YORW

Business Context and Reporting Period

Company: The York Water Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: The Company impounds, purifies, and distributes water to approximately 59,239 customers across 46 municipalities in York and Adams Counties, Pennsylvania. Operations are regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Liquidity: As of June 30, 2008, current liabilities exceeded current assets by $9,075. The Company maintains two lines of credit aggregating $28,000, with $17,047 outstanding as of the reporting date.

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased 8.7% to $2.726 million for the six months ended June 30, 2008, compared to $2.987 million in 2007. This was driven by higher operating expenses and increased interest costs.
• Revenue Stability: Operating revenues remained relatively flat (+0.1%) despite a 4.7% decline in per capita water consumption. The revenue stability was maintained through customer base growth (an increase of 908 customers).
• Expense Increases: Operating expenses rose 5.0% to $8.979 million. Key drivers included higher depreciation ($244k increase), increased salaries and health insurance costs, and higher realty taxes.
• Interest Expense: Interest on long-term debt increased 15.1% to $2.222 million due to higher borrowings under lines of credit and variable interest rates prior to recent refinancing.
• Capital Expenditures: Utility plant additions increased significantly to $9.155 million (from $6.453 million in 2007), reflecting investment in a large water treatment expansion project and infrastructure for pending acquisitions.

Outlook, Risks, and Management Commentary

• Rate Matters: The Company filed a rate increase request on May 16, 2008, seeking $7.1 million (19.6% increase). Approval is pending with the PPUC; if granted, it would be effective no later than February 15, 2009. There is no assurance of approval or the final amount.
• Acquisitions:
  • West Manheim Township: Agreement to acquire system serving ~2,100 customers for ~$2.075 million. Closing expected in Q4 2008. Additional $6.815 million committed for main extensions.
  • Asbury Pointe Water Company: Agreement to acquire facilities serving ~250 customers for ~$242 million. PPUC approval requested in May 2008.
• Debt Refinancing: In May 2008, the Company issued $12 million in PEDFA Series A Bonds to refund Series B Bonds. This refinancing is expected to reduce interest costs from an average of 5.00% (post-tender) back to historic levels, utilizing an interest rate swap to fix the rate at 3.16%.
• Risks: Key risks include weather conditions (drought/rainfall) affecting consumption, regulatory delays in rate approvals, and the ability to secure permits for expansion. The Company notes that increased rainfall and a sluggish economy have reduced per capita consumption.

Investor Verification Checklist

• Rate Case Outcome: Monitor the PPUC's decision on the 19.6% rate increase request filed in May 2008, as this is critical for future margin recovery.
• Acquisition Closings: Verify the successful closing and integration of the West Manheim Township and Asbury Pointe acquisitions in late 2008.
• Interest Rate Exposure: Confirm the effective reduction in interest costs following the May 2008 refinancing and the performance of the interest rate swap agreement.
• Capital Expenditure Funding: Review the Company's ability to fund the anticipated $17.792 million in remaining 2008 construction expenditures without excessive reliance on short-term credit.
• Consumption Trends: Track per capita water usage trends to assess the impact of weather and economic conditions on revenue stability.