The York Water Company 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012, with unaudited quarterly data also provided for the fourth quarter. York Water is a regulated water and wastewater utility serving York and Adams Counties, Pennsylvania. Its principal business is impounding, treating and distributing water; it also operates one wastewater collection and treatment system. The company served approximately 63,779 customers and an estimated population of 189,000 at year-end.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenues | $41.447 million | $40.629 million | +2.0% |
| Operating expenses | $20.874 million | $20.754 million | +0.6% |
| Operating income | $20.573 million | $19.875 million | +3.5% |
| Net income | $9.303 million | $9.084 million | +2.4% |
| Basic EPS | $0.72 | $0.71 | Increase |
| Net cash from operations | $16.422 million | $17.474 million | −6.0% |
| Construction expenditures | $11.543 million | $9.472 million | +21.9% |
| Long-term debt, including current portion | $84.975 million | $85.017 million | Essentially flat |
Operating margin was approximately 49.6%, compared with 48.9% in 2011. Management reported a 22.4% net-income-to-revenue efficiency ratio and a 9.3% return on year-end common equity. Total assets were $282.490 million, common stockholders’ equity was $99.825 million, and cash and cash equivalents were $4.012 million at December 31, 2012.
Quarterly fourth-quarter 2012 results were revenue of $10.401 million, operating income of $5.313 million, net income of $2.398 million and basic EPS of $0.18, compared with fourth-quarter 2011 revenue of $10.081 million, operating income of $4.848 million, net income of $2.123 million and EPS of $0.16.
Material changes versus the prior comparable period
- Revenue increased primarily from the distribution system improvement charge (DSIC), which contributed $583,000 more than in 2011, and customer growth from acquisitions.
- Total per-capita water usage declined 1.3% because of above-average rainfall and customer conservation. Average daily consumption was approximately 18.6 million gallons, against average daily availability of 35.0 million gallons.
- Operating expenses rose only 0.6%. Higher depreciation, wages, distribution maintenance and lower capitalized overhead were substantially offset by lower power expense, doubtful-account expense and tank-remediation costs.
- Income taxes increased 13.0% to $5.606 million, and the effective tax rate rose to 37.6% from 35.3%, primarily because state bonus-depreciation deductibility available in 2011 was not available in 2012.
- Operating cash flow declined by $1.052 million, primarily because of higher income-tax payments.
- The company acquired three systems in 2012, adding approximately 580 combined water and wastewater customers: Asbury Pointe, York Starview and Section A Water Corporation.
- The company initiated a pilot service-line protection program and continued municipal sewer-billing services to diversify revenue sources.
Liquidity, capital structure and cash flow
- York Water generated $16.422 million of operating cash flow and used $12.174 million for investing activities, including $11.543 million of utility-plant additions and $661,000 for acquisitions.
- The company had no borrowings under its $29.0 million of unsecured credit lines at year-end. Management stated that current facilities should provide adequate liquidity through 2013.
- Debt represented 46.0% of total capitalization, down from 47.2% in 2011. Management expects debt capitalization to trend toward, but generally remain near, 50%.
- Standard & Poor’s affirmed an A- rating with a stable outlook and adequate liquidity.
- The $12.0 million variable-rate PEDFA debt is supported by a letter of credit expiring May 6, 2015 and is hedged with an interest-rate swap. The swap had a $2.836 million fair-value liability at year-end.
- Capital expenditures are projected at approximately $14.100 million in 2013 and $13.974 million in 2014, excluding potential acquisitions. Funding is expected from internally generated cash, credit-line borrowings, stock-plan proceeds, DSIC revenues, customer contributions and potentially debt or equity offerings.
Guidance, outlook, risks and unusual items
Management expects 2013 revenue to increase moderately, supported by the continuing DSIC and a potential rate increase toward year-end. The company anticipated filing a rate-increase request in 2013 and expected depreciation and other operating expenses to rise moderately. The filing does not provide formal earnings guidance.
- Rates and cost recovery remain subject to Pennsylvania Public Utility Commission approval. Delayed or inadequate rate relief could reduce profitability and impair recovery of utility investments and regulatory assets.
- Weather, rainfall, drought restrictions, conservation and local economic conditions can materially affect water demand and revenue.
- The company expects to begin armoring one of its two dams between 2015 and 2016, at an estimated cost of approximately $5 million per dam.
- A small amount of mercury was found in an out-of-service tank during 2011 cleaning. No contamination of the water supply or service disruption occurred; costs totaled $186,000 through year-end 2012. Additional remediation or relining costs remain possible.
- The company’s union contract expires April 30, 2013; negotiations were ongoing, and management expected no service interruption.
- The variable-rate bonds may be tendered by holders. If they cannot be remarketed, the company could be required to fund up to $12.0 million, although the filing reported no indication of such an event.
- The defined-benefit pension plans were underfunded by $12.060 million at year-end. The company planned a $1.593 million pension contribution in 2013.
- The board authorized a program on March 11, 2013 to repurchase up to 1.2 million shares. No shares were repurchased during the fourth quarter of 2012.
- The quarterly dividend increased 3.5% to $0.1383 per share in the fourth quarter, representing the sixteenth consecutive annual increase.
Important facts for investors to verify
- Whether the anticipated 2013 rate filing produces timely and sufficient rate relief.
- The sustainability of revenue growth as per-capita water consumption remains under pressure from weather and conservation.
- Actual 2013–2014 capital spending, financing mix and resulting debt capitalization.
- Renewal of the $5.0 million credit line maturing in June 2013 and extension of the letter of credit supporting the variable-rate bonds.
- Final remediation requirements and potential costs for the mercury-affected tank, as well as the timing and cost of dam-armoring projects.
- Pension funding requirements and the continued recoverability of regulatory assets through customer rates.
- The filing states that the audited financial statements and internal control over financial reporting received unqualified opinions.