Given recent small acquisitions from the York Water Co. and Cen-

sus estimates of an increasing population in York and Adams

County, Pennsylvania, York Water Co. is projected to grow at a

faster rate than both inflation and industry projections from IBIS

World which are both around 2.1%. Base case assumptions of

3.1% growth, given population projections, means that when all

valuation methods are considered, York Water Co. has an upside

of 3.55% when compared to its currently trading market price. A

HOLD Recommendation has been placed on the stock given the

simple fact that it is trading less than 10% away from projected fair

value. Upside potential is minimal to be realized in high volumes.

The York Water Company maintains the longest consecutive divi-

dend history in America with dividends being paid out consecutive-

ly for the last 199 years. On top of this impressive record lies an-

other fact worth considering; York Water Co. has consecutively

increased the dividend for the last 18 years and has a 20 year his-

torical dividend payout ratio of 79.7% of basic EPS. This speaks

volumes to the companies lack of cyclicality as well as the goal of

management which seems to be on par with shareholder interests.

Investment Thesis

Company Overview

Company Snapshot

YORW ARTN

Share Price

$23.33 $36.0

52 Week Range $19.7-

25.99

$20.00 -

26.85

Target Price $24.19 -

Difference % 3.55% -

Market Cap $301M $229.4M

Key Statistics (as of year end 2014)

Beta .80 .18

Operating Margin 48.11% 33.8%

Profit Margin 26.66% 15.21%

ROE (as %) 11.93% 9.20%

TEV/EBITDA 13.25x 10.03x

P/E ttm 24.11x 19.40x

EPS $.89 $1.30

Competitors

Connecticut Water Service (CWTS)

Middle Sex Water Co. (MSEX)

California Water Service Group (CWT)

Aqua America Inc. (WTR)

SJW Corp. (SJWRP)

SOURCE: Yahoo! Finance as of 2/20/15

Why York Water Is A Safe Bet

YORK Water Inc.

Nasdaq: YORW November 2015

HOLD

Target: 24.19 Taylor Herron t618h047@ku.edu

The primary business of the York Water Company is to im-

pound, purify to meet or exceed safe drinking standards and distrib-

ute water. The company also owns and operates two wastewater

collection and treatment systems. York Water operates within its

franchised water territory, which covers 39 municipalities within

York County, Pennsylvania and nine municipalities within Adams

County, Pennsylvania. The company's wastewater operations in-

clude portions of three municipalities in York County. Water service

is supplied through the company's own distribution system. The

bulk of York's Company’s water comes from two branches of the

Codus creek which have a combined 73.0million gallons of daily

flow. On top of this, the company owns two reservoirs and seven

wells which provides 12.0 million and 366,000 gallons respectively

to to supply customers in Carroll Valley Borough, Adams County an

the Cumberland Township. The company is regulated by the Penn-

sylvania Public Utility Commission or PPUC in the areas of billing,

payment procedures, dispute processing, terminations, service ter-

ritory, debt and equity financing and rate setting. The York Water

Company continuously looks for water and wastewater acquisition

and expansion opportunities both within and outside its current ser-

vice territory as well as additional opportunities to enter into bulk

contracts with municipalities and other entities to supply water. 1

1 Adapted from company 10-Q Sept. 2015

Page 2

November 2015 HOLD $24.19 Taylor Herron

Competitive Advantage

Risks

The York Water company has paid a consecutive

dividend for the last 199 years and has also in-

creased the dividend consecutively for the last 18

years. Although York Water is paying a smaller divi-

dend than both Connecticut Water Services (CWTS)

and Artesian Resources Corp (ARTN) neither com-

pany has maintained the dividend growth or divi-

dend history that York Water has. The simple fact is

that every county in America has a water supply dis-

tributor. York Water Co. has maintained consistent

dividend growth and has remained unaffected by

cyclical changes in the markets. York's competitive

advantage is their growth potential and manage-

ment who align perfectly with the interests of share-

holders.

The Company's water business is somewhat de-

pendent on weather conditions, particularly the

amount and timing of rainfall. According to the latest

10-Q, revenues are particularly vulnerable to weath-

er conditions in the summer months. As one would

expect, temperatures are generally at their highest

during the summer, which means more risk for de-

hydration and increased water usage in other areas

such as lawn care and irrigation for sports fields and

golf courses. Although the company states that it

has a more than adequate supply of water for such

times, customers may still be required to cut back

water usage under such drought-like conditions.

As a company, York Water has seen a slight decline

in employees but the county of York Pennsylvania has

seen a favorable increase in households each year,

with a CAGR of 1.45% in the 4 years to 2014. The

county is predominantly middle and lower class, but

York has still seen client increases of around 1%. Giv-

en consensus estimates of ~1% annual increases in

housing units, York Water CO. stands to benefit from

the population increases and will experience improved

revenues per client of almost 2% per year.

This can negatively impact revenues due to the sim-

ple fact that revenues are based solely on gallons per

customer usage. York Water takes these concerns

very seriously and as a result, has started instituting

minimum customer charges which are intended to

cover fixed costs of operations under all likely weather

conditions. Although the company does not require

large amounts of working capital, there are still other

risks associated with the business. Increases in reve-

nues are almost completely dependent on the Water

Company’s ability to obtain rate increases from the

Pennsylvania Public Utility Commission (PPUC) in a

timely manner, in adequate amounts, and to increase

volumes of water sold through increased consumption

and increases in the number of customers served.

York Water Company has agreements with multiple

different municipalities to provide sewer billing ser-

vices. One last risk factor yet to be addressed is the

potential for interest rate increases and the underlying

effect on per capita disposable income. Although wa-

ter is a necessity, it is possible to cut back on water

consumption if an individuals budget becomes con-

strained which could mean slightly decreased reve-

nues should the rate increase catch anyone by sur-

prise.

*Graph Created using Data from Yahoo Finance

Market Share and Census Data

Page 3

November 2015 HOLD $24.19 Taylor Herron

Valuation Analysis

Recommendation

For the purpose of this valuation, 6 different meth-

odologies were used, DCF, Gordon Growth Model,

Modified Multi Stage DDM, TEV/EBITDA, LTM P/E,

and TTM P/E, to determine a hexagonal angulation

of $24.03 when viewed from the Base Case as-

sumptions. The York Water company has paid a

dividend consecutively for the last 199 years and

has consecutively increased the dividend for the last

18 years. It is for this reason that heavier weight

was placed upon the Dividend based methodolo-

gies . The Multi stage DDM uses a growth rate of

18.67%, which is the rate at which the dividend was

increased last year, for the next 10 years of divi-

dends and then assumes the 20 year average his-

torical growth of 4.82% for the terminal value. A

Gordon Growth Model was also used to simulate flat

lined dividend growth of 5.5%, which is based on

historic EPS growth figures from the past 5 years.

The actual average of of the past 5 years is 7.07%

annualize growth but this appeared to inflate the

share price from the Gordon growth model and as a

result, a 27% discount rate was applied to bring the

growth down to 5.5%. This growth figure, when

used in conjunction with York Water Co’s 7.93%

cost of equity yielded an estimated value of $25.99

per share. Dividends were also projected out 4

years to simulate the average projection period.2018

EPS estimates of $1.13 appear to be in line with the

company’s history. Given the company’s status as a

major player in the utility sphere, 8 companies were

used to conduct a relative valuation, yielding an aver-

age TEV/EBITDA multiple of 11.5x and an average

NTM P/E of 20.1x. Continuing down the list, a discount-

ed cash flow was also performed, but due to the com-

panies low cost of capital was not weighted very heavi-

ly. DCF analysis yielded an implied equity value per

share of $23.15, which is a downside of .077%.

Based on the weighted average of the valuation meth-

odologies, a fair value of $24.19 was obtained, yield-

ing a potential upside of 3.55%. Certain risks are evi-

dent such as the company’s ability to obtain rate in-

creases from the Pennsylvania Public Utility Compa-

ny, which could translate to slightly decreased reve-

nues. As a result of this and other risks mentioned

beforehand, a HOLD recommendation has been is-

sued. The company Is not affected by cyclicality like

other companies and as a result trades on average

between $19.70 and $25.99. For upside to be real-

ized, the company would have secure these rate in-

creases and pass on to the shareholders.