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City officials announced Friday their intention to purchase Pennichuck Water Works.
Saturday, November 13, 2010

Watershed moment: Pennichuck deal struck

NASHUA – After an eight-year battle, the city of Nashua has reached a historic deal to take ownership of the local water supply and protect valuable watershed land.

Years of secret negotiations and legal maneuvering culminated this week when the city and Pennichuck Corp. struck a $200 million deal in which Nashua will acquire all company stock at $29 a share.

The news was met enthusiastically by Wall Street. The stock climbed 13 percent Friday, closing at $27.52. The sale ends an eminent domain fight that spanned two mayors, twice made its way to the New Hampshire Supreme Court and cost taxpayers some $5 million.

City officials say they don’t expect an immediate decrease in water rates once Nashua assumes ownership. However, over the long term, water customers will pay less under city ownership than they would have under Pennichuck Corp. ownership, city officials say.

That’s largely because the city doesn’t have to worry about turning a profit for shareholders, officials say.

“The long-term effect (on rates) will be very good,” said Alderman-at-Large Brian McCarthy, the board president who has long been a key player in the city’s attempt to acquire the utility.

Details of the settlement will be explained at a public meeting at 7 p.m. Monday in the City Hall auditorium. Similar meetings will be scheduled in other towns served by Pennichuck.

The deal has a total value of just under $200 million, including $138 million for the stock purchase. The city also will assume $60 million in Pennichuck debt.

Once the deal closes, which could take as long as a year, the city will own all Pennichuck holdings, including Pennichuck Water Works, the utility that the city had fought to acquire through eminent domain proceedings.

The city will also own two smaller utilities, Pennichuck East and Pittsfield Aqueduct; Pennichuck Water Services Co., which provides water management such as pumping and metering; and Southwood Co., a real-estate holding company that controls roughly 450 acres of watershed.

Because the city is acquiring the entire company, it won’t have to pay the $40 million the state Public Utilities Commission required if the company had been split up.

Under the deal, most of the roughly 100 Pennichuck employees would retain their jobs except for a few in upper management, such as CEO Duane Montopoli.

Montopoli will receive a severance package and will be replaced with an interim CEO who has yet to be named.

The city won’t have to hire an outside company to run the utility, city officials say.

In a statement released Friday, Montopoli said the deal is a good outcome for both the company’s shareholders and residents of Nashua.

“This stock sale will enable our shareholders to avoid double taxation, and the city will acquire more assets at a lower total cost than would apply in a condemnation taking,” he said.

Unusual transaction

A stock purchase is a highly unusual transaction for a municipality. At least initially, the city will continue to run Pennichuck like a private businesses with a city-appointed board of directors as the governing body.

Typically, municipal water systems are operated as city departments.

“The city is probably going to be in transition with this for a year or two,” Mayor Donnalee Lozeau said. “You don’t go in and change things before you really know what you have.”

The city will bond the money to buy Pennichuck and make payments over 30 years using the money collected in water rates. The deal isn’t going to increase taxes, Lozeau said.

The agreement is binding for Pennichuck, but the city has no obligation to go through with the deal until the full Board of Aldermen vote, which must happen within 90 days.

If aldermen reject the deal, the city forfeits its right to pursue eminent domain for two years.

The city and Pennichuck have battled for control of the local water supply since 2002, when Nashua officials initiated eminent domain proceedings after learning Pennichuck was poised to sell to an out-of-state company. The sale fell through, but the city moved forward.

The city was also concerned that Pennichuck was selling off land surrounding the watershed for development, and officials said they wanted to own that land to protect the local water supply.

In 2008, the Public Utilities Commission ruled that Nashua could take the utility by eminent domain for $203 million, plus a $40 million mitigation fee for damages to Pennichuck’s sister companies, but the city said that price was too high.

Both sides appealed to the state Supreme Court: Pennichuck wanted the decision reversed and Nashua wanted a lower price. Last March, the court backed all of the PUC’s 2008 decisions, which sparked another round of private settlement negotiations.

Deal made Tuesday

The deal was sealed Tuesday, Lozeau said. Aldermen approved the settlement in a closed-door meeting on Tuesday evening, and the Pennichuck Board of Directors endorsed the deal Thursday.

Several steps still must happen before the agreement is finalized.

Two-thirds of Pennichuck shareholders have to endorse the agreement, and it also has to be approved by the N.H. Public Utilities Commission and the federal Securities Exchange Commission.

Also, the agreement needs three votes by the board of aldermen.

One vote would affirm that it’s in the public’s best interest to acquire Pennichuck through a purchase of its assets as opposed to eminent domain.

The second vote would affirm that settlement is in the best financial interest of the city and the utility ratepayers.

Finally, the aldermen would have to approve the 30-year bond to buy the company by a two-thirds vote.

Unlike past closed-door votes, all three votes would be held in public after public debate. Aldermen have until Feb. 8 to pass the three votes.

Sale negotiations originally began under the administration of Mayor Bernie Streeter, but stalled for a time over price, with the city offering $27 a share and Pennichuck holding out for as much as $33 a share.

Lozeau said the settlement succeeds at striking a balance between protecting the local water supply and doing so at a cost that is “reasonably affordable.”

Pennichuck Board Chairman John R. Kreick called the deal a significant event.

“I would like to congratulate the teams from the city and the company who have accomplished this task,” he said in a statement. “I would especially like to thank the Pennichuck employees, who have continued to reliably provide safe water for our customers, despite the uncertainty created by the eminent domain procedures.”

An analyst who follows Pennichuck upgraded the stock’s rating on Friday from “sell” to “neutral.” However, Heike M. Doerr, of equity research firm Janney Montgomery Scott, stopped short of advising investors to buy stock now to make a quick buck from the transaction; fewer than 5,000 shares are traded daily.

“Given the limited trading volume in Pennichuck, we do not encourage investors to arbitrage this deal,” Doerr said in an investment report.

Doerr upgraded the stock’s “fair value” from $16 to $29.

Pennichuck Corp. serves more than 33,000 customers in New Hampshire. Its largest subsidiary, Pennichuck Water Works, serves about 24,500 people in Nashua and 10 other towns, including Amherst, Bedford, Hollis, Merrimack and Milford, although the bulk of those customers are in Nashua.

Patrick Meighan can be reached at 594-6518 or pmeighan@nashuatelegraph.com. Ashley Smith can be reached at 594-6446 or asmith@nashuatelegraph.com.