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BOSTON ( TheStreet) -- The New Hampshire state motto is "live free or die." Those who opt for the former require hydration. Enter: Merrimack-based Pennichuck ( PNNW)), a water utility with an impressive record of growth. Pennichuck has been hustling aqua in the Granite State since 1852.

This small-cap boasts attractive digits: a three-year compounded annual growth rate of 10% for revenue and 223% for earnings. Although Pennichuck succumbed to a net loss in the first quarter, its stock is worth consideration for income-oriented investors.

Second-quarter revenue increased 6% to $8.4 million, but net income dropped 4% to $700,000 and earnings per share declined 5% to 18 cents. The gross margin improved from 38% to 39% and the operating margin stretched from 26% to 27%, a sign of resilient pricing.

A rate increase that was recently approved by the New Hampshire State Public Utilities Commission will increase annual revenue by $5 million. And Pennichuck just secured a $2.1 million federal-stimulus award to upgrade its equipment and infrastructure.

But there are some complex legal issues dogging this company and testing the limits of the state motto. The city of Nashua is attempting to coerce a sale of Pennichuck's assets based on "eminent domain," the government's right to seize private property for public purpose.

A ballot initiative that passed in 2003 allows the city to pursue control of its own water supply. But, as is often the case, the outcome of the initiative might not accurately reflect majority opinion due to weak voter turnout.

In a poll conducted by American Research Group this fall, 42% of respondents opposed the city's attempt to pursue control of its water supply while 39% favored it. With a 4.9% margin of error, the poll is a toss-up.

But one poll statistic is alarmingly clear: 82% of those surveyed didn't vote in the 2003 initiative. Pennichuck estimates that the cost of acquisition could cause a 40% price spike for Nashua customers because they would be required to subsidize water transport to neighboring communities.

Those cognizant of the price tag and the city's intention to hire a French company to run the new utility have some political fervor. Worth noting: Pennichuck's second-quarter profit were hampered by a $70,000 appeal-related cost to battle City Hall.

Pennichuck's stock pays an attractive 3% dividend yield and has a low beta, a measure of market correlation, of 0.4. At a price-to-earnings ratio of 48, the shares aren't cheap, but they've ascended 15% in 2009, outpacing the Dow Jones Industrial Average and S&P 500 Index. Larger peers Aqua America ( WTR) and California Water Service ( CWT) are more affordable.

Investors seeking a rare small-cap legal-arbitrage play should drive up to Nashua and see what they can dig up. Or better yet, take a swim.

-- Reported by Jake Lynch in Boston.

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