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, 2006
Business Overview: The Company impounds, purifies, and distributes water to approximately 165,000 people across 34 municipalities in York County, Pennsylvania. It is regulated by the Pennsylvania Public Utility Commission (PPUC). The Company operates two reservoirs and a pipeline from the Susquehanna River, with an average daily availability of 35 million gallons.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Water operating revenues increased 5.4% ($702 thousand) for the six months ended June 30, 2006, compared to the same period in 2005. This was driven by a 2,477 increase in the average number of customers served, partially offset by reduced per capita consumption.
• Expense Increases: Operating expenses rose 9.0% ($621 thousand) due to higher salaries, increased depreciation from plant investment, higher power and transportation costs, and increased contractual services.
• Interest Expense: Short-term interest expense increased significantly ($260 thousand) due to higher average short-term borrowings ($9.3 million in 2006 vs. $0.4 million in 2005). Long-term interest expense decreased slightly ($47 thousand) due to the remarketing of bonds at a lower rate.
• Net Income: Net income increased marginally by 0.6% ($17 thousand) to $2.725 million, as revenue gains were largely offset by higher operating and interest costs.
• Liquidity Position: Current liabilities exceeded current assets by $23.3 million. This is primarily due to the classification of $12.0 million in variable-rate bonds as current liabilities because they can be tendered at any time, though management believes they would be successfully remarketed.

Guidance, Outlook, and Risks

• Rate Case: The Company filed a rate increase request on April 27, 2006, seeking $4.5 million (16.0% increase). Approval is pending with the PPUC, with any increase effective no later than January 26, 2007. There is no assurance of approval or the amount granted.
• Capital Expenditures: The Company incurred $8.7 million in construction expenditures in the first half of 2006. It anticipates spending approximately $9.3 million for the remainder of 2006, primarily for transmission/distribution systems and the Abbottstown acquisition interconnection.
• Acquisitions: The Company is acquiring the Abbottstown Borough Water System for approximately $0.9 million. Settlement is expected between September and December 2006.
• Stock Split: A 3-for-2 stock split was approved by the Board and the PPUC, expected to occur in the third quarter of 2006. Financial statements have not been restated for this split.
• Risks: Key risks include the ability to obtain timely and adequate rate increases from the PPUC to cover inflation and capital costs, weather conditions affecting water consumption, and interest rate fluctuations on variable-rate debt (mitigated by an interest rate swap).

Investor Verification Checklist

• Rate Case Outcome: Verify the final approval amount and effective date of the $4.5 million rate increase request filed with the PPUC.
• Debt Refinancing: Monitor the status of the $12.0 million variable-rate bonds classified as current liabilities and the success of any remarketing efforts if tendered.
• Acquisition Integration: Confirm the completion of the Abbottstown Borough Water System acquisition and the associated interconnection costs.
• Stock Split Execution: Verify the record date and distribution of the 3-for-2 stock split.
• Capital Spending: Track actual construction expenditures against the projected $9.3 million for the remainder of 2006.