UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]

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

For The Fiscal Year Ended December 31, 2003

OR

[   ]

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.)

Four Water Street

Nashua, New Hampshire 03061

(603) 882-5191

(Address and telephone number of principal executive offices)

___________________

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $1.00 per share

(Title of Class)

Preferred Stock Purchase Rights

(Title of Class)

       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    X          No          

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [X]

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):

Yes                 No    X   

      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, 2003, as reported on the Nasdaq National Market was $59,184,658. 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 25, 2004 was 2,396,340.

DOCUMENTS INCORPORATED BY REFERENCE

      Certain information required for Part III of this report is incorporated by reference to the registrant's definitive Proxy Statement for its 2004 annual meeting of the registrant's shareholders filed with the Commission.

TABLE OF CONTENTS

PART I:

Page

Item 1.

Business

3

Item 2.

Properties

8

Item 3.

Legal Proceedings

10

Item 4.

Submission of Matters to a Vote Of Security Holders

12

PART II:

Item 5.

Market for Registrant's Common Equity and Related Stockholder Matters

13

Item 6.

Selected Financial Data

14

Item 7.

Management's Discussion and Analysis of Financial Condition and Results

15

of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

32

Item 9.

Changes in and Disagreements with Accountants On Accounting and

Financial Disclosure

63

Item 9A.

Controls and Procedures

63

PART III:

Item 10.

Directors and Executive Officers of the Registrant

64

Item 11.

Executive Compensation

64

Item 12.

Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

64

Item 13.

Certain Relationships and Related Transactions

64

Item 14.

Principal Accountant Fees and Services

64

PART IV:

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

65

PART I

Item 1. BUSINESS

Overview

      Pennichuck Corporation (the "Company") is a holding company based in Nashua, New Hampshire. Its principal operating subsidiaries are engaged primarily in the collection, storage, treatment, distribution and sale of potable water throughout southern and central New Hampshire. These subsidiary corporations - Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield"), are each engaged in business as a regulated public utility, subject to the jurisdiction of the New Hampshire Public Utilities Commission (the "NHPUC"). They collectively serve approximately 29,400 residential and commercial and industrial customers. The Company was formed in 1983 following the reorganization of Pennichuck Water Works, which was first established in 1852, into a dedicated water utility. At the same time several tracts of land, formerly held for watershed protection purpo ses, were transferred to The Southwood Corporation ("Southwood"). Southwood is involved in the development of commercial and residential real estate. The Company also conducts non-regulated, water-related management services and contract operations through another subsidiary, Pennichuck Water Service Corporation (the "Service Corporation").

Our Water Business

      Pennichuck is franchised by the NHPUC to gather and distribute water in the City of Nashua, New Hampshire and in portions of the towns of Amherst, Bedford, Derry, Epping, Hollis, Merrimack, Milford and Plaistow, New Hampshire. Pennichuck has transmission mains which directly interconnect its core system in Nashua with the surrounding towns of Amherst, Hudson, Merrimack and Milford. Its core system, which services nearly 22,100 customers, accounts for 95% of Pennichuck's revenues. Its franchises in the remaining towns consist of stand-alone satellite water systems serving over 2,100 customers. Pennichuck has no competition in its core franchise area. Currently, approximately 25% of its water revenues are derived from commercial and industrial customers and approximately 57% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford. Pennichuck's annual water revenues were approximately $14.75 million for calendar year 2003.

      Pennichuck East was organized in 1998 to acquire certain water utility assets from the Town of Hudson, New Hampshire ("Hudson"), following its acquisition of those assets from an investor-owned water utility which previously served Hudson and surrounding communities. Pennichuck East is franchised to gather and distribute water in the New Hampshire towns of Litchfield, Pelham, Windham, Londonderry, Derry, Raymond and Hooksett, which are areas adjacent to the service franchise served by Pennichuck. Pennichuck East has no competition in its core franchise area. The water utility assets owned by Pennichuck East consist principally of water transmission and distribution mains, hydrants, wells, pump stations and pumping equipment, water services and meters, easements and certain tracts of land. Pennichuck East serves approximately 4,450 customers and annual water revenues were approximately $2.98 million for calendar year 2003.

      Pittsfield was acquired by the Company in 1998 and serves approximately 640 customers in and around Pittsfield, New Hampshire with annual water revenues of approximately $447,000. Pittsfield has no competition in its franchise area.

Regulation

      The Company's water utilities are regulated by the NHPUC with respect to their water rates, financings and provision of service. New Hampshire law provides that utilities are entitled to charge rates which permit them to earn a reasonable return on the cost of the property employed in serving its customers, less accrued depreciation, contributed capital and deferred income taxes ("Rate Base"). The cost of capital permanently employed by a utility in its utility business marks the minimum rate of return which a utility is lawfully entitled to earn on its Rate Base. Pennichuck's water rates that were in effect during 2003 were based on a March 2002 NHPUC order in which Pennichuck was granted an overall permanent rate increase of 14.43% based on an overall rate of return of 8.58% and an approved rate base of approximately $43.1 million. Pennichuck East is authorized an overall rate of return of 8.37% on an approved rate base of approximately $7.5 million. P ittsfield is authorized an overall rate of return of 8.42% on an approved rate base of approximately $1.6 million.

      The Company's water utilities are subject to the water quality regulations issued by the United States Environmental Protection Agency ("USEPA") and the New Hampshire Department of Environmental Services ("NHDES"). The USEPA is required to periodically set new maximum contaminant levels for certain chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The quality of the Company's water utilities' treated water currently meets or exceeds all current standards set by the USEPA and the NHDES.

      Pennichuck's filtration plant in Nashua is impacted by the Interim Enhanced Surface Water Treatment Rule ("IESWTR") which established a new turbidity standard of 0.3 NTU. Pennichuck will complete its evaluation of alternatives to meet the new IESWTR turbidity standard and it expects to determine what modifications will be required to its filtration plant by the end of March 2004.

      Two of Pennichuck's small community water systems have wells that produce water with arsenic levels in excess of the new standard of 10 ppb. It will be necessary for Pennichuck to install arsenic treatment systems at these locations. Pennichuck's and Pennichuck East's remaining community water systems have wells that produce water meeting the new arsenic standard.

      Capital expenditures associated with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in our utilities' water rates.

Contract and Real Estate Operations

      The Company formed the Service Corporation to conduct its non-regulated, water-related activities. Its activities initially included providing contract operations and maintenance, water testing and billing services to municipalities. In 1998, the Service Corporation entered into a long-term agreement with the Town of Hudson to provide operations and maintenance contract services to the town with respect to the water utility assets it acquired from an investor-owned water utility. In September 2001, the Service Corporation also entered into a long-term agreement with the Town of Salisbury, Massachusetts to perform similar operations and maintenance services.

      The NHDES has mandated water quality standards for non-transient, non-community water systems ("NTNCWS") - 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 NTNCWS in New Hampshire which will require the services of a certified water operator, such as the Service Corporation, in order to meet the mandates of the NHDES. Accordingly, the Service Corporation is actively pursuing new contracts under which it would serve as a certified water operator and provide

various water-related monitoring, maintenance, testing and compliance reporting services for these systems in New Hampshire. During 2003, the Service Corporation provided such services pursuant to 67 operating contracts.

      Southwood, the Company's real estate subsidiary, was organized for the purpose of owning, developing, selling and managing approximately 1,088 acres of undeveloped land in Nashua and Merrimack, New Hampshire formerly owned by Pennichuck Water Works for watershed protection purposes.

      Since 1988, Southwood has been involved in the planning and development of Southwood Corporate Park, a 65-acre commercially zoned land parcel located in Nashua, New Hampshire. From 1988 through 2001, Southwood sold four lots totaling 25 acres in the Corporate Park. In January 2002, Southwood sold the remaining 40 acres to Winstanley Enterprises, Inc. ("Winstanley"), a regional real estate developer, under the terms of an option agreement between Southwood and Winstanley. Under that 1995 agreement, Winstanley paid to Southwood an option fee each year equal to the annual carrying costs associated with that land.

      In September 1997, Southwood and Winstanley formed Westwood Park LLC ("Westwood") to develop a 404-acre tract of land in northwest Nashua zoned for park-industrial use. Southwood conveyed the land to Westwood in exchange for a 60% interest in Westwood. Since 1997, Westwood has sold four parcels totaling approximately 364 acres to third parties, leaving a balance of approximately 40 acres which are restricted in use for future groundwater supplies.

      Southwood holds a 50% ownership interest in HECOP I, LLC, HECOP II, LLC and HECOP III, LLC, which are limited liability corporations formed to construct and own a 39,000 square foot, a 42,000 square foot and a 66,000 square foot office building, respectively, located in Merrimack, New Hampshire. As of December 31, 2003, approximately 121,000 square feet had been leased to third parties under long-term lease agreements. Southwood also holds a 50% ownership interest in HECOP IV, LLC formed in May 2002. As of December 31, 2003, HECOP IV's principal asset was approximately 9.1 acres of raw land available for future commercial development. The remaining 50% ownership interest in each of these four LLC's is held by John Stabile, a local developer, with whom Southwood has participated in four residential joint ventures during the past 10 years.

      In July 1998, Southwood entered into a joint venture known as Heron Cove at Bowers Pond LLC ("Heron Cove") for the development of an 87 unit, single-family community located in Merrimack, New Hampshire. Under the terms of the joint venture agreement, Southwood conveyed the related land parcel to Heron Cove in exchange for a non-interest bearing note secured by a second mortgage on the real estate conveyed. Southwood holds a 50% ownership interest in this joint venture. The remaining 50% ownership interest is held by John Stabile, a local developer. As of December 31, 2001, all 87 units had been constructed and sold to third parties and this LLC was closed out in 2002.

Financial Information About Industry Segments

      The business segment data of the Company and its subsidiaries for the latest three years is presented in "Note 12 - Business Segment Information" in the accompanying Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K Report.

Employees

      The Company, through its principal subsidiary Pennichuck, employs 82 permanent, full-time employees and officers. Of these, there are 43 management and clerical employees who are non-union. The remaining employees are members of the United Steelworkers Union. The current union contract, which was re-negotiated in February 2002, expires in February 2007. In the opinion of management, employee relations are satisfactory.

Additional Information

      The Company's Internet address is www.pennichuck.com. The Company's web site provides a hyperlink to a third party web site through which the Company's annual, quarterly and current reports, and amendments to those reports, are available free of charge. The Company believes these reports are made available as soon as reasonably practicable after it electronically files them with, or furnishes them to, the Securities and Exchange Commission ("SEC"). The Company does not maintain or provide any information directly to the third-party web site, and does not check its accuracy. The public can also obtain access to such reports at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC's web site which is www.sec.gov.

RISK FACTORS

Risks Related to the Company's Business

      The City of Nashua's use of the power of eminent domain to acquire certain of the water utility assets of the Company may result in material, adverse consequences to the Company and its shareholders.

      The Company is involved in ongoing proceedings with the City of Nashua (the "City") regarding the City's desire to acquire all or a portion of the Company's water utility assets. The City has determined to pursue such acquisition pursuant to its power of eminent domain. Separately, several other communities whose residents are served by one or more of the Company's subsidiaries have expressed interest in forming a regional water authority for the purposes of acquiring and operating a substantial portion of the Company's water related assets. The acquisition of Company assets by eminent domain would be highly uncertain and likely involve protracted proceedings before the New Hampshire Public Utilities Commission ("NHPUC"). The Company's shareholders are not required to ratify or approve any such forced sale of assets, or the price thereof, if so approved by the NHPUC. Given the highly integrated nature of the Company's businesses, a forced sale of some or all of the Company's water related assets may result in increased costs and operating inefficiencies borne by the remaining assets of the Company not so acquired. Additionally, the Service Corporation's ability to service its existing contracts as well as pursue additional operating contracts may be impaired. There is no assurance that the City or a regional water authority, if any, would be successful in acquiring some or all of the Company's assets by eminent domain, nor in such case is there any assurance as to the price determined by the NHPUC to be paid for those assets.

Risks Related to Water Business

      The Company's main source of revenues and earnings is its water utility operations. The water supply and distribution industry is subject to regulations and uncertainties which affect the Company and its financial operations in varying degrees.

Rate Regulation. The Company's water utility subsidiaries, Pennichuck, Pennichuck East and Pittsfield are regulated by the NHPUC with respect to the rates we charge our customers for water and the amount of our capital and debt financing. The profitability of our water operations is largely dependent on the timeliness and adequacy of rate relief allowed by the NHPUC.

Regulatory Lag. The NHPUC generally provides our water utilities with the opportunity to earn a rate of return on our capital invested in property used to serve our customers. However, a delay, known as "regulatory lag," normally occurs between the time capital is invested and the effective date of increased water rates, which reflect that investment.

Water Quality Concerns; Changes in Regulatory Standards. Water utility companies are always subject to certain water quality risks related to environmental contamination. Our water systems have water treatment and alternate water source and storage facilities available as short-term sources of supply in the event of contamination of one of our water sources. While our treated water currently meets or exceeds all standards set by federal and state authorities, it is possible that new or stricter standards could be imposed that will raise our operating costs significantly. Although these costs would likely be recovered in the form of higher rates, there can be no assurance that the NHPUC would approve a rate increase to recover such costs.

Dam Safety. Pennichuck initiated an engineering study of two of its eight dams in 2002. The two dams being studied, the Supply and Harris Pond dams, were the last ones remaining to be studied to insure that the dams, crucial to the operation of Pennichuck, meet all current dam safety standards. The results of the completed study indicated that certain upgrades to the dams' spillways and earthen embankments were required in order to meet current NHDES and Federal standards. The engineering plans and permitting were completed in the fall of 2003 and the required construction will be completed in 2004. The estimated cost of the required dam repairs and upgrades will be about $950,000.

      The proposed dam and repair upgrade time frame has been accepted by the NHDES. Pennichuck could face adverse regulatory actions in the event it is unable to remedy the dam deficiencies within this time period.

Threats to Nation's Health and Security. Water utility companies have generally been on a heightened state of alert since the threats to the nation's health and security in the fall of 2001. The USEPA recently issued a set of instructions to describe what community water systems must do to comply with the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. The Act requires all community drinking water systems that serve more than 3,300 people to certify and submit assessments to the EPA no later than June 2004. We have taken steps to increase security at our water utility facilities, heightened employee awareness of threats to our water supplies, and added security measures regarding the delivery and handling of certain chemicals used in our business. We are not aware of any specific threats to our water utility businesses or other operations.

Impact of Weather and Seasonal Demands. The demand for our water and our revenues is impacted by weather and is seasonal in nature. Normally, our most profitable quarters are the second and third calendar year quarters due to increased water consumption during the late spring and summer months. Demand is normally lower during cool, wet springs and summers than it is during warm, hot springs and summers.

Dependence on Certain Industrial Customers. Approximately $3.66 million of our operating revenues are derived from commercial and industrial customers. Pennichuck's largest water customer, Anheuser

Busch ("AB"), was responsible for about 16.1% of its demand in 2003. In the short term, our profitability would be adversely impacted were AB to significantly reduce its water requirements in the future or if our other commercial and industrial customers materially reduce their use of our water.

      Pennichuck and AB have entered into a ten-year contract that provides the terms and conditions under which AB receives service from Pennichuck. The contract provides for a supply of up to 2 million gallons per day for the AB plant in Merrimack, New Hampshire. AB pays a cost-of-service based rate that is approximately 52% of the retail volumetric rate. The contract contains a "minimum payment obligation" clause that requires AB to pay, each year, at least 90% of the volumetric charges of the prior year. The contract provides that, should AB opt for early termination, there is a minimum annual charge to AB of 90%, 66.67% and 33.3% in the first, second and third year following the year of notification of early termination, respectively, based on the annual charge in the year of notification. In such case, we would seek the approval of the NHPUC to increase the rates of our remaining customers to recover any lost revenues from the loss of such a major indust rial customer. Any increase in our rates and improvement in our profitability from a loss of a major customer could take at least 12 months to realize, an example of regulatory lag. In addition, there can be no assurance that the NHPUC would approve such a rate increase request.

Risks Related to Real Estate Business

Development Risks. Southwood, our real estate subsidiary, is the owner of several tracts of land located in southern New Hampshire which are planned for development. The demand and prices for Southwood's real estate are dependent upon interest rates and construction costs as well as general economic conditions.

Carrying Costs. Real estate assets are subject to ongoing maintenance costs and property taxes. Reductions in demand for our properties may cause us to continue to incur operating costs without any offsetting income.

Building Vacancies. Southwood has a 50% ownership interest in three separate joint ventures owning commercial office buildings located in Merrimack, New Hampshire. Southwood's share of the net operating income from leases associated with those buildings could be adversely impacted by a downturn in the local economy and commercial real estate market.

Item 2. PROPERTIES

Office Buildings

      The Company owns and occupies a three story, 11,616 square foot building located in downtown Nashua, New Hampshire. It also owns a separate building in Nashua which serves as an operations center and storage facility for its construction and maintenance activities. Except as noted in "Note 3- Debt" in the accompanying Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K Report, there are no mortgages or encumbrances on our properties.

Water Supply Facilities

      Pennichuck's principal properties are located in Nashua, New Hampshire, with the exception of several source-of-supply land tracts which are located in the neighboring towns of Amherst, Merrimack

and Hollis, New Hampshire. In addition, Pennichuck owns four impounding dams which are situated on the Nashua and Merrimack border.

      The location and general character of Pennichuck's principal plant and other materially important physical properties are as follows:

      1.    Holt Pond, Bowers Pond, Harris Pond and Supply Pond and related impounding dams comprise the chief source of water supply in Nashua, New Hampshire.

      2.    An Infilco Degremont treatment plant using physical chemical removal of suspended solids and sand and carbon filtration with a rated capacity of 35 million gallons per day, located in Nashua, New Hampshire.

      3.    A water intake plant and pumping facility located on the Merrimack River in Merrimack, New Hampshire. Pennichuck has a permit from the Army Corps of Engineers to withdraw up to 30 million gallons per day of water from the Merrimack River at this intake. The existing pumps are capable of providing up to 16.2 million gallons per day. This supplemental water supply provides an additional source of water during dry summer periods and will provide a long-term supply for Pennichuck's service area.

      4.    Approximately 672 acres of land located in Nashua and Merrimack which are owned and held for watershed and reservoir purposes.

      5.    Eleven water storage reservoirs having a total storage capacity of 20.7 million gallons, six of which are located in Nashua, two in Amherst, one in Bedford, one in Derry and one in Hollis, New Hampshire.

      The source of supply for Pennichuck East is a well system owned by the Town of Hudson in Litchfield, New Hampshire, purchased water from the Manchester Water Works or individual bedrock wells. Pennichuck East has entered into long-term water supply agreements to obtain water from Hudson and Manchester Water Works.

      The Pittsfield Aqueduct Company owns the land surrounding Berry Pond and it treats the water from this Pond through a .5 mgd water filtration plant located in Pittsfield, New Hampshire. Berry Pond serves as the sole source of supply for Pittsfield.

Water Distribution Facilities

      The distribution facilities of the Company's regulated water companies consist of, among other assets, the following:

Pennichuck

Pennichuck

East

Pittsfield

Transmission & distribution mains (in miles)

     412

   119

  13

Services

23,670

4,597

635

Meters

23,952

4,352

681

Hydrants

  2,287

   403

  66

Land Held for Future Development

      Following Pennichuck Water Works' reorganization in 1984 into a holding company structure, the Company transferred 402 acres of previously designated watershed protection land to Pennichuck and approximately 1,088 acres of buffer and alternate use land were transferred to Southwood. Since 1984, Southwood has sold or transferred approximately 836 acres of land to third parties or to participating joint ventures.

      Based on vegetation, topographical, wetland and hydrological studies, the Company and Southwood have designated their remaining 525 acres into buffer (non-developable) and alternate use (developable) designations, resulting in an approximate breakout of 283 and 242 acres, respectively. Of the approximately 242 acres of alternate use land, 36 acres are located primarily in the northwestern section of the City of Nashua, New Hampshire and 206 acres are located in the western and southerly portions of the town of Merrimack, New Hampshire. The following table summarizes the currently approved zoning for alternate use land at December 31, 2003:

Nashua, NH

Merrimack, NH

Total

Residential

36

101

137

Industrial

--

105

105

Total Alternate Use Acreage

36

206

242

      The Company's and Southwood's landholdings in Nashua and Merrimack are classified under "Current Use" status, resulting in an assessment that is based on the property's actual use and not its highest or best use.

Item 3. LEGAL PROCEEDINGS

Regulatory Investigation

      The Company is the subject of an investigation by the New Hampshire Bureau of Securities Regulation (the "Bureau") and the Securities and Exchange Commission (the "SEC"). The scope of the investigation relates generally to the Company's commercialization of real estate through joint ventures involving its Southwood Corporation subsidiary and, in particular, to certain of the Company's public disclosures regarding various joint venture transactions. Specifically, the Bureau and the SEC have alleged that in Note A to the Company's 1998 financial statements, which were included in the Company's annual report to shareholders and incorporated into its Annual Report on Form 10-KSB, the Company improperly disclosed the purchase of a home by Maurice L. Arel, the Company's former President who is also a target of the investigation, from one of the Company's real estate joint ventures as being "on the same terms which would be given to any independent third-party" . In fact, the purchase was not made on such terms, and the Company believes that Mr. Arel received a benefit in the range of $50,000 to $75,000 in connection with the purchase.

      In addition, the Bureau and the SEC have alleged that the Company failed to properly disclose payments from the Company's real estate joint ventures to a landscaping company with which one of Mr. Arel's sons was involved. During the seven-year period from 1996 to 2002, six of the Company's joint ventures engaged for various landscaping projects a company with which one of Mr. Arel's sons was involved. The joint ventures' payments to that landscaping company totaled approximately $517,600 during that period. In three of those years, the aggregate payments for the year exceeded $60,000. In

1999, the joint ventures paid the landscaping company a total of $259,000, the greatest amount that the joint ventures paid to the landscaping company during a single year.

      The regulators have also alleged that the Company failed to disclose the fact that nearly all of its real estate joint ventures had been formed with the same developer, and that the Company did not exercise proper oversight of the activities of those various joint ventures, including by failure to obtain or to keep adequate records, including copies of financial records, contracts, correspondence or other material information.

      The Company's board of directors retained legal counsel to conduct an independent review of the allegations, under the direction of the Company's Audit Committee, and instructed the Company's executive officers and counsel to cooperate fully with the investigation by the Bureau and the SEC. That independent review is now substantially complete and the Company's counsel has briefed the regulators on the board's findings. In addition, and as a result of the independent review, Mr. Arel's employment with the Company and its subsidiaries was terminated in early May 2003.

      The Bureau and the SEC could seek to impose fines, penalties or other sanctions upon the Company as a result of their respective investigations. In November 2003, the Bureau and the SEC indicated a willingness to consider a global settlement of their claims against the Company and against Mr. Arel. Although no agreement or understanding has been reached, the framework of the settlement that is under consideration would consist of a fund to be established for the benefit of the Company's shareholders, a fine to be paid to the Bureau, and a payment to the Bureau to defray its expenses. In addition to the negotiations with the Bureau and the SEC regarding the proposed settlement, the Company is also engaged in negotiations with Mr. Arel as to what portion, if any, of the settlement amounts he would be responsible for paying. There can be no assurance that a settlement agreement with the regulators and Mr. Arel will in fact be reached.

Municipalization Efforts

      The City of Nashua (the "City") formally notified the Company's utility subsidiaries on February 5, 2003 of its intention to acquire all or a portion of their plant and property. The notification letters from the City stated that the City was acting pursuant to New Hampshire's utility municipalization statute. On March 25, 2003, the Company's three utilities notified the City of their decision not to sell their plant and property. Under New Hampshire statutes, a municipality may seek the NHPUC's authorization to compel the sale of utility assets through an eminent domain proceeding if the utility does not agree to sell the assets voluntarily. By letter dated March 26, 2003, the City indicated its intent to pursue such an eminent domain proceeding. The City and the Company have had discussions since that time regarding the City's desire to acquire the Company's assets, the particular assets that the City is interested in acquiring and the price that the C ity would be willing to pay for those assets.

      On April 8, 2003, the Town of Pittsfield formally notified Pittsfield Aqueduct Company, Inc. that it wished to acquire the plant and property of that company. The letter indicated that the Town was providing its notification pursuant to the New Hampshire utility municipalization statute. By letter dated May 28, 2003, Pittsfield Aqueduct Company, Inc. notified the Town of Pittsfield of its decision not to sell its plant and property. To date, the Town of Pittsfield has not commenced an eminent domain proceeding at the NHPUC.

      On March 25, 2004, the City filed a petition for valuation pursuant to New Hampshire RSA 38:9 with the NHPUC. That petition asks the NHPUC to order a determination of the fair market value of the assets of Pennichuck, Pennichuck East and Pittsfield and to allow

the City to acquire these assets. It is not certain whether the City will ultimately choose to complete the acquisition of any portion of the property of the Company's utility subsidiairies even if the NHPUC ultimately approves such an acquisition and establishes a price for it.

Other Proceedings

      The Company and its subsidiaries are not otherwise involved in any material litigation or other proceedings which, in management's opinion, would have an adverse effect on the business, the consolidated financial condition or the operating results of the Company and its subsidiaries.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      During the fourth quarter of the fiscal year covered by this Report, no matters were submitted to a vote of security holders.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's Common Stock is quoted on the Nasdaq National Market System ("NMS") under the symbol "PNNW." On December 31, 2003, there were approximately 700 holders of record of the 2,396,140 shares of the Company's Common Stock outstanding.

      The following table sets forth the comparative market prices per share of the Company's Common Stock based on the high and low closing sales prices as reported on the Nasdaq NMS during the applicable periods and the dividends declared by the Company during those periods. All stock information has been adjusted to reflect the four-for-three stock split effected December 3, 2001.

Dividends

Period

High

Low

Declared

2003:

Fourth Quarter

$28.73

$23.90

$.215

Third Quarter

  26.91

  24.06

  .215

Second Quarter

  25.44

  21.75

  .215

First Quarter

  28.48

  21.01

  .195

2002:

Fourth Quarter

$29.58

$27.10

$.195

Third Quarter

  28.34

  23.65

.228

(1)

Second Quarter

  31.54

  24.55

  .195

First Quarter

  26.44

  24.21

  .195

(1)

Includes a special one-time dividend of $.033 per share.

      Certain bond and note agreements involving the Company's subsidiary, Pennichuck Water Works, Inc. ("Pennichuck"), require, among other things, restrictions on the payment or declaration of dividends by Pennichuck to the Company. Under Pennichuck's most restrictive covenant, approximately $4.38 million of its retained earnings was unrestricted for payment or declaration of common dividends to the Company at December 31, 2003. See Note 3 of the accompanying Notes to Consolidated Financial Statements for further discussion regarding this and other debt covenants.

Securities Authorized for Issuance Under Equity Compensation Plans

      The following table summarizes information, as of December 31, 2003, relating to the equity compensation plans of the Company pursuant to which equity securities of the Company are authorized for issuance.

EQUITY COMPENSATION PLAN INFORMATION

Number of securities

remaining available

for future issuance

Number of securities to

Weighted-average

under equity

be issued upon exercise

exercise price of

compensation plans

of outstanding options,

outstanding options,

(excluding securities

warrants and rights

warrants and rights

reflected in column (a))

Plan category

(a)

(b)

(c)

Equity compensation

plans approved by

security holders (1)

109,838

$23.04

141,501

Equity compensation

plans not approved by

No express number

security holders (2)

-0-

-

set by plan (2)

Total

109,838

$23.04

141,501

___________________________

(1)

These plans are the Company's 1995 Stock Option Plan and the 2000 Stock Option Plan.

(2)

The Company adopted a Deferred Compensation Program for Directors of Pennichuck Corporation in 1987, as amended in 1997 (the "Plan"). The Plan enables directors to defer receipt of all or part of their annual retainer and meeting fees until the individual ceases to be a director or upon age 70, if earlier. Participating directors under the plan have the option of (1) deferring receipt of such fees, with interest accruing thereon based on the Company's average cost of money for its short term borrowings, or (2) converting such fees on a semi-annual basis into common share equivalents based on the closing bid price of the Company's common stock on the conversion date, with dividends credited to the participant on such unit share equivalents and similarly converted into additional common share equivalents. Upon termination of the deferral period, participating directors receive a distribution consisting either of the full amount of cash and interest accrued to his/her account or shares of res tricted common stock of the Company equal to the number of unit share equivalents so accumulated. No directors are presently participating in this Plan. The plan does not provide for a maximum number of shares of common stock that may be issued under the Plan.

Item 6. SELECTED FINANCIAL DATA

2003

2002

2001

2000

1999

Operating revenues

(in $000's)

$21,388

$23,422

$22,754

$23,671

$17,809

Net income (in $000's)

$1,247

$2,341

$3,612

$3,683

$2,616

Earnings per share - basic

$.52

$.98

$1.52

$1.56

$1.12

Cash dividends declared per

share of common stock

$0.84

$0.813

(1)

$0.76

$0.73

$0.69

Total assets (in $000's)

$97,210

$90,982

$87,630

$82,880

$75,581

Long-term debt (in $000's)

$27,247

$27,214

$27,420

$27,237

$28,266

___________________________

(1)

Includes a one-time special dividend of $0.33 per share

      Prior year per share amounts have been restated to reflect the four-for-three stock split in December 2001.

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

Introduction

      Pennichuck Corporation (the "Company") has five wholly-owned subsidiaries. Pennichuck Water Works, Inc. ("Pennichuck"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield") are involved in water supply and distribution in cities and towns throughout southern and central New Hampshire. These water subsidiaries are regulated by the New Hampshire Public Utilities Commission ("NHPUC") and, as such, they must obtain approval to increase their water rates to recover increases in operating expenses and to obtain the opportunity to earn a return on rate base investments. Pennichuck Water Service Corporation (the "Service Corporation") is involved in non-regulated, water-related services and contract operations and The Southwood Corporation ("Southwood") owns, manages, develops, and sells real estate, principally through real estate joint ventures.

      As you read Management's Discussion and Analysis, please refer to the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements and Selected Financial Data contained in this Report.

Forward-Looking Statements

      In addition to the historical financial information, this report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current information and expectations available to management at the time the statements are made and on several assumptions concerning future events that involve risks, uncertainties and factors which may be beyond the Company's control. As such, the actual performance of the Company may be materially different from the future results or performance implied by the forward-looking statements contained in this report. Such factors include, among other things, whether eminent domain proceedings are commenced against some or all of the Company's water utility assets, the success of pending applications for rate increases, changes in governmental regulations, changes in the economic and bu siness environment that may impact demand for the Company's water and real estate products, changes in capital requirements that may affect the Company's level of capital expenditures, changes in business strategy or plans and unusual changes in weather conditions that impact water consumption. Accordingly, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Eminent Domain

      The Company is the subject of eminent domain efforts by the City of Nashua (the "City") and the Town of Pittsfield (the "Town") regarding their desire to acquire all or a portion of the Company's water utility assets. In addition, a number of other communities whose residents are served by one or more of the Company's subsidiaries have expressed interest in forming a regional water authority for the purposes

of acquiring and operating a substantial portion of the Company's water related assets. The acquisition of Company assets by eminent domain would be highly uncertain and likely involve protracted proceedings before the New Hampshire Public Utilities Commission ("NHPUC"). The Company's shareholders are not required to ratify or approve any such forced sale of assets, or the price thereof, if so approved by the NHPUC.

      Given the highly integrated nature of the Company's businesses, a forced sale of some or all of the Company's water related assets may result in increased costs and operating inefficiencies borne by the remaining assets of the Company not so acquired. Additionally, the Service Corporation's ability to service its existing contracts as well as pursue additional operating contracts may be impaired. There is no assurance that the City of Nashua or a regional water authority, if any, would be successful in acquiring some or all of the Company's assets by eminent domain, nor in such case is there any assurance as to the price determined by the NHPUC to be paid for those assets. The status of these eminent domain efforts is discussed in greater detail in Note 9 to the Notes to Consolidated Financial Statements.

      On February 4, 2004, the Company filed a Petition for Declaratory Judgment against the City, seeking a determination by the New Hampshire Superior Court that, among other things, the State utility municipalization statute is unconstitutional and the City has failed to commence eminent domain proceedings at the NHPUC in a timely fashion and therefore is barred from continuing the current utility municipalization process against the Company.

Terminated Merger With Philadelphia Suburban Corporation

      On April 29, 2002, the Company entered into a definitive agreement with Philadelphia Suburban Corporation ("PSC") to merge into a wholly-owned subsidiary of PSC with shareholders of the Company receiving shares of PSC in the merger. Total expenses associated with the PSC merger transaction were approximately $231,000 and $1,946,000 for the twelve months ended December 31, 2003 and 2002, respectively. As discussed in Note 9 to the Notes to the Consolidated Financial Statements, the Company and PSC mutually decided to terminate the merger agreement on February 4, 2003 following a January 14, 2003 referendum by the City of Nashua, New Hampshire. The referendum authorized the City to pursue the acquisition, by an eminent domain proceeding or otherwise, of all or a portion of the Company's water works systems serving the residents of Nashua and other communities in which the Company's three regulated utilities operate.

Results of Operations

      In this section, we discuss our 2003, 2002 and 2001 results of operations and the factors affecting them. The Company's operating activities, as discussed in greater detail in Note 12 to the Notes to Consolidated Financial Statements, are grouped into three primary business segments as follows:

Water utility operations - Involved in the collection, treatment and distribution of potable water for domestic, industrial, commercial and fire protection service in the City of Nashua and certain surrounding communities in southern and central New Hampshire.

Real estate - Involved in the ownership, development, management and sale of industrial and residential property in Nashua and Merrimack, New Hampshire.

Contract operations - Includes the contract operations and laboratory testing activities of the Service Corporation.

      Our consolidated revenues tend to be significantly affected by weather conditions experienced throughout the year and by sales of major real estate parcels which may occur from time to time. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for non-essential usage by our customers during the late spring and summer months.

Results of Operations - 2003 Compared to 2002

      For the year ended December 31, 2003, the Company's consolidated net income was $1.25 million, compared to net income of $2.34 million in 2002, a decrease of nearly 47%. On a per share basis, basic income per share was $.52 for the twelve months ended December 31, 2003, a $.46 per share decrease from last year. This decrease in consolidated net income was due to, among other things, approximately $1.11 million in expenses incurred during 2003 relating to the terminated merger with PSC, the pending regulatory investigations and the eminent domain issue with the City as discussed herein. Excluding the effect of those expenses in 2003 and 2002, consolidated net income was $2.02 million, or $.84 per share and $3.53 million, or $1.48 per share, respectively. Further contributing to this decrease in net income was an 8.7% decrease in consolidated revenues primarily from a decline in both the Company's regulated water and real estate businesses.

Water Utility Operations

      On a combined basis, net income of our three utilities in calendar year 2003 was approximately $1.32 million, a decrease of $1.21 million from 2002 principally due to lower than normal water consumption experienced in the third quarter of 2003 and an increase in distribution, production and administrative costs as discussed below.

      Utility operating revenues for 2003 decreased to $18.68 million, or less than 1% from 2002. For 2003, approximately 82%, 16% and 2% of our total utility operating revenues were generated by Pennichuck, Pennichuck East and Pittsfield, respectively, as shown in the following table.

2003

2002

Change

Pennichuck

$15,254,000

$15,344,000

$  (90,000)

Pennichuck East

2,979,000

3,098,000

(119,000)

Pittsfield

447,000

388,000

59,000 

Total

$18,680,000

$18,830,000

$(150,000)

      The overall decline in water revenues reflects the greater level of precipitation experienced in the regions served by our water utilities during the third quarter of 2003 over the third quarter of 2002. Total rainfall in the third quarter of 2003 was nearly 14 inches compared to only 7.3 inches in the third quarter of 2002. As a result, the combined billed consumption of our three utilities declined by 2.9% from 2002. However, that negative impact on water revenues was partially offset by the positive effect of (i) a 5.76% rate increase approved by the NHPUC and implemented by Pennichuck in April 2002 and (ii) a 2.0% increase in customers over 2002, resulting in a total combined customer base of approximately 29,400 as of December 31, 2003.

      In May 2003, Pittsfield filed a Notice of Intent to File for Rate Relief in which it sought an increase in its annual revenues. That rate case was concluded in December 2003 and in January 2004 the NHPUC granted an increase of 17.7%, representing additional annual revenues of approximately $73,000. This rate increase is effective for water bills rendered on and after January 1, 2004.

      By late March or early April 2004, Pennichuck intends to file a Notice of Intent to File for Rate Relief in which it will be seeking a 9.7% rate increase for temporary rate relief effective on or about June 1, 2004 and an additional increase in its permanent rates effective on or about December 1, 2004. It is not certain whether or not this rate case will be concluded by the end of 2004 or the amount of rate increase which will ultimately be granted by the NHPUC, if any.

      For the year ended December 31, 2003, utility operating expenses increased by $1.78 million, or 13.9%, to $14.57 million as shown in the table below.

2003

2002

Change

Operations & maintenance

$  9,406,000

$  8,057,000

$1,349,000

Depreciation & amortization

2,843,000

2,639,000

204,000

Taxes other than income taxes

2,318,000

2,089,000

229,000

Total

$14,567,000

$12,785,000

$1,782,000

      The operations and maintenance expenses of our water utility business include such categories as:

*

water supply, treatment, purification and pumping,

*

transmission and distribution system functions, including repairs and maintenance and meter reading, and

*

customer service and general and administrative functions.

      The combined increase in our utilities' operating expenses over 2002 was chiefly the result of the following:

*

$240,000 of increased purification and treatment costs in our core Pennichuck system reflecting higher purchased water, power, chemical and labor costs;

*

an increase of approximately $150,000 in distribution system expenses as a result of colder temperatures experienced in the first quarter of 2003 and the utilities' comprehensive system-wide flushing program undertaken in the second and third quarters of 2003 as well as increased labor costs;

*

$800,000 of increased general and administrative costs primarily relating to costs for employee benefits, property and casualty insurance and administrative salaries;

*

Recognition of approximately $244,000 in additional depreciation and amortization charges resulting from approximately $18.6 million of new capital investment over the past three years;

*

an increase in local and state property taxes totaling $209,000 as a result of additional taxable assets placed in service within the utilities' franchise areas during the past year and a $115,000 tax abatement recorded in the third quarter of 2002 from the State of New Hampshire.

      These increased costs are expected to be embedded in the utilities' future cost of providing water service. As such, our utilities will to continue to seek future rate relief to recover these increasing costs.

      For calendar year 2003, 83%, 14% and 3% of the combined utilities' operating income was provided by Pennichuck, Pennichuck East and Pittsfield, respectively, which was comparable to 2002.

Real Estate Operations

      For the year ended December 31, 2003, revenues from Southwood's real estate activities were $949,000 compared to $3,088,000 in 2002. In the table below, we show the major components of real estate revenues during 2003 and 2002.

2003

2002

Land sales:

    Southwood Corporate Park

-

$2,427,000

    Folsom Property

$257,000

-

    HECOP IV

-

168,000

Westwood Park LLC

150,000

--

Other

125,000

179,000

532,000

2,774,000

Income from unconsolidated equity investments

417,000

314,000

    Total

$949,000

$3,088,000

      As shown above, the decrease in our real estate revenues resulted principally from the sale of approximately 40 acres in Southwood Corporate Park in January 2002 to Winstanley Enterprises Inc. ("Winstanley") under the terms of a 1995 option agreement between Southwood and Winstanley.

      In January 2003, Southwood sold a 67 acre parcel of unimproved land located in Merrimack, New Hampshire to the Folsom Development Corporation for approximately $1.5 million. Under the terms of that sale, Southwood received approximately $257,000 in cash and a long-term note receivable of $1.22 million. The note, which matures in October 2005, carries a floating interest rate of prime plus 1.5% and is secured by a first mortgage on the property. The pre-tax gain on that sale was approximately $1.48 million, of which $257,000, representing the net cash received at closing, is included in "Revenues-Real Estate Operations." The remaining gain of approximately $1.22 million, represented by the note receivable, has been deferred until payment of the note since the requirements established under Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" for recognition of all of the profit from this sale have not yet been met.

      At December 31, 2003 and 2002, the Company's wholly-owned real estate subsidiary, The Southwood Corporation, had a 50 percent ownership interest in four limited liability companies ("LLC's") as discussed in greater detail under "Liquidity and Financial Condition, Investments in Unconsolidated Subsidiaries" and also under Note 4 in the Notes to Consolidated Financial Statements. The remaining 50% ownership interest in each of the LLC's is held by John Stabile, a local developer, with whom Southwood has also participated in four residential joint ventures during the past 10 years. Southwood uses the equity method of accounting for its investments in these LLC's and accordingly, its investment is adjusted for its share of earnings or losses and for any distributions received from the LLC's. For the year ended December 31, 2003, Southwood's share of pre-tax earnings and distributions from these LLC's was approximately $417,000 and $67,500, respectively, comp ared to pre-tax earnings of $314,000 and distributions of $175,000 for calendar year 2002. The improvement in the LLC's pre-tax earnings resulted primarily from interest costs savings of $137,000 on the re-refinancing of their mortgages during 2002. Southwood's share of pre-tax earnings is included under "Revenues-real estate operations" in the accompanying Consolidated Statements of Income.

      Southwood also has a 60% ownership in Westwood Park LLC ("Westwood"), a consolidated joint venture formed in 1997 to develop a tract of land in northwest Nashua. During 2003, Westwood received $150,000 representing escrowed funds from a land sale which occurred in 2000. The restrictions relating to these funds have expired and as a result, these funds have been recognized as revenue for 2003.

      Expenses associated with our real estate operations were $104,000 and $1.75 million for the years ended December 31, 2003 and 2002, respectively. The principal reason for this significant decrease was the recognition of approximately $1.66 million of direct infrastructure costs associated with the Southwood Corporate Park land sale in 2002 discussed above. Southwood's 2003 operating expenses of approximately $104,000 consisted primarily of $9,000 of property taxes associated with its remaining landholdings and $65,000 for general and administrative costs.

Contract Operations

      The following table provides a breakdown of revenues from our non-regulated, water-related contract operations for the years ended December 31, 2003 and 2002:

2003

2002

Change

Municipal contracts

$1,191,000

$1,011,000

$180,000 

Community system contracts

235,000

249,000

(14,000)

Watertight program

184,000

165,000

19,000 

Miscellaneous

92,000

34,000

58,000 

Total

$1,702,000

$1,459,000

$243,000 

      Of the $180,000 increase in contract revenue from municipal contracts, approximately $156,000 resulted from additional contract fees billed by the Service Corporation for unplanned work performed under those contracts. The combined base annual fees under those two municipal contracts represent approximately $765,000 and $741,000 for the years ended December 31, 2003 and 2002, respectively, with the balance of $426,000 and $270,000 representing fees earned for services performed in addition to the base scope of services for 2003 and 2002, respectively.

      Contract revenues from community system contracts for 2003 were $235,000 representing 67 operating contracts at the end of 2003 compared to 52 such contracts at the end of 2002. The decline in community system contract revenues for the year resulted from lower fees from unplanned services which totaled $116,000 in 2003 and $140,000 in 2002. Under these types of contracts, the Company performs various water-related monitoring, maintenance, testing and compliance reporting services for water systems throughout southern and central New Hampshire. For 2003 and 2002, Service Corporation revenues included $184,000 and $165,000, respectively, for fees earned under its Watertight program. This program provides maintenance service to residential customers for a fixed annual fee. At the end of 2003, approximately 3,400 customers were enrolled in this program, representing a 27% increase over 2002.

      Expenses associated with our contract operations were $1.52 million and $1.24 million for 2003 and 2002, respectively, comprised primarily of direct costs for servicing its various operating contracts and allocated intercompany charges for general and administrative support for contract operations. The increased expenses from 2002 to 2003 resulted principally from (i) additional direct expenses of $146,000 for servicing the operating contracts and (ii) an increase of $126,000 in allocated intercompany charges due to additional Company and Pennichuck resources utilized for the operation and development of the Service Corporation's various activities.

Merger and other expenses

      Merger and other expenses for the years ended December 31, 2003 and 2002 were $1.11 million and $1.95 million, respectively. For 2003, those expenses were comprised of approximately (i) $235,000 for legal and other fees relating to the eminent domain proceeding discussed earlier, (ii) $231,000 relating

to the terminated merger with PSC and (iii) $648,000 for legal and other fees as well as estimated settlement costs relating to the regulatory investigations. For 2002, those expenses related primarily to investment banking, legal and other fees associated with the terminated merger with PSC.

Interest Expense

      For the year ended December 31, 2003, our consolidated interest expense was $1.97 million which was not a material change from 2002. Interest expense in both years primarily represents interest on long-term indebtedness of the Company and its three regulated water utilities as discussed in Note 3 to the Notes to Consolidated Financial Statements.

Results of Operations -- 2002 Compared to 2001

      For the year ended December 31, 2002, the Company's consolidated net income was $2.34 million, compared to net income of $3.61 million in 2001, a decrease of 35%. On a per share basis, basic income per share was $.98 for the twelve months ended December 31, 2002, a $.54 per share decrease from the prior year. The decrease in consolidated net income was principally due to the transaction expenses incurred during 2002 relating to the proposed merger with PSC which was subsequently terminated in February 2003. Excluding the effect of those merger expenses, consolidated net income for 2002 was $3.53 million, or $1.48 per share.

      Consolidated revenues in 2002 were $23.42 million, a 3% increase over 2001. As discussed below, increased revenues resulted primarily from the Company's regulated water and contract operations businesses offset by decreased revenues from land sales in 2002.

Water Utility Operations

      On a combined basis, net income of our three utilities in calendar year 2002 was approximately $2.53 million, an increase of 30.7% from 2001 principally due to rate relief granted to Pennichuck in 2002 as discussed below.

      Utility operating revenues for 2002 increased to $18.83 million, or 8%, from 2001. For 2002, approximately 82%, 16% and 2% of our total utility operating revenues were generated by Pennichuck, Pennichuck East and Pittsfield, respectively, which was not materially different than in 2001 as shown in the following table.

2002

2001

Change

Pennichuck

$15,344,000

$14,102,000

$1,242,000 

Pennichuck East

3,098,000

2,895,000

203,000 

Pittsfield

388,000

415,000

(27,000)

    Total

$18,830,000

$17,412,000

$1,418,000 

      The $1.24 million increase in Pennichuck's revenues from 2001 to 2002 is principally due to the positive effect of an 8.67% rate increase granted to Pennichuck in September 2001 and an additional 5.76% rate increase granted to Pennichuck in March 2002. The annualized effect of those two rate increases was estimated to be approximately $1.8 million. However, the positive effect of those rate increases in 2002 was partially offset by a 4.6% decline in billed consumption within the core system from 2001. Through the first nine months of 2002, rainfall in the region in which the utilities operate was 16.2% greater than in the same period of 2001, contributing to the overall decline in consumption for the

year. In addition to the core system rate increases, water revenues reflect a 2.1% growth (approximately 600 customers) in the combined utilities' customer base from December 31, 2001 to December 31, 2002.

      During 2002, there were no new rate filings made by the Company's three regulated water utilities.

      Our utilities' operating expenses increased by $376,000, or 3%, to $12.8 million for the year ended December 31, 2002. The primary reasons for the increased utility operating costs from 2001 to 2002 were:

*

$196,000 of additional depreciation expense reflecting new investment in plant assets during 2002 and 2001 totaling $5.12 and $6.02 million for each year, respectively, net of contributions in aid of construction;

*

an increase of approximately $106,000 in property taxes payable to local towns and municipalities reflecting higher assessed values on utility property;

*

a $128,000 increase in pension expense as a result of declining investment returns on pension plan assets and increased payroll costs;

*

a $74,000, or 38%, increase in property and liability premiums paid, consistent with recent changes in the insurance market;

*

offset by approximately $36,000 in lower power and purification expenses, as a result of the decrease in consumption discussed earlier, and $65,000 in additional capitalized overhead on new plant placed in service during 2002.

      The utilities' combined operating income (operating revenues less operating expenses) for the year ended December 31, 2002, increased to $6.04 million, or 21%, over 2001, resulting in an operating margin of 32% in 2002, compared to an operating margin of 29% in 2001.

Real Estate Operations

      For the year ended December 31, 2002, net income from real estate activities conducted by Southwood was $865,000 compared to $1.5 million in 2001. The following table summarizes revenues from major sales and other transactions that occurred in 2002 and 2001 which are discussed further in this section.

2002

2001

Land sales:

    Southwood Corporate Park

$2,427,000

$   422,000

    HECOP IV

168,000

--

    HECOP III

--

155,000

Westwood Park LLC (1)

--

2,000,000

Other

--

100,000

2,595,000

2,677,000

Income from unconsolidated equity investments

314,000

1,313,000

Other

179,000

166,000

    Total

$3,088,000

$4,156,000

_____________________________

(1)

Included in revenues for 2001 is the 40% minority interest share, or approximately $800,000, relating to the sale of land by Westwood Park LLC.

      For 2002, real estate revenues included the following:

*

Net cash proceeds of $2.43 million from the sale of the remaining 40 acres in Southwood Corporate Park during the first quarter of 2002 to Winstanley, one of Southwood's existing joint venture partners discussed earlier;

*

$314,000 in pre-tax earnings from Southwood's 50% ownership interest in HECOP I, II and III;

*

$168,000 cash from the sale of a one-half interest in a 9.1 acre tract of land to John Stabile, a related party, for the creation of HECOP IV, LLC; and

*

$91,000 of interest income earned on outstanding notes receivable due from Adella Realty Trust, also a local developer.

      Revenues from real estate operations during 2001 consisted chiefly of the following:

*

Proceeds of $2 million from the sale of land to the City of Nashua by Westwood Park LLC;

*

$524,000 from Southwood's share of pretax profit from Heron Cove at Bowers Pond LLC, one of its residential joint ventures with John Stabile;

*

$422,000 from the sale of two land parcels in Southwood Corporate Park;

*

$155,000 cash from the sale of a one-half interest in a 4-acre tract of land for the creation of HECOP III, LLC to John Stabile, a related party, who also holds an ownership interest in HECOP I and II;

*

$100,000 from the sale of a residential land parcel to Lansing Realty Trust, an affiliate of Adella Realty Trust; and

*

$141,000 in pre-tax earnings from Southwood's 50% ownership in HECOP I, II and III.

      Expenses associated with our real estate operations during 2002 increased by $838,000 to $1.75 million for the year ended December 31, 2002. Included in 2002 and 2001 real estate expenses was approximately $1.66 million and $396,000, respectively, of direct infrastructure costs associated with the Southwood Corporate Park land sales in those years. Excluding those infrastructure costs, Southwood's 2002 operating expenses were approximately $89,000 consisting primarily of property taxes and general and administrative costs. For 2001, real estate operating expenses were comprised of (i) $47,000 of bad debt expense relating to accrued interest on certain notes receivable, (ii) $108,000 of property taxes and property maintenance expenses associated with Southwood's remaining landholdings, and (iii) $273,000 for allocated intercompany charges.

Contract Operations

      For the year ended December 31, 2002, net income from our contract operations was $127,000, an increase of $38,000, or 43% from 2001.

      The following table provides a breakdown of contract operations revenues for 2002 and 2001:

2002

2001

Change

Municipal contracts

$1,011,000

$666,000

$345,000

Community system contracts

249,000

188,000

61,000

Watertight program

165,000

74,000

91,000

Miscellaneous

34,000

30,000

4,000

    Total

$1,459,000

$958,000

$501,000

      More than half of the $501,000 increase in the contract revenue over 2001 resulted from additional contract fees of $331,000 billed by the Service Corporation under an operating contract with the Town of Salisbury, Massachusetts which began in October 2001. Under the terms of that contract, the Service Corporation operates and maintains that municipality's water system, including all meter reading and billing functions. During 2002, other revenues included (i) $165,000 earned under its Watertight program, which provides maintenance service to residential customers and (ii) contract revenues of approximately $249,000 from 52 operating contracts for non-transient, community water systems. At the end of 2001, the Service Corporation had 40 such operating contracts. Under these contracts, the Company performs various water-related monitoring, maintenance, testing and compliance reporting services for water systems throughout sout hern and central New Hampshire.

      Expenses associated with our contract operations were $1,239,000 and $814,000 for 2002 and 2001, respectively, primarily comprised of direct costs for servicing its various operating contracts and allocated intercompany charges. The increased expenses from 2001 to 2002 resulted principally from (i) additional annualized direct expenses of $224,000 relating to the Town of Salisbury contract, (2) $36,000 in increased Watertight program related expenses, (3) an increase of $139,000 in allocated intercompany charges due to additional Company and Pennichuck resources utilized for the operation and development of the Service Corporation's various activities, and (4) $39,000 of amortization charges reflecting the write-off of certain start up and acquisition costs related to non-transient, community water systems.

Interest Expense

      For the year ended December 31, 2002, our consolidated interest expense was $1.98 million which was not a material change from 2001. Interest expense in both years represents interest on long-term indebtedness of the Company and its three regulated water utilities as discussed in Note 3 to the Notes to Consolidated Financial Statements.

Liquidity and Financial Condition

      During 2003, the primary sources of cash needed for the Company's day to day operating activities, capital projects, debt service and dividend payments were (i) available cash from the Company's short-term investments at the beginning of 2003, (ii) operating cash flow and (iii) borrowings under its revolving loan facility with its bank, Fleet Boston ("Fleet").

      At December 31, 2003 and 2002, the Company's cash and cash equivalents, primarily short-term investments, totaled approximately $391,000 and $2.44 million, respectively. The $2.05 million decline in the Company's consolidated cash position, together with a $2 million increase in its short-term borrowings, were the result of several factors affecting the Company's liquidity during 2003 as discussed below.

*

A combination of lower than normal water consumption and increased distribution maintenance costs adversely impacted the operating income of our regulated operating activities by approximately $1.9 million as discussed earlier under "Results of Operations -- 2003 Compared to 2002, Water Utility Operations."

*

The Company incurred costs totaling approximately $1.11 million relating to the terminated merger with Philadelphia Suburban Corporation, the eminent domain efforts by the City and the regulatory investigations.

*

Our water utility subsidiaries invested approximately $7.2 million in new and replacement property and plant during 2003, net of only $178,000 in contributions in aid of construction from local area developers and state and federal grants.

      During 2003, the Company utilized its revolving loan credit facility (the "Loan Agreement") with Fleet for working capital and capital expenditure requirements. Under the Loan Agreement, the Company and its subsidiaries may borrow up to $2.5 million at interest rates tied to the bank's cost of funds or LIBOR, whichever is lower. At December 31, 2003, there was $2 million outstanding under the Loan Agreement at floating interest rates ranging from 2.43% to 2.47%. In March 2004, the Company received a commitment letter from Fleet to provide for $6.5 million in available short-term credit on the same terms contained in the original Loan Agreement. This increase in the line of credit is necessary in order to fund (i) its planned capital expenditures over the next two years, (ii) any future costs associated with the Company's defense against the City of Nashua's eminent domain taking, and (iii) any unanticipated shortfall in operating cash flow.

      As disclosed in Note 3 of the Notes to Consolidated Financial Statements, the Company has certain debt instruments that contain annual sinking fund or other required principal payments. The Company believes that it will be able to refinance these debt instruments at their maturity through public issuance, or private placement, of debt or equity.

      Our consolidated capital expenditures in 2003 totaled $7.2 million, net of contributions in aid of construction. Practically all of that amount was for projects relating to our water utility business. In 2003, the more significant projects included:

*

$983,000 for replacing aging distribution mains in Nashua, New Hampshire;

*

$896,000 for the repainting of a 4.5 million gallon steel tank in Pennichuck's core system;

*

$484,000 for the initial design phase of planned treatment plant filter upgrades;

*

$1.12 million for the construction of a 1 million gallon storage facility in Pennichuck East's Litchfield, New Hampshire franchise; and

*

$1.19 million for the replacement and installation of new radio read meters which is part of an ongoing replacement program in Pennichuck's and Pennichuck East's service territories.

      The remaining items in the Company's 2003 capital program reflect expenditures for ongoing, routine investment in additional pump stations, services, distribution mains and hydrants, vehicles and sundry system improvements. For 2004, we expect that our total expenditures for capital projects will be approximately $6.99 million, of which $362,000 is expected to be funded by contributions in aid of construction, state grants and low-interest, state revolving loans. Our cash needs for capital expenditures are expected to be met from a combination of internally-generated funds and short-term borrowings under the Company's available line of credit. Additionally, Pennichuck, the Company's largest regulated subsidiary, expects to file a Notice of Intent to File for Rate Relief with the NHPUC by late March or early April 2004 as discussed earlier.

      The Company also expects that its cash flow in 2004 will be positively affected by the recovery of approximately $1.15 million of prior years' Federal tax payments resulting from the carryback of its 2003 net operating loss recognized for tax purposes. This net operating loss resulted principally from additional accelerated tax depreciation allowable under the Internal Revenue Code's recently enacted bonus depreciation rules. The expected recovery of these income taxes is shown under "Refundable income taxes" in the accompanying Consolidated Balance Sheet as of December 31, 2003.

      Over the next five years, the Company expects to spend approximately $62.2 million for capital projects in its regulated water business. Of that amount, approximately $26 million relates to the planned filter upgrades in Pennichuck's core system water treatment plant. This project will be undertaken in order to meet stricter standards promulgated by the LT 1 and LT 2 Interim Enhanced Surface Water Treatment Rules issued by the United States Environmental Protection Agency ("USEPA") which require the elimination or inactivation of certain microbial organisms to improve disinfection and filtration. Our capital expenditures over the next five years are estimated to be $6.99 million in 2004, $21.2 million in 2005, $18.1 million in 2006, $10 million in 2007 and $5.9 million in 2008.

      Pennichuck expects that its future capital investment program will continue to include significant expenditures for replacing aging distribution mains in Nashua and in certain smaller community water systems. In 1999, the City of Nashua began a public works program mandated by the USEPA requiring the City to separate its storm water runoff and sewer discharge systems over the next 10 years. Pennichuck has taken this opportunity to replace any aged or deteriorating water mains in those sections where the City is performing its sewer separation work. It is likely that Pennichuck will continue to spend $1 to $2 million annually on replacing its aging infrastructure within Nashua.

      The Company's ability to finance its five year capital program will be dependent on, among other things, its future available operating cash flow, and its ability to competitively access both the debt and equity markets. The Company anticipates that these capital costs over the next five years will be recovered in the form of higher water rates. However, there can be no assurance that the NHPUC would approve a rate increase to cover all of such costs or the timeliness of such actions.

      The following is a discussion of other major changes in the Company's consolidated financial position from December 31, 2002 to December 31, 2003:

*

"Notes receivable" classified under Current Assets decreased by $605,000 reflecting the net payments received on a development and construction loan to Adella Realty Trust which were repaid in full in May 2003;

*

"Refundable income taxes" increased $811,000 principally from the expected recovery of prior years' income taxes paid resulting from a tax net operating loss carryback discussed earlier;

*

The net decrease in "Accrued pension liability" of $537,000 reflects the Company's change in its pension plan funding status from a $615,000 accrued liability balance at December 31, 2002 to a $78,000 accrued liability at the end of 2003 as discussed in greater detail below.

      The "Long-term note receivable" balance of $1.22 million at December 31, 2003 represents a note received by Southwood from the sale of a 66.8 acre tract of land to Folsom Development Corporation in January 2003 as discussed earlier under "Results of Operations - 2003 compared to 2002, Real Estate Operations." Under the terms of that sale, Southwood conveyed approximately 66.8 acres of land in exchange for approximately $257,000 in cash and a long-term note receivable of $1,224,000. The note, which matures in October 2005, carries a floating interest rate of prime plus 1.5% and is secured by a first mortgage on the property.

Investments in Unconsolidated Subsidiaries

      At December 31, 2003 and 2002, the Company's wholly-owned real estate subsidiary, The Southwood Corporation, had a 50 percent ownership interest in four limited liability companies ("LLC's") as discussed in Note 4 in the Notes to Consolidated Financial Statements. The remaining 50% ownership interest in each of the LLC's is held by John Stabile, a local developer, with whom Southwood has also participated in four residential joint ventures during the past 10 years. The formation of these LLC's provides Southwood with an opportunity to develop its landholdings in such a manner as to provide for a long-term income stream through commercial rental activities. Additionally, the LLC's, as legal entities, mitigate the financial risk associated with sole ownership of developed commercial properties by Southwood. The LLC's, whose assets and liabilities are not included in the accompanying Consolidated Balance Sheets, own certain commercial office buildings on wh ich there are outstanding mortgage notes totaling $9.2 million and $9.5 million as of December 31, 2003 and 2002, respectively. Southwood is contingently liable on one half of the outstanding mortgage balances and as such, it has issued a guarantee to the mortgagee for its share of the guaranteed indebtedness. The principal assets of the LLC's are the land, buildings and leasehold improvements, the total of which at December 31, 2003 and 2002 was $9.72 million and $9.40 million, respectively.

Contractual Obligations

      The following table discloses aggregate information about our contractual obligations and the periods in which payments are due:

Less than

1 to 3

3 to 5

After 5

Total

1 year

years

years

Years

Long-term debt

$29,211,229

$2,350,516

$10,234,889

$1,737,257

$14,888,567

Capital leases

36,450

17,841

18,609

-

-

Operating leases

148,843

47,446

77,767

23,630

-

Pension and post retirement

    contributions (1)

315,000

315,000

-

-

-

Purchase obligations (2)

-

-

-

-

-

    Total

$29,711,522

$2,730,803

$10,331,265

$1,760,887

$14,888,567

_____________________________

(1)

Pension and post retirement contributions cannot be reasonably estimated beyond 2004 and may be impacted by such factors as return on pension assets, changes in the number of plan participants and future salary increases.

(2)

Pennichuck has a Wholesale Water Agreement (the "Agreement") with Manchester (NH) Water Works ("MWW") to purchase water from MWW through six metering points for various community water systems owned by Pennichuck and Pennichuck East. The Agreement, amended in February 2003, has a 25-year term and provides for an average daily flow to Pennichuck and Pennichuck East of up to 2.1 million gallons per day ("MGD") with a maximum daily flow rate of 3.5 MGD. Pennichuck and Pennichuck East purchase water at a rate established by MWW for all of its non-Manchester customers. The current rate, effective January 1, 2004 is $0.781 per one hundred cubic feet ("ccf") in areas where fire protection is not provided by MWW and $1.02 per ccf where fire protection is provided. The Agreement requires that Pennichuck and Pennichuck East pay a one-time source development charge ("SDC") of $1.14 for each gallon of the 2.1 million gallons of the average daily flow. To date, Pennichuck and Pennichuck East had achiev ed a combined peak average daily flow of 894,311 gallons. The SDC is re-calculated annually to reflect any increases in average daily flow and, if the flow is increased, Pennichuck and Pennichuck East pay the SDC for the incremental demand. Any incremental SDC is payable in January of each year. SDC payments began in 1989 and as of December 31, 2003, the total SDC paid to MWW was $1,050,100, which allows the Company to draw an average daily flow of up to 921,140. The incremental SDC paid in 2003 and 2002 was $30,585 and $88,320, respectively. There was no SDC due in January 2004 since the average daily flow in 2003 was less than the previous high average usage level established in 2002. Any future payments to MWW would be subject to an increase in average daily flow. No future obligations under this contract are disclosed since such future payments are based on future water consumption levels that are affected by weather conditions and customer growth.

      In late March or early April 2004, Pennichuck expects to enter into a long-term lease arrangement with HECOP III, LLC for approximately 13,000 square feet of office space located in Merrimack, New Hampshire to serve as the Company's headquarters. Southwood holds a fifty percent (50%) ownership interest in HECOP III, LLC and the remaining ownership interests are held by John Stabile, who is also the holder of ownership interests in three other LLC joint ventures with Southwood as discussed above. The final execution of the lease is not expected to occur until the end of the first quarter of 2004.

Pension Plan

      The Company maintains a defined benefit pension plan covering substantially all of its employees. The accounting for this plan under FASB 87, "Employer's Accounting for Pensions," requires that the Company use key assumptions when computing the estimated annual pension expense. These assumptions are (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 obligations and our annual pension expense. We have reduced our discount rate from 6.50% to 6.25% for 2003 reflecting the overall change in market conditions. 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 as well as historical returns. We assumed that our long-term rate of return on pension plan assets was 8% in 2003 and 2002 and 9% in 2001. In addition, we assumed an increase in participant compensation levels of 3%, 4% and 5% in 2003, 2002 and 2001, respectively. These key assumptions are reviewed annually with our actuary and investment advisor and are updated 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 which may impact the amount of pension expense the Company recognizes.

      At December 31, 2002, the Company had a minimum pension liability of approximately $615,000, representing the excess of its pension liabilities over its plan assets. However, during 2003, the rate of return on plan investments was approximately 17.2% compared to a negative rate of return of 7.4% in 2002. As a result, the market value of the Company's plan assets was slightly lower than its accumulated benefit obligation by approximately $78,000 at December 31, 2003. The Company has recorded an adjustment of approximately $537,000 which resulted in a pension liability of approximately $78,000 at the end of 2003 and a credit, net of taxes, of approximately $349,000 to Other Comprehensive Income. Future adjustments to Other Comprehensive Income will be affected by changes in realized returns on pension plan assets, contributions to pension assets by the Company and changes in discount rates.

Critical Accounting Policies

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

      Regulatory Accounting - the use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation" stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator. In accordance with

SFAS No. 71, we defer costs and credits on the 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 were incurred. These deferred amounts, both assets and liabilities, are then recognized in the income statement 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.

      Revenue Recognition - utility revenues 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. The Company reads its residential customer meters generally on a quarterly basis and records its revenue based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage patterns and the effective water rates. The estimate of the unbilled revenue is a management estimate utilizing certain sets of assumptions and conditions. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 were approximately $1,663,000 and $1,513,000, respectively.

      The Company's non-utility revenues are recognized when services are rendered or when water is delivered. Revenues are based, for the most part, on long-term contractual rates.

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

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

      As further described in Note 6 to the accompanying consolidated financial statements, the Company revised the discount rate in 2003 to 6.25% from 6.50% in 2002 to reflect market conditions. In determining pension obligation and cost amounts, this and other assumptions may change from period to period, and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the Company's pension plan ("the Plan") assets, which partially consist of equity investments, were affected by significant declines in the financial markets from 2000 through 2002 despite positive investment performance during 2003. Fluctuations in market returns may result in increased or decreased pension costs in future periods. These conditions impacted the funded status of the Plan at both December 31, 2003 and 2002, and therefore, will also impact pension costs for 2004.

      The Plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974. While not required to make contributions to the Plan, the Company anticipates that it will contribute approximately $240,000 to the Plan in 2004. The Company believes it has adequate access to capital resources to support these contributions.

Dividend Reinvestment and Common Stock Purchase Plan

      We offer a Dividend Reinvestment and Common Stock Purchase program that is available to our shareholders and residential utility customers residing in New Hampshire. Under this program, our shareholders may reinvest all or a portion of their common dividends into shares of common stock at prevailing market prices. We also accept optional cash payments to purchase additional shares at 100% of the prevailing market prices. This program has provided the Company with additional common equity of $253,000 and $47,000 in 2001 and 2002, respectively. No additional common equity was provided with respect to this program during 2003.

Environmental Matters

      Our water utility subsidiaries are subject to the water quality regulations set forth by the USEPA and the New Hampshire Department of Environmental Services ("DES"). The USEPA is required to periodically set new maximum contaminant levels for certain chemicals as required by the federal Safe Drinking Water Act ("SDWA"). The quality of our treated water currently meets or exceeds all standards set by the USEPA 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 USEPA and DES mandates should eventually be recovered through water rates in our utilities' future rate filings.

      Pennichuck's filtration plant in Nashua is impacted by the Interim Enhanced Surface Water Treatment Rule ("IESWTR") which established a new turbidity standard of 0.3 NTU. Pennichuck has committed approximately $1.48 million in its 2004 capital budget for the design phase required for this project. As discussed earlier, Pennichuck estimates the total cost to comply with this new standard to be approximately $26 million over the next three years although such estimates are subject to any future changes in the IESWTR standards and changes in design and construction that may be required.

      Two of Pennichuck's small community water systems have wells that produce water with arsenic levels in excess of the new standard of 10 ppb which is effective in February 2006. It will be necessary for Pennichuck to install arsenic treatment systems at these locations, however, the expenditures necessary to comply with this standard are not expected to be a material part of the Company's future capital expenditure program. Pennichuck's remaining community water systems have wells that produce water meeting the new arsenic standard.

      Capital expenditures associated with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in our utilities' water rates.

New Accounting Standards

      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 applies specifically to a number of financial instruments that companies have historically presented with their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS 150 became effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material effect on the Company's combined financial statements.

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", as amended and revised in December 2003 ("FIN 46R"), which addresses the consolidation of variable interest entities ("VIE"s) by business enterprises that are the primary beneficiaries. A VIE is an entity that does not have sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the enterprise with the majority of the risks or rewards associated with the VIE. Application of this Interpretation is required for all potential VIEs that are referred to as special-purpose entities for periods ending after December 15, 2003 and, for all other types of entities that are potential VIEs that are not referred to as special purpose entities, the consolidation requir ements apply for periods ending after March 15, 2004. The Company has assessed the impact of FIN 46R and has determined that it does not have any VIEs for which the Company is the primary beneficiary requiring consolidation of the entity as of December 31, 2003. For all other types of entities, the Company is still assessing the impact that FIN 46R will have on its consolidated financial position.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Information regarding market risk of the Company and its subsidiaries is presented in "Note 3- Debt" and "Note 5 - Fair Value of Financial Instruments" in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K report.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors

To the Shareholders and Board of Directors of Pennichuck Corporation:

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Pennichuck Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) on page 65, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on the se financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of Pennichuck Corporation for the year ended December 31, 2001 were audited by other independent auditors who have ceased operations. Those independent auditors expressed an unqualified opinion on those financial statements in their report dated February 15, 2002.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 24, 2004

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31,

2003

2002

ASSETS

Property, Plant and Equipment

    Land

$

1,196 

$

1,142 

    Buildings

21,016 

19,073 

    Equipment

92,556 

86,221 

    Construction work in progress

718 

515 

115,486 

106,951 

    Less accumulated depreciation

(29,759)

(27,279)

85,727 

79,672 

Current Assets

    Cash and cash equivalents

391 

2,444 

    Restricted cash

-- 

151 

    Accounts receivable, net of allowance of

      $37 in 2003 and $40 in 2002

1,332 

1,339 

    Unbilled revenue

1,663 

1,513 

    Notes receivable

-- 

605 

    Refundable income taxes

1,145 

334 

    Materials and supplies, at cost

726 

590 

    Prepaid expenses and other current assets

519 

490 

5,776 

7,466 

Other Assets

    Deferred land costs

849 

792 

    Deferred charges and other assets

3,087 

2,846 

    Investment in real estate partnerships

547 

206 

    Note receivable

1,224 

-- 

5,707 

3,844 

Total Assets

$

97,210 

$

90,982 

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - CONTINUED

(In thousands, except share and per share data)

December 31,

2003

2002

STOCKHOLDERS' EQUITY AND LIABILITIES

Stockholders' Equity

    Common stock - $1 par value

        Authorized - 11,500,000 shares in 2003 and 2002

        Issued - 2,397,092 and 2,393,391 shares,

          respectively

        Outstanding - 2,396,140 and 2,391,439 shares,

          respectively

$

2,397 

$

2,393 

        Additional paid in capital

15,208 

15,170 

        Retained earnings

13,178 

13,941 

        Accumulated Other Comprehensive Income

(473)

(927)

30,310 

30,577 

        Less treasury stock, at cost; 952 and 1,952 shares

          at December 31, 2003 and 2002, respectively

(138)

(144)

30,172 

30,433 

        Minority interest

8 

-- 

Preferred stock, no par value, 100,000 shares

  authorized, no shares issued in 2003 and 2002

-- 

-- 

Commitments and contingencies (Note 9)

Long-term debt, less current portion

26,879 

26,860 

Current Liabilities

    Line of credit

2,000 

-- 

    Current portion of long-term debt

368 

354 

    Accounts payable

913 

673 

    Accrued interest payable

370 

370 

    Other current liabilities

1,773 

1,534 

5,424 

2,931 

Deferred Credits and Other Reserves

    Deferred income taxes

8,552 

6,634 

    Deferred gain on land sale

1,224 

-- 

    Deferred investment tax credits

966 

999 

    Regulatory liability

1,107 

1,138 

    Post-retirement health benefit obligation

560 

570 

    Accrued pension liability

78 

615 

    Other liabilities

345 

541 

12,832 

10,497 

Contributions in Aid of Construction

Total Stockholders' Equity and Liabilities

21,895 

20,261 

$

97,210 

$

90,982 

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share and per share data)

Years Ended December 31,

2003

2002

2001

Revenues

    Water utility operations

$

18,680 

$

18,830 

$

17,412 

    Real estate operations

949 

3,088 

4,156 

    Contract operations

1,702 

1,459 

958 

    Other

57 

45 

228 

21,388 

23,422 

22,754 

Operating Expenses

    Water utility operations

14,567 

12,785 

12,409 

    Real estate operations

104 

1,750 

912 

    Contract operations

1,522 

1,239 

814 

    Other

-- 

-- 

67 

16,193 

15,774 

14,202 

Operating Income

5,195 

7,648 

8,552 

Merger and other expenses

(1,114)

(1,946)

-- 

Other income

56 

65 

221 

Interest expense

(1,969)

(1,978)

(1,981)

Income Before Provision for Income Taxes

2,168 

3,789 

6,792 

Provision for Income Taxes

888 

1,450 

2,657 

Net Income Before Minority Interest

1,280 

2,339 

4,135 

Minority Interest in Loss (Earnings) of

  Westwood Park LLC, net of tax

(33)

2 

(523)

Net Income

$

1,247 

$

2,341 

$

3,612 

Earnings Per Common Share:

    Basic

$.52 

$.98 

$1.52 

    Diluted

$.52 

$.97 

$1.50 

Weighted Average Shares Outstanding:

    Basic

2,392,919 

2,390,942 

2,382,389 

    Diluted

2,398,198 

2,411,781 

2,400,088 

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

Accumulated

Common

Common

Additional

Other

Stock-

Stock-

Paid-in

Retained

Treasury

Comprehensive

Shares

Amount

Capital

Earnings

Stock

Income

Total

Balances at December 31, 2000

2,358,847

$

2,359

$

14,667

$

11,753 

$

(184)

$

-- 

$

28,595 

Net income

3,612 

3,612 

Dividend reinvestment plan

111

142 

253 

Common dividends

  declared - $.76 per share

(1,813)

(1,813)

Exercise of stock options

8,468

8

103

(2)

(86)

23 

Other comprehensive income

(308)

(308)

Directors' fees and other

  deferred compensation plan

21,704

22

217

(6)

233 

Balances at December 31, 2001

2,389,019

2,389

15,098

13,544 

(128)

(308)

30,595 

Net income

2,341 

2,341 

Dividend reinvestment plan

1,789

2

45

47 

Common dividends

  declared - $.813 per share

(1,944)

(1,944)

Exercise of stock options

2,583

2

27

(16)

13 

Other comprehensive income

(619)

(619)

Balances at December 31, 2002

2,393,391

2,393

15,170

13,941 

(144)

(927)

30,433 

Net income

1,247 

1,247 

Common dividends

  declared - $.84 per share

(2,010)

(2,010)

Exercise of stock options

3,701

4

38

6 

48 

Other comprehensive income

454 

454 

Balances at December 31, 2003

2,397,092

$

2,397

$

15,208

$

13,178 

$

(138)

$

(473)

$

30,172 

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

Years Ended December 31,

2003

2002

2001

Net income

$

1,247 

$

2,341 

$

3,612 

Other comprehensive income:

    Additional minimum pension liability

      adjustment

581 

(1,020)

-- 

    Unrealized loss on derivatives

(84)

(476)

(396)

    Reclassification of net losses

      realized in net income

257 

244 

88 

    Income tax (expense) benefit relating

      to other comprehensive loss

(300)

633 

-- 

454 

(619)

(308)

Comprehensive Income

$

1,701 

$

1,722 

$

3,304 

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

PENNICHUCK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years Ended December 31,

2003

2002

2001

Operating Activities:

    Net income

$

1,247 

$

2,341 

$

3,612 

    Adjustments to reconcile net income to net

      cash provided by operating activities:

        Depreciation and amortization

2,914 

2,775 

3,047 

        Gain on sale of land

(257)

(765)

-- 

        Amortization of deferred investment

          tax credits

(33)

(33)

(33)

        Provision for deferred income taxes

1,918 

863 

930 

    Changes in assets and liabilities:

        Accounts receivable and unbilled revenue

(142)

(258)

(1)

        Refundable income taxes

(811)

(209)

245 

        Materials and supplies

(137)

(225)

(11)

        Prepaid expenses

(29)

(10)

(79)

        Deferred charges and other assets

(572)

(139)

(1,364)

        Accounts payable and accrued expenses

487 

(631)

897 

        Other

(320)

291 

29 

Net cash provided by operating activities

4,265 

4,000 

7,272 

Investing Activities:

    Purchases of property, plant & equipment

(7,181)

(5,274)

(6,134)

    Contributions in aid of construction

178 

157 

116 

    Decrease in restricted cash

151 

-- 

852 

    Proceeds from sale of land

257 

2,426 

-- 

    Net change in investment in real

      estate partnerships and deferred land costs

(399)