YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: A regulated public utility providing water impoundment, purification, and distribution services to approximately 62,000 customers across 46 municipalities in York and Adams Counties, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Note: Operating margins for the nine months ended Sept 30, 2009 were approximately 47.0% ($13,035 / $27,734). Net profit margins were approximately 19.8% ($5,501 / $27,734).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 13.8% ($1,184) for the quarter and 15.9% ($3,800) for the nine months compared to 2008. Growth was driven by a rate increase effective October 2008 and the addition of approximately 2,563 customers (primarily from acquisitions).
• Profitability: Net income increased 20.2% ($351) for the quarter and 23.2% ($1,035) for the nine months. This was achieved despite a 5.7% decline in per capita water consumption due to economic conditions and rainfall patterns.
• Expense Increases: Operating expenses rose 8.2% year-over-year for both periods. Key drivers included higher depreciation ($580 increase for nine months), increased pension costs ($437 increase), and higher salary/wage expenses due to a vacation accrual correction ($257).
• Capital Structure: The company completed a public offering of 950,000 shares in September 2009, raising approximately $12.5 million. This reduced the debt-to-total capitalization ratio from 55.3% (Dec 31, 2008) to 48.1% (Sept 30, 2009).

Guidance, Outlook, and Risks

• Capital Expenditures: The company invested $9.6 million in construction and $2.2 million in acquisitions during the first nine months of 2009. It anticipates an additional $3.3 million in construction expenditures for the remainder of 2009.
• Rate Matters: The company does not expect to file a base rate increase request in 2009. Future revenue growth depends on timely regulatory rate relief and customer base expansion.
• Acquisitions: The company closed on the West Manheim Township acquisition in January 2009 and expects to close the Beaver Creek Village acquisition in mid-November 2009.
• 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 $1.6 million immediately.
• Liquidity: The company maintains $33 million in lines of credit. While interest rates are currently low, the company notes that credit market volatility could impact borrowing costs and availability.
• Subsequent Event: On October 6, 2009, the company closed an over-allotment of 120,000 shares, raising an additional $1.6 million. This is not reflected in the September 30 financial statements.

Investor Verification Checklist

• Regulatory Approval: Verify the status of future rate increase filings with the PPUC, as revenue growth is heavily dependent on regulatory approval.
• Consumption Trends: Monitor per capita water usage trends, as a 5.7% decline in 2009 was attributed to economic slowdown and weather, which could impact future volumes.
• Debt Covenants: Confirm the company maintains its A- credit rating to avoid triggering immediate payment clauses on its interest rate swap agreement.
• Capital Funding: Assess the company's ability to fund the remaining $3.3 million in 2009 capital expenditures given current credit market conditions.
• Acquisition Integration: Review the financial impact of the West Manheim and Asbury Pointe acquisitions on long-term revenue stability.