UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(mark one)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For The Fiscal Year Ended December 31, 2010

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-18552

PENNICHUCK CORPORATION

(Exact name of registrant as specified in its charter)

New Hampshire		02-0177370
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

Title of each class		Name of each exchange on which registered
Common Stock, par value $1.00 per		The Nasdaq Stock Market LLC
share (and Preferred Stock Purchase
Rights associated therewith)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing sale price of the Company’s common stock on June 30, 2010, as reported on the Nasdaq Global Market was $101,892,433. For purposes of this calculation, the “affiliates” of the registrant include its directors and executive officers. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

The number of shares of the registrant’s common stock, $1 par value, outstanding as of March 01, 2011 was 4,679,927.

Certain information required for Part III of this report is incorporated herein by reference to the registrant’s definitive proxy statement for its 2011 annual meeting of shareholders (the “Proxy Statement”), which the registrant intends to file with the Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2010.

 

 

PENNICHUCK CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
December 31, 2010

TABLE OF CONTENTS

		Page
Part I
Item 1. Business			2
Item 1A. Risk Factors			11
Item 1B. Unresolved Staff Comments			20
Item 2. Properties			20
Item 3. Legal Proceedings			20
Item 4. Removed and Reserved			21
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholders Matters And Issuer Purchases of Equity Securities			22
Item 6. Selected Financial Data			24
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			41
Item 8. Financial Statements and Supplementary Data			42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			84
Item 9A. Controls and Procedures			84
Item 9B. Other Information			85
Part III
Item 10. Directors, Executive Officers and Corporate Governance			85
Item 11. Executive Compensation			90
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			90
Item 13. Certain Relationships and Related Transactions, and Director Independence			90
Item 14. Principal Accounting Fees and Services			90
Part IV
Item 15. Exhibits, Financial Statement Schedules			91
Signatures			102
Exhibit 10.24
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

Item 1.		BUSINESS

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 Aqueduct”), Pennichuck Water Service Corporation (“Service Corporation”) and The Southwood Corporation (“Southwood”).

Overview

We are engaged primarily in the collection, storage, treatment and distribution of potable water in New Hampshire. We have two reportable business segments: regulated water utility operations and non-regulated water management services. Regulated water utility revenues constituted 93% of our revenues in 2010. 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. Total consolidated assets as of December 31, 2010 were approximately $182 million.

Our Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), and files annual, quarterly and special reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). You may read and copy any reports, statements or other information filed by our Company with the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. Call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our Company’s filings are also available at the website maintained by the SEC at http://www.sec.gov. We also make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any 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.pennichuck.com.

The City of Nashua, New Hampshire (the “City”) began an effort in 2002 to acquire through an eminent domain proceeding, all or a significant portion of Pennichuck Water’s assets, as well as the assets of Pennichuck East and Pittsfield Aqueduct. Effective as of November 11, 2010, we entered into a definitive merger agreement (the “Merger Agreement”) with the City pursuant to which the City will, subject to a number of conditions precedent, purchase all the outstanding common stock and common stock equivalents of Pennichuck Corporation for $29.00 per share in cash. Pursuant to the terms of a settlement agreement, entered into contemporaneously with the Merger Agreement (the “Settlement Agreement”), the Company and the City have agreed that execution of the Merger Agreement constitutes full settlement of their eminent domain dispute whether or not the acquisition is consummated pursuant to the terms of the Merger Agreement.

The acquisition of the Company and the Eminent Domain Proceeding are described elsewhere in this Annual Report on Form 10-K (see Part I, Item 1, “Business” under the heading “Acquisition of the Company and Eminent Domain Proceeding by the City of Nashua”; Part I, Item 3, “Legal Proceedings” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 4 of Part II, Item 8, “Commitments and Contingencies”).

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. Subject to the limitations in the Merger Agreement noted below, our strategy to accomplish those objectives is as follows:

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 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 such systems. See note below regarding the effect of the Merger Agreement.

Pursuing acquisitions of relatively large water systems to expand into new geographic markets in the northeastern United States. Another important element of our strategy 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 that any such acquisitions would be of systems that have sufficient scale to warrant establishing and maintaining a management presence in a new market. These systems would likely be significantly larger than the water systems 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 the large water system market 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. See note below regarding the effect of the Merger Agreement.

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 markets in which it can provide high quality service in a cost effective manner. These markets include small and mid-size municipal utilities, small systems such as community water systems and non-transient, non-community water systems. See note below regarding the effect of the Merger Agreement.

Commercializing our undeveloped land portfolio that’s owned outside of our regulated utilities. Our Company, principally through our Southwood subsidiary, owns several parcels of undeveloped non-utility land primarily in Merrimack, New Hampshire, totaling approximately 450 acres. As opportunities arise, we expect to pursue the environmentally responsible commercialization of this land portfolio in order to enhance shareholder value. This land is owned outside of our regulated utilities. See note below regarding the effect of the Merger Agreement.

Note: During the term of the Merger Agreement, we cannot, (i) acquire businesses, including water systems, of a size generally larger than our past practice, (ii) enter into Material Contracts (as defined in the Merger Agreement), and (iii) sell our undeveloped land, in each case without the prior written consent of the City. Further information regarding the Merger Agreement is contained elsewhere in this Annual Report on Form 10-K (see Part I, Item 1, “Business” under the heading “Acquisition of the Company and Eminent Domain Proceeding by the City of Nashua”; part I, item 3, “Legal Proceedings” and part II, item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and note 4 of part II, item 8, “Commitments and Contingencies”).

Regulated Water Utilities

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”):

•

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

•

Pennichuck East was organized in 1998 and serves 19 communities most of which are located in southern and central New Hampshire; and

•

Pittsfield Aqueduct, which we acquired in 1998, serves customers in the Town of Pittsfield, New Hampshire.

Water revenues are typically lowest during the first and fourth quarters of each 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. Total regulated water utility assets as of December 31, 2010 were approximately $176.1 million.

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. As of December 31, 2010, Pennichuck Water served approximately 26,300 customers, and its 2010 operating revenues totaled approximately $27.0 million.

Pennichuck East serves customers in the towns of Atkinson, Barnstead, Bow, Chester, Conway, Derry, Exeter, Hooksett, Lee, Litchfield, Londonderry, Middleton, Pelham, Plaistow, Raymond, Sandown, Tilton, Weare and Windham, New Hampshire. Pennichuck East has no competition in its core franchise area, other than from customers using their own wells. 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. As of December 31, 2010, Pennichuck East served approximately 6,800 customers, and its 2010 operating revenues totaled approximately $6.4 million.

Pittsfield Aqueduct was acquired in 1998 and serves customers in the town of Pittsfield, New Hampshire, which is located in the central portion of the state. Pittsfield Aqueduct has no competition in its core franchise area, other than from customers using their own wells. The water utility assets owned by Pittsfield Aqueduct consist principally of water transmission and distribution mains, hydrants, water treatment facilities, water services and meters, easements and certain tracts of land. As of December 31, 2010, Pittsfield Aqueduct served approximately 650 customers, and its 2010 operating revenues totaled approximately $600,000.

Water Supply Facilities

Pennichuck Water’s principal properties are located in Nashua, New Hampshire, except for portions of our watershed and 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 nearby Merrimack River. 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 31, 2019 allows us to divert water from the Merrimack River. We may divert between 12.0 million and 30.0 million gallons per day (“mgd”) dependent upon the river elevation and flow. In 2009, we installed three new pumps that increased our pumping capacity to 21.0 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. Pennichuck Water can deliver up to 31.2 mgd into the distribution system. By comparison, Pennichuck Water had an average daily demand of 21.2 mgd during its peak month, which occurred in June 1999.

Our Pennichuck Water utility subsidiary also owns approximately 650 acres of land located in Nashua and Merrimack, New Hampshire that are held for watershed and reservoir purposes. This land is separate and apart from the undeveloped land held principally by Southwood.

We own 14 water storage reservoirs having a total storage capacity of 22.3 million gallons: six in Nashua, two in Amherst, and one in each of Bedford, Derry, Litchfield, Pelham, Barnstead and 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. We have an agreement with the Town of Hudson that expires in 2017, allowing us to pump up to 283,500 gallons per day or 15% of the annual pumpage from the Hudson wells, whichever is less, at a cost equal to the variable cost of production or operation associated with the system as a whole or any of its components and may also include the embedded cost of capital such as debt service or depreciation. Hudson will charge us a higher rate for water pumped in excess of the 283,500 gallons allowed per day, as detailed above. Pennichuck East supplies its Locke Lake and Sunrise Estates water systems from individual bedrock wells. The Birch Hill water system acquires its water from the North Conway Water Precinct.

Pittsfield Aqueduct’s source of water supply for the Town of Pittsfield, New Hampshire is Berry Pond, which holds approximately 97.8 million gallons. Pittsfield Aqueduct owns the land surrounding Berry Pond and it treats the water from this pond through a 0.5 mgd water filtration plant located in the Town of Pittsfield, New Hampshire.

Water Distribution Facilities

As of December 31, 2010, the distribution facilities of our Company’s regulated water companies consisted of, among other assets, approximately 612 miles of transmission and distribution mains and approximately 33,800 service connections.

Capital Expenditures

The water utility industry is capital intensive. We typically spend significant sums each year for additions to or replacement of property, plant and equipment. We estimate that our projected capital expenditures during the 2011 through 2013 period will total approximately $24.2 million. By comparison, for the three year period 2008 through 2010, our capital expenditures were $31.0 million. These figures are exclusive of allowance for funds used during construction.

Regulation

New Hampshire Public Utilities Commission

Our Company’s water utility subsidiaries are regulated by the NHPUC with respect to their water rates, financings and provision of service. We must obtain NHPUC approval to increase our Company’s water utility subsidiaries’ 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 regulated business determines the rate of return that it 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 increases in a timely or sufficient manner to cover our capital expenditures.

In May 2010, Pennichuck Water filed for rate relief with the NHPUC to recover increased operating expenses and to obtain recovery of and return on capital improvements of approximately $15 million since its last rate case, including the last $4 million to complete the upgrade of its water treatment plant in Nashua, New Hampshire. The rate request seeks a permanent annual increase in revenues of $3.9 million, or 16.2%, plus a step increase of $887,000 or 3.7%. In October, 2010, the NHPUC issued an order approving temporary annualized rate relief of approximately $2.6 million for Pennichuck Water effective for bills rendered on or after October 8, 2010. Final hearings on the merits of the case are scheduled for May 2011. We expect an order in the third quarter of 2011. Any difference between the temporary rate relief granted and the permanent rates ultimately approved by the NHPUC for service rendered on or after June 16, 2010 will be reconciled upon the approval of such permanent rates.

In May 2010, Pittsfield Aqueduct filed for approximately $150,000 in rate relief with the NHPUC primarily to recover higher property taxes and insurance costs. In October 2010, the NHPUC issued an order approving annualized temporary rate relief of approximately $61,000 for Pittsfield Aqueduct effective for bills rendered on or after October 8, 2010. Final hearings on the merits of the case are scheduled for April 2011. We expect an order in the third quarter of 2011. Any difference between the temporary rate relief granted and the permanent rates ultimately approved by the NHPUC for service rendered on or after June 16, 2010 will be reconciled upon the approval of such permanent rates.

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 treatment plant in Nashua is subject to the Interim Enhanced Surface Water Treatment Rule, which established a 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 approximately $40 million of upgrades to its existing treatment and storage facilities that were completed in 2009.

Water Management Services

Through Service Corporation, 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. Service Corporation is not subject to NHPUC regulation.

Municipalities

Service Corporation has long-term agreements with the Towns of Salisbury, Massachusetts and Hudson, New Hampshire to provide operations and maintenance contract services and with the Town of Amesbury, Massachusetts to provide water billing and collection services. These agreements expire in 2012, 2015 and 2014, respectively.

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 and 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.

Financial Information about Industry Segments

Our business segment data for the latest three years is presented in Note 5, “Business Segment Reporting” in Part II, Item 8 in this Annual Report on Form 10-K.

Employees

At December 31, 2010, we employed 101 full-time employees, all of whom are Pennichuck Water employees. Of these, there are 53 management and clerical employees who are non-union. The remaining 48 employees are members of the United Steelworkers Union. Our Company’s union contract expires in February 2013. We believe that our employee relations are good.

Acquisition of the Company and Eminent Domain Proceeding by the City of Nashua

Overview

In 2002, the City of Nashua (the “City”) began an effort to acquire all or a significant portion of Pennichuck Water’s assets through an eminent domain proceeding under New Hampshire Revised Statutes Annotated Chapter 38, as well as the assets of Pennichuck East and Pittsfield Aqueduct. In March 2004, the City filed a petition with the NHPUC formally seeking authority to take those assets by eminent domain. In full settlement of the matter, effective as of November 11, 2010, we entered into the “Merger Agreement” with the City pursuant to which the City will, subject to a number of conditions precedent to closing, purchase all the outstanding common stock and common stock equivalents of Pennichuck Corporation for $29.00 per share, or approximately $138 million, in cash. After taking into account our outstanding debt, the transaction represents an enterprise value of approximately $200 million. Pursuant to the terms of the Settlement Agreement, entered into contemporaneously with the Merger Agreement, the Company and the City have agreed that this transaction constitutes full settlement of their eminent domain dispute.

The transaction is subject to approval by the holders of not less than two-thirds of our outstanding shares of common stock and regulatory approval by the NHPUC. The City’s obligation to complete the transaction is subject to there being no approval conditions imposed by the NHPUC that would materially adversely affect the City’s expected economic benefits from the transaction, and to the City’s ability to obtain appropriate financing after all the conditions precedent (including those specified above and other customary closing conditions) have been met.

History of the City of Nashua’s Eminent Domain Proceedings

We entered into an agreement in April 2002 to be acquired by merger with Aqua America, Inc. (formerly Philadelphia Suburban Corporation). The merger was subject to several conditions, including approval by our shareholders and the NHPUC. In February 2003, before we submitted the merger to our shareholders, we and Aqua America agreed to abandon the proposed transaction because of actions taken by the City to acquire our assets by eminent domain.

The City’s Mayor at that time stated his opposition to our proposed merger with Aqua America after we announced it. In November 2002, the City of Nashua Board of Aldermen adopted a formal resolution to hold a City-wide referendum to approve the initiation of an eminent domain proceeding or other acquisition of all or a portion of Pennichuck Water’s system serving the residents of the City and others. In January 2003, the City of Nashua residents approved the referendum.

In November 2003, the City made a proposal to purchase all of our assets for a purchase price of $121 million. The offer was subject to various conditions, including the City’s completion of a municipal bond offering to fund the purchase price. The City claimed that its proposal exceeded by $15 million the approximate value that our shareholders would have received under the proposed Aqua America merger measured at the time that transaction was first announced. The City asserted that the difference would offset the corporate-level income taxes that we would incur in a sale of assets to the City. In December 2003, our Board of Directors unanimously rejected the City’s proposal. At that time, we publicly stated that our board had concluded that the City’s proposal was inadequate and not in the best interests of our shareholders, significantly underestimated the value of our assets and failed to recognize both the underlying value of our shares and the potential tax liabilities that would result from the proposed transaction. We also stated that we believed that the City’s proposal failed to make allowances for assuming our long-term debt and other liabilities.

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 NHPUC ruled in January 2005 that the City could not use the eminent domain procedure to acquire any of the assets of Pennichuck East or Pittsfield Aqueduct, and that, with regard to the assets of Pennichuck Water, the question of which assets, if any, could be taken by the City was dependent on a determination to be made by the NHPUC after a hearing as to what was in the public interest.

The NHPUC conducted a hearing on the merits of the City’s proposed eminent domain taking of the assets of Pennichuck Water, which hearing was completed on September 26, 2007. On July 25, 2008, the NHPUC issued its order in this matter, ruling that a taking of the assets of Pennichuck Water is in the public interest provided certain conditions are met, and provided that the City pay to Pennichuck Water $203 million for such assets determined as of December 31, 2008. The conditions included a requirement that the City pay an additional $40 million into a mitigation fund to protect the interests of the customers of Pennichuck East and Pittsfield Aqueduct. Both Pennichuck Corporation and the City filed motions for rehearing or reconsideration before the NHPUC which were denied in an order dated March 16, 2009.

Subsequently, both the Company and the City filed appeals with the Supreme Court. On March 25, 2010, the Court issued its decision, unanimously affirming the NHPUC’s ruling in its entirety. Following the Court’s decision, neither party filed a request for rehearing with the Court and, accordingly, on April 7, 2010, the Court issued its mandate to the NHPUC, rendering the NHPUC’s July 25, 2008 order effective.

Separately, under RSA 38:13, the City has 90 days from the date of the final determination of the price to be paid for the assets of Pennichuck Water to decide whether or not to issue the debt necessary to fund the taking of the Pennichuck Water assets upon the terms set forth in the NHPUC’s July 25, 2008 order. On June 30, 2010, our Company and the City jointly filed a motion with the NHPUC requesting a scheduling order for the purpose of establishing a process by which the eminent domain valuation of the plant and property of Pennichuck Water would be updated and to make a final determination of the price to be paid for such property and equipment. The Company and the City agreed that the final valuation should be determined by adjusting the preliminary $203 million purchase price set forth in the NHPUC’s Order by an amount equal to the additions and retirements and accumulated depreciation reserves with respect to assets placed in service, or retired from service, after December 31, 2008, consistent with the asset updating approach used by the NHPUC. The joint motion further indicated that the Company and the City remained interested in reaching a negotiated resolution of the proceeding, which could include a possible sale of the stock of Pennichuck Corporation to the City, in which case, the negotiated transaction would be submitted to the NHPUC and the price agreed to would constitute the final determination of price. A final determination of the price triggers a 90 day statutory period, established pursuant to RSA 38:13, for the City to decide whether or not to issue the debt necessary to fund the taking of the Pennichuck Water assets.

On November 11, 2010, the City and the Company signed the Merger Agreement pursuant to which the City will, subject to a number of conditions precedent and contingencies, purchase all of the outstanding common stock and common stock equivalents of the Company for $29.00 per share, or approximately $138 million, in cash. After taking into account the Company’s outstanding debt, the transaction represents an enterprise value of approximately $200 million. On January, 11, 2011, the City’s Board of Aldermen voted 14 -1 to approve and ratify the Merger Agreement and authorize the related financing.

The merger is subject to approval by the holders of not less than two-thirds of our outstanding shares of common stock and also regulatory approval by the NHPUC. The City’s obligation to complete the transaction is subject to there being no burdensome approval conditions imposed by the NHPUC that would materially adversely affect the City’s expected economic benefits from the transaction as well the City’s ability to obtain appropriate financing after all the conditions precedent (including those specified above and other customary closing conditions) have been met.

The initial scheduling hearing of the NHPUC occurred on February 24, 2011. Final hearings on the matter are scheduled for July 27 through July 29, 2011. We are unable to predict if, or when, the closing will occur but we believe it is not likely to occur prior to the fourth quarter of 2011.

The Acquisition of the Company and the Eminent Domain Proceeding are described elsewhere in this Annual Report on Form 10-K (see Part I, Item 1, “Business” under the heading “Eminent Domain Proceeding and the Acquisition of the Company by the City”; Part I, Item 3, “Legal Proceedings” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 4 of Part II, Item 8, “Commitments and Contingencies”).

Town of Pittsfield Eminent Domain Actions

The Town of Pittsfield voted at its 2003 town meeting to acquire the assets of our Pittsfield Aqueduct subsidiary by eminent domain. In April 2003, the Town notified us in writing of the Town’s desire to acquire the assets. We responded that we did not wish to sell the assets. Thereafter, no further action was taken by the Town until March 2005, when the Town again voted to take the assets of our Pittsfield Aqueduct subsidiary and also to appropriate $60,000 for the eminent domain process. On March 22, 2005, we received a letter from the Town reiterating the Town’s desire to acquire the assets of our Pittsfield Aqueduct subsidiary. We do not have a basis to evaluate whether the Town will actively pursue the acquisition of our Pittsfield Aqueduct assets by eminent domain, but since the date of the Town’s letter to us, the Town has taken no further legal steps required to pursue eminent domain under New Hampshire RSA Chapter 38.

Town of Bedford Eminent Domain Actions

The Town of Bedford, New Hampshire voted at its town meeting in March 2005 to take by eminent domain our assets within Bedford for purposes of establishing a water utility, and, by letter dated April 4, 2005, inquired whether our Company, and any relevant wholly-owned subsidiary of the Company, was willing to sell its assets to Bedford. We responded by informing the Town that we did not wish to sell those assets located in Bedford that are owned by any of our subsidiaries. We have not received a response to our letter, and since the date of the Town’s letter to us, the Town has taken no further legal steps required to pursue eminent domain under New Hampshire RSA Chapter 38. During the NHPUC hearing regarding the proposed eminent domain taking by the City of Nashua, the witness for the Town of Bedford testified that the Town’s interest in a possible taking of assets of our Company related to a situation in which the City might acquire less than all of our Company’s assets, leaving the system in Bedford as part of a significantly smaller utility.

Item 1A.		RISK FACTORS

There are various risks involved in investing in our Company, some of which are described below. Investors should carefully consider each of the following factors and all of the other information in this Annual Report on Form 10-K, including information that is incorporated in this Annual Report on Form 10-K by reference.

Risks Related to our Merger Agreement with the City of Nashua

Consummation of the merger with the City is subject to the satisfaction of various closing conditions which may or may not occur. As a result, there can be no assurance that the closing conditions will be satisfied or that the Merger will be successfully completed.

As discussed previously, the Merger Agreement contains various conditions precedent and contingencies which could cause the merger not to be completed, including, among others, approval of the Merger by holders of not less than two-thirds of our Company’s outstanding shares of common stock and approval by the NHPUC of the transaction as being in the public interest. The City’s obligation to complete the transaction is also subject to, (i) there being no burdensome conditions imposed by the NHPUC in approving the merger transaction that would materially adversely affect the City’s expected economic benefits from the transaction, (ii) the City’s ability to obtain appropriate financing after all the conditions precedent (including those specified above and other customary closing conditions) have been met, and (iii) there being no occurrence of any events that would have a material adverse effect on our financial condition. The financing contingency shall be deemed waived by the City if it could reasonably have raised $160 million through the issuance of 30-year general obligation bonds, with optional redemption after ten years, and a true taxable interest rate no greater than 6.50%.

Furthermore, whether or not the merger is completed:

•

Management’s attention to ongoing business concerns may be diverted;

•

We may experience difficulties in employee retention or customer relationships;

•

We will incur significant additional costs and fees related to the pending merger; and

•

Acquisitions and other operational plans and initiatives that we would have undertaken in the absence of the pending merger may be delayed.

In addition, the current market price of our common stock reflects a market expectation that the Merger will occur, and the failure to complete the merger would likely result in a significant decline in the market price of our common stock.

With respect to the joint motion filed by the Company and the City requesting NHPUC approval of the proposed merger, a finding that the “final determination of the price to be paid for the plant and property” occurred (in accordance with New Hampshire utility municipalization statute RSA 38, Section 38:13) as of the effective date of the New Hampshire Supreme Court decision affirming the NHPUC Order or as of some other date prior to the November 11, 2010 effective date of the Merger Agreement, could by operation of law, cause a two-year delay in any consensual settlement process between the parties. Such a two-year delay could make it difficult to restart the settlement process, possibly to the point of permanent impairment.

RSA 38:13 provides that “within 90 days of the final determination of the price to be paid (emphasis added) for the plant and property to be acquired under the provisions of RSA 38:8 [agreed sale under threat of condemnation]...or 38:10 [condemnation taking]...the municipality shall decide whether or not to acquire the plant and property... by a vote to issue bonds...” RSA 38:13 further provides that “If the ratifying vote...shall be in the negative, no other action under this chapter shall be had during the ensuing period of 2 years.” It is the contention of the Company and the City that with respect to events occurring prior to the November 11, 2010 effective date of the Merger Agreement, including the March 2010 decision of the New Hampshire Supreme Court affirming the NHPUC’s July 25, 2008 order, there was no final determination of the price and, therefore, the 90-day period was not triggered. If this is ultimately determined to be incorrect, the Company and the City may be precluded, by operation of state law, from entering into a consensual settlement agreement for a period of two years and then only after obtaining a new majority public vote.

Risks Related to Our Water Utilities

We are subject to federal, state and local regulations that may impose significant limitations and restrictions on the way we do business.

Various federal, state and local authorities regulate many aspects of our business. Among the most important of these regulations are those relating to the quality of water we supply our customers. These laws require us to obtain various environmental permits from environmental regulatory agencies for our operations and to perform water quality tests that are monitored by the U.S. Environmental Protection Agency, or EPA, and the New Hampshire Department of Environmental Services, or DES, for the detection of certain chemicals and compounds in our water. We could be fined or otherwise sanctioned by regulators for non-compliance with these laws, regulations and permits. In addition, government authorities continually review these regulations, particularly the drinking water quality regulations and may propose new or more restrictive requirements in the future. If new or more restrictive limitations on permissible levels of substances and contaminants in our water are imposed, we may not be able to adequately predict the costs necessary to meet regulatory standards. If we are unable to recover the cost of implementing new water treatment procedures in response to more restrictive water quality regulations through the rates we charge our customers, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition and operating results.

An important element of our growth strategy is the acquisition of water systems. Any pending or future acquisition we decide to undertake will involve risks.

The terms of the Merger Agreement provide that we may not invest in any new acquisition without the City’s prior written approval. If the Merger Agreement is terminated, we expect that the acquisition and integration of water systems would be an important element in our growth strategy. This strategy depends on identifying suitable acquisition opportunities and reaching mutually agreeable terms with acquisition candidates. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to expend significant resources. Further, acquisitions may result in our incurrence of debt and contingent liabilities, and fluctuations in quarterly results. In addition, the businesses and other assets we acquire may not achieve the financial results that we expected.

The current concentration of our business in southern and central New Hampshire makes us susceptible to any adverse development in local regulatory, economic, demographic, competitive and weather conditions.

Our core service area comprises Pennichuck Water’s franchise in the City of Nashua, New Hampshire and portions of the surrounding towns of Amherst, Hollis and Merrimack. Pennichuck East serves a similar area in southern and central New Hampshire, east of the Merrimack River and Pennichuck Water’s core service area. Our revenues and operating results are therefore subject to local regulatory, economic, demographic, competitive and weather conditions in these areas. A change in any of these conditions could make it more costly or difficult for us to conduct our business. In addition, any such change would have a disproportionate effect on us, compared to water utility companies that do not have such a geographic concentration.

The loss of a significant commercial or industrial customer could adversely affect our operating results and cash flows.

Our revenues will decrease, and such decrease may be material, if one or more significant commercial or industrial customers terminate, or materially reduce, their use of our water. If any large commercial or industrial customer reduces or ceases its consumption of our water, we may seek NHPUC approval to increase the rates of our remaining customers to recover any lost revenues. There can be no assurance, however, that the NHPUC would approve such a rate relief request, and even if it did approve such a request, it would not apply retroactively to the date of the reduction in consumption. The delay between such date and the effective date of the rate relief may be significant and adversely affect our operating results and cash flows.

Weather conditions and overuse may interfere with our sources of water, demand for water services and our ability to supply water to our customers.

We depend primarily on surface water from the Pennichuck Brook and, to a lesser extent, the Merrimack River in Nashua, New Hampshire to meet the present and future water demands of our customers. Unexpected conditions may interfere with our water supply sources. Drought and overuse may limit the availability of surface water. These factors might adversely affect our ability to supply water in sufficient quantities to our customers and our revenues and operating results may be adversely affected. Additionally, cool and wet weather, as well as drought restrictions and our customers’ conservation efforts, may reduce consumption demand, also adversely affecting our revenues and operating results. Furthermore, freezing weather may also contribute to water transmission interruptions caused by pipe and main breakage. If we experience an interruption in our water supply, it could have a material adverse effect on our operating results, financial condition and cash flows.

Contamination of our water supply may cause disruption in our services and adversely affect our operating results, financial condition and cash flows.

Our water supply is subject to contamination from the migration of naturally occurring substances in groundwater and surface systems, as well as pollution resulting from man-made sources. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the flow of water from an uncontaminated water source through our interconnected transmission and distribution facilities. In addition, we may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities or development of new treatment methods. Our inability to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost effective or timely manner, may have an adverse effect on our operating results, financial condition and cash flows.

Non-performance by our commodity suppliers including water treatment chemicals and electricity, could cause disruption in our services and adversely affect our operating results, financial condition and cash flows.

To the extent these suppliers are sole source suppliers (electricity) or are one of a limited number of suppliers (certain chemicals certified for use in the production of potable drinking water under the Safe Drinking Water Act), we could be unable to produce water or appropriate quantities of water in compliance with the federal Safe Drinking Water Act or we could experience unfavorable cost increases related to the direct costs of producing potable water. The result of any non-performance or unfavorable cost increases by these suppliers would result in reduced net operating income and cash from operations and eventually could adversely affect our overall financial position.

The necessity for increased security has and may continue to result in increased operating costs.

In the wake of the September 11, 2001 terrorist attacks and the ensuing attention to threats to the nation’s health and security, we have expended resources to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We have also incurred expenses to tighten our security measures regarding the delivery and handling of certain chemicals used in our business. We will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. We are not aware of any specific threats to our facilities, operations or supplies. However, it is possible that we would not be in a position to control the outcome of such events should they occur.

Damage to any of our dams may adversely affect our financial condition, revenues, operating results and cash flows.

Pennichuck Water owns seven dams, including four impounding dams which are situated on the Nashua and Merrimack border. While we regularly inspect and maintain the dams to comply with existing standards, a failure of any of those dams could result in injuries and property damage downstream for which we may be liable above our insurance limits and which may adversely affect our financial condition, revenues and operating results. The failure of a dam would also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition, revenues, operating results and cash flows.

We may not be able to maintain our existing indebtedness or to incur additional indebtedness under our existing long-term and revolving debt facilities, if our future credit ratios do not satisfy the requirements under those facilities.

Our ability to issue long-term debt is subject to us satisfying certain financial ratios at the time of such borrowing (i.e., debt incurrence tests) and is subject to obtaining prior written approval from the City. Similarly, our ability to access funds under our revolving credit facilities is subject to maintaining certain financial ratios (i.e., maintenance tests). These ratios limit the amount of long-term debt relative to net plant and the amount of total debt to total capitalization and also specify minimum amounts of earnings and cash flow available to pay interest and fixed charges as a percentage of such interest and fixed charge amounts. We were in compliance with such tests as of December 31, 2010. Our ability to incur additional long-term debt and to continue to satisfy these tests depends, among other factors, on receipt of timely and adequate rate relief.

Should we be unable to issue long-term debt, to borrow under our revolving credit facilities or otherwise to access traditional sources of funds at reasonable costs and terms, our ability to finance our future capital expenditures program on a timely basis could be materially impaired. In such event, we might need to seek other forms of capital at less favorable costs and terms or defer or reduce some of our capital expenditures. Any delay in implementing or completing capital improvements could adversely affect our ability to request and receive rate relief from the NHPUC relating to capital expenditures incurred by us and could give rise to contractual penalties.

If we are unable to pay the principal and interest on our indebtedness as it comes due or we default under certain other provisions of our loan documents, our indebtedness could be accelerated and our operating results, financial condition and cash flows could be adversely affected.

Our ability to pay the principal and interest on our indebtedness as it comes due will depend upon our current and future performance. Our performance is affected by many factors, some of which are beyond our control. We believe that our cash flow from operations and, if necessary, borrowings under our existing revolving credit facilities, will be sufficient to enable us to make our debt payments as they become due. If, however, we do not generate sufficient cash, we may be required to refinance our obligations or sell additional equity, which may be on terms that are not favorable to us. No assurance can be given that any refinancing or sale of equity will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our failure to comply with certain provisions contained in our trust indentures and loan agreements relating to our outstanding indebtedness could lead to a default under these documents, which could result in an acceleration of our indebtedness.

We may be restricted by one or more debt agreements from paying dividends in amounts similar to dividends that our Company has paid in recent periods, or, in more unlikely circumstances, from continuing to pay any dividend.

There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to dividends that our Company has paid in recent periods. It is our current intention, however, to continue to pay comparable cash dividends in the future, subject to the terms of our Company’s debt agreements and the terms of the Merger Agreement with the City. Certain bond and note agreements as well as our revolving credit facilities impose restrictions on the payment or declaration of dividends under certain circumstances.

The success of our business strategies depends significantly on the services of the members of our senior management team and the departure of any of those persons could cause our operating results to suffer.

The success of our business strategies depends significantly on the continued individual and collective contributions of our senior management team. If we lose the services of any member of our senior management or are unable to hire and retain experienced management personnel, it could harm our operating results.

Risks Related to Our Water Service Business

Our water service subsidiary’s revenue growth depends on its ability to enter into new operating contracts and maintain its existing contracts with municipalities, communities and non-transient, non-community water systems.

In our target market of New Hampshire and nearby portions of Maine, Massachusetts and Vermont, municipalities and communities own and operate the majority of water systems. A significant portion of Service Corporation’s marketing and sales efforts is spent demonstrating the benefits of contract operations to elected officials and municipal authorities. Employee unions and certain “public interest” groups generally oppose the principle of outsourcing these services to companies like us and are active opponents in this process. The political environment means that decisions are made based on many factors, not just economic factors. There can be no assurance that we can maintain or expand our water service business.

Our water management subsidiary’s business depends on trained, qualified employees.

State regulations set the staff training, experience and staff qualification standards required for Service Corporation’s employees to operate specific water facilities. We must recruit, retain and develop qualified employees, maintain training programs and support employee advancement. We must provide the proper management and operational staff of state-certified and qualified employees to support the operation of water facilities. Failure to do so could put us at risk for, among other things, operational errors at the facilities, which could have an adverse effect on our water management business.

Our water management subsidiary’s business is subject to environmental and water quality risks.

Clients of Service Corporation are owners of the facilities that we operate under contract. The facilities must be operated in accordance with various federal and state water quality standards. We also handle certain hazardous materials at these facilities, for example, sodium hydroxide. Any failure of our operation of the facilities, including noncompliance with water quality standards, hazardous material leaks and spills, and similar events, could expose us to environmental liabilities, claims and litigation costs. There can be no assurance that we will successfully manage these issues, and failure to do so could have a material adverse effect on our future results of operations.

Other Risks

There is a limited trading market for our common stock; you may not be able to resell your shares at or above the price you pay for them.

Although our common stock is listed for trading on the NASDAQ Global Market, the trading in our common stock has substantially less liquidity than many other companies quoted on the NASDAQ Global Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common stock at any given time. This presence in turn depends on the individual decisions of investors and general economic and market conditions over which we have no control. As a consequence of the limited volume of trading in our common stock, a sale of a significant number of shares of our common stock in the open market could cause our stock price to decline.

We are subject to anti-takeover measures that may be used by existing management to discourage, delay or prevent changes of control that might benefit non-management shareholders.

•

Classified Board of Directors

We have a classified Board of Directors, which means only three or four of our eleven total directors are elected each year. A classified board can make it harder for an acquirer to gain control by voting its candidates onto the Board of Directors and may also deter merger proposals and tender offers. At least two annual meetings of shareholders, instead of one, would generally be required to effect a change in a majority of the board.

•

Authorized Shares

Our Articles of Incorporation authorize the issuance of 11,500,000 shares of common stock and 115,000 shares of preferred stock. The shares of common stock and preferred stock were authorized in an amount greater than intended to be issued to provide our Board of Directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and employee stock option grants. However, these additional authorized shares may also be used by the Board of Directors to deter future attempts to gain control of our Company. The Board of Directors has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board has the power to issue a series of preferred stock that would have the effect of discouraging or blocking a post-tender offer merger or other transaction by a third party.

Notwithstanding these rights, pursuant to the terms of the Merger Agreement, we are prohibited from issuing any additional shares of stock or stock options while the Merger Agreement is in effect.

•

Shareholder Rights Plan

Our Board of Directors has adopted a shareholder rights plan. Any rights under this plan will expire on May 5, 2011 unless previously redeemed or extended. The rights plan is intended to improve the bargaining position of our Board of Directors in the event of an unsolicited offer to acquire our Company’s outstanding common stock. Under the terms of the rights plan, a preferred stock purchase right is attached to each share of our common stock that is currently outstanding or becomes outstanding before the rights become exercisable, are redeemed or expire. The rights will become exercisable only if an individual or group has acquired or obtained the right to acquire or announced a tender or exchange offer that if consummated would result in such individual or group acquiring, beneficial ownership of more than 15% (or up to 20% with the prior approval of the Board of Directors) of our outstanding common stock. Upon the occurrence of a triggering event, the rights will entitle every holder of our common stock, other than the acquirer, to purchase our stock or stock of our successor on terms that would likely be economically dilutive to the acquirer. Our Board of Directors, however, has the power to amend the rights plan so that it does not apply to a particular acquisition proposal or to redeem the rights for a nominal amount before they become exercisable.

Effective March 18, 2009, our Company and its largest shareholder GAMCO Investors, Inc. (“GAMCO”), and the other affiliated Gabelli group of companies and funds (collectively the “Gabelli Group”), entered into a letter agreement, pursuant to which GAMCO and the Gabelli Group have been granted an exemption to collectively purchase up to, but less than, 20% of our Company’s outstanding shares of common stock, subject to terms set forth in the letter agreement.

Effective November 11, 2010, we amended the rights plan pursuant to which the execution and delivery of the Merger Agreement, the consummation of the merger, and the consummation of any other transaction contemplated in the Merger Agreement will be deemed not to result in events that authorize the exercise of the rights under the rights plan.

•

Supermajority Shareholder Approval May be Required for Fundamental Transactions with an “Interested Shareholder”

Our Articles of Incorporation require that certain fundamental transactions must be approved by the holders of two-thirds of each class of stock entitled to vote and two-thirds of the total number of shares entitled to vote, unless a majority of “disinterested directors” has approved the transaction and other specified conditions are satisfied, in which case the required shareholder approval will be the minimum approval required by applicable law. The transactions that are subject to this provision are various fundamental transactions between us and an “interested shareholder” or an affiliate of that shareholder. These transactions include certain sales or other dispositions of our assets, certain issuances of our capital stock, certain transactions involving our merger, consolidation, division, reorganization, dissolution, liquidation or winding up or certain amendments of our Articles of Incorporation or bylaws. We believe that the interested shareholder provision will likely encourage an acquirer to negotiate with the Board of Directors before commencing a tender offer.

Approval by the NHPUC would be required for any acquisition of the Company and the NHPUC would consider factors other than what is in the best interest of our shareholders.

Our water utility subsidiaries are regulated by the NHPUC. The NHPUC takes the position that under New Hampshire law, water utility holding companies may not be acquired unless and until there is an order of the NHPUC approving the acquisition. In practice, companies acquiring water utility holding companies in New Hampshire have typically sought NHPUC approval as a condition of any transaction. The NHPUC may approve an acquisition only if it determines that the acquisition will not result in net harm to customers and is lawful, proper and in the public interest.

Item 1B.		UNRESOLVED STAFF COMMENTS

None.

Item 2.		PROPERTIES

Pennichuck Water owns a building in Nashua that serves as an operations center and storage facility for our construction and maintenance activities.

Pennichuck Water leases approximately 20,000 square feet of office space located in Merrimack, New Hampshire. This office space serves as Pennichuck Corporation’s headquarters. The lease expires in July 2013.

The properties used in our regulated water utility business are described in Part I, Item 1, “Business” under the heading “Regulated Water Utilities” in this Annual Report on Form 10-K, which is incorporated herein by reference.

Except as discussed in Note 9, “Debt” in Part II, Item 8 in this Annual Report on Form 10-K, there are no mortgages or encumbrances on our properties.

Item 3.		LEGAL PROCEEDINGS

The City of Nashua, New Hampshire (the “City”) has been engaged in an effort that began in 2002 to acquire all or a significant portion of the assets of Pennichuck Water, our largest utility subsidiary, through an eminent domain proceeding under NHRSA Chapter 38, and to acquire the assets of our Pennichuck East and Pittsfield Aqueduct regulated utilities. As previously disclosed in a Form 8-K filed November 12, 2010 and in connection with the Merger Agreement, on November 11, 2010 our Company entered into a settlement agreement (the “Settlement Agreement”) with the City. Pursuant to its terms, the Settlement Agreement provides that the pending eminent domain proceeding by the City against the Company (docketed by the NHPUC as DW 04-048), will be terminated if the merger is not completed for any reason, including as a result of the City not obtaining either a timely positive vote of its Board of Aldermen or the financing required for the merger.

See Part I, Item 1A, “Risk Factors” for a discussion of various risks and uncertainties associated with this proceeding.

Giardia Litigation

In August 2010, two claims were filed against our Company and Pittsfield Aqueduct relating to a single outbreak of Giardia contamination that occurred in the water supply for the Birch Hill community water system in North Conway, New Hampshire during September 2007. The Center for Disease Control characterizes giardiasis as a “common cause of waterborne disease in humans in the United States” resulting from ingesting Giardia cysts. Healthy people normally recover within 2-6 weeks without medicine and more quickly with medicine. There were 16 confirmed cases of giardiasis at Birch Hill in September 2007, two of which resulted in some prolonged physical effects. The 3-year statute of limitations has now run out on filing any new claims relating to this outbreak. Therefore, these are the only cases we expect to have filed with respect to this incident.

Water utilities are not required by federal or state water quality standards to test for Giardia. To our knowledge, this is the only known outbreak of Giardia at Birch Hill. The water quality of the wells servicing the Birch Hill community was determined to meet all state/federal water quality standards when we purchased the system in 2006, and we believe that we continued to operate them in accordance with those standards. To date, the source and means by which Giardia cysts might have infected the well remains unknown. Normally, if there is an outbreak of Giardia, it usually occurs in surface water or in a shallow gravel-packed well close to surface water. It is highly unusual for a bedrock well, such as the one in question at Birch Hill, to become infected with Giardia cysts. Even though the presence of Giardia cysts was not confirmed in the well in question, as a precaution, the well was immediately shut-down and abandoned in September 2007. Since then, the Birch Hill water system has been interconnected to the North Conway Water District water system. We expect that both of these claims will be covered by our Company’s primary and/or umbrella insurance policies and that there will not be any material impact on our Company.

Both of these cases are currently scheduled to be tried in the first quarter of calendar year 2012.

Item 4.		REMOVED AND RESERVED

PART II

Item 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the NASDAQ Global Market and trades under the symbol “PNNW.” On March 1, 2011, there were 558 holders of record of the 4,679,927 shares of our common stock outstanding. The closing price per share of our common stock on March 1, 2011 was $28.11. The following table sets forth the comparative market prices per share of our common stock based on the high and low sale prices as reported on the NASDAQ Global Market during the applicable periods and the cash dividends declared per share by our Company during those periods. Our stock price increased following the November 12, 2010 announcement of the signing of the Merger Agreement with the City of Nashua.

										Dividends
Period		High				Low				Declared
2010
Fourth Quarter		$	28.39			$	22.81			$	.185
Third Quarter			23.89				21.56				.180
Second Quarter			24.41				20.77				.180
First Quarter			23.51				19.00				.180
2009
Fourth Quarter		$	24.50			$	20.44			$	.175
Third Quarter			24.80				21.01				.175
Second Quarter			23.24				19.69				.175
First Quarter			21.90				16.56				.175

We expect to continue to pay comparable cash dividends in the future, subject to the terms of our debt agreements. During the term of the Merger Agreement, we may continue to pay dividends in accordance with past practice but may not increase the dividend rate above the current rate. Certain covenants in Pennichuck Water’s and Pennichuck East’s loan agreements, as well as our revolving credit loan agreements, effectively restrict our ability to upstream dividends from Pennichuck Water and Pennichuck East, as well as to pay dividends to our shareholders, under certain circumstances.

Several of Pennichuck Water’s loan agreements contain a covenant that requires it to maintain a minimum net worth of $4.5 million. As of December 31, 2010, Pennichuck Water’s net worth was $53.1 million. One of Pennichuck East’s loan agreements contains a covenant that requires it to maintain a minimum net worth of $1.5 million. As of December 31, 2010, Pennichuck East’s net worth was $7.0 million. Additionally, our Bank of America revolving credit loan agreement contains a covenant that requires we maintain a minimum consolidated tangible net worth of $46.0 million ($37.0 million plus the amount of equity proceeds subsequent to December 31, 2007). As of December 31, 2010, our consolidated tangible net worth was $56.2 million. See Note 9, “Debt” in Part II, Item 8 in this Annual Report on Form 10-K for further discussion regarding these and other debt covenants.

The following graph provides a comparison of the yearly cumulative total shareholder return on the common stock of our Company for the last five years with the yearly cumulative total return of the Russell 2000 Index and the average yearly cumulative total return of an industry peer group over the same period, assuming a $100 investment on December 31, 2005. All of these cumulative returns are computed assuming the reinvestment of dividends at the frequency with which dividends were paid during applicable years. Historical stock performance during this period may not be indicative of future stock performance.

		Base Period
Company Name / Index		12/31/05				12/31/06				12/31/07				12/31/08				12/31/09				12/31/10
Pennichuck Corporation			100				102.16				138.51				109.61				116.53				155.72
Russell 2000 Index			100				118.37				116.51				77.15				98.11				124.46
Peer Group (1)			100				104.50				104.70				96.84				110.05				125.83

(1)		The peer group companies consist of Artesian Resources Corporation, Connecticut Water Service Inc., Middlesex Water Company, and The York Water Company.

It should be noted that this graph represents historical stock performance and is not necessarily indicative of any future stock price performance.

Information on equity compensation plans required by Item 5 is incorporated by reference herein from the section in our Proxy Statement entitled “Equity Compensation Plan Information.”

Item 6.		SELECTED FINANCIAL DATA

We have derived the selected historical financial data as of and for each of the years presented from our audited financial statements. You should read the information below in conjunction with our historical financial statements and related notes appearing in Part II, Item 8 in this Annual Report on Form 10-K and our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Part II, Item 7 in this Annual Report on Form 10-K.

(in thousands, except share		For the Year Ended December 31,
and per share data)		2010				2009				2008				2007				2006
Consolidated Statements of Income:
Operating revenues		$	36,492			$	32,772			$	30,979			$	29,535			$	24,481
Operating expenses:
Operations and maintenance			18,131				17,108				16,702				16,019				15,388
Depreciation and amortization			4,237				4,087				4,001				3,482				3,200
Taxes other than income taxes			4,028				3,585				2,866				2,368				2,240
Total operating expenses			26,396				24,780				23,569				21,869				20,828
Operating income			10,096				7,992				7,410				7,666				3,653
Eminent domain and merger-related costs, net			(514	)			(499	)			(217	)			(897	)			(2,355	)
Net (loss) earnings from investments accounted for under the equity method			(7	)			(4	)			3,390				60				(34	)
Other (expense) income, net			(44	)			(36	)			(110	)			1,255				713
Allowance for funds used during construction			16				149				453				517				1,015
Interest income			2				1				187				166				428
Interest expense			(3,369	)			(3,658	)			(3,649	)			(2,875	)			(2,501	)
Income before provision for income taxes			6,180				3,945				7,464				5,892				919
Provision for income taxes			2,399				1,563				2,743				2,311				349
Net income		$	3,781			$	2,382			$	4,721			$	3,581			$	570
Earnings per common share (diluted)		$	0.80			$	0.55			$	1.11			$	0.84			$	0.14
Weighted average common shares outstanding (diluted)			4,697,221				4,294,013				4,266,129				4,269,241				4,215,724
Cash dividends declared per common share		$	0.725			$	0.70			$	0.66			$	0.66			$	0.66

		As of December 31,
(in thousands)		2010				2009				2008				2007				2006
Consolidated Balance Sheets:
Property, plant and equipment, net		$	158,796			$	154,803			$	151,319			$	140,326			$	124,160
Total assets			181,601				177,605				174,954				168,588				144,905
Line of credit			—				—				1,465				—				—
Current portion of long-term debt			1,053				5,897				5,199				6,675				474
Long-term debt including current portion			60,719				60,176				64,785				64,672				48,170
Shareholders’ equity			56,150				55,219				47,780				45,565				44,550
Total capitalization including line of credit			116,869				115,395				114,030				110,237				92,720

Item 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 Aqueduct”), Pennichuck Water Service Corporation (“Service Corporation”) and The Southwood Corporation (“Southwood”).

Pennichuck Corporation is a non-operating holding company whose income is derived from the earnings of its 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 Aqueduct. Our regulated water utility revenues constituted 93.2%, 91.5% and 91.4% of our revenues in 2010, 2009 and 2008, respectively. Pennichuck Water, our principal subsidiary which was established in 1852, accounted for 74.0%, 71.4% and 71.3% of our 2010, 2009 and 2008 revenues, respectively. Pennichuck Water’s franchise area presently includes the City of Nashua, New Hampshire and 10 surrounding municipalities.

Our Company’s regulated water utility subsidiaries are regulated by the New Hampshire Public Utilities Commission (the “NHPUC”) with respect to their water rates, financings and provision of service. We must obtain NHPUC approval to increase our Company’s regulated water subsidiaries’ 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 regulated business marks the rate of return that it 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 increases in a timely or sufficient manner to cover our capital expenditures.

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 New Hampshire and Massachusetts. Its most significant contracts are with the Town of Hudson, New Hampshire and the Town of Salisbury, Massachusetts.

Southwood is engaged in real estate management and commercialization activities. Historically, most of Southwood’s activities were conducted through real estate joint ventures. Over the past 10 years, Southwood has participated in four joint ventures with John P. Stabile II, a local developer. Southwood’s earnings have from time to time during that period contributed a significant percentage of our net income, including in the year ended December 31, 2008 (i.e., the January 2008 sale of the three commercial office buildings that comprised substantially all of the assets of HECOPs I, II, and III as more fully described in Note 7, “Equity Investments in Unconsolidated Companies” in Part II, Item 8, in this Annual Report on Form 10-K). Southwood’s contributions from the sale of real estate have increased the fluctuations in our net income during the 10-year period. Looking ahead, we expect real estate commercialization to contribute a smaller proportion of our revenues and earnings over the next several years. Furthermore, during the term of the Merger Agreement (defined below) with the City of Nashua (the “City”), our entry into new sales contracts covering any of our remaining 450 acres of undeveloped land are subject to advance written approval by the City.

The eminent domain dispute with the City that is described in more detail below and elsewhere in this report has had a material adverse effect on our results of operations in recent years. The dispute was resolved with the signing of a definitive merger agreement (“Merger Agreement”) on November 11, 2010 with the City pursuant to which the City will, subject to a number of conditions precedent and contingencies, purchase all of the outstanding common stock and common stock equivalents of Pennichuck Corporation for $29.00 per share, or approximately $138 million, in cash. After taking into account our outstanding debt, the transaction represents a total enterprise value of approximately $200 million.

As you read the Management’s Discussion and Analysis, refer to our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements in Item 8 in this Annual Report on Form 10-K.

Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K, including certain statements in 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, but are not limited to, a future judicial or regulatory determination that events prior to the November 11, 2010 effective date of the Merger Agreement constituted a final determination of the price to be paid under RSA 38:13 and triggered the statutory 90-day period within which the City was required to decide whether to take, by eminent domain, the assets of our Pennichuck Water subsidiary; the expiration of said 90-day period without the City having made any such decision; whether the merger transaction is approved by our shareholders and the NHPUC; whether the merger transaction is ultimately consummated; 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. These risks and others are described elsewhere in this Annual Report on Form 10-K, including particularly under Part I, Item 1A, “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, 2010 were significantly affected by the following events that occurred during one or more of the years in that period:

•

Sale of land and building owned by HECOPs I, II and III in January 2008;

•

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

•

Rate relief granted by the NHPUC to our regulated water utilities;

•

Increased recorded amounts of allowance for funds used during construction as a result of the upgrade of our water treatment plant; and

•

Costs associated with our actions to oppose efforts by the City of Nashua to acquire all or a significant portion of the assets of our regulated water utility subsidiaries through an eminent domain proceeding under New Hampshire law.

The Merger Agreement and Eminent Domain Settlement

The City has been engaged in an ongoing effort that began in 2002 to acquire all or a significant portion of the assets of Pennichuck Water, our largest utility subsidiary, through an eminent domain proceeding under NHRSA Chapter 38. The matter was resolved on November 11, 2010 when the City and the Company entered into a Merger Agreement pursuant to which the City will, subject to a number of conditions precedent and contingencies, purchase all of the outstanding common stock and common stock equivalents of Pennichuck Corporation for $29.00 per share, or approximately $138 million, in cash.

The transaction, which we sometimes refer in this Annual Report as the merger, is subject to approval by holders of not less than two-thirds of our Company’s outstanding shares of common stock and regulatory approval by the NHPUC. The City’s obligation to complete the merger is subject to, (i) there being no burdensome conditions imposed by the NHPUC in approving the merger that would materially adversely affect the City’s expected economic benefits from the transaction, and (ii) the City’s ability to obtain appropriate financing after all the conditions precedent (including those specified above and other customary closing conditions) have been met.

See Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a discussion of the background of the eminent domain proceeding and the settlement of the dispute in connection with the Merger Agreement, which discussion is incorporated herein by reference.

Our annual eminent domain and merger-related costs in 2010 through 2006 were $514,000, $499,000, $217,000, $897,000 and $2.4 million, respectively.

Critical Accounting Policies, Significant Estimates and Judgments

We have identified the accounting policies below as those policies critical to our business operations and an understanding of our results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, 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 reflected in these accounting policies could result in significant changes to the consolidated financial statements. Our critical accounting policies are as follows:

Regulatory Accounting. Accounting Standards Codification Topic 980, “Regulated Operations” prescribes 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. Accordingly, 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 have not deferred costs incurred to defend against the City’s eminent domain proceeding against our Pennichuck Water subsidiary or in connection with the merger.

Revenue Recognition. The revenues of our regulated 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 customer meters on a monthly basis and record revenues based on those readings. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage and the effective water rates. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying consolidated financial statements as of December 31, 2010 and 2009 were approximately $2.4 million and $2.3 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 Postretirement Benefits. Our pension and other postretirement benefit costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made into the plans, earnings on the plans’ assets, the discount rate applied to estimated future payment obligations, the expected long-term rate of return on plan assets and health care cost trends.

Changes in pension and other postretirement benefit obligations associated with these factors may not be immediately recognized as costs in the consolidated statements of income, but generally are recognized in future years over the remaining average service period of the plan 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 other postretirement benefit costs and funding requirements (See Note 2 of Part II, Item 8, “Postretirement Benefit Plans”). Further, the value of our pension plan assets are subject to fluctuations in market returns which may result in increased or decreased pension expense in future periods.

Our pension plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974. We currently anticipate that we will contribute approximately $1.1 million to the plan during 2011 as compared to $514,000 in 2010.

Results of Operations—General

In this section, we discuss our 2010, 2009 and 2008 results of operations and the material factors affecting them. Our operating activities are discussed in greater detail in Note 5, “Business Segment Reporting” in Part II, Item 8 in this Annual Report on Form 10-K.

Results of Operations—2010 Compared to 2009

Overview

Our revenue, and consequently our net income, can be significantly affected by economic and weather conditions as well as customer conservation efforts. Water revenue is typically at its lowest point during the first and fourth quarters of the calendar year. Water revenue in the second and third quarters tends to be greater because of increased water consumption for non-essential usage by our customers during the late spring and summer months.

For the year ended December 31, 2010, our net income was $3.8 million, compared to $2.4 million for the year ended December 31, 2009. On a per share basis (diluted), net income for the year ended December 31, 2010 was $0.80 as compared to $0.55 for the year ended December 31, 2009. The principal factors that affected current period net income, relative to the prior period, included the following:

•

An increase in regulated water utility operating income of $2.1 million;

•

A decrease in interest expense of $289,000; partially offset by

•

A decrease in allowance for funds used during construction (“AFUDC”) of $133,000;

•

A decrease in water management service operating income of $76,000; and

•

An increase in income tax expense of $836,000.

Our net income per share was affected by our issuance of 387,000 shares of common stock in December 2009, raising approximately $7.5 million of net proceeds.

Regulated Water Utility Operations

Our regulated water utility operations include the activities of Pennichuck Water, Pennichuck East and Pittsfield Aqueduct, each of which is regulated by the NHPUC.

For the year ended December 31, 2010, our regulated water utility operating revenue increased to $34.0 million compared to $30.0 million for the year ended December 31, 2009, an increase of approximately $4.0 million or 13%. The increase in revenue was principally due to an increase in water usage volumes due to dry weather experienced in the third quarter of 2010 and, to a lesser extent, the temporary rate increase granted to Pennichuck Water in October 2010. For the year ended December 31, 2010, 67% of our billed regulated water utility usage was to residential customers, and 26% to commercial and industrial customers, with the balance being principally from billings to municipalities.

We believe customer usage will continue to be impacted by the economy, weather, and conservation efforts as a result of the continuing installation of more water efficient appliances as well as general customer response to various conservation focused communications and rate increases.

For the year ended December 31, 2010, our total utility operating expenses increased by approximately 8% over the year ended December 31, 2009 as shown in the table below.

		Year ended December 31,
(in thousands)		2010				2009				Change
Operations & maintenance		$	15,797			$	14,515			$	1,282
Depreciation & amortization			4,232				4,078				154
Taxes other than income taxes			4,026				3,587				439
Total Utility Operating Expenses		$	24,055			$	22,180			$	1,875

The operations and maintenance expenses of our regulated 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; and

•

Engineering, customer service and general and administrative functions.

The $1.9 million increase in our utilities’ operating expenses over the same period in 2009 was primarily the result of the following:

•

Increased production costs of $582,000 related to increased chemical, power and purchased water costs associated with higher water usage levels;

•

Increased taxes other than income taxes of $439,000, principally related to increased real estate taxes resulting from capital additions as well as increased assessed values in our core Pennichuck Water system;

•

Increased general and administrative costs of $323,000 primarily relating to the combined effects of, (i) increased compensation expense accrued in accordance with our management incentive plans, increased non-cash compensation expense recorded for employee stock options granted during the first quarter of 2010 and annual wage increases (ii) increased health benefit costs and (iii) an increase in supplemental executive retirement plan costs, partially offset by (iv) a decrease in defined benefit and postretirement medical plan costs;

•

Increased transmission and distribution costs of $287,000 primarily relating to increased fuel costs, flushing activities and system maintenance costs; and

•

Increased depreciation and amortization of $154,000 principally due to increased depreciation attributable to the completion of the water treatment plant upgrade at Pennichuck Water in 2009.

As a result of the above changes in operating revenue and operating expenses, regulated water utility operating income increased to $9.9 million from $7.8 million, an increase of approximately $2.1 million or 28%, for the year ended December 31, 2010 compared to the year ended December 31, 2009.

Pennichuck Water filed for rate relief with the NHPUC on May 7, 2010 seeking a permanent annual increase in revenue of approximately $3.9 million, or 16.2%, plus a step increase of approximately $887,000, or 3.7%. Additionally, our rate relief filing includes a request to recover certain amounts expended by us in connection with the eminent domain proceedings. On October 8, 2010, the NHPUC issued an order approving an annualized temporary increase in rates of approximately $2.6 million, or 10.8%, effective for bills rendered on or after October 8, 2010. Any difference between the temporary rate relief granted and the permanent rates ultimately approved by the NHPUC for service rendered on and after June 16, 2010 will be reconciled upon the approval of such permanent rates.

Water Management Services

The operating revenue of our water management services segment decreased to $2.5 million for the year ended December 31, 2010 from $2.8 million for the year ended December 31, 2009, which is a decrease of approximately $309,000, or 11%.

Service Corporation’s contracts with two municipalities ended on June 30, 2009 and July 31, 2009 and have not been renewed by the municipalities. The operating revenue earned from these two contracts was $136,000 for the year ended December 31, 2009. Operating revenue earned from unscheduled work on continuing contracts decreased to $804,000 for the year ended December 31, 2010 from $979,000 for the year ended December 31, 2009, a decrease of approximately $175,000, or 18%.

The net income of our water management services segment decreased to $125,000 for the year ended December 31, 2010 from $191,000 for the year ended December 31, 2009, which is a decrease of approximately $66,000, or 35%.

Eminent Domain and Merger-related Costs

Our eminent domain expenses were $514,000 for the year ended December 31, 2010 and $499,000 for the year ended December 31, 2009. The 2010 and 2009 eminent domain expenses included the legal fees associated with the Supreme Court proceedings and, in 2010, also included legal costs in connection with the Merger Agreement.

Allowance for Funds Used During Construction (“AFUDC”)

For the year ended December 31, 2010 and 2009, we recorded AFUDC of $16,000 and $149,000, respectively. The approximately $133,000 decrease was attributable to the completion in 2009 of certain large projects (e.g., the multi-year upgrade to Pennichuck Water’s water treatment plant). We do not expect to incur a significant amount of AFUDC in 2011.

Interest Expense

For the year ended December 31, 2010, our interest expense was $3.4 million, compared to $3.7 million in 2009. The decrease of approximately $289,000 was primarily attributable to the payoff at maturity of a 5% $5 million note on March 1, 2010.

Provision for Income Taxes

For the year ended December 31, 2010, we recorded income tax expense of $2.4 million compared to $1.6 million for the year ended December 31, 2009. The effective income tax rate was approximately 38.8% and 39.6% for the respective periods. The effective rate for the year ended December 31, 2009 was approximately the same as the statutory rate. The decrease in the effective income tax rate from 2009 to 2010 includes an adjustment for the recognition of certain state tax credits previously not expected to be utilized.

Results of Operations—2009 Compared to 2008

Overview

For the year ended December 31, 2009, our net income was $2.4 million, compared to net income of $4.7 million for the year ended December 31, 2008. On a per share basis, the fully diluted income per share for the year ended December 31, 2009 was $0.55, compared to fully diluted income per share of $1.11 for the year ended December 31, 2008. The principal factors that affected current period net income, relative to prior period net income, included the following:

•

A 2008 non-operating, after-tax gain of approximately $2.3 million ($3.4 million before federal income taxes) from the sale of three commercial office properties by three of our HECOP joint ventures;

•

An increase in 2009 regulated water utility operating income of $679,000;

•

An increase in 2009 eminent domain-related costs of $282,000;

•

A decrease in interest income of $186,000;

•

A decrease in allowance for funds used during construction of $304,000; and

•

A decrease in the 2009 provision for income taxes of $1.2 million.

Regulated Water Utility Operations

Our regulated water utility operations include the activities of Pennichuck Water, Pennichuck East and Pittsfield Aqueduct, each of which is regulated by the NHPUC.

Our utility operating revenues increased to approximately $30.0 million in 2009, an increase of $1.7 million, or 6.0%, over 2008, as shown in the following table.

		Year Ended December 31,
(Dollars in thousands)		2009								2008								Change
Pennichuck Water		$	23,403				78	%		$	22,097				78	%		$	1,306
Pennichuck East			5,038				17	%			5,088				18	%			(50	)
Pittsfield Aqueduct			1,552				5	%			1,118				4	%			434
Total		$	29,993				100	%		$	28,303				100	%		$	1,690

The increase in revenues was primarily the result of the full year impact in 2009 of temporary rate increases granted to Pennichuck Water and Pittsfield Aqueduct in 2008 and a partial year effect of the permanent rate increases granted to those subsidiaries in 2009 offset, in part, by an approximately $1.7 million revenue decrease associated with reduced customer usage.

For the year ended December 31, 2009, approximately 66% of our billed water utility usage was to residential customers and approximately 29% to commercial and industrial customers, with the balance being principally from billings to municipalities. Company-wide usage for the year ended December 31, 2009 declined by approximately 6.8%, approximately half of which was the result of energy conservation programs implemented by our largest industrial customer beginning in the third quarter of 2008. The revenue impact of these conservation programs was substantially offset in 2009 by a make-whole provision contained in the customer’s contract.

We believe that the then prevailing adverse economic conditions and customer conservation efforts, as well as cool and wet weather patterns in June and July of 2009, were the primary cause of the reduction in consumption among our residential, commercial and industrial customers (aside from the effects of the energy conservation programs implemented by the industrial customer discussed above).

For the year ended December 31, 2009, utility operating expenses increased by approximately $1.0 million, or approximately 4.8%, to approximately $22.2 million as shown in the table below.

		Year Ended December 31,
(in thousands)		2009				2008				Change
Operations & maintenance		$	14,515			$	14,312			$	203
Depreciation & amortization			4,078				3,990				88
Taxes other than income taxes			3,587				2,867				720
Total		$	22,180			$	21,169			$	1,011

The operations and maintenance expenses of our regulated 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; and

•

Engineering, customer service and general and administrative functions.

The $1.0 million increase in our utilities’ operating expenses over the same period in 2008 was primarily the result of the following:

•

Increased taxes other than income taxes of $720,000, principally related to increased real estate taxes resulting from capital additions in our core Pennichuck Water system, as well as increased assessed values;

•

Increased general and administrative costs of $343,000 primarily relating to increased pension and postretirement expense of $261,000;

•

Increased customer accounting expenses of $112,000, primarily associated with the additional costs of billing customers on a monthly rather than a quarterly basis;

•

Increased depreciation and amortization of $88,000 principally due to increased depreciation attributable to completed portions of the water treatment plant upgrade for Pennichuck Water; and

•

Increased transmission and distribution costs of $90,000 relating to repair or replacement of gates, mains, meters, services and hydrants; partially offset by

•

Decreased production costs of $356,000 related to lower consumption levels and lower power rates.

As a result of the above changes in operating revenue and operating expenses, regulated water utility operating income increased to $7.8 million from $7.1 million, or 9.5%, for the year ended December 31, 2009 compared to the year ended December 31, 2008.

Water Management Services

The operating income of our water management services business was $325,000 and $375,000 for the year ended December 31, 2009 and December 31, 2008, respectively. Service Corporation’s contracts with two municipalities ended on June 30, 2009 and July 31, 2009, and were not been renewed by the municipalities. The operating revenue earned from these two contracts was 5% and 10% of Service Corporation’s total revenue for the year ended December 31, 2009 and 2008, respectively. These two contracts contributed approximately $75,000 and $164,000 in operating income for the years ended December 31, 2009 and 2008, respectively. The decrease in operating income associated with these two contracts of $89,000 was the primary cause for the overall decrease in operating income of $50,000 for the year ended December 31, 2009 compared to December 31, 2008.

Eminent Domain Expenses

Our eminent domain expenses were $499,000 for the year ended December 31, 2009 as compared to $217,000 for the year ended December 31, 2008. The 2009 eminent domain expenses were primarily attributable to legal fees in connection with our appeal to the New Hampshire Supreme Court and, to a lesser extent, our retention of an investment banking firm in January 2009.

Allowance for Funds Used During Construction (“AFUDC”)

For the year ended December 31, 2009 and 2008, we recorded AFUDC of approximately $149,000 and $453,000, respectively. The $304,000 decrease was attributable to the completion of certain large projects qualifying for AFUDC during the reported periods.

Interest Income

For the years ended December 31, 2009 and 2008, we recorded interest income of approximately $1,000 and $187,000, respectively. The decrease of $186,000 was primarily attributable to lower balances in our bank and money market accounts throughout 2009, as well as lower earned rates on these balances.

Provision for Income Taxes

For the years ended December 31, 2009 and 2008, we recorded an income tax provision of $1.6 million and $2.7 million, respectively. The decrease was largely due to federal income taxes on the January 2008 gain on the sale of the real estate held by HECOP I, II, and III joint ventures. The effective income tax rate was 39.6% and 36.7%, respectively.

The State of New Hampshire income tax liability on income attributable to our Company’s four joint ventures is imposed at the Limited Liability Company 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 consolidated statements of income and comprehensive income. The amount of such state income taxes in 2008 was approximately $217,000. This is the principal reason why the “Provision for Income Taxes” for 2008, as a percentage of “Income Before Provision for Income Taxes,” was lower in 2008 than the statutory rate of 39.6%.

Liquidity and Capital Resources

Overview

Our primary sources of funds are cash flow from utility operations, cash proceeds from the commercialization of portions of our non-utility real estate holdings, borrowings pursuant to our bank revolving credit facilities and proceeds from the sale of long-term debt and equity securities. Our primary uses of funds are capital expenditures associated with our continuous utility construction programs, dividends on our common stock payable as and when declared by our Board of Directors and repayments of principal on our outstanding debt obligations, whether pursuant to scheduled sinking fund payments or final maturities.

For the past several years, cash flows have fluctuated primarily based on four factors: (i) weather, (ii) amount and timing of rate increases, (iii) gains recognized on the sale of non-utility real estate and cell tower leases and (iv) costs associated with the City of Nashua’s eminent domain proceeding and the Merger Agreement. We expect that weather and the amount and timing of rate increases will continue to impact its liquidity and that gains from the sale of non-utility real estate will occur relatively infrequently. We expect that costs will be incurred throughout most of 2011 primarily related to seeking shareholder and NHPUC approvals in connection with the proposed merger.

We expect to utilize our Bank of America revolving credit facility in response to variations in cash flow from the factors described above. This $16 million revolving credit facility expires on June 30, 2011 and is expected to be renewed at a lower maximum borrowing amount, reflecting our reduced capital expenditure plans after the completion of the $40 million water treatment plant upgrade in 2009.

During the period from 2008 through 2010, in addition to cash flow from operations, we generated $29.3 million of proceeds from long-term borrowings. We also generated an aggregate $8.6 million during the same period through a public offering of common stock, our Dividend Reinvestment and Common Stock Purchase Plan and the exercise of stock options. The proceeds from the long term debt and equity offerings were invested primarily in capital additions including specifically the $40 million water treatment plant upgrade.

We borrowed $4.5 million on March 1, 2010 pursuant to a 20-year amortizing loan at the London Interbank Offered Rate (“LIBOR”) plus 1.75%. We also entered into an interest rate swap to effectively fix the interest rate on the outstanding loan amount at 5.95%.

Capital Expenditures Program

We are engaged in construction programs at our utility subsidiaries primarily for water distribution system repair, rehabilitation and replacement, water storage facility maintenance and additions, and water supply security. We expect our capital expenditures to be approximately $8.1 million, $9.2 million and $6.9 million for the years ending December 31, 2011, 2012 and 2013, respectively. The timing of these projects may be impacted by weather, availability of contractors and equipment, coordination with other utilities and municipalities in order to reduce digging and paving costs and the availability and cost of financing.

2011-2013 External Financing Requirements

We will continue to apply for long-term debt funds directly from the State of New Hampshire Revolving Fund (“SRF”) program as needed. We currently have one outstanding SRF loan request in the amount of $300,000. Funds provided under SRF loans carry long-term fixed interest rates set with reference to various Municipal Bond Indices, which rates are generally below the rates for comparable U.S. Treasury securities of like maturity. As of December 31, 2010, we had thirteen outstanding SRF loans, five of which also included partial funding through American Recovery and Reinvestment Act of 2009, with aggregate principal balances outstanding of approximately $8.6 million. Included in the thirteen loans are three loans which were not fully drawn as of December 31, 2010. These three loans, totaling approximately $3.0 million, had approximately $1.4 million drawn as of December 31, 2010 with a balance left to draw of approximately $1.6 million. We expect to borrow approximately $800,000 on these three loans in 2011. The balance of approximately $800,000 is not expected to be utilized. The construction associated with the available loans will not be completed until mid-2011.

We expect that the majority of the remainder of our 2011-2013 funding requirements will be provided by cash flow from our operations (after payment of dividends on common stock but before repayment of current principal due on long-term debt) and short term borrowings. During the term of the Merger Agreement, aside from continuing to utilize our revolving credit facilities in the normal course of business, we cannot enter into new borrowings without the prior written consent of the City. The Merger Agreement also prohibits us from issuing any stock (other than upon the exercise of existing stock options) during its term.

In addition to the specific restrictions in the Merger Agreement regarding future debt or equity financings, our timing and mix of future debt and equity financing is subject to a number of factors including, but not limited to, (i) debt and equity market conditions; (ii) the need to maintain a balanced capital structure in order to preserve financial flexibility and to manage our overall cost of capital; and (iii) certain debt issuance covenants as contained in our outstanding loan agreements, which are discussed above. Other than the renewal of our Bank of America short term revolving line of credit which expires on June 30, 2011 and SRF funding that becomes available for specific projects, we do not expect to require any new debt financings in 2011.

The receipt of timely and adequate rate relief is also critically important in providing us cash flow from operations and the ability to access the credit and equity markets, at reasonable costs and terms. We are unable, however, to predict the outcome of our future rate relief filings.

Significant Financial Covenants

Our $16.0 million revolving credit loan agreement with Bank of America currently is scheduled to expire on June 30, 2011. This loan agreement contains three financial maintenance tests which must be met on a quarterly basis. The capitalized terms below are used herein as defined in the revolving credit loan agreement. These maintenance tests, and our actual performance against these tests as of the dates specified, are as follows:

1.

Our Fixed Charge Coverage Ratio must exceed 1.2x (2.3x as of December 31, 2010);

2.

Our Tangible Net Worth must exceed $46.0 million ($56.2 million as of December 31, 2010); and

3.

Our Funded Debt (less certain cash and short-term investment balances, if any) must not exceed 65% of our Total Capitalization (51.1% as of December 31, 2010).

Also, various Pennichuck Water and Pennichuck East loan agreements contain tests that govern the issuance of additional indebtedness. The capitalized terms below are used herein as defined in the revolving credit loan agreement. These issuance tests are as follows:

1.

To issue Short-Term Debt, the sum of our Short-Term Debt and our Funded Debt may not exceed 65% of the sum of our Short-Term Debt, our Funded Debt and our capital stock and all surplus accounts (unless the new Short-Term Debt is subordinated to our existing debt);

2.

To issue long-term debt, our Funded Debt generally may not exceed 60% of our Net Amount of Capital Property Additions; and

3.

To issue long-term debt, our Earnings Available for Interest divided by our Interest Expense must exceed 1.5x.

Several of Pennichuck Water’s loan agreements contain a covenant that prevents Pennichuck Water from declaring dividends if Pennichuck Water does not maintain a minimum net worth of $4.5 million. As of December 31, 2010, Pennichuck Water’s net worth was $53.1 million. One of Pennichuck East’s loan agreements contains a covenant that prevents Pennichuck East from declaring dividends if Pennichuck East does not maintain a minimum net worth of $1.5 million. As of December 31, 2010, Pennichuck East’s net worth was $7.0 million.

As of December 31, 2010, we were in compliance with all of our financial covenants. Our ability to continue to satisfy these covenants depends, among other factors, on receipt of timely and adequate rate relief.

Quarterly Dividends

One of our primary uses of funds is dividends on our common stock, payable as and when declared by our Board of Directors. We have paid dividends on our common stock each year since 1856. On January 26, 2011, the Board of Directors declared a first quarter common stock dividend of $0.185 per share payable March 1, 2011 to shareholders of record as of February 15, 2011. The first quarter dividend amount results in an indicated annual rate of $0.74 per share. During the term of the Merger Agreement, we are restricted from increasing our dividend rate above the current rate although we are allowed to continue to pay dividends consistent with past practice. Accordingly, we expect to continue to pay comparable cash dividends in the future, subject to the terms of our debt agreements, as discussed above.

Off-Balance Sheet Arrangements

On August 24, 2006, Pennichuck Water implemented a legal defeasance transaction for its outstanding $780,000 New Hampshire Industrial Development Authority 7.50% 1988 Series tax-exempt bonds (“1988 Series Bonds”). Pennichuck Water placed U.S. treasury securities in an irrevocable escrow account with The Bank of New York, the Bond Trustee, in an aggregate amount sufficient to provide for all remaining scheduled principal and interest payments on the 1988 Series Bonds. This defeasance transaction discharged all future Pennichuck Water obligations with respect to the 1988 Series Bonds, and we no longer record the debt in our consolidated financial statements.

In October 2005, Pennichuck Water completed a $49.5 million tax-exempt debt financing with the New Hampshire Bond Finance Authority (“BFA”). The BFA acts solely as a passive conduit to the tax-exempt bond markets with us acting as the obligor for the associated tax-exempt debt. We borrowed $38.1 million of the $49.5 million offering with the remaining $11.4 million placed in escrow for the sole benefit of bondholders with no recourse to us. As a result of the recent completion of our $40 million water treatment plant upgrade and the December 2009 issuance of approximately $7.5 million of equity capital, net of expense, we allowed the $11.4 million to expire when the escrow matured on July 1, 2010.

We have one interest rate financial instrument, an interest rate swap, described in detail in Note 9, “Debt” in Part II, Item 8 in this Annual Report on Form 10-K.

Contractual Obligations

The following table discloses aggregate information about our contractual obligations as of December 31, 2010 and the periods in which payments are due:

																		More
						Less than				1 to 3				3 to 5				Than
(in thousands)		Total				1 Year				Years				Years				5 Years
Long-term debt obligations (1)		$	61,019			$	1,053			$	2,212			$	2,274			$	55,480
Estimated interest on long-term debt			50,009				3,001				6,106				5,836				35,066
Short-term borrowings			—				—				—				—				—
Operating lease obligations			793				320				473				—				—
Pension and retiree medical costs (2)			6,371				1,165				1,323				1,355				2,528
Total		$	118,192			$	5,539			$	10,114			$	9,465			$	93,074

(1)		Represents debt maturities including current maturities.
(2)		Pension and retiree medical costs beyond 2010 are estimated as they may be impacted by such factors as return on pension assets, changes in the number of plan participants and future salary increases.

In July 2010, Pennichuck Water renegotiated its lease arrangement for approximately 20,000 square feet of office space located in Merrimack, New Hampshire. This office space serves as Pennichuck Corporation’s headquarters. The renegotiated lease expires in July 2013.

Pension Plan. We maintain a defined benefit pension plan covering substantially all of our employees. We estimate annual pension expense based on assumptions regarding (i) the discount rate applied to the projected benefit obligation, (ii) the long-term rate of return on plan assets and (iii) the long-term rate of future increases in compensation. A lower discount rate increases the present value of our pension obligation and our annual pension funding. Our expected long-term rate of return on pension plan assets is based on the plan’s expected asset allocation, expected returns on various classes of plan assets, and historical returns.

Certain key assumptions used to value benefit obligations and calculate net periodic benefit cost for our defined benefit pension plan include the following:

		2010				2009				2008
Discount rate for benefit obligations, end of year (a)			5.50	%			6.00	%			5.75	%
Expected return on plan assets for the year (net of investment expenses)			7.50	%			7.50	%			7.50	%
Rate of compensation increase, beginning of year			3.00	%			3.00	%			3.00	%

(a)		an increase or decrease in the discount rate of 0.5%, would result in a change in the funded status as of December 31, 2010, for the DB Plan and the OPEB Plans, of approximately $1.0 million and $200,000, respectively, as discussed in Note 2 of Part II, Item 8, “Postretirement Benefit Plans.”

These key assumptions are reviewed annually and are updated periodically to reflect the plan’s experience. Actual results in any given year will often differ from our actuarial assumptions because of economic and other conditions and may impact the amount of funding we contribute into the plan.

Dividend Reinvestment and Common Stock Purchase Plan

Prior to November 11, 2010 effective date of the Merger Agreement, we offered a Dividend Reinvestment and Common Stock Purchase program. Under this program, our shareholders, employees and customers could reinvest all or a portion of their common stock dividends into shares of common stock at prevailing market prices. We also accepted optional cash payments to purchase additional shares at 100% of the prevailing market prices. This program has provided us with additional common equity of $143,000 in 2010 and $130,000 in 2009. The program was suspended on November 11, 2010 in accordance with the terms of the Merger Agreement.

Environmental Matters

Our regulated water utility subsidiaries are subject to the water quality regulations set forth by the 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 treated water currently meets or exceeds all standards set by the EPA and the DES. However, increased monitoring and reporting standards have led to additional operating costs for us. Any additional monitoring and testing costs arising from future EPA and DES mandates should eventually be recovered through water rates in our utilities’ future rate filings.

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 increases in a timely or sufficient manner to cover such capital expenditures.

Item 7A.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding market risk of our Company and our subsidiaries is presented in Note 6, “Financial Measurement and Fair Value of Financial Instruments” and Note 9, “Debt” in Part II, Item 8 in this Annual Report on Form 10-K.

We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk. As described below, we have one interest rate financial instrument, an interest rate swap, which qualifies as a derivative, as described in Note 9, “Debt” in Part II, Item 8 in this Annual Report on Form 10-K.

We are subject to commodity price risks associated with price increases for chemicals, electricity and other commodities. These risks are reduced through contracts and the ability to recover price increases through rates. Non-performance by our commodity suppliers can have a material adverse impact on our results of operations, cash flows and financial position.

Our exposure to financial market risk results primarily from fluctuations in interest rates. We are exposed to changes in interest rates primarily from our Bank of America revolving credit facility. This revolving credit facility, which includes a total borrowing capacity of $16.0 million, permits us to borrow, re-pay and re-borrow, in varying amounts and from time to time at our discretion through June 30, 2011. We had no borrowings under this revolving credit facility as of December 31, 2010. Borrowings under this credit facility bear interest rates at prime or LIBOR plus 1.2% to 1.7% (based on the results of various financial ratios). The applicable margin as of December 31, 2010 was 1.45%. During 2011, we may utilize a portion of this facility from time to time to fund our short-term cash requirements.

Item 8.		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reports and Financial Statements
Management’s Report on Internal Control Over Financial Reporting			43
Reports of Independent Registered Public Accounting Firm			44
Consolidated Balance Sheets			46
Consolidated Statements of Income			48
Consolidated Statements of Shareholders’ Equity			49
Consolidated Statements of Comprehensive Income			51
Consolidated Statements of Cash Flows			52
Notes to Consolidated Financial Statements
Note 1 Description of Business, Acquisition of Company and Summary of Significant Accounting Policies			54
Note 2 Postretirement Benefit Plans			60
Note 3 Stock-based Compensation Plans			68
Note 4 Commitments and Contingencies			70
Note 5 Business Segment Reporting			74
Note 6 Financial Measurement and Fair Value of Financial Instruments			76
Note 7 Equity Investments in Unconsolidated Companies			77
Note 8 Income Taxes			78
Note 9 Debt			81
Note 10 Shareholder Rights Plan			83
Note 11 Quarterly Financial Data (unaudited)			83

Pennichuck Corporation and Subsidiaries

Management’s Report on Internal Control Over Financial Reporting

Management of Pennichuck Corporation (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that

(1)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the Board of Directors of the Company; and

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In assessing the effectiveness of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. As a result of management’s assessment and based on the criteria in the framework, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, ParenteBeard LLC, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. Their report appears on the following page.

/s/ Duane C. Montopoli		/s/ Thomas C. Leonard
Duane C. Montopoli		Thomas C. Leonard
President and Chief Executive Officer		Senior Vice President and Chief Financial Officer

March 4, 2011

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Pennichuck Corporation

We have audited Pennichuck Corporation’s (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pennichuck Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Pennichuck Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related statements of income, shareholders’ equity, comprehensive income, and cash flows of Pennichuck Corporation, as well as the financial statement schedules listed in the accompanying index, and our report dated March 4, 2011 expressed an unqualified opinion.

Reading, Pennsylvania

March 4, 2011

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Pennichuck Corporation

We have audited the accompanying consolidated balance sheets of Pennichuck Corporation (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pennichuck Corporation as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Pennichuck Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2011 expressed an unqualified opinion.

Reading, Pennsylvania
March 4, 2011

PENNICHUCK CORPORATION AND SUBSIDIARIES

		As of December 31,
		2010				2009
ASSETS
Property, Plant and Equipment, net		$	158,796			$	154,803
Current Assets:
Cash and cash equivalents			2,383				1,570
Accounts receivable, net of allowance of $54 and $53 in 2010 and 2009, respectively			2,153				2,064
Unbilled revenue			2,389				2,287
Materials and supplies			743				727
Deferred and refundable income taxes			717				1,636
Prepaid expenses			1,307				1,170
Total Current Assets			9,692				9,454
Other Assets:
Deferred land costs			2,497				2,474
Deferred charges and other assets			10,502				10,760
Investment in real estate partnership			114				114
Total Other Assets			13,113				13,348
TOTAL ASSETS		$	181,601			$	177,605

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS — CONTINUED
(in thousands, except share data)

		As of December 31,
		2010				2009
SHAREHOLDERS’ EQUITY AND LIABILITIES
Shareholders’ Equity:
Common stock—$1 par value Authorized—11,500,000 shares in 2010 and 2009 Issued— 4,677,105 and 4,652,260 shares, respectively Outstanding— 4,675,903 and 4,651,058 shares, respectively		$	4,677			$	4,652
Additional paid in capital			41,312				40,619
Retained earnings			10,488				10,086
Accumulated other comprehensive loss			(189	)			—
Treasury stock, at cost; 1,202 shares in 2010 and 2009			(138	)			(138	)
Total Shareholders’ Equity			56,150				55,219
Preferred stock, $100 par value, 15,000 shares authorized; and, no par value, 100,000 shares authorized, no shares issued in 2010 and 2009			—				—
Commitments and contingencies (Note 4)
Long-term Debt, Less Current Portion			59,666				54,279
Current Liabilities:
Current portion of long-term debt			1,053				5,897
Accounts payable			1,972				1,104
Accrued interest payable			701				721
Accrued wages and payroll withholding			565				269
Accrued liability — retainage			178				480
Other current liabilities			406				391
Total Current Liabilities			4,875				8,862
Deferred Credits and Other Reserves:
Deferred income taxes			19,180				18,776
Deferred investment tax credits			735				768
Regulatory liability			890				839
Postretirement health benefit obligation			1,708				1,656
Accrued pension liability			4,623				4,031
Other liabilities			1,890				1,549
Total Deferred Credits and Other Reserves			29,026				27,619
Contributions in Aid of Construction			31,884				31,626
TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES		$	181,601			$	177,605

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES

		Years Ended December 31,
		2010				2009				2008
Operating Revenues		$	36,492			$	32,772			$	30,979
Operating Expenses:
Operations and maintenance			18,131				17,108				16,702
Depreciation and amortization			4,237				4,087				4,001
Taxes other than income taxes			4,028				3,585				2,866
Total Operating Expenses			26,396				24,780				23,569
Operating Income			10,096				7,992				7,410
Eminent domain and merger-related costs			(514	)			(499	)			(217	)
Net (loss) earnings from investments accounted for under the equity method			(7	)			(4	)			3,390
Other expense, net			(44	)			(36	)			(110	)
Allowance for funds used during construction			16				149				453
Interest income			2				1				187
Interest expense			(3,369	)			(3,658	)			(3,649	)
Income Before Provision for Income Taxes			6,180				3,945				7,464
Provision for Income Taxes			2,399				1,563				2,743
Net Income		$	3,781			$	2,382			$	4,721
Earnings Per Common Share:
Basic		$	0.81			$	0.56			$	1.11
Diluted		$	0.80			$	0.55			$	1.11
Weighted Average Common Shares Outstanding
Basic			4,660,456				4,274,174				4,240,410
Diluted			4,697,221				4,294,013				4,266,129

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES

																		Accumulated
										Additional								Other
		Common Stock								Paid in				Retained				Comprehensive				Treasury
		Shares				Amount				Capital				Earnings				Income (Loss)				Stock
Balances as of December 31, 2007			4,227,037			$	4,227			$	32,772			$	8,761			$	(57	)		$	(138	)
Net income			—				—				—				4,721				—				—
Dividend reinvestment plan			7,073				7				151				—				—				—
Stock-based compensation			—				—				65				—				—				—
Common dividends declared—$.66 per share			—				—				—				(2,798	)			—				—
Exercise of stock options			19,288				19				104				—				—				—
Other comprehensive loss:
Unrealized loss on derivatives, net of tax benefit of $(70)			—				—				—				—				(105	)			—
Reclassification adjustment for net loss realized in net income, net of tax benefit of $34			—				—				—				—				51				—
Balances as of December 31, 2008			4,253,398				4,253				33,092				10,684				(111	)			(138	)
Net income			—				—				—				2,382				—				—
Common stock offering			387,000				387				7,149				—				—				—
Dividend reinvestment plan			5,793				6				124				—				—				—
Stock-based compensation			—				—				74				—				—				—
Common dividends declared—$.70 per share			—				—				—				(2,980	)			—				—
Exercise of stock options			6,069				6				72				—				—				—
Tax effect of disqualifying dispositions			—				—				108				—				—				—
Other comprehensive income:
Unrealized loss on derivatives, net of tax benefit of $(6)			—				—				—				—				(9	)			—
Reclassification adjustment for net loss realized in net income, net of tax benefit of $80			—				—				—				—				120				—
Balances as of December 31, 2009			4,652,260			$	4,652			$	40,619			$	10,086			$	—			$	(138	)

PENNICHUCK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY — CONTINUED
(in thousands, except share and per share data)

																		Accumulated
										Additional								Other
		Common Stock								Paid in				Retained				Comprehensive				Treasury
		Shares				Amount				Capital				Earnings				Income (Loss)				Stock
Balances as of December 31, 2009			4,652,260			$	4,652			$	40,619			$	10,086			$	—			$	(138	)
Net income			—				—				—				3,781				—				—
Common stock offering			—				—				(6	)			—				—				—
Dividend reinvestment plan			6,521				7				136				—				—				—
Stock-based compensation			—				—				239				—				—				—
Common dividends declared—$.725 per share			—				—				—				(3,379	)			—				—
Exercise of stock options			18,324				18				326				—				—				—
Tax effect of disqualifying dispositions			—				—				(2	)			—				—				—
Other comprehensive income:
Unrealized loss on derivatives, net of tax benefit of $(183)			—				—				—				—				(276	)			—
Reclassification adjustment for net loss realized in net income, net of tax benefit of $58			—				—				—				—				87				—
Balances as of December 31, 2010			4,677,105			$	4,677			$	41,312			$	10,488			$	(189	)		$	(138	)

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES

		Years Ended December 31,
		2010				2009				2008
Net income		$	3,781			$	2,382			$	4,721
Other comprehensive (loss) income:
Unrealized loss on derivatives			(459	)			(15	)			(175	)
Reclassification of net loss realized in net income			145				200				85
Income tax benefit (expense) relating to other comprehensive (loss) income			125				(74	)			36
Other comprehensive (loss) income			(189	)			111				(54	)
Comprehensive income		$	3,592			$	2,493			$	4,667

The accompanying notes are an integral part of these consolidated financial statements.

PENNICHUCK CORPORATION AND SUBSIDIARIES

		Years Ended December 31,
		2010				2009				2008
Operating Activities:
Net income		$	3,781			$	2,382			$	4,721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,459				4,286				4,201
Amortization of original issue discount			12				12				12
Amortization of deferred investment tax credits			(33	)			(33	)			(33	)
Provision for deferred income taxes			2,085				2,012				2,100
Equity component of allowance for funds used during construction			(8	)			(65	)			(190	)
Undistributed loss in real estate partnership			7				4				6
Stock-based compensation expense			239				74				65
Changes in assets and liabilities:
(Increase) decrease in accounts receivable and unbilled revenue			(191	)			732				(421	)
(Increase) decrease in refundable income taxes			(643	)			586				(972	)
(Increase) decrease in materials and supplies			(16	)			162				259
Increase in prepaid expenses			(137	)			(36	)			(223	)
Decrease (increase) in deferred charges and other assets			286				1,829				(1,940	)
Increase (decrease) in accounts payable			868				(222	)			(1,841	)
(Decrease) increase in accrued interest payable			(20	)			(83	)			190
Increase (decrease) in other			775				(1,494	)			2,152
Net cash provided by operating activities			11,464				10,146				8,086
Investing Activities:
Purchase of property, plant and equipment, including debt component of allowance for funds used during construction			(8,507	)			(8,168	)			(14,688	)
Proceeds from sales of property, plant and equipment			50				113				—
Increase in investment in real estate partnership and deferred land costs			(30	)			(21	)			(23	)
Distributions in excess of earnings in investment in real estate partnerships			—				—				414
Net cash used in investing activities		$	(8,487	)		$	(8,076	)		$	(14,297	)