DEATH
OF PENNICHUCK IS CERTAIN TO
RESULT IN MORE TAXES FOR NASHUA
Dear Customers and Shareholders,
With apologies to Ben
Franklin, the only thing certain to happen from the death of Pennichuck
Corporation is . . . more taxes.
We estimate it will cost
the city of Nashua one million dollars or more in legal fees and consultant
expenses just for trying to take the assets of Pennichuck Corporation
by eminent domain. This is a trivial sum compared to the financial
burden taxpayers and water consumers will have to shoulder if the
city succeeds in condemning our 151-year-old company.
The liquidation of Pennichuck
will actually trigger a series of tax events that will have immediate
and long-term repercussions on the fiscal health of the water business.
A look at the financial fundamentals exposes the city’s flawed offer
as a classic comparison of apples and oranges, and reveals an apparent
misunderstanding or lack of knowledge of tax laws.
First, the city falsely
asserts that its offer of $121 million in cash ($106 million for all
Pennichuck assets and $15 million to cover corporate tax liabilities)
is equal to the stock-for-stock offer from Philadelphia Suburban Corporation
(PSC) of almost two years ago. The city’s estimate of the corporate
tax liability is vastly underestimated. (Had the city allowed Pennichuck
to speak with its tax advisors, we might have been able to enlighten
them.)
Second, in the PSC transaction,
Pennichuck shareholders would have exchanged Pennichuck stock for
PSC stock. There would have been no tax liability unless one chose
to sell the stock. In the cash transaction that would result from
taking the company’s assets by eminent domain, Pennichuck shareholders
would have no choice but to pay substantial capital gains taxes immediately.
Just as any homeowner would not expect to be disadvantaged by paying
taxes when a homeowner’s property is taken by eminent domain, neither
would a Pennichuck owner.
Third, the liquidation
of Pennichuck Corporation will cause a permanent shortfall to the
city in annual tax revenues that the company would have paid.
A realistic estimate of
the total federal and state tax liabilities – triggered solely by
the city’s action – combined with the value of the Pennichuck assets,
will bring the city’s total cost to a range of $200 million. The city’s
plan to pay for taking Pennichuck assets relies entirely on water
revenues to support a bond issue. The city outlined this plan in testimony
submitted as part of its intervention in the PSC case. An updated
analysis of the city’s plan, using these more accurate but substantially
higher numbers, will undoubtedly lead to a water rate increase, possibly
by as much as 25 percent or more. (Had the city allowed us to speak
with its financial advisors, we might have been able to enlighten
them, too!)
Pennichuck Corporation
doesn’t make the tax laws, but we do understand them. It is our hope
that by sharing our understanding and addressing the facts, the city
of Nashua will fully recognize the implications of its current course
of action.
Our Sunday installment
in this series will take an historical look at the city of Nashua’s
past attempts to take Pennichuck.
Pennichuck Corporation
December 19, 2003
