YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Reporting Period: Quarter and six months ended June 30, 2005 (Form 10-Q)
Business Overview: A regulated public utility impounding, purifying, and distributing water to approximately 53,843 customers across 34 municipalities in York County, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Liquidity Note: As of June 30, 2005, current liabilities exceeded current assets by $12,277,445. This is primarily due to the classification of $12,000,000 in PEDFA Exempt Facilities Revenue Bonds as current liabilities because bondholders can tender them at any time. The company maintains $26,500,000 in lines of credit with $1,500,000 outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Water operating revenues increased 19.0% ($2.07 million) year-over-year. This was driven by a 15.9% rate increase effective November 2004 (contributing ~$1.77 million) and an increase in the customer base (from 52,192 to 53,603 average customers).
• Expense Increases: Operating expenses rose 12.4% ($762,811). Key drivers included higher depreciation ($229,000) due to the Susquehanna River Pipeline investment, increased wages ($135,000), and higher pension expenses ($104,000).
• Net Income: Net income increased slightly by 3.1% ($81,227) despite higher revenues, as gains in 2004 (specifically a $743,195 gain on land sale) were not repeated in 2005.
• Interest Expense: Long-term debt interest increased 20.8% due to higher debt balances, while short-term debt interest decreased 88.1% as the company repaid short-term borrowings used for the pipeline project with tax-exempt debt.

Outlook, Risks, and Management Commentary

• Capital Expenditures: The company incurred $5.86 million in construction expenditures in the first half of 2005. It anticipates spending approximately $6.18 million for the remainder of 2005, primarily for transmission/distribution systems and the automated meter reading system.
• Acquisitions: On July 6, 2005 (subsequent to the reporting period), the company closed the acquisition of Spring Grove Water Company and Spring Grove Borough water systems for approximately $1.9 million, adding ~1,000 customers. A third acquisition (Mountain View Water Company) is expected to close later in 2005.
• Rate Developments: The company plans to file its next rate increase request in April 2006. Future revenue recovery is dependent on PPUC approval.
• Internal Controls: Management disclosed a material weakness in internal controls related to the billing function. While treasury and check processing controls have been remediated, the billing portion of the new enterprise software system is delayed until Q1 2006. Interim measures are in place.
• Market Risk: The company manages interest rate risk on its variable-rate PEDFA Series B bonds ($12 million) using an interest rate swap agreement, effectively fixing the rate at 3.16%.

Investor Verification Checklist

• Rate Case Timing: Verify the status of the planned April 2006 rate filing and the likelihood of approval to cover future capital investments.
• Internal Control Remediation: Monitor the implementation of the new billing software in Q1 2006 to ensure the material weakness is fully resolved.
• Debt Refinancing: Confirm the successful remarketing of the $12 million PEDFA Series B bonds if tendered by bondholders, as this impacts liquidity classification.
• Acquisition Integration: Track the financial integration and customer retention of the Spring Grove and Mountain View acquisitions.
• Capital Project Costs: Review actual vs. budgeted costs for the Susquehanna River Pipeline and automated meter reading systems to ensure no overruns.