YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A regulated public utility operating in York and Adams Counties, Pennsylvania, providing water impoundment, purification, and distribution. The company serves approximately 61,625 customers as of Q1 2009.

Key Financial Metrics

Dividends: $0.126 per share declared for Q1 2009.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 16.9% ($1,268) driven by a rate increase effective October 2008 and the addition of approximately 2,619 customers (including 2,050 from acquisitions).
• Profitability: Net income rose 24.1% ($291) despite higher operating expenses. The effective tax rate increased to 39.1% from 35.0%.
• Expense Increases: Operating expenses rose 6.4% ($289). Key drivers included a $257 vacation accrual correction (Note 4), higher depreciation ($183), and increased pension costs ($133). These were partially offset by reduced capital stock taxes ($162).
• Debt Structure: Long-term debt increased due to new issuances and the reclassification of $5,000 in short-term borrowings to long-term debt following a line of credit renegotiation.
• Acquisitions: Completed the acquisition of West Manheim Township (1,800 customers) in January 2009 and Asbury Pointe Water Company (250 customers) in late 2008, both recorded at prices below depreciated asset cost.

Outlook, Risks, and Management Commentary

• Guidance: Management does not expect to file a base rate increase request in 2009. Revenues are expected to remain elevated due to new customers and the full-year impact of the 2008 rate increase.
• Capital Expenditures: Anticipated construction expenditures for the remainder of 2009 are approximately $10,305. Funding will come from internal funds, lines of credit, customer advances, and potential equity offerings.
• Equity Strategy: The company aims to maintain a 50% equity ratio in total capitalization (currently 42.7%). A shelf registration (Form S-3) was filed in April 2009 to facilitate future equity issuance when market conditions improve.
• Risks:
  • Interest Rate Risk: Managed via an interest rate swap on $12,000 of variable-rate debt. The swap is currently in a liability position; a credit rating downgrade below BBB- could trigger immediate payment of approximately $2,472.
  • Regulatory Risk: Dependence on the Pennsylvania Public Utility Commission (PPUC) for rate relief.
  • Operational Risk: Weather conditions (drought) and economic slowdowns affecting water consumption (per capita consumption decreased 2.7% in Q1 2009).
• Unusual Items: A $257 expense was recorded to correct an understatement of accrued vacation pay from prior periods, deemed immaterial to trends.

Investor Verification Checklist

• Debt Maturities: Verify the plan to fund the $2,700 mandatory tender of 1994 bonds due May 15, 2009, using lines of credit.
• Equity Dilution: Monitor the timing and pricing of potential equity offerings under the new S-3 shelf registration to maintain the target 50% equity ratio.
• Interest Rate Swap: Confirm the company's credit rating remains at or above BBB- to avoid triggering the swap agreement's early termination clause.
• Capital Spending: Track the $10.3 million projected capital expenditures for the remainder of 2009 against actual cash flow generation.
• Rate Case Status: Confirm no new base rate increase filings are planned for 2009, relying instead on the October 2008 rate relief.