Pennichuck Water Special Committee

REPORT OF THE PENNICHUCK WATER SPECIAL COMMITTEE MAY 5, 2015 A meeting of the Pennichuck Water Special Committee was held on Monday, May 5, 2015, at 7:07 p.m. in the Aldermanic Chamber. Alderman-at-Large Daniel T. Moriarty, Chair, presided. Members of the Committee present: Alderman-at-Large David W. Deane Alderman Sean M. McGuinness Alderwoman Mary Ann Melizzi-Golja Alderman-at-Large Lori Wilshire Also in Attendance: Mr. Thomas J. Leonard, Chairman, Board of Directors, Pennichuck Corp. Mr. John Patenaude, Chief Executive Officer, Pennichuck Corp. Mr. Larry D. Goodhue, Chief Financial Officer, Pennichuck Corp. _______________________________________________________________________________________ PUBLIC COMMENT - None COMMUNICATIONS From: Larry D. Goodhue, Chief Financial Officer Re: R-15-133, Approving the Proposal of Pennichuck Corporation to Borrow and Issue Up to $25,500,000 in an Aggregate Principal Amount of Tax-Exempt Bonds and/or Other Borrowings  Referred to Cmte – 4/14/15 MOTION BY ALDERMAN DEANE TO ACCEPT AND PLACE ON FILE MOTION CARRIED Mr. Leonard I think I’ll defer this to Mr. Goodhue but this is a borrowing that’s in the ordinary course and as the Chairman has suggested we do need to get the approval of the sole shareholder and that’s the reason we are here. Mr. Goodhue In my letter dated March 31, 2015, we spell out that we are seeking approval of up to $25,500,000 and it shows the composition of those borrowings. Over $16.2 to $16.4 million of it is to refinance three of our existing bond issuances that are outstanding at the corporation and were actually outstanding as of the time of the acquisition by the city. This is the second and final step really in refinancing the Legacy Bonds that were able to be refinanced for the corporation from that pre-existing debt. As you might recall last year we came and did a bond issuance which you approved and we closed in December of last year and included in that was four bond issuances that were refinanced for a total of $23,350,000 million. This is the remaining 3 bonds. We did not refinance those last year as the largest of the three that were remaining were ALT or Alternative Minimum Tax Bonds that were issued in October of 2005 and if they are refinanced before they were ten years old there are significant penalties associated with refinancing. We needed to hold those off to the side to refinance them on or after October 1st of this year and as such we left two other series along with those so that the averaging of those would be a borrowing level that was significant to go to the market and the blending of the interest rates and the terms would all aggregate together. The second part of this is approximately $7 million to finance the money to build a replacement facility for our operations portion of our business which is currently housed at our Will Street facility in Nashua, NH. Then there’s approximately $2.1 million associated with cost of issuance relating to the new bonds, certain capitalized interest relative to those bonds and a little Pennichuck Water Special Committee -2- 05/05/15 bit of a margin there in that when we seek approval from you we are seeking an upper limit knowing that we get an approval with the full intent that it’s going to be something less than that but we need to have an authority that’s enough that allows us to go to market and close on this indenture. We are looking to re-bond these monies all in one bond issuance; however, the lives of the bonds may have a little bit different lives. The $7 million for the building we are probably looking at a 30-year life where as the life on the $16.2 to $16.4 million of refinanced bonds might have a life that’s a little bit shorter than that because it’s really driven by the original estimated useful lives of the assets that were originally funded by those bonds. Alderman Wilshire Last year we took a tour of the Will Street facility. It’s in dire need of replacement. It’s outgrown and obsolete as it gets. I think that’s a great thing that you plan to do. Do you have any idea where that facility might end up? Mr. Patenaude We have done a search throughout the city and currently it would be on the campus; and I call the campus on Concord Street, the water treatment plant is really in Nashua and on the other side of the river going up the hill there is some flat area going into Merrimack and that’s where we would look to build. That’s the least expensive alternative for the rate payers. We have looked at this from many aspects; the work we do is a little noisy. If you are out there at 3:00 a.m. and somebody is loading dirt in the trucks and you hear the tingling as they are backing up, we took that into consideration as well. We can’t be in a heavily populated neighborhood. Mr. Goodhue This is land that is outside the water shed on that piece of property and we would carve out the land sufficient for the facility alone to do that construction. Mr. Leonard From the standpoint of the Board of Directors, we have been looking at this for a couple of years and working closely with Don Ware and Larry and John. This is an important business decision that we are making and we looked at many different alternatives. The ultimate decision was what was the best business decision to save money and basically keep the rates low. We feel convinced that this is the best site and the best decision. Mr. Goodhue Just to further elaborate onto what Mr. Leonard just said, in fact, we had originally considered going for the new money for this building last year with the bonding and actually deferred it by a year to give enough time to do the due diligence to make sure that we had vetted all of the opportunities relative to the needs for this facility. Alderman Deane I look at the Will Street Bldg. similar as to when I looked at the public works garage when it used to be across the street on Main Street back when the Pennichuck; basically when Will Street was put it and Pennichuck fed the City of Nashua and that was about as far as is got. Obviously when you look at today’s standards and the amount of business we have and the size of the distribution system and how Will Street was once located out in the boon docks, it’s now within the confines of a neighborhood. I am happy to hear that you did an extensive search and you are not in the water shed. Times have changed and that building has not. It would be nice to have it in Nashua, it would be but at the end of the day taking care of what we own and getting some efficiency out of it is what needs to be done. I am happy to hear about everybody’s involvement in it and it took some time. Pennichuck Water Special Committee -3- 05/05/15 Chairman Moriarty Of the $16 million that we are currently applying to refinancing, why didn’t you roll that into last years’ $48 million? Mr. Goodhue That was all related to the fact that; what I am going to call our Series A Bonds which were issued on October st 1 , 2005, and were issued as Alternative Minimum Tax Bonds and by federal statute there is a significant penalty to refinance them before they are ten years old. By waiting one year we are able to refinance without the significant penalty. Chairman Moriarty Are there any more bonds that existed prior to the city taking ownership of Pennichuck that are going to need to be refinanced in the future? Mr. Goodhue No, we have one other “corporate” bond that we are not going to refinance even though it’s at a little bit higher interest rate. It has a make whole provision so if we refinanced it we would have to pay all of the incremental interest on day one so economically that does not make sense for the company or its ratepayers. That will be there until full term and it has a $400,000 annual sinking fund payment and it winds up maturing in 2022. It will expire at the end of its normal life. Chairman Moriarty Going forward, what is the expected request for bonds? Mr. Goodhue If you back to the time that the city purchased the corporation there was a model put together in support of that whole activity and it was forecasted that the company has an annual need of $8 to $10 million to invest in infrastructure which would grow with inflation over time. It was noted at that time that it would be funded with debt over time in the new structure as the city as the shareholder. Prior to that transaction the company had the ability to go to the public markets and issue stock or equity as well as to issue debt to build infrastructure. All of our infrastructure investment is now debt funded so about an $8 to $10 million run rate relative to future investments. The bonding we did last year was to raise bonding capital for capital investments for 2013, 2014, 2015 and 2016 so I would anticipate that in the 2017 timeframe we will be looking to do another multi-year bonding for capital for 2017, 2018 and 2019. Mr. Leonard Just to elaborate on that, there are a couple of reasons that we are doing them in lumps. One of them is the cost of this process. You need to go out to bond for enough money to make it worthwhile and you can spread the cost over a large enough number. The other thing is that we have a capital expenditure budget that we look at and we look at it for three to five years and that happens to coincide with the planning as well. Every two or three year bond coincides with the planning. Not everything is bonded though. Mr. Goodhue If you were to just bond on an every year basis you would have a much higher cost of issuance and you would be going to market with a tranche that was so small that you wouldn’t attract enough market interest and/or Pennichuck Water Special Committee -4- 05/05/15 favorable interest rates. When we did our bonding last year we went out to market and they double subscribed so they had twice as many offers on the table to buy the bonds as we were able to issue because of the size and as a result we closed on the bonds and it was an all in total interest cost of an average of about 4.13% which is a very favorable rate. Alderman Deane That’s what the city does; bundle it up it and there are very aggressive people out there looking to swallow that up and in the end we garner the cost avoidance through the reduction in the interest rate so it’s good. From: John L. Patenaude, Chief Executive Officer Re: Pennichuck Corporation Quarterly Report to the Sole Shareholder for the Quarter Ended March 31, 2015 MOTION BY ALDERMAN DEANE TO ACCEPT AND PLACE ON FILE MOTION CARRIED Mr. Goodhue What you have in front of you is the quarterly report to the sole shareholder for the quarter ending March 31, 2015. It summarizes our financial status as of that date; either on a year-to-date P&L or cash flow basis and/or the balance sheet as of the date comparable to the same period from the prior year. In the executive summary area we highlight some of the major things that you would focus on. The first quarter had $8.5 million worth of revenue which is up slightly from the $8.3 million from the previous year. That represents some of the rate increases that were incurred and finalized during the prior year in our Pennichuck East and our Pittsfield Aqueduct subsidiaries that had a rate increase that were included in that. We had paid approximately $2.1 million in debt payments and dividends to the City of Nashua in repayment on the note that we have with the city and the equity contribution that the city made into the corporation, that’s what the dividends relate to. We did complete the $23.35 million worth of bond redemption that I talked about in that bonding even though the bonding closed on December 15th, there’s a 30-day notice requirement that happens with bond holders so two days after the closing they can actually notice those bond holders and then 30 days has to transpire . So at our year end financials, which I believed we discussed last time we were in front of you, that was sitting there in the debt side but there was also money sitting in an escrow account. On January th 20 that escrow account was closed out and all of the bond holders were paid off and that debt came off of our books. Those are some of major things that happened within the first quarter. If you turn to page 3 you’ll see the income statement relative to the corporation for the first quarter and again, $8.5 million of revenues coming down to a pre-tax loss of $1.6 million but earnings before interest, taxes, depreciation, amortization or EBITDA of $2.3 million roughly on par with the prior year which was at $2.5 million. As I have described before, EBITDA is the cash basis proxy for net income. It’s the cash that’s generated by the operations of the company which is there to satisfy our debt requirements relative to the city and to our external debt holders. If you go to page 5, the balance sheet, this is where you’ll see comparative March 31st through December 31st and it’s easy to see the restricted cash bond fund escrow at $23,725,000 going to zero. The $23,725,000 was the $23,350,000 that I spoke about a few moments ago plus the $375,000 of accrued interest on those bonds. The acquisition premium, that’s all related to the transaction with the city that is being amortized over the life of the city’s bond indenture that they floated to purchase the company. The total debt of the company is $198 million which includes the note payable to the city which at this point in time is about $112,000 or $113,000 as the outstanding principle balance for which we $707,000 and change per month as a note payment to the city. The cash flow statement is what takes you from an accrual basis and then the top section turns that into the cash basis of that in that it takes it from accrual to cash basis and one of the major items at our company is that we incur a lot of depreciation and amortization on an annual basis. In one quarter $1.3 million worth of depreciation and amortization which is non-cash expenses as a part of our net income. We produced about $1.1 million in cash in the first quarter from our operations and then you have a significant number of the Pennichuck Water Special Committee -5- 05/05/15 $23.957 million, that’s the reduction of that bond fund and the payment on long-term debt is the extinguishment of that debt. It all comes down to the company having just about $4 million in cash at the end of the first quarter. Chairman Moriarty Is the total value of all of the pipes listed somewhere included in a number on any of these sheets? Mr. Goodhue The balance sheet on page 5, the very top number, $173,124,000 is the net book value of all of our fixed assets and a good portion of that, about 30% to 40% of that number are pipes in the ground relative to the company’s assets. Chairman Moriarty What’s the net worth of the company? Mr. Goodhue st The net worth is the shareholders equity, $23,160,000 as of March 31 which is the first line under the big bold title Shareholder’s Equities and Liabilities. Chairman Moriarty So the $173 million in assets and there’s enough debt associated with all of this that the net worth of the company is $24 million? Mr. Goodhue $23,160,000. Chairman Moriarty How do you expect that number to change? Mr. Goodhue That number will go down over time because as we are dividending against the equity of that the city has into us that is paid out of that line. At the same time the acquisition premium of $78 million will bleed down over time as well. Chairman Moriarty So at some point in the future that $24 million will go to zero and it will be transferred to the city presumably to pay off the debt that the city is currently holding or not? Mr. Patenaude No, the debt is being paid on a monthly basis. The $23,160,000 you see here is really the equity; the city put in $30 million in equity when they did the acquisition. Remember that the first quarter is our worst quarter. There is low usage and high expenses because of weather and everything else. During the summer the equity should go up again and in the fall it will drop a little. Over time it could bleed down but it’s not expected to go down to zero. Pennichuck Water Special Committee -6- 05/05/15 Mr. Goodhue We also have a section here where we talk about significant capital expenditures that were made within the first quarter and significant events that occurred within the first quarter. We talked about the refunding of those bonds. We did close on a loan with a bank for a Pennichuck East Utility and that was approved in the fall of last year but based on the timing and waiting for regulatory approval we did not close on that until March of this year and that’s actually reimbursement financing for Capex for Pennichuck East in the tail end of 2014. Then we also did complete the supplemental financing for our new water system in Pennichuck East during the first quarter as well. We will be closing on three other loans next week relative to approvals we had gotten from the committee recently for SRF funding on all of our PWW, PEU, and PAC company’s. Chairman Moriarty I have a couple of philosophical questions about the net worth of the company. Let’s say it’s worth $23 million; if someone wanted to buy a building that was worth $23 million they would have to get a loan for $23 million to buy it so does that mean that somebody in some sense could want to buy Pennichuck and it would only cost them $23 million? Mr. Goodhue Not necessarily. Just like the city went through an evaluation process, a buyer would have to go through the same process. The process is done on a fixed asset base or a cash flow base. When the city bought Pennichuck, part of it was looking at the cash flow to make sure it could generate a sufficient cash flow to support the debt. It’s a multi-faceted evaluation, it’s not a one size fits all. Chairman Moriarty I suppose as a comparison would be a company that does an initial public offering, it may have a cash value of a few million dollars but it has money generating and they tag it some sort capital value and then they say it’s worth a billion dollars or something. If you were to try to do that to Pennichuck, what would be its real value? Is it really a $200 million company? Mr. Patenaude There are many answers to that because the PUC had valued at one point in time, just Pennichuck Water Works at roughly $203 million and then they added another $40 million for mitigation of the other regulated utilities so at that point in time one could have said that it was worth $243 million and the city basically paid $150 million and absorbed the debt that was on the books. You have to look at the timing and what the value is; what can an investor get. When the city purchased Pennichuck we had the lowest value possible relative to the fact that we wanted rate payers to get the benefit over time. If someone were buying this and it was a regulated company and a third party was buying it they would look at the cash flow and go to the PUC and say “rather than getting a 5% return on our equity, can we 16% pre-tax on our equity?” Therefore, the value goes up and that’s why I’m saying that one size does not fit all, it depends on the buyer. UNFINISHED BUSINESS – None Pennichuck Water Special Committee -7- 05/05/15 NEW BUSINESS – RESOLUTIONS R-15-133 Endorsers: Mayor Donnalee Lozeau Alderman-at-Large Lori Wilshire Alderman Sean M. McGuinness APPROVING THE PROPOSAL OF PENNICHUCK CORPORATION TO BORROW AND ISSUE UP TO TWENTY-FIVE MILLION FIVE HUNDRED THOUSAND DOLLARS ($25,500,000) IN AN AGGREGATE PRINCIPAL AMOUNT OF TAX-EXEMPT BONDS AND/OR OTHER BORROWINGS MOTION BY ALDERMAN WILSHIRE TO RECOMMEND FINAL PASSAGE MOTION CARRIED NEW BUSINESS – ORDINANCES – None PUBLIC COMMENT – None REMARKS BY THE ALDERMEN Mr. Goodhue The 5th grade drawings are downstairs so take a look as they are very interesting. They will also be at the annual meeting on Saturday as well. Alderwoman Melizzi-Golja Unfortunately, I will not be able to be at the annual meeting as I had a family emergency come up but I wanted to be there. Chairman Moriarty I had heard from someone’s daughter who won one of the awards for the drawings that are on display downstairs. There’s going to be a ceremony tomorrow at noon and I plan on being at the annual meeting on Saturday. It’s our 3rd Annual Shareholder meeting since the City of Nashua acquired it. POSSIBLE NON-PUBLIC SESSION ADJOURNMENT MOTION BY ALDERMAN DEANE TO ADJOURN MOTION CARRIED The Pennichuck Water Special Committee meeting was adjourned at 7:40 p.m. Alderman Sean M. McGuiness Committee Clerk