Rate Covenant Test - If during any fiscal year, the EBITDA of Pennichuck Water
shall not equal at least 1.1 times all amounts paid or required to be paid during that year
(“Amounts Paid’), then the Company shall undertake reasonable efforts to initiate a
rate-making proceeding with the NH Public Utilities Commission, to rectify this
coverage requirement in the succeeding fiscal years. Thereby, the ratio of EBITDA to
Amounts Paid must be equal to or greater than 1.1; as of December 31, 2018 and 2017,
the Rate Covenant coverage ratio was 1.48 and 1.41, respectively.
Pennichuck East’s loan agreement for its unsecured notes payable to a bank of $8.1 million
and $8.1 million at December 31, 2018 and 2017, respectively, contains a minimum debt
service coverage ratio requirement of 1.10. At December 31, 2018 and 2017, this ratio was
0.89 and 0.92, respectively. This covenant has not been met, and the Bank has waived such
noncompliance. Also, Pennichuck East is required to maintain a maximum ratio of total debt
to total capitalization of 65%; at December 31, 2018 and 2017, this ratio was 65% and 59%,
respectively.
As of December 31, 2018 and 2017, the Company had a $2.9 million and $3.1 million,
respectively, interest rate swap which qualifies as a derivative. This financial derivative is
designated as a cash flow hedge. This financial instrument is used to mitigate interest rate risk
associated with our outstanding $2.9 million loan which has a floating interest rate based on
the three-month London Interbank Offered Rate (“LIBOR”) plus 1.75% as of December 31,
2018. The combined effect of the LIBOR-based borrowing formula and the swap produces an
“all-in fixed borrowing cost” equal to 5.95%. The fair value of the financial derivative, as of
December 31, 2018 and 2017, included in our Consolidated Balance Sheets under “Other
Liabilities and Deferred Credits” as “Derivative instrument” was $263,000 and $374,000,
respectively. Changes in the fair value of this derivative were deferred in accumulated other
comprehensive income.
Swap settlements are recorded in the statement of income (loss) with the hedged item as
interest expense. During the years ended December 31, 2018 and 2017, $59,000 and $76,000,
respectively, was reclassified pre-tax from accumulated other comprehensive income to
interest expense as a result of swap settlements. The Company expects to reclassify
approximately $66,000, pre-tax, from accumulated other comprehensive income to interest
expense as a result of swap settlements, over the next twelve months.
Note 11 — Lines of Credit
In April of 2018, the Company’s existing Line of Credit, which had a $6 million limit for
borrowings was replaced by a new $4 million Working Capital Line of Credit, and two new
Fixed Asset Lines of Credit for Pennichuck Water Works, Inc. ($10 million FALOC) and
Pennichuck East Utility, Inc. ($3 million FALOC), to be used to fund Construction Work in
Progress on capital projects, which will be refinanced into long-term debt term loan obligations
or issued bond indebtedness, annually.
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