 25, 2003, the Company's three utilities notified the City of their decision not to sell their plant and property. Under New Hampshire statutes, a municipality may seek the NHPUC's authorization to compel the sale of utility assets through an eminent domain proceeding if the utility does not agree to sell the assets voluntarily. By letter dated March 26, 2003, the City indicated its intent to pursue such an eminent domain proceeding. The City and the Company have had discussions since that time regarding the City's desire to acquire the Company's assets, the particular assets that the City is interested in acquiring and the price that the City would be willing to pay for those assets.
On April 8, 2003, the Town of Pittsfield formally notified Pittsfield Aqueduct Company, Inc. that it wished to acquire the plant and property of that company. The letter indicated that the Town was providing its notification pursuant to the New Hampshire utility municipalization statute. By letter dated May 28, 2003, Pittsfield Aqueduct Company, Inc. notified the Town of Pittsfield of its decision not to sell its plant and property. To date, the Town of Pittsfield has not commenced an eminent domain proceeding at the NHPUC.
On March 25, 2004, the City filed a petition for valuation pursuant to New Hampshire RSA 38:9 with the NHPUC. That petition asks the NHPUC to order a determination of the fair market value of the assets of Pennichuck, Pennichuck East and Pittsfield and to allow
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the City to acquire these assets. It is not certain whether the City will ultimately choose to complete the acquisition of any portion of the property of the Company's utility subsidiairies even if the NHPUC ultimately approves such an acquisition and establishes a price for it.
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.
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.
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___________________________
(1)
Includes a one-time special dividend of $0.33 per share
Prior year per share amounts have been restated to reflect the four-for-three stock split in December 2001.
Item 7.
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.
Forward-Looking Statements
In addition to the historical financial information, this report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current information and expectations available to management at the time the statements are made and on several assumptions concerning future events that involve risks, uncertainties and factors which may be beyond the Company's control. As such, the actual performance of the Company may be materially different from the future results or performance implied by the forward-looking statements contained in this report. Such factors include, among other things, whether eminent domain proceedings are commenced against some or all of the Company's water utility assets, the success of pending applications for rate increases, changes in governmental regulations, changes in the economic and business environment that may impact demand for the Company's water and real estate products, changes in capital requirements that may affect the Company's level of capital expenditures, changes in business strategy or plans and unusual changes in weather conditions that impact water consumption. Accordingly, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Eminent Domain
The Company is the subject of eminent domain efforts by the City of Nashua (the "City") and the Town of Pittsfield (the "Town") regarding their desire to acquire all or a portion of the Company's water utility assets. In addition, a number of 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
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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 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. The status of these eminent domain efforts is discussed in greater detail in Note 9 to the Notes to Consolidated Financial Statements.
On February 4, 2004, the Company filed a Petition for Declaratory Judgment against the City, seeking a determination by the New Hampshire Superior Court that, among other things, the State utility municipalization statute is unconstitutional and the City has failed to commence eminent domain proceedings at the NHPUC in a timely fashion and therefore is barred from continuing the current utility municipalization process against the Company.
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 PSC merger transaction were approximately $231,000 and $1,946,000 for the twelve months ended December 31, 2003 and 2002, respectively. As discussed in Note 9 to the 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, New Hampshire. The referendum authorized the City 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.
Results of Operations
In this section, we discuss our 2003, 2002 and 2001 results of operations and the factors affecting them. The Company's operating activities, as discussed in greater detail in Note 12 to the Notes to Consolidated Financial Statements, are grouped into three primary business segments as follows:
Water utility operations - 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 - Includes the contract operations and laboratory testing activities of the Service Corporation.
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*
A combination of lower than normal water consumption and increased distribution maintenance costs adversely impacted the operating income of our regulated operating activities by approximately $1.9 million as discussed earlier under "Results of Operations -- 2003 Compared to 2002, Water Utility Operations."
*
The Company incurred costs totaling approximately $1.11 million relating to the terminated merger with Philadelphia Suburban Corporation, the eminent domain efforts by the City and the regulatory investigations.
*
Our water utility subsidiaries invested approximately $7.2 million in new and replacement property and plant during 2003, net of only $178,000 in contributions in aid of construction from local area developers and state and federal grants.
During 2003, the Company utilized its revolving loan credit facility (the "Loan Agreement") with Fleet for working capital and capital expenditure requirements. Under the Loan Agreement, the Company and its subsidiaries may 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, 2003, there was $2 million outstanding under the Loan Agreement at floating interest rates ranging from 2.43% to 2.47%. In March 2004, the Company received a commitment letter from Fleet to provide for $6.5 million in available short-term credit on the same terms contained in the original Loan Agreement. This increase in the line of credit is necessary in order to fund (i) its planned capital expenditures over the next two years, (ii) any future costs associated with the Company's defense against the City of Nashua's eminent domain taking, and (iii) any unanticipated shortfall in operating cash flow.
As disclosed in Note 3 of the Notes to 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 these debt instruments at their maturity through public issuance, or private placement, of debt or equity.
Our consolidated capital expenditures in 2003 totaled $7.2 million, net of contributions in aid of construction. Practically all of that amount was for projects relating to our water utility business. In 2003, the more significant projects included:
*
$983,000 for replacing aging distribution mains in Nashua, New Hampshire;
*
$896,000 for the repainting of a 4.5 million gallon steel tank in Pennichuck's core system;
*
$484,000 for the initial design phase of planned treatment plant filter upgrades;
*
$1.12 million for the construction of a 1 million gallon storage facility in Pennichuck East's Litchfield, New Hampshire franchise; and
*
$1.19 million 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.
The remaining items in the Company's 2003 capital program reflect expenditures for ongoing, routine investment in additional pump stations, services, distribution mains and hydrants, vehicles and sundry system improvements. For 2004, we expect that our total expenditures for capital projects will be approximately $6.99 million, of which $362,000 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 borrowings under the Company's available line of credit. Additionally, Pennichuck, the Company's largest regulated subsidiary, expects to file a Notice of Intent to File for Rate Relief with the NHPUC by late March or early April 2004 as discussed earlier.
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The Company also expects that its cash flow in 2004 will be positively affected by the recovery of approximately $1.15 million of prior years' Federal tax payments resulting from the carryback of its 2003 net operating loss recognized for tax purposes. This net operating loss resulted principally from additional accelerated tax depreciation allowable under the Internal Revenue Code's recently enacted bonus depreciation rules. The expected recovery of these income taxes is shown under "Refundable income taxes" in the accompanying Consolidated Balance Sheet as of December 31, 2003.
Over the next five years, the Company expects to spend approximately $62.2 million for capital projects in its regulated water business. Of that amount, approximately $26 million relates to the planned filter upgrades in Pennichuck's core system water treatment plant. This project will be undertaken in order to meet stricter standards promulgated by the LT 1 and LT 2 Interim Enhanced Surface Water Treatment Rules issued by the United States Environmental Protection Agency ("USEPA") which require the elimination or inactivation of certain microbial organisms to improve disinfection and filtration. Our capital expenditures over the next five years are estimated to be $6.99 million in 2004, $21.2 million in 2005, $18.1 million in 2006, $10 million in 2007 and $5.9 million in 2008.
Pennichuck expects that its future 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 began a public works program mandated by the USEPA requiring the City to separate its storm water runoff and sewer discharge systems over the next 10 years. Pennichuck has taken this opportunity to replace any aged or deteriorating water mains in those sections where the City is performing its sewer separation work. It is likely that Pennichuck will continue to spend $1 to $2 million annually on replacing its aging infrastructure within Nashua.
The Company's ability to finance its five year capital program will be dependent on, among other things, its future available operating cash flow, and its ability to competitively access both the debt and equity markets. The Company anticipates that these capital costs over the next five years will be recovered in the form of higher water rates. However, there can be no assurance that the NHPUC would approve a rate increase to cover all of such costs or the timeliness of such actions.
The following is a discussion of other major changes in the Company's consolidated financial position from December 31, 2002 to December 31, 2003:
*
"Notes receivable" classified under Current Assets decreased by $605,000 reflecting the net payments received on a development and construction loan to Adella Realty Trust which were repaid in full in May 2003;
*
"Refundable income taxes" increased $811,000 principally from the expected recovery of prior years' income taxes paid resulting from a tax net operating loss carryback discussed earlier;
*
The net decrease in "Accrued pension liability" of $537,000 reflects the Company's change in its pension plan funding status from a $615,000 accrued liability balance at December 31, 2002 to a $78,000 accrued liability at the end of 2003 as discussed in greater detail below.
The "Long-term note receivable" balance of $1.22 million at December 31, 2003 represents a note received by Southwood from the sale of a 66.8 acre tract of land to Folsom Development Corporation in January 2003 as discussed earlier under "Results of Operations - 2003 compared to 2002, Real Estate Operations." Under the terms of that sale, Southwood conveyed approximately 66.8 acres of land in exchange for approximately $257,000 in cash and a long-term note receivable of $1,224,000. The note, which matures in October 2005, carries a floating interest rate of prime plus 1.5% and is secured by a first mortgage on the property.
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In late March or early April 2004, Pennichuck expects to enter into a long-term lease arrangement with HECOP III, LLC for approximately 13,000 square feet of office space located in Merrimack, New Hampshire to serve as the Company's headquarters. Southwood holds a fifty percent (50%) ownership interest in HECOP III, LLC and the remaining ownership interests are held by John Stabile, who is also the holder of ownership interests in three other LLC joint ventures with Southwood as discussed above. The final execution of the lease is not expected to occur until the end of the first quarter of 2004.
Pension Plan
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 discount rate applied to the projected benefit obligation, (ii) the long-term rate of return on plan assets and (iii) the long-term rate of future increases in compensation. A lower discount rate increases the present value of our pension obligations and our annual pension expense. We have reduced our discount rate from 6.50% to 6.25% for 2003 reflecting the overall change in market conditions. Our expected long-term rate of return on pension plan assets is based on the plan's expected asset allocation, expected returns on various classes of plan assets as well as historical returns. We assumed that our long-term rate of return on pension plan assets was 8% in 2003 and 2002 and 9% in 2001. In addition, we assumed an increase in participant compensation levels of 3%, 4% and 5% in 2003, 2002 and 2001, respectively. These key assumptions are reviewed annually with our actuary and investment advisor and are updated to reflect the plan's experience. Actual results in any given year will often differ from our actuarial assumptions because of economic and other conditions which may impact the amount of pension expense the Company recognizes.
At December 31, 2002, the Company had a minimum pension liability of approximately $615,000, representing the excess of its pension liabilities over its plan assets. However, during 2003, the rate of return on plan investments was approximately 17.2% compared to a negative rate of return of 7.4% in 2002. As a result, the market value of the Company's plan assets was slightly lower than its accumulated benefit obligation by approximately $78,000 at December 31, 2003. The Company has recorded an adjustment of approximately $537,000 which resulted in a pension liability of approximately $78,000 at the end of 2003 and a credit, net of taxes, of approximately $349,000 to Other Comprehensive Income. Future adjustments to Other Comprehensive Income will be affected by changes in realized returns on pension plan assets, contributions to pension assets by the Company 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.
Regulatory Accounting - the use of regulatory assets and liabilities as permitted by 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
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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' customers. In the event that the inclusion in the rate-making process is disallowed, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
Revenue Recognition - utility revenues are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. The Company reads its residential customer meters generally on a quarterly basis and records its revenue based on 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 water 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. Accrued unbilled revenues recorded in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 were approximately $1,663,000 and $1,513,000, respectively.
The Company's non-utility revenues are recognized when services are rendered or when water is delivered. Revenues are based, for the most part, on long-term contractual rates.
Pension and Other Post Retirement Benefits - the Company's pension and other postretirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, earnings on the plans' assets, the discount rate, the expected long-term rate of return on the plans' assets and health care cost trends.
In accordance with SFAS No. 87, "Employers Accounting for Pensions" ("SFAS 87") and SFAS No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"), changes in pension and postretirement benefit obligations other than pensions ("PBOP") associated with these factors may not be immediately recognized as pension and PBOP costs in the statements of income, but generally are recognized in future years over the remaining average service period of the plans' participants.
As further described in Note 6 to the accompanying consolidated financial statements, the Company revised the discount rate in 2003 to 6.25% from 6.50% in 2002 to reflect market conditions. In determining pension obligation and cost amounts, this and other assumptions may change from period to period, and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the Company's pension plan ("the Plan") assets, which partially consist of equity investments, were affected by significant declines in the financial markets from 2000 through 2002 despite positive investment performance during 2003. Fluctuations in market returns may result in increased or decreased pension costs in future periods. These conditions impacted the funded status of the Plan at both December 31, 2003 and 2002, and therefore, will also impact pension costs for 2004.
The Plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974. While not required to make contributions to the Plan, the Company anticipates that it will contribute approximately $240,000 to the Plan in 2004. The Company believes it has adequate access to capital resources to support these contributions.
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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 residing in New Hampshire. 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. This program has provided the Company with additional common equity of $253,000 and $47,000 in 2001 and 2002, respectively. No additional common equity was provided with respect to this program during 2003.
Environmental Matters
Our water utility subsidiaries are subject to the water quality regulations set forth by the USEPA and the New Hampshire Department of Environmental Services ("DES"). 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 our treated water currently meets or exceeds all standards set by the USEPA and the DES. 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 DES mandates should eventually be recovered through water rates in our utilities' future rate filings.
Pennichuck's filtration plant in Nashua is impacted by the Interim Enhanced Surface Water Treatment Rule ("IESWTR") which established a new turbidity standard of 0.3 NTU. Pennichuck has committed approximately $1.48 million in its 2004 capital budget for the design phase required for this project. As discussed earlier, Pennichuck estimates the total cost to comply with this new standard to be approximately $26 million over the next three years although such estimates are subject to any future changes in the IESWTR standards and changes in design and construction that may be required.
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 which is effective in February 2006. It will be necessary for Pennichuck to install arsenic treatment systems at these locations, however, the expenditures necessary to comply with this standard are not expected to be a material part of the Company's future capital expenditure program. Pennichuck's remaining community water systems have wells that produce water meeting the new arsenic standard.
Capital expenditures associated with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in our utilities' water rates.
New Accounting Standards
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 applies specifically to a number of financial instruments that companies have historically presented with their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material effect on the Company's combined financial statements.
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In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", as amended and revised in December 2003 ("FIN 46R"), which addresses the consolidation of variable interest entities ("VIE"s) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise with the majority of the risks or rewards associated with the VIE. Application of this Interpretation is required for all potential VIEs that are referred to as special-purpose entities for periods ending after December 15, 2003 and, for all other types of entities that are potential VIEs that are not referred to as special purpose entities, the consolidation requirements apply for periods ending after March 15, 2004. The Company has assessed the impact of FIN 46R and has determined that it does not have any VIEs for which the Company is the primary beneficiary requiring consolidation of the entity as of December 31, 2003. For all other types of entities, the Company is still assessing the impact that FIN 46R will have on its consolidated financial position.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 Financial Instruments" in the Notes to the Consolidated Financial Statements included in Item 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
To the Shareholders and Board of Directors of Pennichuck Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Pennichuck Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) on page 65, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. The financial statements of Pennichuck Corporation for the year ended December 31, 2001 were audited by other independent auditors who have ceased operations. Those independent auditors expressed an unqualified opinion on those financial statements in their report dated February 15, 2002.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 2004
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
Pennichuck Corporation (the "Company") is an investor-owned holding company located in Nashua, New Hampshire with three wholly-owned operating subsidiaries, Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield"), involved in regulated water supply and distribution in Nashua and towns throughout southern and central New Hampshire; non-regulated, water-related services conducted through Pennichuck Water Service Corporation (the "Service Corporation"); and real estate management and development activities conducted through The Southwood Corporation ("Southwood").
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 29,400 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 Standards No. ("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 8,300 customers while Southwood owns, manages and develops real estate.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
(b) Investment in Joint Ventures
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 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 ventures. See Note 4, "Equity Investments in Unconsolidated Companies" for further discussion of its equity investments.
(c ) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.
(d) 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, when purchased, of three months or less.
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(m) Notes Receivable
In January 2003, Southwood sold a tract of land to an unaffiliated regional developer for approximately $1.5 million. Under the terms of that sale, Southwood conveyed approximately 66.8 acres of land in exchange for approximately $257,000 in cash and a long-term note receivable of $1,223,990. The note, which matures in October 2005, 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 was approximately $1.48 million, of which $257,000, representing the net cash received at closing, is included in "Revenues-Real estate operations." The remaining gain of $1,223,990, represented by the note receivable, has been deferred until payment of the note since the requirements established under Statement of Financial Accounting Standards No. 66, " Accounting for Sales of Real Estate," for recognition of all of the profit from this sale have not yet been met.
Included in current assets at December 31, 2002 were 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 provided for an annual interest rate of 10.5% and were secured by a first mortgage interest in the land and buildings, were repaid in full in May 2003.
(n) Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes" 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.
(o) 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.
(p) Reclassifications
Certain amounts in 2002 have been reclassified to conform with the 2003 financial statement presentation.
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2003, approximately $4.4 million of Pennichuck's retained earnings were unrestricted for payment or declaration of common dividends. In addition, substantially all of the assets owned by Pennichuck East, totaling approximately $16.6 million and $13.8 million at December 31, 2003 and 2002, respectively, are secured 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. Borrowings under the revolving credit facility bear interest at a variable rate equal to the lesser of the bank's cost of funds or the LIBOR rate plus 125 basis points. The revolving credit facility is subject to renewal and extension by the bank annually on June 30 of each year. At December 31, 2003, the Company had outstanding borrowings under the revolving credit facility totaling $2.0 million. At December 31, 2002, there were no outstanding borrowings under this facility.
The Company has two interest rate financial instruments which qualify as derivatives under Statement of Financial 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 1.82% and 2.08%, at the end of 2003 and 2002, 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, 2003 and 2002. The fair value of the financial derivatives, included in the Company's consolidated balance sheet as "Other liabilities", was approximately $345,000 and $541,000 at December 31, 2003 and 2002, respectively. 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, 2003 and 2002, Southwood had a 50 percent ownership interest in four limited liability companies ("LLCs"). The remaining 50 percent ownership interest in each of the LLCs is held by John Stabile, principal owner of H.J. Stabile & Son, Inc.("Property Manager").The LLCs, 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 approximately $9.2 million and $9.5 million at December 31, 2003 and 2002, respectively. Southwood is contingently liable for 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 the four LLCs and accordingly, its investment is adjusted for its share of earnings or losses and for any distributions or dividends received from the LLCs. For the years ended December 31, 2003, 2002 and 2001, Southwood's share of earnings in the LLCs was approximately $417,000, $314,000, and $141,000, respectively. Southwood's share of earnings and losses are included under revenues-real estate operations in the accompanying consolidated statements of income. For the years ended December 31, 2003, 2002 and 2001, cash distributions received from the LLCs were approximately $68,000, $175,000 and $200,000, respectively. The principal assets of the LLCs are the land, buildings and leasehold improvements, the
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
total of which at December 31, 2003 and 2002 was approximately $9.7 million and $9.4 million, respectively.
In accordance with the terms of the LLCs' operating agreements, the Property Manager charges the LLCs a management fee to offset its real estate management costs. The management fee is calculated as a percentage of the LLCs' monthly rent. For the years ended December 31, 2003, 2002 and 2001, total management fees charged to the LLCs were approximately $73,000, $90,000 and $82,000, respectively. The Property Manager also leases approximately 14,000 square feet of office and garage space in one of the LLCs for which it made annual lease payments of approximately $202,000 in 2001, 2002 and 2003.
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, 2003 is as follows:
Carrying
Value
Fair Value
($000's)
Long-term debt
$
27,247
$
30,985
Interest rate swaps
$
(345)
$
(345)
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, 2003 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 (the "Plan") covering substantially all full-time employees. The benefits are formula-based, giving consideration to both past and future service as well as participant compensation levels. 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 Plan uses December 31 for the measurement date to determine its projected benefit obligation and fair value of plan assets. The Plan uses January 1 as the measurement date to determine net periodic benefit costs. The changes in benefit obligation and plan assets were as follows:
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Weighted average assumptions used to
value benefit obligations were as follows:
Discount rate at the end of the year
6.00%
Health care cost trend rate at the end of the year
9.00%
($000's)
Components of net periodic benefit cost were
as follows:
Service cost
$
Interest cost
Amortization of prior service cost
Net periodic benefit cost
$
Weighted average assumptions used to calculate net
periodic benefit cost were as follows:
Discount rate at the beginning of the year
6.00%
Expected return on plan assets for the year (net of
investment expenses)
8.00%
Health care cost trend rate at the beginning of
the year
9.00%
In December 2003, the FASB issued Staff Position (FSP) 106-1, "Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act provides for drug benefits for retirees over the age of 65 under a new Medicare Part D program. For employers like the Company, who currently provide retiree medical programs for former employees over the age of 65, there are subsidies available which are inherent in the Act. The Act entitles these employers to a direct tax-exempt federal subsidy. However, since the effective date of the Act was December 2003 and because most employers have not had time to consider the accounting considerations and that there is no appropriate accounting guidance for the federal subsidy, the FASB issued this FSP to allow employers a one-time election to defer recognition of the impact of the Act in the employer's accounting until formal guidance is issued. The Company has elected to defer recognition of the provisions of this Act until further accounting guidance is issued. As a result, the provisions of the Act are not reflected in the following disclosure. The issuance of formal accounting guidance may require a change to previously reported information. The Company is continuing to monitor the impact of the Act.
Note 7 - Stock Based Compensation Plans
The Company provides its officers and key employees incentive and non-qualified options on a discretionary basis pursuant to two stock option plans, the 1995 Stock Option Plan ("1995 Plan") and the 2000 Stock Option Plan ("2000 Plan").
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Year Ended December 31,
Risk-free interest rate
3.30%
4.60%
5.08%
Expected dividend yield
3.42%
2.90%
4.70%
Expected lives
5 years
5 years
5 years
Expected volatility
36.00%
36.00%
34.00%
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 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.
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. The merger was subject to several conditions, including, among other things, 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 (the "City") adopted a resolution calling for a referendum to authorize the City 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 the City and others. The City's voters passed the referendum on January 14, 2003. 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 City's ongoing efforts to acquire Pennichuck's utility plant and property by eminent domain. Expenses associated with the PSC merger transaction and related issues totaled approximately $231,000 and $1,946,000 for the years ended December 31, 2003 and 2002, respectively. Those expenses consisted of the following:
($000's)
Investment banking fees
$
--
$
1,086
Legal and other fees relating to merger and regulatory approval
Total merger and related costs
$
$
1,946
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 realized approximately $1.5 million of merger-related direct costs for Federal income tax purposes in 2003.
Pending Municipalization Efforts
The City formally notified the Company's utility subsidiaries on February 5, 2003 of its intention to acquire all or a portion of their plant and property. The notification letters from the City stated that the City was acting pursuant to New Hampshire's utility municipalization statute. On March 25, 2003, the Company's three utilities notified the City of their decision not to sell their plant and property. Under New Hampshire statutes, a municipality may seek the NHPUC's authorization to compel the sale of utility assets through an eminent domain proceeding if the utility does not agree to sell the assets voluntarily. By letter dated March 26, 2003, the City indicated its intent to pursue such an eminent domain proceeding.
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The City and the Company have had discussions since that time regarding the City's desire to acquire the Company's assets, the particular assets that the City is interested in acquiring and the price that the City would be willing to pay for those assets.
On April 8, 2003, the Town of Pittsfield formally notified Pittsfield Aqueduct Company, Inc. that it wished to acquire the plant and property of that company. The letter indicated that the Town was providing its notification pursuant to the New Hampshire utility municipalization statute. By letter dated May 28, 2003, Pittsfield Aqueduct Company, Inc. notified the Town of Pittsfield of its decision not to sell its plant and property.
To date, neither the City of Nashua nor the Town of Pittsfield has commenced an eminent domain proceeding at the NHPUC. If such a proceeding were commenced, it is not certain whether either the City or the Town would ultimately choose to complete the acquisition of any portion of the property of the Company's utility subsidiaries even if the NHPUC ultimately approved such an acquisition and established a price for it.
On February 4, 2004, the Company filed a Petition for Declaratory Judgment against the City, seeking a determination by the New Hampshire Superior Court that, among other things, the State utility municipalization statute is unconstitutional and the City has failed to commence eminent domain proceedings at the State Public Utilities Commission in a timely fashion and therefore is barred from continuing the current utility municipalization process against the Company.
The Company cannot predict the ultimate outcome of these matters. It is possible that, if the acquisition efforts of the City and/or the Town of Pittsfield are successful, the financial position of the Company would be materially impacted. No adjustments have been recorded in the accompanying condensed consolidated financial statements for these uncertainties.
Regulatory Investigation
The Company is the subject of an investigation by the New Hampshire Bureau of Securities Regulation (the "Bureau") and the Securities and Exchange Commission (the "SEC"). The scope of the investigation relates generally to the Company's commercialization of real estate through joint ventures involving its Southwood Corporation subsidiary and, in particular, to certain of the Company's public disclosures regarding various joint venture transactions. Specifically, the Bureau and the SEC have alleged that in 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, the Company improperly disclosed the purchase of a home by Maurice L. Arel, the Company's former President who is also a target of the investigation, from one of the Company's real estate joint ventures as being "on the same terms which would be given to any independent third-party". In fact, the purchase was not made on such terms, and the Company believes that Mr. Arel received a benefit in the range of $50,000 to $75,000 in connection with the purchase.
In addition, the Bureau and the SEC have alleged that the Company failed to properly disclose payments from the Company's real estate joint ventures to a landscaping company with which one of Mr. Arel's sons was involved. During the seven-year period from 1996 to 2002, six of the Company's joint ventures engaged for various landscaping projects a company with which one of Mr. Arel's sons was
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
involved. The joint ventures' payments to that landscaping company totaled approximately $517,600 during that period. In three of those years, the aggregate payments for the year exceeded $60,000. In 1999, the joint ventures paid the landscaping company a total of $259,000, the greatest amount that the joint ventures paid to the landscaping company during a single year.
The regulators have also alleged that the Company failed to disclose the fact that nearly all of its real estate joint ventures had been formed with the same developer, and that the Company did not exercise proper oversight of the activities of those various joint ventures, including by failing to obtain or to keep adequate records, such as copies of financial records, contracts, correspondence or other material information.
The Company's board of directors retained legal counsel to conduct an independent review of the allegations, under the direction of the Company's Audit Committee, and instructed the Company's executive officers and counsel to cooperate fully with the investigation by the Bureau and the SEC. That independent review is now substantially complete and the Company's counsel has briefed the regulators on the board's findings. In addition, and as a result of the independent review, Mr. Arel's employment with the Company and its subsidiaries was terminated in May 2003.
The Bureau and the SEC could seek to impose fines, penalties or other sanctions upon the Company as a result of their respective investigations. In November 2003, the Bureau and the SEC indicated a willingness to consider a global settlement of their claims against the Company and against Mr. Arel. Although no agreement or understanding has been reached, the framework of the settlement that is under consideration would consist of a fund to be established for the benefit of the Company's shareholders, a fine to be paid to the Bureau, and a payment to the Bureau to defray its expenses. In addition to the negotiations with the Bureau and the SEC regarding the proposed settlement, the Company is also engaged in negotiations with Mr. Arel as to what portion, if any, of the settlement amounts he would be responsible for paying. There can be no assurance that a settlement agreement with the regulators and Mr. Arel will in fact be reached. The Company has recorded as an expense in 2003 a liability for this settlement based on the best estimates of the Company and its legal counsel.
Operating Leases
The Company leases certain office equipment under operating lease agreements expiring through October 2008. Total rent expense was approximately $39,500, $24,300 and $17,600 for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company's remaining lease commitments for all leased equipment as of December 31, 2003 are as follows:
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PENNICHUCK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
(In thousands, except per share amounts)
Year Ended December 31, 2002
Revenues
$
6,865
$
5,053
$
6,537
$
4,967
Operating Income
1,672
1,459
2,910
1,606
Net income
(709)
1,377
1,043
Earnings per common share
Basic
$
0.26
$
(0.30)
$
0.58
$
0.44
Diluted
$
0.26
$
(0.30)
$
0.57
$
0.44
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" as of the end of the period covered by this report.
Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the company's reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) information is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Based on their evaluation, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that information relating to the company (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms.
There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors and executive officers appears under "Election of Directors" and "Corporate Governance, Board and Committee Membership" in our Proxy Statement for the Annual Meeting of Stockholders (the "Proxy Statement"), to be held April 23, 2004. Those portions of the Proxy Statement are incorporated by reference into this report.
Compliance with Section 16(a) of the Exchange Act
Information about compliance with Section 16(a) of the Exchange Act appears under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
Code of Ethics
Information regarding our code of ethics (the Company's Code of Ethics for Financial Professionals) appears under "Executive Compensation - Code of Ethics for Financial Professionals" in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report. We will post amendments to or waivers from a provision of the Code of Ethics for Financial Professionals on our website at www.pennichuck.com.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information about compensation of our named executive officers and related matters appears under "Executive Compensation," "Report of the Compensation and Benefits Committee" and under "Comparative Stock Performance" in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information about security ownership of certain beneficial owners and management appears under "General Disclosures - Security Ownership of Certain Beneficial Owners" and "General Disclosures - Security Ownership of Management" in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report. Information regarding securities authorized for issuance under equity compensation plans appears under "Executive Compensation - Equity Compensation Plans" in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and related transactions appears under "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information about principal accountant fees and services appears under "Relationship with Independent Accountants - Fees Paid to PricewaterhouseCoopers LLP" in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
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Exhibit
Number
Description of Exhibit
4.5
Amendment to Rights Agreement dated April 29, 2002, by and between Pennichuck Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 99.2 to 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)
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)
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Exhibit
Number
Description of Exhibit
10.10
Loan Agreement dated April 8, 1998, between Pennichuck Corporation, Pennichuck East Utility, Inc. and Fleet Bank- NH (Filed as Exhibit 10.11 to the Company's 1998 second quarter Form 10-QSB report and incorporated herein by reference)
10.11
Amendment Agreement dated April 24, 1998, to Loan Agreement dated April 8, 1998 between Pennichuck Corporation, Pennichuck East Utility, Inc., The Southwood Corporation, Pennichuck Water Service Corporation and Fleet Bank-NH (Filed as Exhibit 10.12 to the Company's 1998 second quarter Form 10-QSB report and incorporated herein by reference)
10.12
Employment Agreement by and between Pennichuck Corporation and Maurice L. Arel (Filed as Exhibit 10.13 to the Company's 1998 Form 10-KSB Report and incorporated herein by reference)
10.13
Form of Change of Control Agreement by and between Pennichuck Corporation and executive officers (Stephen J. Densberger, Charles J. Staab, Bonalyn J. Hartley and Donald L. Ware) each dated January 8, 1999 (Filed as Exhibit 10.14 to the Company's 1999 first quarter Form 10-QSB Report and incorporated herein by reference)
10.14
Amendment Agreement dated August 24, 1999, to Amended and 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)
10.16
Employment Agreement between Donald L. Correll and Pennichuck Corporation dated August 4, 2003 (Filed as Exhibit 10.14 to the Company's 2003 third quarter Form 10-Q report and incorporated herein by reference)
Code of Ethics for Financial Professionals (Filed as Exhibit 14 to this Form 10-K report)
Subsidiaries of Pennichuck Corporation (Filed as Exhibit 21 to the Company's 1997 Form 10-KSB Report and incorporated herein by reference)
Consent of PricewaterhouseCoopers LLP (Filed as Exhibit 23 to this Form 10-K report)
31.1
Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.1 to this Form 10-K report)
31.2
Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (Filed as Exhibit 31.2 to this Form 10-K report)
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REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of
Pennichuck Corporation:
Our audits of the consolidated financial statements referred to in our report dated February 24, 2004 appearing in the 2003 Annual Report to Shareholders of Pennichuck Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 2004
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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