YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended March 31, 2007
Business Overview: A regulated utility operating in York and Adams Counties, Pennsylvania, providing water impoundment, purification, and distribution to approximately 58,101 customers. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

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

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 11.7% ($771) driven by a 2,222 customer increase, largely due to the acquisition of Abbottstown Borough water system (approx. 400 customers) in January 2007.
• Expense Increases: Operating expenses rose 13.0% ($484) due to higher salaries ($169), depreciation ($127), software support ($117), and pension costs ($87). These were partially offset by a $115 reduction in capital stock and realty taxes.
• Interest Expense: Long-term debt interest increased 10.7% ($91) due to higher outstanding balances from a $10.5 million bond issuance in late 2006. Short-term interest expense decreased $102 due to lower average short-term debt balances.
• Net Income: Increased 5.3% ($67) to $1,326 despite higher expenses, primarily due to revenue growth.
• Liquidity Position: Current liabilities exceeded current assets by $725, primarily due to $1,563 in short-term borrowings used to fund operations, acquisitions, and construction.

Guidance, Outlook, and Risks

• Capital Expenditures: The company incurred $2,366 in construction expenditures in Q1 2007 and anticipates approximately $11,500 for the remainder of the year. Funding sources include internal funds, short-term borrowings, customer advances, and stock issuance via DRIP/ESPP.
• Rate Developments: A 9.2% rate increase was approved by the PPUC effective September 15, 2006. Management does not expect to file a new rate increase request in 2007.
• Acquisition: The Abbottstown Borough acquisition was funded via internal funds and short-term borrowings. The purchase price was less than the depreciated cost of assets, resulting in a negative acquisition adjustment of $131 being amortized.
• Risks: Key risks include weather conditions (drought/rainfall) affecting water usage, regulatory approval of future rate increases, and inflation impacting facility replacement costs. The company relies on the PPUC for rate relief to recover infrastructure investments.
• Accounting Adjustments: In March 2007, the company corrected a miscalculation regarding a note receivable, reducing notes receivable by $544 and interest income by $71 (applicable to 2003-2006). This was deemed immaterial to overall operations.

Investor Verification Checklist

• Regulatory Approval: Verify the status of future rate increase applications with the PPUC, as revenue recovery depends on regulatory approval.
• Debt Maturity Profile: Review the maturity schedule of long-term debt, particularly the variable-rate PEDFA Series B bonds, to assess interest rate exposure despite the swap agreement.
• Capital Project Execution: Monitor the completion of the $4.5 million meter reading system and other infrastructure upgrades to ensure they align with the $11.5 million remaining capital budget.
• Customer Growth vs. Consumption: Analyze the trend of per capita water consumption, which decreased 1.4% in Q1 2007 despite customer growth, to assess long-term revenue stability.
• Short-Term Borrowing Usage: Track the utilization of the $20.5 million lines of credit, as short-term borrowings increased to $1.563 million to fund working capital and acquisitions.