YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2007
Business Overview: A regulated public utility providing water impoundment, purification, and distribution services to approximately 58,697 customers across 40 municipalities in York and Adams Counties, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Note: Cash flow data is presented for the nine-month period only as per the filing.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 11.0% ($2.3 million) for the nine months ended September 30, 2007, primarily driven by a 9.2% rate increase effective September 15, 2006, and an increase in customer count due to the Abbottstown Borough acquisition.
• Expense Increases: Operating expenses rose 12.2% ($1.4 million) year-over-year. Key drivers included higher depreciation ($514k), increased salaries ($490k), higher pension expenses ($248k), and software support costs ($209k).
• Interest Expense: Long-term debt interest increased 13.4% due to new debt issuance in late 2006. Conversely, short-term debt interest decreased significantly ($357k) as the company reduced reliance on short-term borrowings.
• Liquidity Position: Current liabilities exceeded current assets by $6.1 million as of September 30, 2007, a reversal from a $775k surplus at year-end 2006. This shift was caused by $5.0 million in new short-term borrowings used for acquisitions and construction.
• EPS Dilution: Despite higher net income, EPS decreased slightly ($0.01 for the nine months) due to a 7.7% increase in weighted average shares outstanding following a public offering in December 2006.

Outlook, Risks, and Management Commentary

• Capital Projects: The company has committed $6.1 million to a water treatment expansion project, with $5.1 million remaining to be incurred. Construction expenditures for the remainder of 2007 are estimated at $3.2 million.
• Acquisitions:
  • Completed: Abbottstown Borough system (400 customers) acquired in January 2007 for ~$900k.
  • Pending: Agreement signed to acquire West Manheim Township system (2,100 customers) for ~$2.1 million. Closing expected in October 2008 pending regulatory approval.
• Rate Developments: The company anticipates filing a new rate increase request in 2008. The last approved increase (9.2%) was effective September 2006.
• Drought Conditions: A drought watch was expanded to include York and Adams Counties in October 2007. Management does not expect a material impact on fourth-quarter revenues or net income, though voluntary water use reductions were requested.
• Regulatory Risks: Future profitability depends on the timely approval of rate increases by the PPUC to recover infrastructure investment costs. There is no assurance that requested increases will be granted in full or on time.
• Accounting Updates: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) in January 2007 with no impact on financial position. It is currently evaluating SFAS 157 (Fair Value Measurements) and SFAS 159 (Fair Value Option).

Investor Verification Checklist

• Rate Case Timing: Verify the expected filing date and magnitude of the 2008 rate increase request to ensure coverage of rising operational and capital costs.
• Acquisition Closing: Monitor regulatory approval status for the West Manheim Township acquisition and the associated $2.1 million capital outlay.
• Short-Term Debt Usage: Track the utilization of the $20.5 million lines of credit, specifically the $5.0 million outstanding balance, to ensure it is used for temporary liquidity needs rather than permanent funding.
• Drought Impact: Observe water consumption trends in Q4 2007 to confirm management's assessment that drought conditions will not materially affect revenue.
• Pension Funding: Confirm the scheduled $719k pension contribution in Q4 2007 as disclosed in the notes.