YORW

Business Context and Reporting Period

Company: The York Water Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2004
Business Overview: A regulated water utility operating in York County, Pennsylvania, subject to the Pennsylvania Public Utility Commission (PPUC). The company impounds, purifies, and distributes water to an estimated population of 156,000.

Key Financial Metrics

Liquidity: Current liabilities exceeded current assets by $12,269,894 as of September 30, 2004. The company maintains $26.5 million in lines of credit.

Material Changes vs. Prior Period

• Revenue Growth: Nine-month operating revenues increased 5.4% ($838,775), driven by an 8.5% rate increase effective June 2003 and increased customer count (up 1,055). However, heavy rainfall in 2004 (49.5 inches vs. 31.6 inch average) suppressed per capita consumption.
• Profitability: Net income for the nine months increased 17.1% ($564,439). This was aided by a one-time gain of $743,195 on the sale of land in Q1 2004. Conversely, Q3 2004 net income decreased 17.1% compared to Q3 2003 due to lower revenues and higher expenses.
• Expenses: Operating expenses rose 7.5% year-over-year for the nine-month period. Increases were attributed to higher depreciation, insurance premiums, wages, and distribution maintenance. Interest expense on short-term debt increased 107.8% due to borrowings for the Susquehanna River Pipeline Project.
• Capital Structure: The company issued 415,000 shares of common stock in July 2004, raising approximately $6.8 million in net proceeds to repay short-term debt. Long-term debt increased by $7.3 million due to new tax-exempt bond issuances in April 2004.

Outlook, Risks, and Management Commentary

• Rate Relief: The PPUC authorized a 15.9% rate increase (approx. $3.5 million annual revenue) on September 30, 2004. The increase is effective upon the operational launch of the Susquehanna River Pipeline, expected in early November 2004.
• Capital Projects: The Susquehanna River Pipeline Project is estimated to cost $23 million total. As of September 30, 2004, approximately $15.5 million (72%) had been spent. Remaining capital commitments are approximately $3.8 million. The project is expected to be completed by December 2004.
• Financing Plans: Management plans a $12 million tax-exempt bond issuance in Q4 2004 to complete project financing. Future liquidity will rely on operating cash flows, credit lines, and customer advances.
• Risks:
  • Regulatory Risk: Future rate increases are subject to PPUC approval; there is no assurance of timely or sufficient relief to cover investment costs.
  • Weather Risk: Revenue is sensitive to rainfall and temperature, which affect water consumption volumes.
  • Interest Rate Risk: The company has variable-rate debt (LIBOR + spread) and does not use derivatives to hedge interest rate exposure.
• Unusual Items: The $743,195 gain on land sale is non-recurring and should not be expected in future periods.

Investor Verification Checklist

• Verify the operational status and completion date of the Susquehanna River Pipeline Project to confirm the effective date of the approved 15.9% rate increase.
• Monitor the execution of the planned $12 million tax-exempt bond issuance in Q4 2004 to ensure refinancing of short-term project debt.
• Assess the impact of continued heavy rainfall on Q4 2004 water consumption volumes and revenue realization.
• Review the company's ability to service increased debt levels, given the reclassification of $4.3 million in bonds to current maturities.
• Confirm that the $6.8 million stock offering proceeds were fully utilized to reduce short-term indebtedness as stated.