Business Context and Reporting Period
Company: The York Water Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company impounds, purifies, and distributes water within a franchised territory covering 39 municipalities in York County and 7 in Adams County, Pennsylvania. It is regulated by the Pennsylvania Public Utility Commission (PPUC). As of June 30, 2009, the Company served approximately 61,808 customers with an average daily availability of 35.0 million gallons.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
|---|---|---|---|---|
| Water Operating Revenues | $17,984 | $15,368 | $9,210 | $7,862 |
| Operating Income | $8,199 | $6,325 | $4,228 | $3,333 |
| Net Income | $3,410 | $2,726 | $1,913 | $1,520 |
| Basic EPS | $0.30 | $0.24 | $0.17 | $0.13 |
| Cash Flow from Operations | $7,507 | $5,537 | N/A | N/A |
| Total Assets | $247,665 | $240,442 | N/A | N/A |
| Long-Term Debt (excl. current) | $82,154 | $83,612 | N/A | N/A |
| Short-Term Borrowings | $10,000 | $6,000 | N/A | N/A |
Liquidity: The Company maintains unsecured lines of credit aggregating $33,000. As of June 30, 2009, outstanding borrowings under these lines totaled $21,960. The weighted average interest rate on line of credit borrowings was 1.41%.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 17.0% year-over-year for the six-month period. This was driven by a rate increase effective October 9, 2008, and the addition of approximately 2,600 customers (primarily from the West Manheim and Asbury Pointe acquisitions).
- Profitability: Net income increased 25.1% to $3.41 million for the six months ended June 30, 2009. The increase was partially offset by higher depreciation ($387k increase), pension expenses ($291k increase), and interest expense ($220k increase).
- Consumption Trends: Despite customer growth, per capita water consumption declined by 3.7% due to a sluggish economy and conservation efforts.
- Debt Structure: The Company retired $2.7 million in 1994 bonds in May 2009 using line of credit funds. Short-term borrowings increased to $10 million due to the reclassification of a line of credit with a maturity date of less than one year.
Guidance, Outlook, and Risks
- Capital Expenditures: The Company anticipates construction expenditures of approximately $8.6 million for the remainder of 2009. Funding sources include internally generated funds, line of credit borrowings, customer advances, and potential equity offerings.
- Rate Matters: The Company does not expect to file a base rate increase request in 2009, relying on the full-year impact of the October 2008 rate increase.
- Acquisitions: The Company announced an agreement on July 20, 2009, to acquire the Beaver Creek Village water system for approximately $70,000, expected to close in Q4 2009.
- Risks and Contingencies:
- Interest Rate Risk: The Company utilizes an interest rate swap to hedge a $12 million variable-rate debt issue. The swap is currently in a liability position; if the Company's credit rating falls below BBB-, it could be required to pay approximately $1.35 million immediately.
- Weather: Operations are dependent on rainfall; drought conditions could impact supply.
- Regulatory: Future profitability depends on obtaining timely and adequate rate relief from the PPUC.
- Accounting Adjustments: In Q1 2009, the Company recorded an additional $257,000 in vacation accrual expense to correct an understatement from prior periods. This was deemed immaterial to the trend in net income.
Investor Verification Checklist
- Debt Covenants: Verify the Company's compliance with the BBB- credit rating requirement for its interest rate swap agreement to avoid immediate liability triggers.
- Capital Funding: Monitor the Company's ability to fund the anticipated $8.6 million in remaining 2009 capital expenditures, particularly given the reliance on market conditions for potential equity offerings.
- Consumption Trends: Assess the sustainability of revenue growth given the 3.7% decline in per capita consumption and the impact of the sluggish economy on industrial and residential usage.
- Acquisition Integration: Review the financial impact of the West Manheim and Asbury Pointe acquisitions, including the amortization of negative acquisition adjustments.
- Rate Case Status: Confirm the Company's stance on not filing a new base rate increase in 2009 and the sufficiency of current rates to cover rising operational costs (pension, depreciation).