Takeover possibility slows Pennichuck improvements
Pennichuck Corp. may put off some $3.8 million in capital improvements and maintenance to its water system, as well as have to borrow at higher rates, as a result of the New Hampshire Public Utilities Commission’s recent decision to allow the city of Nashua to take over the company’s waterworks, according to a recent company filing with the Securities Exchange Commission.
But the deferral might slightly lower Pennichuck’s current 25 percent rate increase request before the PUC.
The company stressed that any delay in maintenance will not affect the quality or safety of drinking water but would involve “such things as water main and booster station replacement projects.”
While the filing used the word “considered” in mentioning the deferral, the company has already stopped spending money on some items, said chief financial officer Thomas Leonard.
“We are not buying leak detection equipment, we aren’t renewing some service plans, and we are canceling vehicle replacements,” he said. Leonard said it was the first time the company has evaluated deferring a “substantial amount of maintenance” because of the takeover threat.
The city and Pennichuck have been locked in an eminent domain battle for the past five years. At the end of July, the PUC ruled that the city could take over the utility for $203 million with certain conditions, but Pennichuck said it plans to ask the commission to reconsider. If that fails, it said, it plans to take the case to the state Supreme Court, a process that could take more than a year.
The city, in the meantime, is considering whether it wants to acquire the company at that price.
The filing also warned that if the battle continues, the company’s legal costs should again climb. Since 2005, Pennichuck has spent nearly $6 million in legal and professional fees. The company hardly spent anything in the first half of 2008 while awaiting the PUC decision, but in the past the legal battle was a drag on company earnings.
According to the filing, in the first half of this year Pennichuck posted a net income of $3.2 million, as opposed to $1.5 million in the first half of 2007 (though most of the gains were in the first quarter.)
In the quarter ending June 30, Pennichuck’s net income dropped from $1.35 million from the first quarter of last year to just under $800,000, or 19 cents a share.
The earnings were enough, however, for the company’s board on Aug. 8 to declare a third-quarter common stock dividend of 16.5 cents per share, payable Sept. 1 to shareholders of record Aug. 15.
That amount results in an projected annual rate of 66 cents per share.
Some deferred capital maintenance is included in Pennichuck’s proposed current rate increase, said Leonard, though it amounts to no more than 10 percent of the request.
The rate requests are supposed to pay for a water plant upgrade project, which should cost another $7.7 million from 2008 to 2010 on top of the $30.5 million already spent, and for continual construction programs for water distribution repair, rehabilitation and replacement, facility maintenance and water supply security. The company plans to spend $22.4 million on those items from 2008-2010 in addition to $19.4 million spent during the last three years.
The water utility’s proposed current 25 percent rate filed June 23, includes “replacement of aging infrastructure.”
Aside from increasing rates, Pennichuck also pays for capital improvements through bonding, but that may prove difficult because of the eminent domain fight.
“We may find that we are unable to, or elect not to, issue or remarket certain debt securities pending the definitive ruling on the city’s petition or we may find that the cost that we incur in connection with the issuance or remarketing of such debt increases materially,” the filing said.
“Not many people are going to buy a 20-year bond in Pennichuck if they think we may be around for only one to five years,” Leonard said.
Instead, he said, the company might have to use its revolving credit line, which has less favorable terms than long term bonding.