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The York Water Company (NASDAQ:YORW)

Wall Street Analyst Forum

February 15, 2007 10:30 am ET

Executives

Jeff Osman - President and CEO

Presentation

Jeff Osman

Well, good morning. Thank you, Alyssa. As Alyssa says, I'm here on behalf of The York Water Company. I'll start off with our Safe Harbor statement. I'll actually be making several forward-looking statements this morning. So you should be cautioned that things may not turn out to be -- may not turn out exactly as I have described them.

As Alyssa mentioned, we are the oldest investor-owned water utility in the United States and we've operating continuously since 1816. We are a pure water utility. And after March presentation, we're, at least, in my view, a more traditional water utility, a more eastern water utility where we gather water, we purify it and distribute it to our customer base. We have no other businesses.

We serve about 165,000 people with nearly 58,000 service connections. The company has a strong credit rating of A-. Dividends have been paid continuously since the company's founding. That's 191 consecutive years of dividends, since 1816, and we've been able to increase our dividends for the last 10 years.

Gives a little information about our ownership. We're predominantly owned by retail investors. We have about approximately 10% owned by institutional investors and insiders own about 4% of the company.

Before we go further, I should invite you to participate if you like. These are very comfortable if this presentation is interactive. So if you have questions as we go through the presentation, please don't hesitate to get my attention and we'll address your question right then.

This is the company's service territory. We serve, I mentioned, about 58,000 service connections in South Central Pennsylvania, predominantly York and Adams County, Pennsylvania. And in the inset there, pay particular attention, we -- our service territory is approximately 40 miles north of Baltimore and up -- in several slides later, I'll talk in more depth about what that has meant for the company.

This is just a picture I've throw in from time to time. Just I tire the charts and dialogue. This is a picture of the company's impoundments.

Gives a little information on the company's customer growth. As you can see, over this period of time, since 2002 the company has grown from some 51,000 to nearly 58,000 customers.

And here is a chart of our operating revenues throughout the same period. And as you can see by this chart, we have the best topline ever in 2005 and our expectation is that in 2006, we'll top the 2005s figure.

Throughout the presentation, I'm going to show a number of slides that talk a little bit about the company's recent history. We have a very good recent history. The company has been very successful over the last four to five years. And you'll see a number of charts that depict that.

An important thing to think about is that we think we can duplicate -- replicate that going forward, that is that we have a wonderful recent history. And we think we're poised and positioned for that history to continue. And I'll talk a little bit more about how we're going to do that I think with this next slide.

Yes. We have a three-prong strategy for growth as a company history, what we call organic growth, that is growth within our service territory. We are actively pursuing acquisitions and we look to that to provide us some growth going forward. And what I call appropriate pricing. We're a regulated utility. And for price increases we have to go to our financial regulator, the Pennsylvania Public Utility Commission. And that's one way that we grow the company's topline. I'll talk a little bout each of these now.

Our customer growth. As you can see that -- in the most recent three years, our customer growth has ramped up just a little bit, going from 1.9% to 2.4%, 4.9% and 3.1% over the last three years. That's -- in the water business that's a pretty good organic growth, and we're very pleased with it.

And the reason we are experiencing it is that we have become a bedroom community for the Baltimore-Washington area. Housing cost in the Baltimore-Washington metropolitan area are quite high and we find more and more water of our new customers who work in that metropolitan region but live in our region and we provide water service to them.

And that's added a lot to the customer -- to our customer growth over the last several years. We think the factors that are driving that will continue. The housing markets -- there's still a substantial difference in the housing markets between the Baltimore metropolitan area and our service territory. And we think more and more customers will be driven into our service territory. And we think more and more customers will be driven into our service territory. So we expect that kind of growth to continue.

Here is a listing of some of the Company’s recent acquisitions. I mentioned that we’re actively pursuing acquisitions, and we’re very eager to do this business. And here are four that we’ve managed to acquire in the last several years.

This past week, I took a list of the people we’re talking to from time to time. And they actually have 15 other candidates for acquisition just within our region. And these are a 15 here that we took to on a very regular basis.

And we don’t make projections about when we might actually -- if and when we might actually acquire them, but we are very serious about our acquisition activities and are constantly in contact with these water purveyors, these 15 water purveyors to try to convince them to sell out to us.

In Mike’s presentation, he talked a little bit about people who, well, really operate assets rather than own them. We don’t do that. We own all the assets that we manage. And that’s really the way we like to go forward. I won’t say we won’t ever look at an opportunity to manage a system, but we would only do so if we got some sense that we might openly own it. And that’s the only way I think we do [into] management situation.

I am bringing up a map here, but it’s a pretty big slide. And it takes some time to fill up. So kind of bear with me, if you would. The acquisitions we’re looking at, I mentioned they are all within our region and all can be interconnected to our present system. None of them are so distant that we would have to run them as a satellite. They’ll all be interconnected. Yes.

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Unidentified Audience Member

[Question Inaudible]

Jeff Osman

Well, these systems -- most of these systems were municipal systems. They are small burrows or townships. One of them is a private system. Most of the ones that we’re looking at are municipal systems. And I mentioned there are several people recently.

And I am very surprised. These systems range from about 400 to maybe 6,000 customers, so relatively small. Although for a company our size, they will be a very nice acquisition. But people are very reluctant to get out of the water business, even people who don’t belong here, people who struggle to meet the Safe Drinking Water Act requirements and the like.

They just -- I think it’s a control thing more than anything else. They are very reluctant to let go of their water systems. And they take a long time, sometimes a two-year incubation period. So -- but we are working in earnest. As far as -- we have competitors.

On this slide, actually we’ll talk a little about that. We have competitors with Aqua, competes in our market. The American system competes in our market. United does to a small extent, but mostly our competition is the Aqua systems and the American.

Do you have a question?

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

The question is why do these people want to get out of the business. And mostly is they can’t purify the water up to the Safe Drinking Water Act’s standards. They are ever increasing that is they always getting more difficult to achieve and they are not willing or cannot make the investments and have the personnel on site to treat water at that level, and they finally come to us and [ask us to].

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

All the ones that we are currently actively discussing acquiring are, yes.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

That’s exactly, right. And this I will talk a little bit more about, you know, on this slide that’s slide 14 for those just listening. This is our latest project that we are very excited about, okay.

That’s we recently started business in Adams County and we are in the process constructing in water mains from our distribution system in New York County over to the Galesburg Municipal Authority. And we are wiling to sell them water that they will resale to their customers.

And it’s a nice customer for us. It’s about a half a million customer that’s one of our larger customer, we very excited about that prospect. But it does much more than that for us. Okay. What it does is it allows us to deliver water into the Eastern portion of Adam’s County.

And Adam’s county has not had very much ground water as a scarcity ground water and service water. And so this is the first opportunity for developers in Adam’s County. That have a source of water to supply the new developments and we anticipate is more than anticipate.

We know that they had nearly 2,000 developers come forward and ask whether we’ll be willing to -- willing and able to supply them with water and we have said, yes. So we think that this pipeline is going to bring us a larger customer and going to bring us a lot of opportunity for growth that we wouldn’t otherwise have.

And a third positive thing of the company is we think its going to slam the door on the competition so to speak. For any problems that there is not much acquisition activity in Adams County up to this point is, acquirers has bring a source of water with them that is, there is I mentioned there is a scarcity of water in Adams County.

And so its one of the largest problems of municipalities and private companies stays over there. And so they only can sell out the, a company that can solve that problem. York Water Company can and customer proximity that some of our competitors cannot. So we think it gives us a tremendous competitive advantage in that region of constraints.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

They can drill a long well in their own supply.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

I actually don’t know the answer to that question. There been a lot of pick-up to what I call pent-up development in Adam’s County. That a lot of developers wanted to build homes and not been able to do that because of ground water was not available. And either groundwater source -- surface water was not available. And now that we are this large pipeline over into that region, we think that's the only set of our problems.

You notice up on the screen that this is an area also influence by the Baltimore and Washington, metropolitan area. And we expect development pressure as a result of it's proximity to that area. So there is a great project for us, we are very excited about. We think it's going to do quite a lot for the York Water Company.

Our third leg of our growth strategy is rate case history. And I'll just talk very briefly about this. This is a company's history on rate cases since 1990. And I'd like to draw your attention to a couple of things of the screen.

First of all, the frequency with which we are willing to do rate that we think that is perfect for shareholder to get an increase in rates. We make that legal. I've been boxed the couple of the problems on the schedule. It's hard to tell in this, but I can tell us better there.

I want to point out the last three vacations in the size of them, company has got little more aggressive in it's rate request and you can see the last four years, the bottom three are 9.2, 15.9 and 8.5%. They are fairly healthy rate increases and at also in box the column, it's litigated/settled.

I just want to point out that company has been able to settle its rate cases since 1994. we're very pleased with that that advantages the Company and that we get that revenue stream a lot earlier than we would have went through a fully litigated rate case and cost of fully litigated rate case are much higher than a settlement procedure.

And the reason we've been able to do that settlement out is because of our regulatory relations with our financial regulator, which I have a slide. A little later I'll talk more about that.

Just another picture, this is our pumping station we have on the Susquehanna River. And there is a story to itself. Up to 2000 -- late 2004, early 2005, the Company has a safe yield water of 23 million gallons today, that is the enough water that we can drive of our supply.

We are little different in the west. We don't really earn those rights on the water. We actually own just the right to use the water. We get an allocation from our Environmental regulators, the Department of Environmental Protection, Pennsylvania, to use so much of that.

Our safe yield at the end of 2004 was 23 million gallons. We are selling about 20 million gallons. So we were something a quite close to our allocation. We have some concerns about our -- how we're going to sustain growth?

And so we were questioned and were granted an additional 12 million gallon a day allocation from the Susquehanna River and we're successful with that effort and so now, we have an allocation of -- and a safe field of 35 million gallons a day and we're selling about 20. So we're at least this point very comfortable about better prospects for having a source of water available going forward.

Here is chart on recent net income and there is -- as you can see from this chart, we've experienced record earnings. You might have noted that on our rate case chart that -- our most recent rate case went into effect September 1st, 2006. And so in 2006 and in 2007, we’ll start doing -- enjoy the benefit of that rate increase. It was just over 9%.

Here is a specific the company uses as the efficiency ratio, and we use net income. We go right to the bottomline. We think that’s the most important criteria. And here, you can see that our efficiency ratio since 2001 has hovered just over 20%. And it is the best in the water industry. We’re very proud about that.

And the Company doesn’t provide guidance on its earnings. We provide, what I call, soft guidance. We’ll talk a little bit about our topline growth and what we think is going to drive it. And we’ll talk about our efficiencies that we think, our efficiency is the best in the industry, and we think we will sustain that ratio.

And so our -- it’s our notion that we will continue to operate at an efficient level and that should -- you should be able to conclude something about our earnings growth from the fact that we talk a little bit about our topline growth and maintain -- that we can maintain our efficiency ratio.

There is our return on equity, on yearend equity, through the year 2005. And you can see we’ve been able to keep our returns at about 11 -- although 11% for mostly that period of time, and that’s pretty good in the industry. We’re very pleased with that return and feel very good about it.

There is a -- the fixture of our earnings per share over the recent past. And I’ll talk a little about -- we think our topline will grow. We think our margins will stay steady. So we think earnings should grow as well.

There is cash dividends per share over the recent several years. I mentioned earlier, and I always look for an opportunity to repeat this that we have been paying dividends for 191 years, consecutively since 1816. We think that’s a remarkable record. And we have been increasing that for 10 years.

And here is a short part of that that history. And we understand the power of dividends. We know that there are number of our, particularly our retail investors buy us for that reason. And so it’s very important to the Company.

This little chart that I use talks about the Company’s payout ratio. We have been very successful in increasing the dividends for about 10 years. But at the same time, I am very pleased, that we’ve been able to strengthen the Company’s balance sheet at the same time, that we have been able to invest more of our earnings back into the Company and have driven down our payout ratio down to just under 76%. And our short-term objective is to get that under 75%.

So going forward, our expectation is that we will continue to increase our dividends, but at the same time, strengthen the Company’s balance sheet. There is Company’s pumping station. All the water that we distribute goes through this station. It was built in sometime in the 1890s and still in very good order. We are very proud of the way we maintain our assets. And this is just an example.

I’ve got several slides that talk about our regulatory relations. Obviously, if you’re regulator of water utility, that’s very important to you. And we’re regulated primarily by three entities.

The -- our financial regulator is the Pennsylvania Public Utility Commission. And we have two environmental regulators, Pennsylvania Department of Environmental Protection and the Susquehanna River Basin Commission. And our reputation with those regulators is the best.

I use this slide this is Company's trademark logo. And I use this slide as a metaphor of the quality into water that the Company delivers. This slogan that we use our customers uses all the time that good York water neither our regulators I hear our regulators using this all the time as well.

So we've been very successful in branding that slogan and partly because it's true, and there's nothing like getting good regulatory relations like delivering the best water you ask we can. And we do so and that has lead to the Company's success. There's another way we measure our -- measure our customer complaint rate and add a lot to our regulatory relations as well.

This is information complied by the, our public utility commission. Let me show our complaint rates both complaint rate and justified complaint rate compared to our major competitors in Pennsylvania, Aqua Pennsylvania and Pennsylvania American as you could see our complaint rate is significantly lower than those

And then this is my last chart on regulatory relations and it's a little busy with that total there. But I hope you can see it. And these are – there are five Class-A water companies operating in Pennsylvania. And these are the aerial charges for each of those five and you could see York Water Company's rates are the most affordable.

So to sum of that regulatory -- those several regulatory slides, we think we deliver the best water we deliver in Pennsylvania. And our customers and regulator agree with us. We know we have a very best customer service by a large margins and our water is most affordable. And those three things really help us to deal with our regulators and have lead to a lot of successes.

Earlier I equated around about our rate case history and how we've been successfully able to settle rate cases since 1994. And a part of what makes that happen is our regulatory relations with the Pennsylvania Republic Utility Commission. Those are Company's forwards plans.

And all the water that we deliver is followed this facility. Once again it's just a picture to kind of break up the chart just a little bit. There is the Company’s recent stock performance. And since I learned how to do this, I can't resist. You know, it's all corny, but I keep putting it in here. As you can see the Company stock has done very, very well since 2002. We're very proud of the value that we provided our investors.

There is a same chart, sort of the same chart, just expressed a different way that if a shareholder bought a share or stock at the end of 2002 for $9.82, which was the share price at that time, it is now being worth $19.87. And that number is a little hard to read.

I should mention to you all the pictures in these slide, these are pictures that were all taken in the Company’s watershed reservoir area. And a lot of them will appear in Company's annual report just two weeks from now.

Here is the Company's market cap. And it's pretty much the same story. In 2002, the Company had a market cap of $19 million. And as of today, it's approximately $200 million, so pretty pleased.

Here is a chart that compares our performance with the rest of the water industry and the Standard & Poor’s 500. This chart, we'll require to put this in our proxy each year. And we were actually very happy to do so, because as you can see, York Water Company’s performance is significantly higher than the rest of our peer group and higher than we Standard & Poor’s 500.

And here it is on an individual basis, okay? That at least over the last five years, these are the water companies that we think are our peers. And over the last five years, the Company's performance has been better than any of the five. I call this my -- with apologies to Jim Cramer, I call this my best in best of three chart.

And I have a chart here that talks a little bit about how we think we can keep this going. As I mentioned, I hope you got some notion from the charts that we've put out that we’ve been very successful, particularly over the last four years. And going forward our plan is to keep that success going. And this is the way we expect to do it.

Once again during the water business, job one is providing high-quality water. We expect to continue to do so. We expect our customer service to remain extremely high, to remain the best. I use the expression, we're in the workplace. That's the way we talk about getting our employees engaged in the business.

The Company has been very successful in the recent past, and our employees are very excited about our success. And there's been a lot of fun for us all. And I think they were engaged in the business and very excited about continuing that success.

I mentioned our strategies for topline growth, appropriate pricing, organic growth and acquisitions, and then we hope to maintain the quality of our earnings by keeping our margins the best in the industry.

So that's our presentation this morning, but I am available to answer any questions, if you have those. Yes?

Question-and-Answer-Session

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

We use activated charcoal.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

Yes. And with disinfectant chlorine, yes. And we use a [softer] as well to make sure our lead and copper are not drawn from the water, so just pass it to our distribution system. Yes sir?

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

Well, there has been some, okay? In the water industry, okay? We have been dealing with, although they were terrorists. We have been dealing with what we are calling the vandalism, Okay? People would just sling in our reservoirs or graffiti our standpipes. And so we actually had a pretty good security in place to keep those, sorts of, things from happening.

Most of our facilities, you can’t get near. But we did do some investment to improve that, okay? We secured our facilities a little better. We have cameras all over the place now, which we didn’t have formerly. Most of our important facilities, there are camera -- there are a number of cameras placed there that we can see what’s happening…

And than the most important is that we put in place, what’s call a SCADA system, that's a system with monitors water distribution that’s sort of thing. As a part of that system, we now know immediately if the contaminant is entered in anywhere in our distribution system.

We have the facilities in place to analyze the water that goes through our various distribution points. And will alert us if there is a contamination. We made that investment in 2002 most -- all most of our investments behind us. So we made in 2002 and our regulator allowed us to recover return on that. So it was -- it worked out fine.

Unidentified Audience Member

[Inaudible question]

Jeff Osman

Well, since we announced our plans to deliver water to Gettysburg, we have some 20 developers come to us and ask whether they can serve us for development. The developments range from a 100 homes to 700 homes, and anywhere in between. So yes, we are -- with our announcement we are seeing tremendous interest in developing in Eastern Adam's County area.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

No.

Unidentified Audience Member

Why is that?

Jeff Osman

Well, our personal river evidence was very nice by the Public Utility Commission.

Unidentified Audience Member

Okay.

Jeff Osman

Our model is just a little bit different. And what we do is, we refuse to take any of the risk.

Unidentified Audience Member

Negative.

Jeff Osman

And developer will come to us, and say, "I’ve got 200 homes I’m going to build here, okay. And would you serve water?" And we say, "Yes. You put the distribution; you pay for the distribution system to serve those homes." And then as homes are connected, we pay portion back to the developer. And what that does, of course, they’ll list all the risk from the company, but we don’t give. None of those homes were sold. The Company doesn’t have any out of pocket, capital. So that’s the way we did it. That’s the way our regulation is set up, and we are not alone. Any company -- any water company in Pennsylvania does in the same fashion. Yes.

Unidentified Audience Member

[Question inaudible]

Jeff Osman

Well, we are quite well introduced and as we had other opportunities that we will have to run as a satellite either further displacement in the town of Pennsylvania or in a neighboring state for example Maryland. The Southern edge of our service territories of Mason-Dixon Line the border between Maryland and Pennsylvania, and for the right opportunity we crossed that border, for a system in Maryland. So the answer is yes.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

Well, we’ve been blessed in a way that, we haven’t had any problem obtaining capital, okay, both equity capital we’ve done several follow on, stock offerings over the last several years and a number of bond issues mostly tax-free debt. And there seems to be a tremendous appetite for both our bonds and our common stock.

And so, my guess is that we will have an opportunity to somewhere find that capital. And I don't think there is any limit to -- there obviously has to be a limit, but $20 million would not be a limitation for The York Water Company.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

Well, I think that -- something like that is going to be part of the company's long-term strategy, not necessarily New York, but looking further, okay, and establishing a satellite, and then building around that satellite. If there are opportunities, for example, in Northern Maryland we'll probably be very willing to do something like that.

We haven't really thought too much about New York. That's -- we're actually so busy with the 15 candidates that I mentioned that it's hard to look further.

Yes, sir.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

That's sort of the exclusivity deals.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

No. There is no -- we're not prohibited from moving into any community.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

No. We're not prohibited from doing something like that.

Unidentified Audience Member

[Question Inaudible]

Jeff Osman

No. I see none, no.

Okay. Well, I thank you very much for your attention.

TRANSCRIPT SPONSOR

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