YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2010
Business Overview: A regulated utility operating in York and Adams Counties, Pennsylvania, providing water impoundment, purification, and distribution to approximately 62,286 customers. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 2.8% ($242) driven by a higher distribution surcharge (DSIC) and a net increase of 661 customers. This growth occurred despite a 3.3% decline in per capita water consumption attributed to a sluggish economy.
• Profitability: Net income rose 22.8% ($342) to $1,839. This was primarily due to higher revenues and a $269 reduction in salary and wage expenses (partially due to a vacation accrual in the prior year).
• Expense Management: Total operating expenses decreased 5.2% ($262). Lower pension costs, reduced legal fees, and lower maintenance expenses offset increases in depreciation and power costs.
• Interest Expense: Decreased 5.4% ($68) due to lower rates on variable-rate bonds and the retirement of specific bond series in the prior year.
• Capital Expenditures: Utility plant additions were $1,510 in Q1 2010, a decrease from $2,399 in Q1 2009, reflecting a planned lower volume of eligible construction.

Outlook, Risks, and Management Commentary

• Rate Matters: The company expects to file a new application with the PPUC seeking rate relief in May 2010. The last approved increase (effective Oct 2008) generated approximately $5,950 in additional annual revenues.
• Capital Plan: Anticipated construction expenditures for the remainder of 2010 are approximately $11,230. Funding is expected to come from internally generated funds, lines of credit, and customer advances.
• Liquidity: The company maintains $33,000 in unsecured lines of credit. As of March 31, 2010, outstanding borrowings under these lines were $6,269. The company does not maintain significant cash balances, utilizing a cash management account to automatically pay down debt or invest excess funds.
• Debt Obligations: A mandatory tender date of June 1, 2010, exists for $4,300 of 3.75% Industrial Development Authority Revenue Refunding Bonds. The company plans to fund this via lines of credit or new debt issuance.
• Risks:
  • Weather Dependency: Revenues are vulnerable to weather conditions; drought restrictions could limit usage, while hot weather increases demand.
  • Interest Rate Risk: The company uses an interest rate swap to convert $12,000 of variable-rate debt to a fixed rate. The swap was in a liability position of $1,029 as of March 31, 2010.
  • Regulatory Risk: Future profitability depends on the ability to obtain timely and adequate rate relief from the PPUC.
• Credit Rating: Standard & Poor's affirmed the company's credit rating at A- with a stable outlook on April 26, 2010.

Investor Verification Checklist

• Rate Filing Status: Verify the outcome of the expected May 2010 rate application with the PPUC, as this is critical for future revenue growth.
• Debt Refinancing: Confirm the funding source for the $4,300 bond tender due June 1, 2010, and monitor interest rate trends affecting the variable-rate debt portion.
• Consumption Trends: Monitor per capita water usage trends; a continued 3.3% decline could pressure revenues despite customer base growth.
• Capital Expenditure Funding: Assess the company's ability to fund the projected $11,230 in remaining 2010 capital expenditures without diluting equity or increasing leverage beyond the target 50% debt-to-capitalization ratio.
• Derivative Liability: Review the fair value of the interest rate swap liability ($1,029) and the potential impact of credit rating changes on swap covenants.