Business Context and Reporting Period
Company: The York Water Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 2011
Business Overview: A regulated public utility providing water impoundment, purification, and distribution services to approximately 62,556 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) | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating Revenues | $9,645 | $9,016 |
| Operating Expenses | $5,059 | $4,741 |
| Operating Income | $4,586 | $4,275 |
| Net Income | $2,139 | $1,839 |
| Basic EPS | $0.17 | $0.15 |
| Cash Flow from Operations | $4,815 | $4,480 |
| Cash and Equivalents (End of Period) | $2,704 | $0 |
| Total Assets | $261,740 | $259,931 |
| Total Long-Term Debt | $85,031 | $85,132 |
| Debt to Total Capitalization | 48.0% | 48.3% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 7.0% ($629 thousand) driven by a rate increase effective November 4, 2010, and a 0.7% increase in per capita water volume, primarily from industrial and commercial sectors.
- Expense Increases: Operating expenses rose 6.7% ($318 thousand). Key drivers included a $94 thousand increase in pension expense, a $76 thousand increase in depreciation, and higher costs for 401K, salaries, and health insurance.
- Profitability: Net income increased 16.3% ($300 thousand) to $2.139 million. The effective tax rate decreased to 35.2% from 38.8% due to the deductibility of bonus depreciation for state purposes.
- Interest Expense: Increased 9.3% ($112 thousand) primarily due to interest on newly issued Senior Notes in late 2010, partially offset by lower line of credit borrowings.
- Liquidity: Cash and cash equivalents increased to $2.704 million from zero, largely representing proceeds from the October 2010 long-term debt issue.
Guidance, Outlook, and Risks
- Capital Expenditures: The company invested $2.103 million in Q1 2011. It anticipates approximately $10.7 million in construction expenditures for the remainder of 2011, funded by internal cash flow, stock purchase plans, customer advances, and line of credit borrowings.
- Rate Matters: The company does not expect to file a base rate increase request in 2011 following the PPUC-approved increase in November 2010.
- Outlook: Management expects revenues to increase for the remainder of the year due to the rate hike and higher summer demand. However, results could be impacted by drought restrictions, weather patterns, or regulatory actions.
- Derivative Risk: The company utilizes an interest rate swap to convert $12 million of variable-rate debt to a fixed rate. The swap is in a liability position; if the company's credit rating falls below BBB-, the counterparty could request immediate payment of approximately $1.269 million.
- Accounts Receivable: Management noted a trend of slower customer payments, leading to an increase in receivables exceeding revenue growth. The allowance for doubtful accounts has been increased accordingly.
Investor Verification Checklist
- Rate Relief Timing: Verify the impact of the November 2010 rate increase on full-year revenue projections versus the 15.9% originally requested.
- Capital Funding: Confirm the company's ability to fund the anticipated $10.7 million in remaining 2011 capital expenditures without over-reliance on short-term credit lines.
- Receivables Quality: Monitor the aging of accounts receivable and the trend of uncollectible accounts given the noted decline in payment timeliness.
- Weather Sensitivity: Assess the potential impact of drought conditions or restrictions on summer water consumption and revenue.
- Debt Covenants: Review compliance with debt covenants, specifically the credit rating requirement (BBB-) tied to the interest rate swap agreement.