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Article by DailyStocks_admin    (12-05-08 06:06 AM)

Filed with the SEC from Nov 20 to Nov 26:

Pennichuck (PNNW)
A group of funds including Mario Gabelli's Gamco Investors (ticker: GBL) said that it recently had sent Pennichuck a letter nominating three candidates for election to the board at the company's 2009 annual meeting. Gamco plans to nominate Clarence A. Davis, Mark M. Feldman and Michael I. German. The Gabelli group currently has 631,282 shares (14.85%).

BUSINESS OVERVIEW

Overview

We are engaged primarily in the collection, storage, treatment and distribution of potable water in New Hampshire. We have three reportable business segments: regulated water utilities, non-regulated water management services and real estate management and commercialization. Water utility revenues constituted 92.2% of our consolidated revenues in 2007. We are headquartered in Merrimack, New Hampshire, which is located approximately 45 miles north of Boston, Massachusetts. Our Company, which was incorporated in New Hampshire in 1852, became a utility holding company in 1983, when it completed a reorganization resulting in the transfer of all of our water utility assets at that time to Pennichuck Water.

The U.S. Securities and Exchange Commission (the “SEC”) maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov . We make available free of charge on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The address of our website is www.pe nnichuck .com .

Our Strategy

Our mission is to be a leading supplier of clean, safe and reliable drinking water and quality water-related services in New England and to achieve sustainable growth in our revenues and earnings by:

Investing in our regulated water utilities to maintain reliable, high quality service. To maintain our position as a respected water supplier, we will make ongoing capital investments in our water systems to meet or exceed applicable regulatory requirements and to maintain our infrastructure.

Acquiring additional small and mid-size water systems in New Hampshire and nearby portions of Maine, Massachusetts and Vermont. We believe there remain significant opportunities to grow our customer base in New Hampshire and nearby portions of Maine, Massachusetts and Vermont. We estimate that there are a total of 1,850 water systems in those target areas. We expect that increasingly stringent regulation, the resulting increase in capital requirements and the need for skilled operators will continue to cause system owners to consider selling their water systems or outsourcing the management of their systems.

Expanding our water management business with a focus on servicing small and mid-size water systems, where we believe we can leverage our capital resources as well as our operating and technical expertise. Service Corporation’s strategy calls for a focus on segments in which it can provide high quality service in a cost effective manner. These segments include small and mid-size municipal utilities, small systems such as community water systems and non-transient, non-community water systems.

Pursuing acquisitions of relatively large water systems to expand into new geographic markets in the northeastern United States. An important element of our strategic plan is to seek to expand into new geographic markets in the northeastern United States by acquiring one or more relatively large water systems. We expect to focus on systems that have sufficient scale to warrant establishing and maintaining a management presence in a new market. These systems will likely be significantly larger than the small and mid-size water systems that we are targeting nearby our existing service areas. We do not expect, however, that these larger systems will be substantially larger than Pennichuck Water. We believe there are a number of such large water systems in the northeastern United States that are potentially attractive acquisition opportunities. We anticipate that this large water system segment within the U.S. water utility industry will continue to consolidate, as system owners, whether investor-owned utilities or municipalities, facing increasingly stringent regulation and the resulting increase in capital requirements, consider acquisitions by other companies. The pace at which acquisition opportunities will arise is, of course, unpredictable.

Water Utility Business

Overview . Three of our subsidiaries are water utilities engaged in the collection, storage, treatment, distribution and sale of potable water in southern and central New Hampshire, subject to the jurisdiction of the New Hampshire Public Utilities Commission (the “NHPUC”):

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Pennichuck Water Works, Inc., our principal subsidiary, was established in 1852 and services the City of Nashua, New Hampshire and 10 surrounding New Hampshire municipalities located in southern New Hampshire with an estimated population of 110,000, almost 10% of the population of the State of New Hampshire;

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Pennichuck East Utility, Inc. was organized in 1998 and serves 15 communities most of which are located in southern and central New Hampshire; and

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Pittsfield Aqueduct Company, Inc., which we acquired in 1998, serves customers in Pittsfield, as well as three other communities in central and northern New Hampshire.

Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for nonessential usage by our customers during the late spring and summer months.

The City of Nashua, New Hampshire (the “City”) is engaged in ongoing efforts that began in 2002 to acquire through an eminent domain proceeding all or a significant portion of Pennichuck Water’s assets. The eminent domain proceeding and its effects on us are described elsewhere in this Annual Report on Form 10-K. See “—Ongoing Eminent Domain Proceeding”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3.

Service Areas. Pennichuck Water is franchised by the NHPUC to distribute water in the City of Nashua, New Hampshire and in portions of the towns of Amherst, Bedford, Derry, Epping, Hollis, Merrimack, Milford, Newmarket, Plaistow and Salem, New Hampshire. Pennichuck Water’s transmission mains extend from Nashua into portions of the surrounding towns of Amherst, Hudson, Merrimack, Hollis and Milford. Its franchises in the remaining towns consist of stand-alone satellite water systems. Pennichuck Water has no competition in its core franchise area, other than from customers using their own wells. Pennichuck Water serves approximately 25,800 customers and its 2007 revenues totaled $21.8 million.

Pennichuck East was organized in 1998 to acquire certain water utility assets from the Town of Hudson, New Hampshire following the Town’s acquisition of those assets from an investor-owned water utility which previously served Hudson and surrounding communities. Pennichuck East is franchised to distribute water in portions of the New Hampshire towns of Atkinson, Bow, Chester, Derry, Exeter, Hooksett, Lee, Litchfield, Londonderry, Pelham, Plaistow, Raymond, Sandown, Weare and Windham, which are near the areas served by Pennichuck Water. Pennichuck East has no commercial competition in its core franchise area. The water utility assets owned by Pennichuck East consist principally of water transmission and distribution mains, hydrants, wells, pump stations and pumping equipment, water services and meters, easements and certain tracts of land. Pennichuck East serves approximately 5,300 customers and annual water revenues were approximately $4.7 million for calendar year 2007.

Pittsfield was acquired by our Company in 1998 and serves approximately 1,800 customers in and around Pittsfield, New Hampshire with water revenues of approximately $783,000 for calendar year 2007. Pittsfield has no competition in its franchise area. These amounts reflect Pittsfield’s June 2006 acquisition of three water systems aggregating approximately 1,100 customers in the central and northern parts of New Hampshire: the Locke Lake water system in Barnstead, the Birch Hill water system in Conway and the Sunrise Estates water system in Middleton, New Hampshire. These acquisitions are our largest since 1998.

Water Supply Facilities . Pennichuck Water’s principal properties are located in Nashua, New Hampshire, except for portions of our watershed or buffer land which are located in the neighboring towns of Amherst, Merrimack and Hollis, New Hampshire. In addition, Pennichuck Water owns four impounding dams which are situated on the Nashua and Merrimack border.

The primary source of potable water for our core Pennichuck Water system is the Pennichuck Brook, Holt Pond, Bowers Pond, Harris Pond and Supply Pond in the Nashua area that together can hold up to 500 million gallons of water. We supplement that source during the summer months by pumping water from the adjacent Merrimack River. Pennichuck Water can deliver up to 31.2 million gallons per day (“mgd”), into the distribution system. By comparison, Pennichuck Water’s peak month, which occurred in June 1999, had an average daily demand for that month of 21.2 mgd.

We own a water treatment plant in Nashua that uses a combination of physical and chemical removal of suspended solids and sand and carbon filtration to treat the water that Pennichuck Water supplies. The plant has a rated capacity of 35.0 mgd. The plant’s capacity will not be affected by the upgrade described elsewhere in this Annual Report on Form 10-K.

We own a raw water intake and pumping facility located on the Merrimack River in Merrimack, New Hampshire. This supplemental water supply provides an additional source of water during summer periods and will provide a long-term supply for Pennichuck Water’s service area. A permit from the Army Corps of Engineers that has been extended through December 21, 2009 allows us to divert water from the Merrimack River. We may divert between 12.0 and 30.0 mgd dependent upon the river elevation and flow. Our existing pumping facility on the Merrimack River is capable of providing up to 16.2 mgd and as part of our 2008 to 2010 capital expenditures program discussed elsewhere in this Annual Report on Form 10-K, we plan to install new pumps that will increase our pumping capacity to 21.0 mgd.

We also own approximately 672 acres of land located in Nashua and Merrimack, New Hampshire that are held for watershed and reservoir purposes.

We own 14 water storage reservoirs having a total storage capacity of 22.3 million gallons, six of which are located in Nashua, two in Amherst, one in Bedford, one in Derry, one in Litchfield, one in Pelham, one in Barnstead and one in Hollis, New Hampshire.

We own a 900,000 gallon per day gravel-packed well located in Amherst, New Hampshire.

The sources of supply for Pennichuck East consist of purchased water from Manchester Water Works, Hooksett Village Water Precinct, the Town of Derry, the Town of Raymond, a well system owned by the Town of Hudson, in Litchfield, New Hampshire and individual bedrock wells. Pennichuck East has entered into long-term water supply agreements to obtain water from Manchester Water Works and Hudson. The terms of our Manchester supply contract are described in Item 7 of this Annual Report on Form 10-K. We have an agreement with Hudson, which expires in 2017, that allows us to pump up to 283,500 gallons per day from its wells at a cost equal to the variable cost of production or operation associated with the system as a whole or any of its components. Hudson will charge us a higher rate for water pumped in excess of the 283,500 gallons allowed per day.

Pittsfield’s sole source of supply is Berry Pond, which holds approximately 97.8 million gallons. Pittsfield owns the land surrounding Berry Pond and it treats the water from this pond through a 0.5 mgd water filtration plant located in Pittsfield, New Hampshire. The sources of supply for the Locke Lake, Sunrise Estates and Birch Hill systems are individual bedrock walls.

Capital Expenditures. The water utility business is capital intensive. We typically spend significant sums each year for additions to or replacement of property, plant and equipment. During 2008, and to a lesser extent in 2009 and 2010, our capital expenditures will be particularly large as we:

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substantially complete our upgrade of Pennichuck Water’s Nashua water treatment plant to meet the requirements of the Interim Enhanced Surface Water Treatment Rule discussed below and undertake other improvements intended to allow us to comply with current and projected water quality requirements and provide for operating redundancy;

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undertake various water distribution, storage, supply, maintenance, rehabilitation and replacement projects; and

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continue to implement a radio-based meter reading system.

We estimate that our projected capital expenditures during the 2008 through 2010 period will total approximately $32.6 million in current dollars. By comparison, for the three year period 2005 through 2007, our capital expenditures were $50.0 million. These figures are exclusive of Allowance for Funds Used During Construction (“AFUDC”).

Regulation

New Hampshire Public Utilities Commission . Our Company’s water utilities are regulated by the NHPUC with respect to their water rates, financings and provision of service. New Hampshire law provides that utilities are entitled to charge rates which permit them to earn a reasonable return on the cost of the property employed in serving their customers, less accrued depreciation, contributed capital and deferred income taxes (“Rate Base”). The cost of capital permanently employed by a utility in its utility business marks the minimum rate of return which a utility is lawfully entitled to earn on its Rate Base. Capital expenditures associated with complying with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in our water rates, though there can be no assurance that the NHPUC will approve future rate relief in a timely or sufficient manner to cover our capital expenditures.

Pennichuck Water’s rates in effect at the beginning of 2007 were based on a September 2006 NHPUC order authorizing a 14.41% temporary rate increase, or a $2.4 million annualized increase in revenues, effective retroactively for service rendered on and after July 18, 2006.

In May and June 2007, the NHPUC issued final written orders authorizing increases in permanent rates of 31.43% and 3.07%, respectively, or $5.2 million and $505,000 annualized increases in revenues, respectively. The May 2007 order consisted of an 11.07% increase effective retroactively for service rendered on and after July 18, 2006 and a 20.36% increase effective retroactively for service rendered on and after January 5, 2007. The net amount due to Pennichuck Water from periods predating the May 2007 order (including approved rate case expenses) was billed to customers over the ensuing nine-month period. The June 2007 order was effective for service rendered on and after June 1, 2007.

Pennichuck Water is planning to file a new request for rate relief in mid-2008 primarily to seek recovery of and return on capital expenditures incurred for the completed and used and useful portions of its water treatment plant upgrade project that are not yet reflected in rates.

Pennichuck East’s rates in effect at the beginning of 2007 were based on a February 2006 NHPUC final written order authorizing a 24.26% increase in permanent rates, or an approximate $756,000 annualized increase in revenues effective retroactively for service rendered on and after June 16, 2005.

In March 2007, Pennichuck East filed a Notice of Intent to file rate schedules seeking a 22.0% increase in rates, or a $927,000 annualized increase in revenues. In August 2007, the NHPUC issued an order authorizing an 11.99% temporary rate increase, or a $501,000 annualized increase in revenues, effective for service rendered on and after May 29, 2007.

On February 26, 2008, Pennichuck East entered into a settlement agreement with the staff of the NHPUC regarding permanent rates. The terms of the settlement, which will not become effective unless approved by the NHPUC, provide for a permanent annualized increase in Pennichuck East’s revenues of $712,000, or 17.19%, effective for service rendered on and after May 29, 2007. This would replace the temporary increase currently in effect. A final order from the NHPUC regarding this rate settlement is expected by April 2008. Any difference between the temporary rate increase already granted and the permanent rates ultimately approved by the NHPUC will be reconciled upon the approval of such permanent rates.

Pittsfield is planning to file a new request for rate relief prior to mid-2008 primarily to seek recovery of increases in certain operating expenses since 2002, the test year for purposes of its most recent rate increase awarded in 2003, as well as to obtain recovery of and a return on several million dollars of capital expenditures incurred for the rehabilitation and upgrade of systems acquired in mid-2006 as described above.

Under New Hampshire law, the Company may not be acquired unless and until there is a final, non-appealable order of the NHPUC approving the acquisition. The NHPUC may approve an acquisition only if it determines that the acquisition will not have an adverse effect on rates, terms, service or operation of the utilities and is lawful, proper and in the public interest.

Water Quality Regulation. Our Company’s water utilities are subject to the water quality regulations issued by the United States Environmental Protection Agency (“EPA”) and the New Hampshire Department of Environmental Services (“DES”). The EPA is required to periodically set new maximum contaminant levels for certain chemicals as required by the federal Safe Drinking Water Act. The quality of our Company’s water utilities’ treated water currently meets or exceeds all current standards set by the EPA and the DES.

Pennichuck Water’s filtration plant in Nashua is impacted by the Interim Enhanced Surface Water Treatment Rule, which established a new turbidity standard of 0.3 Nephelometric Turbidity Units or NTU. Turbidity is a measure of sediment or foreign particles that are suspended in the water. Pennichuck Water completed its evaluation of alternatives to meet the new turbidity standard in 2004, resulting in its recommendations for upgrades to its existing treatment facilities, beginning with its raw water facilities through its finished water pumping and storage facilities. This work was divided among six distinct construction contracts, with Contracts 1 and 2 involving upgrades to Pennichuck Water’s raw water facilities being completed in 2005. Upgrades to Pennichuck Water’s finished water pumpage and storage facilities (Contracts 3 and 5) were completed in January 2007. The design of the proposed upgrades to the existing coagulation, flocculation, sedimentation, filtration and chemical feed facilities (Contract 4) was completed in April 2006 and construction on these upgrades began in June of 2006 with completion expected in early 2009. The design for the proposed improvements to our Merrimack River intake (Contract 6) was completed in 2007. Construction is expected to commence in the first half of 2008 with completion in the second half of 2008.

Water Management Services

We complement our regulated water utility business by providing contract operation and maintenance services, including monitoring water quality, testing, maintenance and compliance reporting services for water systems for various towns, businesses and residential communities primarily in southern and central New Hampshire. The business segment is not subject to NHPUC regulation and we conduct this business through our subsidiary, Service Corporation. As of December 31, 2007, Service Corporation was providing such services pursuant to 88 operating contracts.

Municipalities. In 1998, Service Corporation entered into a long-term agreement with the Town of Hudson, New Hampshire (“Hudson Agreement”) to provide operations and maintenance contract services with respect to the water utility assets acquired from an investor-owned water utility. In 2006, the Hudson Agreement was extended to 2015. Pursuant to the Hudson agreement, the Town of Hudson has requested Service Corporation install, own and operate updated customer meter-reading equipment. The estimated capital cost for this project ranges from $500,000 to $600,000. Service Corporation and the Town of Hudson are actively negotiating the final terms and conditions for such project.

In September 2001, Service Corporation entered into a long-term agreement with the Town of Salisbury, Massachusetts (“Salisbury Agreement”) to perform similar operations and maintenance services. The Salisbury Agreement expired in September 2006 and was extended through September 2007. In October 2007, Service Corporation entered into a new contract with the Town providing for a five-year extension.

In December 2005, the Town of Barnstable, Massachusetts selected a joint proposal from Service Corporation and Whitewater, a wholly-owned subsidiary of R.H. White, to operate and maintain the Hyannis Water System. A two-year definitive agreement between Whitewater and the Town of Barnstable was executed (the “Hyannis Agreement”) and services commenced in early February 2006. Service Corporation provides billing, accounts receivable management and related customer services pursuant to this public/private partnership agreement. The parties recently extended the Hyannis Agreement for an additional year through February 2009.

Non-transient, non-community water systems . The DES has mandated water quality standards for non-transient, non-community water systems – defined as public facilities such as schools, apartment and office buildings accommodating more than 25 persons and served by a community well. There are an estimated 600 such systems in New Hampshire which require the services of a certified water operator, such as Service Corporation, in order to meet the mandates of the DES. Accordingly, Service Corporation is actively pursuing new contracts under which it would serve as the certified water operator and provide various water-related monitoring, maintenance, testing and compliance reporting services for these systems in New Hampshire.

Competition. In marketing its services to municipalities, Service Corporation must address competition from incumbent service providers, including municipal employees and a reluctance by municipalities to outsource water management to an investor-owned company. For contracts with non-transient, non-community water systems, Service Corporation competes primarily with well drillers, laboratories, pump equipment vendors and small contract operators who provide various services to these systems.

Real Estate Management and Commercialization

Southwood is engaged in real estate management and commercialization activities. We originally organized Southwood in 1983 to manage and develop approximately 1,490 acres of land in Nashua and Merrimack, New Hampshire.

Undeveloped Land. Southwood, for its own account or on behalf of our Company, controls several parcels of developable land in Nashua and Merrimack, New Hampshire, totaling approximately 450 acres. One parcel, aggregating approximately 40 acres, is located in Nashua and the remaining parcels, aggregating approximately 410 acres, are located in Merrimack. The entire portfolio of land held for future development is classified under “current use” status, resulting in a tax assessment that is based on the property’s actual use and not its highest or best use.

Over the next several years, if and to the extent that opportunities arise, Southwood expects to pursue the efficient and orderly commercialization of its land portfolio and may consider the reinvestment of certain land sale proceeds in income producing properties in order to defer the recognition of taxes. In June 2007, Southwood entered into a listing agreement with a real estate broker to offer for sale one of its land holdings known as Parcel B. Parcel B, which consists of 27.23 acres, has received all necessary approvals for the phased development of up to 110,000 square feet of commercial office space. No assurance can be given as to the terms and conditions of, or likelihood of completing, this transaction, if at all.

Developed Land and Real Estate Investments. Of the land originally under its control, Southwood contributed various parcels to four joint ventures to develop the Heron Cove Office Park, a three-building, 147,000 square foot, multi-tenant office project in Merrimack, New Hampshire. Until January 2008, Southwood had a 50% ownership interest in each of those joint ventures, which are sometimes referred to in this Annual Report on Form 10-K as HECOP I-IV. HECOP I, II and III own commercial office buildings. HECOP IV owns a nearby 9.1 acre parcel that has been approved for the construction of commercial office space. The managing partner of the HECOP joint ventures is John P. Stabile II (“Stabile”), a local developer with whom Southwood has participated in four residential joint ventures during the past 10 years.

As of December 31, 2007, HECOP I-III were subject to mortgage notes with various financial institutions. The mortgage notes, which totaled approximately $10.5 million as of December 31, 2007, are not included in our accompanying consolidated balance sheets, and were each secured by the underlying real property. In addition, Southwood was contingently liable for approximately $3.7 million, representing one-half of the outstanding balance for three of the four mortgages under a guarantee that Southwood has provided to the mortgagee limited to 50% of HECOP II and III’s obligations to their lender. Southwood’s investments in HECOP I-III had an aggregate carrying value of $534,000 as of December 31, 2007.


MANAGEMENT DISCUSSION FROM LATEST 10K

Introduction

The Company is a non-operating holding company whose income is derived from the earnings of five wholly owned subsidiaries. We are engaged primarily in the collection, storage, treatment and distribution of potable water for domestic, industrial, commercial and fire protection service in New Hampshire through our three utility subsidiaries: Pennichuck Water Works, Inc. (“Pennichuck Water”), Pennichuck East Utility, Inc. (“Pennichuck East”) and Pittsfield Aqueduct Company, Inc. (“Pittsfield”). Our water utility revenues constituted 92.2% of our consolidated revenues in 2007. Pennichuck Water, our principal subsidiary which was established in 1852, accounted for 73.7% of our 2007 consolidated revenues. Pennichuck Water’s franchise area presently includes the City of Nashua, New Hampshire (the “City”) and 10 surrounding municipalities.

Our water subsidiaries are regulated by the New Hampshire Public Utilities Commission (the “NHPUC”) and must obtain NHPUC approval to increase their water rates to recover increases in operating expenses and to obtain the opportunity to earn a return on investments in plant and equipment. New Hampshire law provides that utilities are entitled to charge rates which permit them to earn a reasonable return on the cost of the property employed in serving their customers, less accrued depreciation, contributed capital and deferred income taxes (“Rate Base”). The cost of capital permanently employed by a utility in its utility business marks the minimum rate of return that a utility is lawfully entitled to earn on its Rate Base. Capital expenditures associated with complying with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in water rates, though there can be no assurance that the NHPUC will approve future rate increases in a timely or sufficient manner to cover our capital expenditures.

The businesses of our two other subsidiaries are non-regulated water management services and real estate development and investment. Pennichuck Water Service Corporation (“Service Corporation”) provides various non-regulated water-related monitoring, maintenance, testing and compliance reporting services for water systems for various towns, businesses and residential communities in and around southern and central New Hampshire. Its most significant contracts are with the Towns of Hudson and Wilton, New Hampshire and the Towns of Salisbury and Barnstable, Massachusetts.

The Southwood Corporation (“Southwood”) is engaged in real estate management and commercialization activities. Historically, most of Southwood’s activities were conducted through real estate joint ventures. During the past 10 years, Southwood has participated in four residential joint ventures with John P. Stabile II, (“Stabile”) a local developer. Southwood’s earnings have from time to time during that period contributed a significant percentage of our consolidated net income. Southwood’s contributions from the sale of real estate have increased the fluctuations in our net income during that period. We expect that Southwood will contribute a smaller proportion of our future revenues and earnings (excluding the effects of the January 2008 sale of the three commercial office buildings that comprised substantially all of the assets of HECOP I, II and III as more fully described elsewhere in this Annual Report on Form 10-K).

As you read Management’s Discussion and Analysis, please refer to our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form10-K Report.

Forward-Looking Statements

Certain statements in this Management’s Discussion and Analysis are forward-looking statements intended to qualify for safe harbors from liability under the Private Securities Litigation Reform Act of 1995, as amended (and codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by, or include the words “in the future,” “believes,” “expects,” “anticipates,” “plans” or similar expressions, or the negative thereof.

Forward-looking statements involve risks and uncertainties, and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors include, among other things, whether eminent domain proceedings are successful against some or all of our water utility assets, the success of applications for rate relief, changes in governmental regulations, changes in the economic and business environment that may impact demand for our water and real estate products, changes in capital requirements that may affect our level of capital expenditures, changes in business strategy or plans and fluctuations in weather conditions that impact water consumption. These risks and others are described elsewhere in this Annual Report on Form 10-K, including particularly under the caption “Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Events Significantly Affecting Our Earnings During Recent Years

Overview. Our earnings during the five year period ended December 31, 2007 were significantly affected by the following events that occurred during one or more years of that period:

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Sales of land by Southwood, which were especially significant in 2004;

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Sale of one cell tower lease in 2006 and eight cell tower leases in 2007;

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Increased recorded amounts of AFUDC as a result of the ongoing construction of our water treatment plant;

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Our actions to oppose ongoing efforts by the City of Nashua, New Hampshire that began in 2002 to acquire all or a significant portion of Pennichuck Water’s assets through an eminent domain proceeding under New Hampshire utility law;

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Defense and settlement costs related to parallel investigations by the U.S. Securities and Exchange Commission (the “SEC”) and the New Hampshire Bureau of Securities Regulation (the “Bureau”) that were conducted primarily in 2003 and settled in December 2004; and

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Expenses related to the merger agreement that we entered into in April 2002 with Aqua America Inc. (formerly known as Philadelphia Suburban Corporation) and terminated in February 2003.

We expect that Southwood’s revenues from land sales will constitute a relatively minor percentage of our future consolidated revenues (excluding the effects of the January 2008 sale of the three commercial office buildings that comprised substantially all of the assets of HECOP I, II and III as more fully described elsewhere in this Annual Report on Form 10-K).

City of Nashua’s Ongoing Eminent Domain Proceeding . The City of Nashua’s Mayor stated his opposition to our proposed merger with Aqua America almost immediately after we announced it. In January 2003, Nashua residents approved a referendum authorizing the City to pursue the acquisition of our assets by eminent domain or otherwise. In March 2004, as part of the eminent domain process, the City filed a petition with the NHPUC seeking approval to acquire all of our water utility assets, whether or not related to our Nashua service area. The eminent domain proceeding and potential consequences for us are described elsewhere in this Annual Report on Form 10-K.

The eminent domain merits hearing before the NHPUC began on January 10, 2007, but was subsequently suspended through July 16, 2007, by agreement of the parties (“Stay Agreement”) to allow the City and Pennichuck to engage in settlement discussions. On July 16, 2007, the Stay Agreement expired without the parties having reached a settlement of their eminent domain dispute. While we have publicly stated our willingness to consider any future comprehensive settlement proposals the City may wish to make, to our knowledge none are currently pending. We remain vehemently opposed to the City's proposed eminent domain taking of Pennichuck Water assets.

The merits hearing resumed on September 4, 2007 and concluded on September 26, 2007. Briefs summarizing the arguments of each party were filed in the fourth quarter 2007. A ruling by the NHPUC on the City’s petition may be issued at any time.

Our annual eminent domain-related expenses in 2004 through 2007 were $1.2 million, $2.4 million, $2.4 million and $0.9 million, respectively.

SEC and New Hampshire Investigations and Settlement. We and our former President and Chief Executive Officer were the subject of parallel investigations by the SEC and the Bureau that began in early 2003 and late 2002, respectively, as disclosed in previous filings, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Effective December 16, 2004, the SEC and the Bureau entered into settlements with the former CEO and us. Under the terms of the New Hampshire settlement, our Company’s shareholders as of March 31, 2003 received a payment totaling $280,000 as of March 1, 2005. The former CEO was financially responsible for $160,000 of that amount and our Company was responsible for the balance. Our investigation-related expenses were $162,000 in 2004, $30,000 in 2005 and $0 in 2006 and 2007.

Terminated Merger Agreement. We entered into an agreement in April 2002 to be acquired in a merger with Aqua America Inc. In February 2003, before the merger was submitted to our shareholders, we agreed with Aqua America to abandon the proposed transaction because of actions taken by the City of Nashua, summarized below, to attempt to acquire all or a significant portion of Pennichuck Water’s assets by eminent domain. We incurred $1.9 million and $231,000 of merger-related expenses that we recognized in 2003 and 2002, respectively.

Critical Accounting Policies

We have identified the accounting policies below as those policies critical to our business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Changes in the estimates or other judgments included within these accounting policies could result in significant changes to the consolidated financial statements. Our critical accounting policies are as follows.

Regulatory Accounting. The use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation” stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator such as the NHPUC. In accordance with SFAS No. 71, we defer costs and credits on the consolidated balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits are incurred. These deferred amounts, both assets and liabilities, are then recognized in the consolidated statements of income in the same period that they are reflected in rates charged to our water utilities’ customers. In the event that the inclusion in the rate-making process is disallowed, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.

We did not defer the costs associated with the terminated merger agreement with Aqua America, our defense against the City’s ongoing eminent domain proceeding or the SEC and Bureau regulatory investigations and settlements.

Revenue Recognition. The revenues of our water utility subsidiaries are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. We read our residential customer meters generally on a quarterly basis and record revenues based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage patterns and the effective water rates. The estimate of the unbilled revenue is a management estimate utilizing certain sets of assumptions and conditions. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying consolidated financial statements as of December 31, 2007 and 2006 were approximately $2.4 million and $2.0 million, respectively.

Our non-utility revenues are recognized when services are rendered. Revenues are based, for the most part, on long-term contractual rates.

Pension and Other Post-retirement Benefits. Our pension and other post-retirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, earnings on the plans’ assets, the discount rate, the expected long-term rate of return on the plans’ assets and health care cost trends.

In accordance with SFAS No. 87, “ Employers Accounting for Pensions” and SFAS No. 106, “ Employers Accounting for Post-retirement Benefits Other than Pensions ”, changes in pension and post-retirement benefit obligations other than pensions (“PBOP”) associated with these factors may not be immediately recognized as pension and PBOP costs in the consolidated statements of income, but generally are recognized in future years over the remaining average service period of the plans’ participants.

In determining pension obligation and expense amounts, the factors and assumptions described above may change from period to period and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the value of our pension plan assets, which partially consist of equity investments, are subject to fluctuations in market returns which may result in increased or decreased pension expense in future periods. These conditions impacted the funded status of our pension plan at both December 31, 2007 and 2006 and, therefore, will also impact pension expense for 2008.

Our pension plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Accordingly, we anticipate that we will contribute approximately $800,000 to the plan during 2008. This contribution includes approximately $255,000 to reduce the plan’s unfunded status, per current requirements under the Pension Protection Act.

Results of Operations—General

In this section, we discuss our 2007, 2006 and 2005 results of operations and the factors affecting them. Our operating activities, as discussed in greater detail in Note 12 to the Notes to Consolidated Financial Statements, are grouped into three reportable business segments as follows:

•

Water utility operations;

•

Water management services;

•

Real estate operations; and

•

Other

Our consolidated revenues tend to be significantly affected by weather conditions experienced throughout the year and, from time to time, by final orders of the NHPUC on our requests for rate increases. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for nonessential usage by our customers during the late spring and summer months.

Results of Operations—2007 Compared to 2006

Overview. For the year ended December 31, 2007, our consolidated net income was $3.6 million, compared to net income of $570,000 in 2006. On a per share basis, fully diluted income per share for 2007 was $0.84 as compared to $0.14 per share for 2006. The increase in consolidated net income of $3.0 million for the year ended December 31, 2007 was primarily attributable to the following factors.

Beneficial factors:

•

An increase in 2007 regulated water utility operating income of $4.1 million;

•

A reduction in 2007 net eminent domain-related costs of $1.5 million (2007 costs are net of a $250,000 cash payment received from the City of Nashua); and

•

Other income of $1.2 million (pre-tax) from the sale of one cell tower lease in February and seven cell tower leases in June 2007 compared to other income of $405,000 from the sale of one cell tower lease in November 2006.

Partially offsetting factors:

•

An increase in the income tax provision of $2.0 million;

•

Reduced interest income of $262,000;

•

A decrease in AFUDC in the amount of $498,000;

•

An increase in interest expense of $374,000 due to increased long-term borrowings; and

•

The receipt in 2006 of a payment in the amount of $200,000 representing a settlement with our prior directors and officers insurance provider.

Our consolidated revenues for the year ended December 31, 2007 were $29.5 million, compared to $24.5 million for the year ended December 31, 2006. The increase in our combined revenues was primarily attributable to rate relief granted to Pennichuck Water and Pennichuck East, and to 3.6% combined water utility customer growth.

Water Utility Operations. Our water utility operations include the activities of Pennichuck Water, Pennichuck East and Pittsfield, each of which is regulated by the NHPUC. On a combined basis, net income of our three utilities for the year ended December 31, 2007 was $4.2 million, an increase of $2.5 million from 2006. Water utility operating revenues increased by $5.2 million as a result of rate increases and customer growth. The combined utility customer base during the year increased 3.6%, resulting in a total combined customer base of approximately 32,900 as of December 31, 2007. 2007 water utility operating income also benefited from a change in the method of allocating certain overhead and administrative costs between regulated and non-regulated operations.

We believe that due to the combined effects of an economic slowdown in the commercial and industrial sectors, changing demographics and conservation measures, water consumption from existing customers has generally been declining. Such decline was mitigated during the third quarter 2007 due to higher consumption resulting from dryer weather in 2007 compared to 2006. We also believe that there is a potential for further consumption decline that may result from increased customer conservation efforts as a result of two matters. Future rate increases, as discussed elsewhere in this Annual Report on Form 10-K, could lead to decreased consumption. Also, the implementation of automated meter reading equipment that allows for monthly billing, rather than quarterly billing, may also give rise to further water conservation.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Introduction
The terms “we,” “our,” “our Company,” and “us” refer, unless the context suggests otherwise, to Pennichuck Corporation (the “Company”) and its subsidiaries, Pennichuck Water Works, Inc. (“Pennichuck Water”), Pennichuck East Utility, Inc. (“Pennichuck East”), Pittsfield Aqueduct Company, Inc. (“Pittsfield”), Pennichuck Water Service Corporation (“Service Corporation”) and The Southwood Corporation (“Southwood”).
We are a holding company whose income is derived from the earnings of our five wholly-owned subsidiaries. We are engaged primarily in the collection, storage, treatment and distribution of potable water for domestic, industrial, commercial and fire protection service in New Hampshire through our three utility subsidiaries: Pennichuck Water, Pennichuck East and Pittsfield. Our water utility revenues constituted 92% of our consolidated revenues for the nine months ended September 30, 2008 and 2007. Pennichuck Water, our principal subsidiary which was established in 1852, accounted for 72% and 74% of our consolidated revenues for the nine months ended September 30, 2008 and 2007, respectively. Pennichuck Water’s franchise area presently includes the City of Nashua, New Hampshire (the “City”) and 10 surrounding municipalities.
Our water utility subsidiaries are regulated by the New Hampshire Public Utilities Commission (“NHPUC”) and must obtain NHPUC approval to increase their water rates to recover increases in operating expenses and to obtain the opportunity to earn a return on investments in plant and equipment. New Hampshire law provides that utilities are entitled to charge rates that permit them to earn a reasonable return on the cost of the property employed in serving their customers, less accrued depreciation, contributed capital and deferred income taxes (“Rate Base”). The cost of capital permanently employed by a utility in its utility business marks the rate of return that a utility is lawfully entitled to earn on its Rate Base. Capital expenditures associated with complying with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in water rates, though there can be no assurance that the NHPUC will approve future rate increases in a timely or sufficient manner to cover our capital expenditures.
The businesses of our two other subsidiaries are non-regulated water management services and real estate management and commercialization. Service Corporation provides various non-regulated water-related monitoring, maintenance, testing and compliance reporting services for water systems for various towns, businesses and residential communities in and around southern and central New Hampshire. Its most significant contracts are with the Towns of Hudson and Wilton, New Hampshire, and the Towns of Salisbury and Barnstable, Massachusetts.
Southwood is engaged in real estate management and commercialization activities. Historically, most of Southwood’s activities were conducted through real estate joint ventures. During the past 10 years, Southwood has participated in four residential joint ventures with John P. Stabile, II (“Stabile”), a local developer. Southwood’s earnings have from time to time during that period contributed a significant percentage of our consolidated net income, including in the nine months ended September 30, 2008 (i.e., the January 2008 sale of the three commercial office buildings that comprised substantially all of the assets of HECOP I, II, and III as more fully described elsewhere in this Quarterly Report on Form 10-Q). Southwood’s contributions from the sale of real estate have increased the fluctuations in our net income during that period. We expect that Southwood will contribute a smaller proportion of our future revenues and earnings.

Forward-Looking Statements
Certain statements in this Quarterly Report, including Management’s Discussion and Analysis, are forward-looking statements intended to qualify for safe harbors from liability under the Private Securities Litigation Reform Act of 1995, as amended (and codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by, or include the words “in the future,” “believes,” “expects,” “anticipates,” “plans” or similar expressions, or the negative thereof.
Forward-looking statements involve risks and uncertainties, and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors include, among other things, whether eminent domain proceedings are ultimately successful against some or all of our water utility assets, the success of applications for rate relief, changes in governmental regulations, changes in the economic and business environment that may impact demand for our water, services and real estate products, changes in capital requirements that may affect our level of capital expenditures, changes in business strategy or plans and fluctuations in weather conditions that impact water consumption. For a complete discussion of our risk factors, see Item 1A, Risk Factors, in our Annual Report on Form 10-K for the period ended December 31, 2007, as supplemented by our Item 1A, Risk Factors, disclosure in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008 and updated in Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
City of Nashua’s Ongoing Eminent Domain Proceeding
The City of Nashua’s then-current Mayor stated his opposition to our proposed merger with Philadelphia Suburban (now Aqua America) almost immediately after we announced the proposed merger in 2002. In January 2003, Nashua residents approved a referendum authorizing the City to pursue the acquisition of our water utility assets. In March 2004, as part of what has become the eminent domain process, the City filed a petition with the NHPUC seeking approval to acquire all of our water utility assets, whether or not related to our Nashua service area. The eminent domain proceeding and potential consequences for us are more fully discussed in our 2007 Annual Report on Form 10-K.
The eminent domain merits hearing before the NHPUC began on January 10, 2007, but was subsequently suspended through July 16, 2007 by agreement of the parties (“Stay Agreement”) to allow the City and Pennichuck to engage in settlement discussions. On July 16, 2007, the Stay Agreement expired without the parties having reached a settlement of their eminent domain dispute. The merits hearing resumed on September 4, 2007 and was concluded on September 26, 2007.
On July 25, 2008, the NHPUC issued an order that the taking of the operating assets of Pennichuck Water is in the public interest provided certain conditions are met, and that the price to be paid to Pennichuck Water for such assets is $203 million as of December 31, 2008. The conditions include a requirement that Nashua place an additional $40 million into a mitigation fund to protect the interests of the customers of Pennichuck East and Pittsfield. Another condition is that the City submit to the NHPUC, for its advance approval, the final operating contracts between the City and its planned contractors. The remaining conditions cover various aspects of the operation and oversight of the water system under City ownership.

Under New Hampshire law, all parties to the proceeding and persons directly affected by the order have 30 days to seek reconsideration or a rehearing before the NHPUC. Our Company and the City of Nashua were the only parties to submit such motions. The NHPUC’s ruling on any request for reconsideration or a rehearing may be appealed to the New Hampshire Supreme Court. We cannot predict when the NHPUC will rule on the pending motions from the City and our Company, but we expect that the full rehearing and appeal process is likely to take a year or more. We have publicly stated our willingness to consider any comprehensive settlement proposals the City may wish to make to us but, to our knowledge, none are currently pending. We remain opposed to the City’s proposed eminent domain taking of Pennichuck Water assets.
Critical Accounting Policies, Significant Estimates and Judgments
We have identified the accounting policies below as those policies critical to our business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Changes in the estimates or other judgments included within these accounting policies could result in significant changes to the condensed consolidated financial statements. Our critical accounting policies are as follows.
Regulatory Accounting. The use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards No. 71 (“SFAS 71”), “Accounting for the Effects of Certain Types of Regulation,” stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator such as the NHPUC. In accordance with SFAS 71, we defer costs and credits on the condensed consolidated balance sheets as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits are incurred. These deferred amounts, both assets and liabilities, are then recognized in the condensed consolidated statements of income in the same period that they are reflected in rates charged to our water utilities’ customers. In the event that the inclusion in the rate-making process is disallowed, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.
We did not defer the costs associated with the terminated merger agreement with Aqua America or our defense against the City’s ongoing eminent domain proceeding.
Revenue Recognition. The revenues of our water utility subsidiaries are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. We read our residential customer meters generally on either a monthly or a quarterly basis and record revenues based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage patterns and the effective water rates. The estimate of the unbilled revenue is a management estimate utilizing certain sets of assumptions and conditions. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying condensed consolidated financial statements as of September 30, 2008 and December 31, 2007 were $2.5 million and $2.4 million, respectively.
Our non-utility revenues are recognized when services are rendered. Revenues are based, for the most part, on long-term contractual rates.

Pension and Other Post-retirement Benefits. Our pension and other post-retirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, earnings on the plans’ assets, the discount rate, the expected long-term rate of return on the plans’ assets and health care cost trends.
In accordance with SFAS No. 87, “ Employers Accounting for Pensions” and SFAS No. 106, “ Employers Accounting for Post-retirement Benefits Other than Pensions ”, changes in pension and post-retirement benefit obligations other than pensions (“PBOP”) associated with these factors may not be immediately recognized as pension and PBOP costs in the condensed consolidated statements of income, but generally are recognized in future years over the remaining average service period of the plans’ participants.
In determining pension obligation and expense amounts, the factors and assumptions described above may change from period to period, and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the value of our pension plan assets, which partially consist of equity investments, are subject to fluctuations in market returns which may result in increased or decreased pension expense in future periods. These conditions impacted the funded status of our pension plan at both September 30, 2008 and December 31, 2007, and therefore, may also impact pension expense for the remainder of 2008.
Our pension plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Accordingly, we anticipate that we will contribute approximately $836,000 to the plan during 2008. This contribution includes approximately $256,000 to reduce the plan’s underfunded status, per current requirements under the Pension Protection Act.
Results of Operations — General
In this section, we discuss our results of operations for the three and nine months ended September 30, 2008 and 2007 and the factors affecting them. Our operating activities, as more fully discussed in Note 5 to the notes to condensed consolidated financial statements, are grouped into three primary business segments as follows:
•
Water utility operations;
•
Water management services; and
•
Real estate operations.
Our consolidated revenues tend to be significantly affected by weather conditions experienced throughout the year and in past years have been significantly affected by sales of major real estate parcels which occurred from time to time. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for non-essential usage by our customers during the late spring and summer months.

Overview
For the three months ended September 30, 2008, our consolidated net income was $913,000, compared to net income of $1.6 million for the three months ended September 30, 2007. On a per share basis, fully diluted income per share for the three months ended September 30, 2008 was $0.21 as compared to $0.38 per share for the three months ended September 30, 2007. The principal factors that affected current year net income, relative to prior year net income, include the following:
•
A decrease in 2008 regulated water utility revenues of $1.1 million due principally to record rainfall levels in 2008;
•
An increase in 2008 water utility operating expenses of $376,000;
•
A reduction in 2008 eminent domain-related costs of $500,000;
•
An increase in 2008 interest expense of $257,000;
•
An increase in 2008 Service Corporation operating income of $82,000; and
•
A decrease in the 2008 provision for income taxes of $454,000.
Water Utility Operations
Our water utility operations include the activities of Pennichuck Water, Pennichuck East and Pittsfield, each of which is regulated by the NHPUC. On a combined basis, operating income of our three utilities for the three months ended September 30, 2008 was $2.3 million, a decrease of $1.5 million from 2007.

The decrease in our utility operating revenues was primarily attributable to significantly reduced demand for water due to record rainfall in the third quarter of 2008. Recorded rainfall in the third quarter of 2008, as reported to the National Weather Service from our Nashua water treatment plant, set an all time record of 25 inches compared to the prior record of 20 inches in 1991 and the long term average of 10 inches for the same period. In addition, the record rainfall was spread relatively evenly over each of the three months in the third quarter, further impacting customers’ summer irrigation and other outdoor usage.
The combined utility customer base increased 1.2%, resulting in a total combined customer base of approximately 33,200 as of September 30, 2008. For the three months ended September 30, 2008, approximately 20% of our water utility operating revenues were derived from commercial and industrial customers, approximately 68% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford, New Hampshire.

We believe that due to the combined effects of an economic slowdown in the commercial and industrial sectors, changing demographics and conservation measures, water consumption from existing customers has generally been declining. We also believe that further consumption decline may result from increased customer conservation efforts as a result of the following two matters: (1) future rate increases, as discussed elsewhere in this Quarterly Report on Form 10-Q, could lead to decreased consumption, and (2) the implementation of automated meter reading equipment that allows for monthly billing, rather than quarterly billing, may give rise to further water conservation.

The operations and maintenance expenses of our water utility business include such categories as:
•
Water supply, treatment, purification and pumping;
•
Transmission and distribution system functions, including repairs and maintenance and meter reading;
•
Engineering, customer service and general and administrative functions; and
•
Real estate taxes.
The change in our utilities’ operating expenses over the same period in 2007 was primarily the result of the following:
•
Increased real estate taxes of $232,000, principally related to capital additions in our core Pennichuck Water system;
•
$194,000 of decreased general and administrative costs primarily relating to a reduction in accrued bonuses resulting from operating performance variations between the comparable periods;
•
Increased depreciation and amortization of $161,000 principally due to increased depreciation attributable to completed portions of the water treatment plant upgrade for Pennichuck Water; and
•
$114,000 of increased transmission and distribution costs relating to repair or replacement of gates, mains, meters and hydrants, supplies, fuel and labor costs.
As a result of the above changes in operating revenue and operating expenses, operating income declined 38.3% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.
Our utilities periodically seek rate relief, as necessary, to recover costs associated with capital additions as well as increases in operating costs as they occur over time.

On June 23, 2008, Pennichuck Water filed for rate relief with the NHPUC to recover increased operating expenses and to obtain recovery of and a return on capital improvements principally for the ongoing major upgrade to its water treatment plant, the replacement of a 5.5 million gallon water tank, the installation of radio meter reading equipment, and the replacement of aging infrastructure. Pennichuck Water requested an overall increase in rates that, if approved in its entirety, would result in an annual increase in revenues of approximately $5.1 million. Included in the $5.1 million are two proposed step increases that, if approved, would increase annual revenues by approximately $1.9 million. As part of its filing, Pennichuck Water requested a temporary rate increase totaling approximately $2.4 million per annum effective for service rendered from and after July-August 2008.
On May 2, 2008, Pittsfield submitted a rate case filing with the NHPUC requesting an overall increase in rates that would result in an annualized increase in revenues of approximately $1.2 million. The rate filing seeks primarily to recover increases in certain operating expenses since 2002 (2002 was the test year for purposes of its most recent rate increase awarded in 2003) as well as to obtain recovery of and a return on several million dollars of capital expenditures incurred for the rehabilitation and upgrade of systems acquired in mid-2006. As a part of such filing, Pittsfield requested a temporary increase for service rendered on and after June 6, 2008 that would result in an annualized increase in revenues of approximately $718,000.

The combined base fees under Service Corporation’s municipal contracts were $299,000 and $255,000 for the three months ended September 30, 2008 and 2007, respectively, with the balance of $171,000 and $74,000 representing fees earned for services performed in addition to the base scope of services for 2008 and 2007, respectively. Of the net increase of $141,000 in total municipal contract revenue, $44,000 is attributable to an increase in revenue from services that were performed pursuant to the base scope and $97,000 is attributable to an increase in revenue from services that were performed in addition to the base scope.
Miscellaneous income increased by $24,000 primarily attributable to an increase in contract testing programs in the amount of $23,000.
For the three months ended September 30, 2008, total operating expenses associated with our water management services increased by $82,000 from 2007. These costs are comprised primarily of direct costs for servicing our various operating contracts as well as allocated intercompany charges for general and administrative support for contract operations. Total operating costs increased due to the combined effects of an $87,000 increase in maintenance expenses and a $28,000 increase in intercompany charges partially offset by a $20,000 decrease in bad debt expense and a $12,000 decrease in marketing expenses.

As of September 30, 2008 and 2007, Southwood held approximately 450 acres of undeveloped land in southern New Hampshire, as well as a 50% ownership interest in four joint ventures organized as limited liability companies. The remaining ownership interest in each joint venture was then primarily held by Stabile. The real estate assets sold in January 2008 by three of the four joint ventures comprised substantially all of the assets of those three joint ventures. The fourth joint venture currently owns undeveloped land and generates no revenue. Therefore, future earnings or losses resulting from the joint ventures are expected to be insignificant.
Southwood uses the equity method of accounting for its investments in the joint ventures. Consequently, Southwood’s investment is adjusted for its share of earnings or losses and for any distributions received from the joint ventures. Southwood’s share of pre-tax earnings (loss) is included under “Net (loss) earnings from investments accounted for under the equity method” in the accompanying condensed consolidated statements of income and comprehensive income.
Eminent Domain Expenses, Net
Our eminent domain expenses were $125,000 for the three months ended September 30, 2008 as compared to $625,000 for the three months ended September 30, 2007. The 2008 eminent domain expenses were primarily attributable to reviewing and analyzing the NHPUC’s July 25, 2008 eminent domain order and preparing our motion for rehearing that was filed in August 2008. The 2007 eminent domain expenses were primarily attributable to expenses incurred in preparing for and conducting the merits hearing, and to a lesser extent, expenses related to settlement discussions.

Allowance for Funds Used During Construction (“AFUDC”)
For the three months ended September 30, 2008 and 2007, we recorded AFUDC of approximately $99,000 and $145,000, respectively. The $46,000 decrease is largely attributable to lower amounts of construction work in progress as major phases of Pennichuck Water’s upgrade to its water treatment plant have been completed and placed in service throughout 2008.
Interest Income
For the three months ended September 30, 2008 and 2007, we recorded interest income of approximately $49,000 and $2,000, respectively. The increase of $47,000 is primarily attributable to higher cash and short-term investment balances resulting from the issuance of $15 million of tax-exempt bonds in October 2007 and an additional $5 million of tax-exempt bonds in May 2008.
Interest Expense
For the three months ended September 30, 2008, our interest expense was approximately $934,000, compared to $677,000 in 2007. The increase of $257,000 is primarily attributable to the issuance of $7.5 million and $12.5 million of Series BC-3 (5.0%) and BC-4 (5.375%) Bonds, respectively, in May 2008. Interest expense in both periods primarily represents interest on long-term indebtedness of our Company’s three regulated water utilities. On October 1, 2008, Pennichuck Water repurchased its $6 million Series B-1 Bonds, for which interest expense was included in both periods at a rate of $3.85%.
Provision for Income Taxes
For the three months ended September 30, 2008 and 2007, we recorded an income tax provision of $603,000 and $1.1 million, respectively. The effective income tax rate is 39.8 % and 39.6%, respectively. The State of New Hampshire income tax liability on income attributable to our Company’s four joint ventures is imposed at the LLC level, and not at the Pennichuck Corporation level (in contrast to federal income taxes). Therefore, State of New Hampshire income taxes for the Joint Ventures are included in “Net (loss) earnings from investments accounted for under the equity method” in the accompanying condensed consolidated statements of income and comprehensive income.

Overview
For the nine months ended September 30, 2008, our consolidated net income was $4.2 million, compared to net income of $3.1 million for the nine months ended September 30, 2007. On a per share basis, fully diluted income per share for the nine months ended September 30, 2008 was $0.98 as compared to $0.73 per share for the nine months ended September 30, 2007. The principal factors that affected current year net income, relative to prior year net income, include the following:
•
A 2008 non-operating after-tax gain of approximately $2.3 million ($3.4 million before federal income tax) from the sale of land and three commercial office buildings by three of our four HECOP joint ventures;
•
A 2007 non-operating gain of $1.2 million (pre-tax) from the sale of eight cell tower leases;
•
A decrease in 2008 regulated water utility operating income of $1.1 million;
•
An increase in 2008 interest expense of $712,000;
•
A reduction in 2008 eminent domain-related costs of $553,000 (2007 costs were net of a $250,000 cash payment from the City of Nashua); and
•
An increase in the 2008 provision for income taxes of $387,000.
Water Utility Operations
Our water utility operations include the activities of Pennichuck Water, Pennichuck East and Pittsfield, each of which is regulated by the NHPUC. On a combined basis, operating income of our three utilities for the nine months ended September 30, 2008 was $5.3 million, a decrease of $1.1 million from 2007.

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