Southwood is engaged in real estate management and commercialization activities. Historically, most of Southwood's activities were conducted through joint ventures. During the past 10 years, Southwood has participated in four joint ventures with John P. Stabile, II, a local developer. Southwood's earnings have from time to time during that period contributed a significant percentage of our consolidated net income, including in the three months ended March 31, 2008 (i.e., the January 2008 sale of the three commercial office buildings that comprised substantially all of the assets of HECOP I, II, and III as more fully described in Note 8, "Equity Investments in Unconsolidated Companies" in Part I, Item I, in this Quarterly Report on Form 10-Q).Southwood's contributions from the sale of real estate have increased the fluctuations in our net income during that period. While we expect that Southwood will contribute a smaller proportion of our future revenues and earnings over the next several years, we expect to pursue the orderly commercialization of Southwood's 450 acres of undeveloped land as opportunities arise.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, including Management's Discussion and Analysis, are forward-looking statements intended to qualify for safe harbors from liability under the Private Securities Litigation Reform Act of 1995, as amended (and codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by, or include the words "in the future," "believes," "expects," "anticipates," "plans" or similar expressions, or the negative thereof.
Forward-looking statements involve risks and uncertainties, and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors include, among other things, whether eminent domain proceedings are ultimately successful against some or all of our water utility assets, the success of applications for rate relief, changes in governmental regulations, changes in the economic and business environment that may impact demand for our water, services and real estate products, changes in capital requirements that may affect our level of capital expenditures, changes in business strategy or plans and fluctuations in weather conditions that impact water consumption. For a complete discussion of our risk factors, see Part I, Item 1A, "Risk Factors", in our 2008 Annual Report on Form 10-K, as supplemented by Part II, Item 1A, "Risk Factors", in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. City of Nashua's Ongoing Eminent Domain Proceeding The City of Nashua's then-current Mayor stated his opposition to our proposed merger with Philadelphia Suburban (now Aqua America) almost immediately after we announced the proposed merger in 2002. In January 2003, Nashua residents approved a referendum authorizing the City to pursue the acquisition of our water utility assets. In March 2004, the City filed a petition with the NHPUC under the New Hampshire utility municipalization statute, NHRSA Ch. 38, seeking to take by eminent domain all of the utility assets of our Company's three utility subsidiaries. In January 2005, the NHPUC ruled that the City could not use the eminent domain procedure to acquire any of the assets of Pennichuck East or Pittsfield Aqueduct. The eminent domain proceeding and potential consequences for us are more fully discussed in our 2008 Annual Report on Form 10-K.

A taking of assets by eminent domain as per the NHPUC order would result in a significant taxable gain and related tax liability to the Company based on the difference between the price paid to Pennichuck Water for the assets taken and Pennichuck Water's underlying tax basis in such assets. The tax liability would be due upon sale of the assets unless the proceeds of the taking were reinvested in other water utility assets in accordance with certain provisions of the Internal Revenue Code. A taking by eminent domain could also result in our Company incurring various other costs depending on the final terms of the eminent domain taking and decisions that our Company may make regarding its remaining operations. These costs may include expenditures associated with termination and/or funding of health and retirement plans, certain debt redemption premiums, severance costs and professional fees. In addition, if the Company were to sell some or all of its remaining businesses or assets, it may be forced to accept prices below their current carrying values as a result of then-current market conditions, a limited number of potential buyers, and/or other factors. It is possible that, if the acquisition efforts of the City are successful, the financial position of our Company would be materially and adversely impacted.
We have publicly stated our willingness to consider any credible settlement proposals the City may wish to make to us as an alternative to its continued pursuit of an eminent domain taking. We have acknowledged publicly that such a settlement could involve the City's acquisition of our Company and all of its subsidiaries and assets. In any event, we remain opposed to an eminent domain taking of the assets of Pennichuck Water pursuant to the terms of the July 2008 NHPUC order.
Critical Accounting Policies, Significant Estimates and Judgments We have identified the accounting policies below as those policies critical to our business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Changes in the estimates or other judgments included within these accounting policies could result in significant changes to the condensed consolidated financial statements. Our critical accounting policies are as follows.
Regulatory Accounting. The use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation," stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator such as the NHPUC. In accordance with SFAS 71, we defer costs and credits on the condensed consolidated balance sheets as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits are incurred. These deferred amounts, both assets and liabilities, are then recognized in the condensed consolidated statements of income in the same period that they are reflected in rates charged to our water utilities' customers. In the event that the inclusion in the rate-making process is disallowed, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval.

We did not defer the costs associated with our defense against the City's ongoing eminent domain proceeding.
Revenue Recognition. The revenues of our water utility subsidiaries are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. We read our customer meters on a monthly basis and record revenues based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage and the effective water rates. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying condensed consolidated financial statements as of March 31, 2009 and December 31, 2008 were approximately $2.0 million and $2.9 million, respectively.
Our non-utility revenues are recognized when services are rendered. Revenues are based, for the most part, on long-term contractual rates. Pension and Other Post-retirement Benefits. Our pension and other post-retirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, return on plan assets, the discount rate, the expected long-term rate of return on the plans' assets and health care cost trends.
In accordance with SFAS No. 87, "Employers Accounting for Pensions" and SFAS No. 106, "Employers Accounting for Post-retirement Benefits Other than Pensions", changes in pension and post-retirement benefit obligations other than pensions ("PBOP") associated with these factors may not be immediately recognized as pension and PBOP costs in the condensed consolidated statements of income, but generally are recognized in future years over the remaining average service period of the plans' participants.
In determining pension obligation and expense amounts, the factors and assumptions described above may change from period to period, and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the value of our pension plan assets are subject to fluctuations in market returns which may result in increased or decreased pension expense in future periods.
Although our pension plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974, market declines significantly impacted the value of our pension plan assets in 2008 and the first quarter of 2009, which we has unfavorably impacted pension expense. Accordingly, we currently anticipate that we will contribute approximately $1.0 million to the plan during 2009.

Results of Operations - General
In this section, we discuss our results of operations for the three months ended March 31, 2009 and 2008 and the factors affecting them. Our operating activities, as more fully discussed in Note 5, "Business Segment Reporting" in Part I, Item I, in this Quarterly Report on Form 10-Q, are grouped into three primary business segments as follows:
• Water utility operations;

• Water management services; and

• Real estate operations.

Results of Operations - Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 Overview
Our consolidated revenues, and consequently our net income, can be significantly affected by weather conditions experienced throughout the year, and in past years our net income has been significantly affected by sales of major real estate assets which occurred from time to time. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for non-essential usage by our customers during the late spring and summer months.
For the three months ended March 31, 2009, our Company incurred a consolidated net loss of $68,000, compared to net income of $2.5 million for the three months ended March 31, 2008. On a per share basis, the fully diluted loss per share for the three months ended March 31, 2009 was $0.02 as compared to fully diluted income per share of $0.58 for the three months ended March 31, 2008. The principal factors that affected current period net loss, relative to prior period net income, include the following:
• A 2008 non-operating, after-tax gain of approximately $2.3 million ($3.4 million before federal income taxes) from the sale of land and three commercial office buildings by three of our HECOP joint ventures;

• A decrease in 2009 regulated water utility operating income of $186,000;

• An increase in 2009 eminent domain-related costs of $106,000; and

• A decrease in the 2009 provision for income taxes of $1.4 million (inclusive of the approximately $1.1 million federal income tax on the sale of the joint venture property in 2008).

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

Our utility operating revenues increased to approximately $6.3 million in 2009, an increase of 3.0% over 2008, as shown in the following table.

                                              Three Months Ended March 31,
                                        2009                  2008             Change
                                                        (000's)
            Pennichuck Water      $ 4,842        76 %   $ 4,778        78 %   $     64
            Pennichuck East         1,123        18 %     1,178        19 %        (55 )
            Pittsfield Aqueduct       364         6 %       189         3 %        175

            Total                 $ 6,329       100 %   $ 6,145       100 %   $    184

For the three months ended March 31, 2009, approximately 20% of our water utility operating revenues were derived from commercial and industrial customers, and approximately 66% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford, New Hampshire. The increase in revenues is primarily the result of the temporary rate increases granted to Pennichuck Water and Pittsfield Aqueduct in December 2008 offset, in large part, by declines in customer usage. Residential customer usage in our core system declined approximately 3.3% for the three months ended March 31, 2009 compared to the same period in 2008. While commercial customer usage remained relatively constant in the three months ended March 31, 2009 compared to the same period in 2008, industrial usage declined primarily as a result of an energy conservation program implemented by one of our large customers.
We believe that the current economic recession has been the primary cause of the current reduction in consumption among our residential customers. We also believe that usage has and may be further impacted by increased customer conservation efforts as a result of rate increases, as discussed elsewhere in this Quarterly Report on Form 10-Q, and the implementation of automated meter reading equipment that allows for monthly billing, rather than quarterly billing.
For the three months ended March 31, 2009, utility operating expenses increased by approximately $370,000, or approximately 7.1%, to approximately $5.6 million as shown in the table below.

                                               Three Months Ended March 31,
                                            2009             2008         Change
                                                           (000's)
         Operations & maintenance        $    3,644       $    3,527     $    117
         Depreciation & amortization          1,023              973           50
         Taxes other than income taxes          888              685          203

         Total                           $    5,555       $    5,185     $    370

The operations and maintenance expenses of our water utility business include such categories as:
• Water supply, treatment, purification and pumping;

• Transmission and distribution system functions, including repairs and maintenance and meter reading;

• Engineering, customer service and general and administrative functions;

The change in our utilities' operating expenses over the same period in 2008 was primarily the result of the following:
• Increased taxes other than income taxes of $203,000, principally related to increased real estate taxes caused by capital additions in our core Pennichuck Water system as well as increased real estate tax rates;

• Increased general and administrative costs of $41,000 primarily relating to increased pension and post-retirement expense of $73,000 offset partially by lower amounts expensed for wages and benefits;

• Increased customer and accounting costs and collection expenses of $38,000;

• Increased depreciation and amortization of $50,000 principally due to increased depreciation attributable to completed portions of the water treatment plant upgrade for Pennichuck Water; and

• $31,000 of increased transmission and distribution costs relating to repair or replacement of gates, mains, meters and hydrants, supplies, fuel and labor costs.

As a result of the above changes in operating revenue and operating expenses, water utility operating income declined to $774,000 from $960,000, or 19.4%, for the three months ended March 31, 2009 compared to the three months ended March 31, 2008.
Our utilities periodically seek rate relief, as necessary, to recover costs associated with capital additions as well as increases in operating costs as they occur over time. In May 2008, the Company's Pittsfield Aqueduct utility subsidiary filed for rate relief with the NHPUC to recover increased operating expenses and to obtain recovery of and a return on capital improvements principally benefitting water systems acquired in 2006. Pittsfield Aqueduct requested an overall increase in rates that, if approved in its entirety, would result in an annual increase in revenues of approximately $1.1 million effective for service rendered from June 6, 2008. In December 2008, the NHPUC issued an order approving temporary rate relief for Pittsfield Aqueduct. The order provides for an annualized temporary increase in revenues of approximately $666,000 effective for service rendered from June 6, 2008. Increased revenues for the period June 6, 2008 through December 31, 2008 were recorded in the fourth quarter of 2008 in the amount of $315,000.
On January 14, 2009, the Company filed a motion with the NHPUC to extend the procedural schedule in the Pittsfield Aqueduct rate case until March 13, 2009 in order to allow the Company to revise its request for permanent rate relief. In broad terms, the Company will be proposing to transfer the assets of the systems in Barnstead, Middleton and Conway, New Hampshire (the "North Country Systems") to its sister utility, Pennichuck East. A final hearing on the merits of the case is scheduled for the week of September 21, 2009. Temporary rates, as approved, will remain in effect for the North Country Systems until permanent rates are approved by the Commission.
In June 2008, the Company's Pennichuck Water utility subsidiary filed for rate relief with the NHPUC to recover increased operating expenses and to obtain recovery of and a return on capital improvements principally for the ongoing major upgrade to its water treatment plant, the replacement of a 5.5 million gallon water tank, the installation of radio meter reading equipment, and the replacement of aging infrastructure. Pennichuck Water requested an overall increase in rates that, if approved in its entirety, would result in an annual increase in revenues of approximately $5.1 million. Included in the $5.1 million are two proposed step increases that, if approved, would increase annual revenues by approximately $1.9 million. In December 2008, the NHPUC issued an order approving temporary rate relief for Pennichuck Water. The order provides for an annualized temporary increase in revenues of approximately $2.4 million, or 11%, effective for service rendered from July 28, 2008. Increased revenues for the period July 28, 2008 through December 31, 2008 were recorded in the fourth quarter of 2008 in the amount of $702,000. A final hearing on this case regarding the establishment of permanent rates is scheduled for May 19, 2009.

The temporary rate relief that has now been granted by the NHPUC for both Pennichuck Water and Pittsfield Aqueduct does not necessarily reflect the ultimate outcome of the underlying requests for permanent rate relief. Any difference between the temporary rate relief that has been granted and the permanent rates ultimately approved by the NHPUC for these utilities will be reconciled upon the approval of such permanent rates. Water Management Services
The operating income of our water management services segment decreased by $8,000 from $104,000 for the three months ended March 31, 2008 to $96,000 for the three months ended March 31, 2009.
Real Estate Operations
As of March 31, 2009 and 2008, our Company, principally through our Southwood subsidiary, owned approximately 450 acres of non-utility, undeveloped land in southern New Hampshire. We expect to pursue the commercialization of these 450 acres over the next several years as market conditions improve.
As of March 31, 2009 and 2008, Southwood held a 50% ownership interest in a real estate joint venture (known as HECOP IV) organized as a limited liability company. HECOP IV currently owns undeveloped land and generates no revenue. Consequently, earnings or losses from HECOP IV for the foreseeable future are expected to be insignificant. As of March 31, 2008, Southwood also held a 50% ownership interest in three other real estate joint ventures (known as HECOP I, II, and III) also organized as a limited liability companies.
For the three months ended March 31, 2009, Southwood's equity share of pre-tax loss from HECOP IV was approximately $(2,000). For the three months ended March 31, 2008, Southwood's equity share of pre-tax income from HECOP I, II, III, and IV was approximately $3.5 million. The 2008 pre-tax earnings was due principally to an approximately $3.4 million gain (before federal income taxes) from the January 2008 sale of the three commercial real estate properties owned by HECOP I, II, and III. The real estate assets sold by HECOP I, II, and III comprised substantially all of the assets of those three joint ventures. In December 2008, HECOP I, II and III were dissolved.

Eminent Domain Expenses
Our eminent domain expenses were $118,000 for the three months ended March 31, 2009 as compared to $12,000 for the three months ended March 31, 2008. The 2009 eminent domain expenses were primarily attributable to on-going legal fees and the Company's retention of an investment banking firm in January 2009. The Company expects to continue to incur eminent domain expenses in 2009. Allowance for Funds Used During Construction ("AFUDC") For the three months ended March 31, 2009 and 2008, we recorded AFUDC of approximately $121,000 and $146,000, respectively. The $25,000 decrease is largely attributable to the completion of certain large projects qualifying for AFUDC during the reported periods. This trend is expected to continue principally because the upgrade to Pennichuck Water's water treatment plant is scheduled for completion in early 2009.
Interest Income
For the three months ended March 31, 2009 and 2008, we recorded interest income of approximately $6,000 and $81,000, respectively. The decrease of $75,000 is . . .