Business Context and Reporting Period
Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2010
Business Overview: A regulated public utility providing water impoundment, purification, and distribution services to approximately 62,546 customers across 46 municipalities in York and Adams Counties, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2009 | 3 Months Ended Sep 30, 2010 | 3 Months Ended Sep 30, 2009 |
|---|---|---|---|---|
| Water Operating Revenues | $29,251 | $27,734 | $10,487 | $9,750 |
| Operating Income | $14,924 | $13,035 | $5,604 | $4,836 |
| Net Income | $6,853 | $5,501 | $2,670 | $2,091 |
| Basic EPS | $0.54 | $0.48 | $0.21 | $0.18 |
| Cash Flow from Operations | $10,619 | $12,679 | N/A | N/A |
| Total Assets | $256,022 | $248,837 | N/A | N/A |
| Total Debt (Long-term + Current) | $78,230 | $77,568 | N/A | N/A |
| Stockholders' Equity | $90,438 | $86,922 | N/A | N/A |
Dividends: $0.384 per share declared for the nine months ended September 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 5.5% year-over-year for the nine-month period, driven by a Distribution Surcharge (DSIC) and a 646-customer increase in the customer base. Per capita consumption also rose slightly.
- Profitability: Net income increased 24.6% ($1,352) for the nine-month period. This was primarily due to higher revenues and reduced expenses in salary/wages, interest, and employee retirement.
- Expense Management: Operating expenses decreased 2.5% year-over-year. Reductions were attributed to lower salary/wage expenses (due to a prior year vacation accrual), reduced pension costs, and lower maintenance expenses, partially offset by higher depreciation and power costs.
- Interest Expense: Interest expense decreased 5.0% due to the retirement of specific bond series (Series 1995) and reduced borrowings on lines of credit.
- Cash Flow: Net cash provided by operating activities decreased by $2,060 compared to the prior year, largely due to increased income tax payments and changes in working capital accounts.
Guidance, Outlook, and Risks
- Rate Matters: The PPUC authorized a rate increase effective November 4, 2010, expected to generate approximately $3,400 in additional annual revenues. The company does not expect to file a base rate increase request in 2011.
- Capital Expenditures: The company invested $5,727 in the first nine months of 2010. It anticipates spending an additional $5,505 for the remainder of the year on infrastructure upgrades and replacements.
- Financing Activity: On October 8, 2010 (subsequent to the period end), the company issued $15,000 in Senior Notes (5.00% due 2040) to pay off line of credit borrowings and retire maturing debt.
- Drought Risk: A drought watch was issued for the service territory in September 2010, calling for a voluntary 5% reduction in water use. Management does not expect this to materially impact fourth-quarter results, as usage typically declines in Q4.
- Interest Rate Risk: The company utilizes an interest rate swap to convert $12,000 of variable-rate debt to a fixed rate. The swap was in a liability position of $2,138 as of September 30, 2010.
Investor Verification Checklist
- Rate Implementation: Verify the actual revenue impact of the PPUC-approved rate increase effective November 4, 2010.
- Debt Refinancing: Confirm the utilization of proceeds from the October 2010 Senior Notes issuance to reduce short-term borrowing costs.
- Weather Sensitivity: Monitor water consumption levels in Q4 2010 to assess the actual impact of the drought watch on revenues.
- Capital Commitments: Track the remaining $996 in committed capital expenditures for water treatment facility upgrades.
- Derivative Liability: Review the fair value of the interest rate swap liability in future filings, noting the potential for reclassification to interest expense.