YORW

Business Context and Reporting Period

Company: The York Water Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: A regulated water utility operating in Pennsylvania. The company provides water service to residential, commercial, and industrial customers. Operations are subject to rate regulation by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Liquidity Position: As of June 30, 2003, current liabilities exceeded current assets by approximately $2.2 million. The company maintains $21.5 million in unsecured lines of credit, with $3.3 million utilized as of the reporting date.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 2.6% year-over-year, driven by an addition of 804 customers and a distribution surcharge collected for infrastructure improvements.
• Expense Trends: Operating expenses rose 4.1% due to higher depreciation, postage, insurance, and property taxes. This was partially offset by reduced pumping station maintenance and shareholder expenses.
• Net Income: Net income increased slightly by 0.6% ($10,810) despite higher operating expenses, aided by a lower effective tax rate (33.7% in 2003 vs. 35.5% in 2002).
• Pension Costs: Supplemental retirement expenses increased significantly due to a decrease in the discount rate used by the pension actuary. However, $173,940 in pension expenses were reclassified to regulatory assets following a rate case approval.
• Capitalized Interest: Allowance for funds used during construction (AFUDC) increased 105.7% due to capitalized interest on the Susquehanna River project.

Guidance, Outlook, and Risks

Rate Developments

Effective June 26, 2003, the PPUC authorized an 8.5% rate increase, expected to generate approximately $1.725 million in additional annual operating revenues. The company plans to file its next rate increase request on or after March 31, 2004.

Capital Projects and Liquidity

The company anticipates construction expenditures of approximately $13.3 million for the second half of 2003. Financing will rely on internally generated funds, customer advances, short-term borrowings, and stock issuances under dividend reinvestment and employee stock purchase plans.

Key Risks and Contingencies

• Regulatory Approvals: The permitting process for the Susquehanna River pipeline is ongoing. A favorable ruling on the reclassification of Lake Redman is expected in late 2003, followed by EPA approval for discharge permits.
• Construction Timeline: Construction on the Susquehanna River project (estimated cost $22 million) is expected to begin in late August or early September 2003 pending final environmental approvals.
• Market Risk: The company is exposed to interest rate fluctuations on its variable-rate lines of credit (Prime/LIBOR + 1% to 1.25%). It does not use derivative instruments to hedge this risk.
• Debt Maturities: Mandatory tender dates exist for the 4.40% Series 1994 bonds (May 15, 2004) and 6.0% Series 1995 bonds (June 1, 2005).

Investor Verification Checklist

• Verify the final approval status and timeline for the Susquehanna River pipeline discharge permits and Lake Redman reclassification.
• Monitor the execution of the 8.5% rate increase approved in June 2003 and its impact on future cash flows.
• Review the company's ability to fund the projected $13.3 million in H2 2003 capital expenditures without increasing long-term debt significantly.
• Assess the impact of the upcoming mandatory tender dates for 1994 and 1995 bonds on future refinancing costs.
• Confirm the stability of the pension discount rate assumptions, given the recent volatility in supplemental retirement expenses.