YORW

Business Context and Reporting Period

Company: The York Water Company (York Water Co.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2010
Business Overview: A regulated public utility providing water impoundment, purification, and distribution services to approximately 180,000 people across 46 municipalities in York and Adams Counties, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).

Key Financial Metrics

Note: Total Debt calculated as Long-term debt ($78,911) plus Current portion of long-term debt ($41) plus Short-term borrowings ($3,000) for 2010.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 4.3% ($780) year-over-year, driven by a higher Distribution Surcharge (DSIC) and customer base growth (average customers increased by 689).
• Profitability: Net income rose 22.7% ($773) due to higher revenues and reduced operating expenses, specifically lower salary/wage expenses and pension costs.
• Expense Reduction: Operating expenses decreased 3.5% ($341). Key drivers included a one-time reduction in vacation accruals from the prior year and lower distribution system maintenance costs.
• Interest Expense: Interest expense declined 5.1% ($129) due to the retirement of $4.3 million in bonds in June 2010 and lower variable rates on lines of credit.
• Cash Flow: Net cash provided by operating activities decreased 14.6% ($1,093) primarily due to a lower non-cash adjustment for deferred income taxes compared to the prior year.

Guidance, Outlook, and Risks

• Rate Matters: The company filed a rate increase request on May 14, 2010, seeking $6.22 million (15.9% increase). The request is under review by the PPUC, with any approval effective no later than February 13, 2011. There is no assurance the full amount will be granted.
• Capital Expenditures: The company invested $3.6 million in the first half of 2010. It anticipates spending approximately $9.1 million for the remainder of the year on infrastructure upgrades and replacements. Funding is expected to come from internal funds, lines of credit, and customer advances.
• Weather Sensitivity: Revenues are vulnerable to weather conditions. While hot, dry weather increases usage, drought restrictions could limit consumption and negatively impact revenue.
• Derivative Risk: The company utilizes an interest rate swap to convert $12 million of variable-rate debt to a fixed rate. The swap was in a liability position of $1.7 million as of June 30, 2010. A credit rating downgrade below BBB- could trigger immediate payment obligations.
• Liquidity: The company maintains $33 million in committed lines of credit. It does not hold significant cash on the balance sheet, relying on a cash management system to automatically pay down borrowings or invest excess funds.

Investor Verification Checklist

• Rate Case Outcome: Monitor the PPUC's decision on the 15.9% rate increase request filed in May 2010, as this is critical for future revenue stability.
• Capital Funding: Verify the company's ability to fund the projected $9.1 million in remaining 2010 capital expenditures without over-reliance on short-term credit lines.
• Interest Rate Exposure: Review the status of the interest rate swap agreement and the company's credit rating to ensure no covenant violations occur.
• Weather Impact: Assess local weather patterns and potential drought restrictions that could alter water consumption volumes in the second half of the year.
• Debt Refinancing: Track the maturity dates of current debt obligations and the company's strategy for refinancing short-term borrowings with long-term debt.