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City officials announced Friday their intention to purchase Pennichuck Water Works.
Sunday, December 19, 2010

Nashua unseals minutes from water company discussions

NASHUA – Unsealed minutes from closed-door sessions held by the Board of Aldermen tell an incomplete tale of the city’s struggles to negotiate a deal to acquire its local water utility.

The story of the city’s efforts to acquire Pennichuck Water Works is incomplete because an entire year is missing from the record of meetings: 2005.

At least one closed-door session of the aldermen’s Pennichuck Water Special Committee was held that year, on Jan. 12. It’s unclear whether any additional closed meetings, in which minutes were sealed, were held and remain obscured from the public eye.

Also, the audio tapes for six other meetings from 2003-07 were either missing or blank, said James McNamee, the city’s corporation counsel.

McNamee went through the minutes line by line to redact “portions that contain Pennichuck’s material confidential information which is not yet subject to disclosure,” he wrote in a memo to the board.

What’s clear is how Pennichuck played cat and mouse with the city and fought the takeover at every turn.

“I originally had hoped that this would be a case fought on the issues, but the company has made it I think pretty clear that it is going to fight issues only as a last resort,” said Rob Upton, a consultant the city hired to help with the negotiations on April 27, 2004.

“I think what is happening is the company views this taking by the city as its death knell, and I think what we are seeing is, it is fighting for its life. It has made it very clear that it is going to do anything and everything that it has to do in order to try to survive.”

The years of secret negotiations and legal maneuvering recently culminated when the city and Pennichuck Corp. struck a $200 million deal in which Nashua will acquire all company stock at $29 a share. But getting there was never easy, and the city knew it.

“I think it is going to be a lot more unpleasant and maybe even more expensive than we originally thought,” Upton said in 2004.

“The company is going to try to beat the city not on the merits, because I think its claims are in many instances almost laughable, but rather by delaying, trying to scare the public and making the process more expensive in the hope that what it can do is wear down this board and cause you to throw in the towel.”

Aldermen voted last month to unseal the minutes after the city reached an agreement to acquire Pennichuck Corp., the water utility’s parent company, through the stock purchase.

The city has unsealed 36 sets of minutes dating to a Pennichuck Water Special Committee meeting of Feb. 4, 2004. The minutes can be found on the city’s website, www.gonashua.com.

The unsealed minutes repeatedly show the city was always serious in its desire to negotiate a settlement, while Pennichuck dug its heels in.

They also show a ruling by the N.H. Public Utilities Commission in July 2008 that gave both parties a new impetus to settle and avoid a taking by eminent domain.

The PUC ruled it was in the public interest for the city to take the assets of Pennichuck Water Works, but set the price at $203 million and required the city to pay a mitigation fund of an additional $43 million.

Pennichuck appealed the decision giving the city the green light to acquire the company, and the city appealed the price. Meanwhile, negotiations stepped up.

The earliest unsealed minutes were from a Feb. 2, 2004, meeting of the Pennichuck Water Special Committee. It showed a reluctance then of Pennichuck to negotiate with the city.

Alderman-at-Large Brian McCarthy, the committee chairman, referred to negotiations with Pennichuck that had occurred in the fall of 2003.

“Pennichuck was never willing to discuss anything but their theory that the utility was worth over $200 million, and that was only in the most vague terms where they simply said they had a number that started with a 2, and that was the extent of the information we received from them,” McCarthy said.

The city had offered $121 million, derived by taking the $106 million cash equivalent of the Philadelphia Suburban deal – the Dutch company that almost bought Pennichuck, launching the city’s efforts to acquire the utility – and adding $15 million the city believed to be unavoidable tax consequences of a private acquisition of the assets.

That number was derived by First Southwest, then the city’s financial adviser, McCarthy noted.

Pennichuck’s board rejected the offer after a brief discussion.

In the minutes, McCarthy talked about Pennichuck filing suit that day, and it’s the first record of a confidentiality agreement between the city and Pennichuck. Throughout the past several years, city officials would neither confirm nor deny that such an agreement existed.

“There has never been anything that I would characterize as substantive negotiation,” McCarthy said.

Aldermen’s discussions even then early showed they expected the legal challenges to end up before the state Supreme Court. Aldermen fretted that 15 other towns served by Pennichuck would line up against Nashua in eminent domain proceedings.

Faced with intense opposition from Pennichuck and a negative public relations campaign, the city was urged to hire a public relations firm to help counter Pennichuck’s negative ads. Former Alderman Steven Bolton and former Mayor Bernie Streeter argued against hiring a P.R. firm.

“But certainly, I think the best thing that we can do is to continue to tell the truth, and I don’t think we need a professional to tell us to tell the truth,” Streeter said.

On May 25, 2004, McCarthy advised the committee that Pennichuck had invited elected officials from other towns to meetings “to describe the evils of Nashua taking the system,” but evidently no one came.

Then on July 7, 2004, McCarthy told the committee, “There is one other issue that I wanted to bring you guys up to speed on, which requires ultimately high confidentiality based on the discussions we have had with Pennichuck, which is one of their major shareholders has asked them to engage in mediation with us, although we are not calling it mediation, we are calling it structured settlement discussions or facilitated settlement discussions.”

City adviser Upton had met with a Pennichuck attorney to establish ground rules.

“Rob (Upton) did ask me to stress the extreme nervousness of the company over this leaking out,” McCarthy said. “It would be very bad for them because apparently under the SEC rules is that they can negotiate in a case as long as it doesn’t become public, but if it becomes public then in order to squelch false information about it, they have to disclose a lot about it.

“They obviously don’t want to be put in that position. Their lawyer is even talking about only going into this if a document is circulated and signed by everyone on either side that might have wind of it that they will not disclose it.”

After a brief discussion, McCarthy said, “I think that they are in a position that they are really motivated to reach a solution of some sort.”

“They don’t think the ads are working?” Alderman David Deane said.

“Apparently not,” Bolton said.

However, there was never any more mention in the unsealed minutes of mediation. The minutes pick up again nearly two years later on March 13, 2006, for a closed special meeting of the Board of Aldermen.

City negotiators had met the previous week with Donald Correll, who was then president and chief executive officer of Pennichuck.

Nothing had changed over the past two years in the positions of the company and city, noted David Rootovich, who was then the president of the Board of Aldermen.

Then, in a meeting on March 28, 2006, Rootovich said Pennichuck’s proposal and Nashua’s counterproposal were “worlds apart.”

Five months later, talks took a dramatic turn.

On Aug. 21, 2006, aldermen were asked to sign a new confidentiality agreement because of SEC regulations. Once members signed, the board would be given “inside information,” Upton said.

The aldermen signed, and then Upton described a conversation he had with a Pennichuck attorney: “So they are at $240 million and we’re at $140 million or $150 million and suddenly the gap doesn’t look quite as large as it did.“

In subsequent discussions, Pennichuck asked if the city could acquire stock.

“It became immediately obvious that what the company most wanted to do was to sell the entire company not just some assets maybe just in Nashua or the assets of PWW, it wanted to sell the entire company and they wanted to do it through a stock sale,” Upton said.

“I think it is likely that this company has been for sale from that point to the present point, and what they have had is they have had us as a real hindrance to any sale because of our action for eminent domain.”

That might have opened the door for a stock purchase agreement sooner than it did. However, that prospect was derailed when the city’s bond counsel advised that in his interpretation of state statutes, the city couldn’t legally acquire stock, only assets.

In a meeting on Nov. 8, 2006, it was clear that questions about cost and whether the city can legally buy stock hindered negotiations.

“They have this emotional figure in their minds that they have to receive $36 per share,” Upton said. “Where that comes from is that is what they think if they had done the Philadelphia deal they would have stock worth that now. It is entirely emotional and has nothing to do with value, but they think that is the level that they have to have.”

Then Upton described how Pennichuck’s new CEO had issued the city an ultimatum: Agree to a settlement by Jan. 1, 2007, or go to trial.

Duane Montopoli was described as “a tough guy” charged with making the company stop bleeding money. Some aldermen saw the ultimatum as a bluff and an attempt the scare the city into a deal favorable for Pennichuck.

The top price of various proposals being discussed was acquiring all of Pennichuck Corp.’s assets for $235 million.

On Nov. 17, 2006, the board authorized three settlement proposals: $225 million to acquire assets of the entire company and offers of $175 million for Pennichuck Water Works and $160 million for other utility assets. The board approved three proposals by a 10-4 vote.

Upton wanted the board to authorize the three to show Pennichuck officials that two-thirds of aldermen were willing to commit to a deal. Some officials doubted that a super-majority of the board would agree to a deal, Upton said.

By the beginning of 2007, much of the groundwork had been established for a negotiated settlement, but there were still legal battles and starts and stops in negotiations until Mayor Donnalee Lozeau announced on Nov. 12, 2010, that an agreement had been struck.

More of the unsealed minutes detail aldermen’s discussions through the machinations of the complicated process:

In January 2007, hearings began at the PUC, but were suspended when both sides asked for 120 days to work out a negotiated settlement. Shortly afterward, the city terminated the talks, saying it couldn’t reach a settlement. The case returned to the PUC.

In July 2008, the PUC made its crucial ruling endorsing the eminent domain acquisition but setting a high price, thus encouraging negotiations to resume.

In March 2009, the PUC denied both parties’ requests for reconsideration, and a month later, both the city and Pennichuck appealed to the N.H. Supreme Court.

On Jan. 21, 2010, both parties argued their cases before the court. Two months later, the court upheld the PUC’s ruling, leaving the city with 90 days to decide whether to take the utility by eminent domain for $243 million. Shortly after, closed-door settlement talks resumed between the city and Pennichuck, eventually culminating in the November agreement.

Still missing from the record are minutes for closed-session meetings of June 18, 2003; June 8, 2004; March 14, 2006; March 16, 2006; April 17, 2007; and April 25, 2007.

The city has no explanation why records for 2005 haven’t been released.

The Pennichuck deal has yet to officially close, which could take as long as a year. When it does, 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.

Patrick Meighan can be reached at 594-6518 or pmeighan@nashuatelegraph.com.