Pennichuck will eye expansion if Nashua drops purchase plan



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With the city of Nashua apparently rethinking its strategy in acquiring Pennichuck Water Works and the New Hampshire Supreme Court slated to hear arguments on the takeover in early 2010, the utility's Merrimack-based parent company is beginning to look beyond the controversy.Pennichuck Corp. will be looking to purchase private water companies all over New England and develop much of the land it owns if Nashua doesn't take over some or all of the company, chief executive Duane C. Montopoli disclosed at a presentation at the Dec. 3 Gabelli & Company's Water Investment Summit in New York City.The company also hopes to take advantage of a new rule that allows for more frequent rate increases and expand its WaterTight repair program to neighboring communities, he said.The city of Nashua has been trying to seize Pennichuck Water Works - which consists of 70 percent of Pennichuck Corp.'s assets and revenues - ever since 2003, but the company has been fighting the effort. At the urging of Gabelli & Company, its largest stockholder, the company has been negotiating to sell the entire company to Nashua instead, at a price of $33 a share.But Montopoli said at the Dec. 3 summit he doesn't expect the city to buy the company at the $203 million price tag put on it by the state Public Utilities Commission (plus $40 million for a mitigation fund.) Although he maintained that both sides would make out better with a negotiated deal, he said he expected both sides to "slow the process" as the New Hampshire Supreme Court decision on an appeal of the PUC ruling nears.In fact, on Dec. 8, Nashua Mayor Donnalee Lozeau told consultants hired to assist in the Pennichuck acquisition to stop their work, as the city apparently hasn't been able to close the gap between the water utility's asking price and what the city has deemed its worth on the open market."The city's objective remains to secure and protect our water supply and watershed resources for the long-term benefit of its citizens at the lowest possible cost," Lozeau said in a press release.Diversification planAs a result, Pennichuck appears to be attempting to diversify a little more.The company expects to close on at least one deal with a water company next year, and eventually hopes to increase its holdings through "numerous" deals, from 7 percent to as much as 15 percent, Montopoli said at the summit.It also plans to "monetize" some 450 acres of "non-utility" developable land. The wrong way to do that is to just sell the property, he said. Instead, Pennichuck hopes to partner with a developer and then sell off a much more valuable asset. He did not offer a timeline, but just said the company wanted to "commercialize land over time."The company has developed and sold off land before - at times, critics complain, resulting in more risk to the water supply.Pennichuck also wants to boost earnings through rate increases. First, it hopes to recover $4.2 million for a recent treatment plant upgrade. Then it hopes to take advantage of a new New Hampshire Water Infrastructure and Conservation Adjustment Program that allows rate increases between rate cases. This will not only speed up the replacement of aging infrastructure and result in quicker income to the utility, Montopoli said, it helps consumers by "reducing rate shock."Montopoli also said Pennichuck figures it can earn $2.2 million by expanding a program that - for a fee - provides 100 percent coverage of water leaks from the property line to the shutoff valve in the basement.If the city doesn't take over the company, "we intend to grow the business in these four pieces," Montopoli said.'Fair market value'Meanwhile, Lozeau has called off the work of consultants C.W. Downer and Co., an investment banking company, and Rath, Young and Pignatelli, a law firm with expertise in business and financial consultations.Hired a year ago, the consultants have been doing a market analysis and researching the fair market value of Pennichuck. Their work determined the fair market value for all of Pennichuck Corp. is about $25 per share, according to a presentation Arthur Gottlieb, managing director of C.W. Downer, gave to the board of aldermen.Lozeau, Gottlieb, attorneys Paul A. Burkett and William Ardinger of Rath, Young and Pignatelli, and city attorney James McNamee met Dec. 8 with reporters and editors of The Telegraph to go over the consultants' analysis.The consultants say their analysis, which looked at Pennichuck and nine similar water utilities, established Pennichuck Corp.'s value to be about $182 million, far less than the $203 million price the PUC established for the Pennichuck Water Works portion of the company.Since 2004, the city has spent about $4.6 million in its efforts to acquire the water utility. The city has spent about $475,000 for the consultants' analysis of the market and work establishing the fair market value."I believe that paying more than fair market value is like taking money from our citizens and handing it to out-of-state investors," Lozeau said during a presentation to the board of aldermen.She also said that the PUC "got it wrong" when it set the price for Pennichuck Water Works at $203 million.Lozeau noted in the press release that one of the three PUC commissioners dissented, placing the value of the water business at $151 million.Lozeau also noted in the press release that Pennichuck put an additional roadblock in the path of any sales agreement - a "poison pill" provision that prevents any investor from acquiring 15 percent or more of the company's stock. Gabelli alone is exempted from the provision.Lozeau left the door open that eminent domain can be avoided and a settlement between the city and Pennichuck can be reached that serves the best interests of the city and Pennichuck Corp. shareholders. However, she repeated that the city would not pay above fair market value to purchase the company.Montopoli and Pennichuck Corp. Executive Vice President Stephen Densberger attended the presentation to the board of aldermen.Afterward, speaking in the hallway outside the Aldermanic Chamber, Montopoli said, "It's very unclear to me what the objective of the presentation was."He added: "What your readers should understand is that at $25 per share, the city would be valuing the assets they want in a change of control transaction at nearly $100 million less than the PUC has valued those same assets," he said. Reporters Patrick Meighan and Ashley Smith of The Telegraph contributed to this story. Bob Sanders can be reached at bsanders@nhbr.com. 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