Pennichuck Water Special Committee

REPORT OF THE PENNICHUCK WATER SPECIAL COMMITTEE JANUARY 31, 2012 A meeting of the Pennichuck Water Special Committee was held on Monday, January 31, 2012 at 7:03 p.m. in the Aldermanic Chamber. Alderman-at-Large Brian S. McCarthy presided. Members of the Committee present: Alderman Michael J. Tabacsko Alderman-at-Large Mark S. Cookson Alderman-at-Large Lori Wilshire Members not in Attendance: Alderman-at-Large Barbara Pressly Also in Attendance: John Patenaude, Chief Operating Officer, Pennichuck Corporation Chairman McCarthy Alderman Tabacsko has graciously agreed to Clerk temporarily. We will wait until we have the whole committee here to elect a Clerk. Alderman-at-Large Barbara Pressly arrived at 7:05 p.m. ELECTION OF COMMITTEE CLERK Chair McCarthy called for nominations for a Committee Clerk Alderman Wilshire nominated Alderman Cookson MOTION BY ALDERMAN TABACSKO TO CLOSE THE NOMINATIONS MOTION CARRIED Alderman Pressly Mr. Chairman I’m at another meeting in the building. If you don’t need me for a quorum I would like to be excused. Chairman McCarthy That would be fine. Alderman Pressly Okay. If you need something give me a call. Chairman Pressly If you want to vote on the election of the Clerk first. Alderman Pressly For this vote, sure, yes. Pennichuck Water Special Committee -2- 1/31/12 A Viva Voce Roll Call was taken, which resulted as follows: Yea: Alderman McCarthy, Alderman Pressly, Alderman Tabacsko, Alderman Cookson, Alderman Wilshire 5 Nay: 0 MOTION CARRIED PUBLIC COMMENT - None COMMUNICATIONS – None UNFINISHED BUSINESS - None NEW BUSINESS – RESOLUTIONS R-12-06 Endorsers:Mayor Donnalee Lozeau Alderman Michael J. Tabacsko Alderman-at-Large Lori Wilshire Alderman Mary Ann Melizzi-Golja Alderman Diane Sheehan Alderman Kathy Vitale Alderman-at-Large Barbara Pressly APPROVING THE PROPOSAL OF PENNICHUCK EAST UTILITY, INC. TO BORROW UP TO $525,000 FROM THE STATE REVOLVING LOAN FUND Chairman McCarthy I will invite Mr. Patenaude to join us. Good evening. John Patenaude Thank you Mr. Chairman. This loan is for the amount of $525,000 for a project which is at Locke Lakes up in Barnstead, NH. It is replacing approximately 8,500 linear feet of small diameter PVC pipe. The loan is from the New Hampshire Drinking Water State Revolving Fund. The interest rate is 3.104% and based on this project and where it is in the community it is in, there is a 30% forgiveness on this loan by the State. It has nd been approved by the Pennichuck Board prior to this filing with the PUC, which was done on December 2 . It is expected to close by the end of February. Chairman McCarthy So the interest rate is did you say 1.04%? John Patenaude 3.104% and that is before the 30% forgiveness so if you take the 30% forgiveness out it is a negative interest rate. Alderman Tabacsko If I may through you to Mr. Patenaude, I guess that was going to be my question is the forgiveness is on that principal amount of $525,000 so in the end you will pay back 30% less than that. Pennichuck Water Special Committee -3- 1/31/12 John Patenaude That is correct; each payment is reduced by 30% as you go. The interest is on the full amount of $525,000, but they have forgiven principal on a monthly basis. Alderman Tabacsko What is the alternative to this? John Patenaude The alternative would be going to a more structured loan where there would be no forgiveness, the interest rate would probably be higher, and you would be paying over 5%, and it would be probably over 20 years. This is the best deal in town. Alderman Tabacsko If the closing hadn’t taken place just recently, if Pennichuck was still independent, would this be available to Pennichuck? John Patenaude Yes. Alderman Tabacsko As an independent? John Patenaude As an independent company yes. Alderman Tabacsko Thank you. Alderman Cookson Thank you. Two questions, one is the terms of the loan? John Patenaude It is 20 years. Alderman Cookson And then you made reference to the Board of Directors approving this on December 2nd. This would have been the prior board of directors. John Patenaude The prior board of directors, yes. Pennichuck Water Special Committee -4- 1/31/12 Alderman Cookson And we have a new Board of Directors. They have met I believe it was just this past Friday… John Patenaude Yes. Alderman Cookson …was this part of the conversation with them? John Patenaude No it wasn’t. Alderman Cookson Because you already had the approval of the Pennichuck’s board of directors? John Patenaude That is correct, and the filing had already been made with the New Hampshire Public Utilities Commission. Alderman Cookson Thank you. Chairman McCarthy Are there any other questions? MOTION BY ALDERMAN WILSHIRE TO RECOMMEND FINAL PASSAGE OF R-12-06 MOTION CARRIED R-12-07 Endorsers: Mayor Donnalee Lozeau Alderman-at-Large Lori Wilshire Alderman Mary Ann Melizzi-Golja Alderman Michael J. Tabacsko Alderman Diane Sheehan Alderman-at-Large Barbara Pressly Alderman-at-Large Brian S. McCarthy APPROVING THE PROPOSAL OF PENNICHUCK CORPORATION TO BORROW UP TO TEN MILLION DOLLARS ($10,000,000) UNDER A REVOLVING LINE OF CREDIT WITH RBS CITIZENS, NATIONAL ASSOCIATION John Patenaude This Line of Credit replaces the Bank of America line of credit, which was in existence prior to the merger. As you may well remember, the agreement with Bank of America had a change of control element in it that terminated the loan as of the date of merger. There was no amount outstanding on that loan as of the date of merger. Pennichuck Water Special Committee -5- 1/31/12 I started this process with the help of the City finance folks back in July putting out a request for a term sheet to local banks, the larger banks, and three of the banks, after going through their own review, decided not to provide a term sheet and two banks did. This was the better deal of the two. The other bank would have limited the borrowings to 80% of the receivables, which are approximately $5 million so that would have limited the amount to about $3.5 million on a borrow basis. The new board voted on this measure last Friday, approved it, and were aware that we were coming before this board to get approval for the line of credit. The terms here are that the rates are LIBOR plus 250 basis points, and there is an unused fee of 25 basis points. There is a fee relative to closing the deal. It is 10 basis points, which is $10,000. The term is for two years. Alderman Cookson Thank you. Could you repeat that in layman’s terms? John Patenaude In layman’s terms, the interest rate is based on LIBOR, which is a banking term, plus 250 basis points so today the LIBOR was roughly 1.1% so that would make the loan at roughly 3.6%. The 25 basis points for the unused fee is roughly, if we were to use the Line or borrow under the Line, it would be $25,000 per year. There are conditions. There is a fixed charge ratio that earnings before interest, taxes, and depreciations, plus lease and rent expense, plus one-time expense are added back and to the ratio to the interest expense, lease and rent expense in the current portion of the long-term debt that has to be one to one, which is a very good ratio. Most banks look for anything about 1.75 to 2 to 2.5 on that ratio. The other ratio is a equity capitalization ratio that the total capitalization of the company will not be less than 35% so current equity has to be 35% of the capitalization, today that is about 53 or 54%. Chairman McCarthy How do we figure the capitalization of Pennichuck at this point? John Patenaude It would be the investment, which is roughly $30 million over the debt. It is around 52% as we are going through so you take all of the assets. Chairman McCarthy I guess I’m asking towards the future. As we pay down the bond on the purchase… John Patenaude That number would start to … Chairman McCarthy …there isn’t any market capitalization perse because there is no basis for setting the costs of our shares. John Patenaude No, but the equity is still there. The equity and the paid in capital and… Pennichuck Water Special Committee -6- 1/31/12 Chairman McCarthy Okay so we would just consider essentially the book value to be the capital… John Patenaude Yes, book value. Alderman Tabacsko Which is theoretically the price we paid. John Patenaude Yes. There is a piece of equity and a piece that is allotted. Chairman McCarthy The premium that we paid for it ultimately washes out of the capitalized value. John Patenaude Right, over time. Chairman McCarthy I can’t imagine that number ever gets low enough that we would have trouble keeping the capitalization rate that the one term would require. John Patenaude If it does it is years out. Alderman Tabacsko Just from a relative standpoint, this line of credit replaced a previous line at the independent company. How does this compare in terms of favorability? John Patenaude It is much better. The terms are much better. The ratios that the Bank of America had were more difficult. We would have had a hard time obtaining those ratios. That is why they bowed out when we had the discussions. And they had more ratios than this. Citizens Bank was very amenable to working with us, given the highly leveraged situation. They gave us good terms, a good rapport. Alderman Tabacsko Thank you. Alderman Cookson Thank you. Are there any other lines of credit that Pennichuck has? Pennichuck Water Special Committee -7- 1/31/12 John Patenaude Not a line of credit no. What they do have, Pennichuck East Utility, Inc. (PEU) has a line of credit with CoBank out in Colorado, I think a $4 million Line of Credit just for PEU itself. Alderman Cookson Okay. And you had mentioned that under the change of control, which terminated the original Bank of America line of credit, there was no debt associated with that. Is that correct? John Patenaude That is correct. Alderman Cookson How long had that line of credit been in existence, and not had any balance or not had any debt associated with it? John Patenaude At least a year and a half. Alderman Cookson And how do you foresee this line of credit being used over the next two years? John Patenaude A line of credit is really as a fallback position especially in capital projects. Rather than we have a half million or a two million dollar project, rather than going out to fund those on an individual basis, we would borrow under the Line, get to a number, $5 million or $6 million and then go out and fund that for a 20 year period. It gives us the ability to bundle projects together and then go out. Alderman Cookson So at this point in time does the new corporation and its leadership have a capital expenditure plan that says we need this line of credit now? John Patenaude It won’t be needed early in this year, and we are still working on the budgets to finish it up for the Pennichuck board this month given the acquisition accounting that we’re going through, but we don’t see going through this line much before towards the end of next year. Alderman Cookson And you said this line of credit was only for 2 years? John Patenaude Yes it is two years; renewable at the end of two years. Pennichuck Water Special Committee -8- 1/31/12 Alderman Cookson Renewable after the end of two years. How does this serve you now? What is the purpose for initiating this now? John Patenaude The purpose is we have good rates and also Citizens is willing to go ahead with this so it gives us a backstop. You don’t want to wait until you are ready for the line the next day to set up the line. You really want to set it up in advance. Alderman Cookson I understand that, but if you are telling me that you are not going to use this line of credit or potentially use this line of credit until the end of next year… John Patenaude This year. I meant this year. Alderman Cookson Oh so the end of 2012? John Patenaude Yes. Alderman Cookson Thank you. Chairman McCarthy Are there any other questions? MOTION BY ALDERMAN WILSHIRE TO RECOMMEND FINAL PASSAGE OF R-12-07 MOTION CARRIED NEW BUSINESS – ORDINANCES – None PUBLIC COMMENT - None REMARKS BY THE ALDERMEN Alderman Cookson Thank you. This was a question for Mr. Patenaude. I had just read that you and the Mayor will be traveling I believe it is this coming week meeting with the employees of Pennichuck and the rest of the company. John Patenaude We did that last week. Pennichuck Water Special Committee -9- 1/31/12 Alderman Cookson You did that last week. John Patenaude Yes. Alderman Cookson How was that? John Patenaude It was very good. The employees were very receptive. It has been a long time since the leadership in the City has met with the employees. They were very happy. They have made comments to other members of the leadership team that were there before that they are now happy; they know what is going on. They know that their duty is to continue to work and we’re not going to sell them down the river so to speak. They were concerned going back to the eminent domain days. Those fears have been quelled. Alderman Cookson So at this point you have met with all of the employees of Pennichuck? John Patenaude Yes we have. Alderman Cookson And two senior executives have been let go at this point, is that correct? John Patenaude Yes sir. Alderman Cookson And then the others will be maintaining their position for at least 6 months? John Patenaude For some time, not the full 6 months. They are being transitioned out. Alderman Cookson So at most 6 months? John Patenaude At most. Pennichuck Water Special Committee -10- 1/31/12 Alderman Cookson Alright. Thank you very much. Chairman McCarthy Is there anything else? I will comment I went in and sat in on the Board of Director’s meeting on Friday, which seemed to go quite well. The Board was very engaged. If you haven’t seen him, Mr. Leonard was elected Chairman, which I think is a fine choice. There were a number of presentations on the condition of the corporation from the executive staff, and a lot of great questions from the Board, most of which were answered with we will have to set up another meeting for that. We’re going to get our $12,000 worth out of those guys. Any other comments? Alderman Tabacsko As I said privately before the meeting, but I wanted to congratulate Mr. Patenaude and wish him all the best as he guides this company down the path. I’m sure we’ve got the right guy there for this period of time. John Patenaude Thank you. Chairman McCarthy Is there any other business? ADJOURNMENT MOTION BY ALDERMAN TABACSKO TO ADJOURN MOTION CARRIED The Pennichuck Water Special Committee meeting was adjourned at 7:25 p.m. Alderman-at-Large Mark S. Cookson Committee Clerk