YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: A regulated public utility impounding, purifying, and distributing water to approximately 165,000 people across 38 municipalities in York and Adams Counties, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics (Nine Months Ended Sept 30, 2006)

Note: All figures in thousands of dollars unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 5.8% year-over-year, driven by a 2,419 customer increase (to 56,431) and a 9.2% rate increase approved by the PPUC effective September 15, 2006. This offset a decrease in per capita water consumption.
• Expense Increases: Operating expenses rose 9.9%, primarily due to higher salaries ($328k), depreciation ($124k), distribution maintenance ($121k), and transportation costs ($77k) linked to gas prices and new vehicles.
• Interest Expense: Short-term interest expense increased significantly ($436k) due to higher average short-term debt balances ($10.76M vs $1.59M) used to fund construction and acquisitions. Long-term interest expense decreased slightly due to bond remarketing.
• Capital Expenditures: Utility plant additions totaled $15.15M for the nine months, a significant increase from $10.62M in the prior year. Major projects included an automated meter reading system and the Abbottstown acquisition infrastructure.
• Stock Split: A 3-for-2 stock split was effected on September 11, 2006. All share and per-share data in the filing have been restated to reflect this.

Outlook, Risks, and Management Commentary

• Liquidity Position: Current liabilities ($35.9M) exceed current assets ($6.6M) by $29.4M. This is largely due to the classification of $12.0M in variable-rate bonds as current liabilities (tenderable at any time) and $17.0M in short-term borrowings. Management believes the bonds will be successfully remarketed if tendered.
• Capital Needs: The company anticipates remaining 2006 construction expenditures of approximately $1.25M. Funding sources include internal cash flow, short-term credit lines ($22.5M total capacity), customer advances, and a planned common stock offering (600,000 shares registered but not yet effective).
• Recent Financing: On October 27, 2006, the company secured a $10.5M loan via the York County Industrial Development Authority at 4.75% interest, maturing in 2036.
• Regulatory Risks: Future profitability depends on the PPUC's timely approval of rate increases to cover rising facility replacement costs and inflation. The company cannot guarantee future rate relief.
• Internal Controls: A previously identified material weakness in the billing function was remediated in 2005. In Q3 2006, the company implemented Oracle enterprise software modules to further segregate duties and improve controls.

Investor Verification Checklist

• Debt Maturity Profile: Verify the status of the $12.0M PEDFA Series B bonds classified as current liabilities and the company's ability to remarket them if tendered.
• Rate Case Impact: Confirm the full-year revenue impact of the 9.2% rate increase approved in September 2006.
• Capital Expenditure Funding: Monitor the effectiveness of the planned common stock offering and the utilization of the $22.5M credit lines to fund the $16.7M+ in construction expenditures.
• Acquisition Integration: Track the completion of the Abbottstown Borough Water System acquisition (expected settlement December 2006) and associated interconnection costs.
• Interest Rate Exposure: Assess the impact of rising LIBOR rates on the $17M in short-term variable-rate borrowings (weighted average rate 6.09%).