The York Water Company — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended September 30, 2013. York Water provides regulated water service across 39 municipalities in York County and eight municipalities in Adams County, Pennsylvania, and operates one wastewater collection and treatment system. The interim financial statements are unaudited and presented in thousands of dollars, except per-share amounts.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30 | Nine Months Ended Sept. 30 |
|---|---|---|
| Operating revenues | $10,912 | $31,718 |
| Operating income | $5,367 | $15,441 |
| Net income | $2,535 | $7,016 |
| Basic EPS | $0.19 | $0.54 |
| Operating margin | 49.2% | 48.7% |
| Net margin | 23.2% | 22.1% |
| Cash flow from operations | Not separately reported | $13,667 |
| Capital expenditures and system acquisitions | Not separately reported | $6,623 |
At September 30, 2013, cash and cash equivalents were $6,795, compared with $4,012 at December 31, 2012. Total assets were $286,976, net utility plant was $242,657, stockholders’ equity was $101,785, and total debt, including current maturities, was $84,944. Debt represented 45.5% of total capitalization. The company had $29,000 of committed unsecured credit lines and no outstanding borrowings under those facilities.
Cash dividends declared were $0.1383 per share in the third quarter and $0.4149 per share for the first nine months. Standard & Poor’s maintained an A- rating with a stable outlook.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue decreased $113, or 1.0%, primarily because total per-capita water volume sold declined 2.4%. The decline was partly offset by the distribution surcharge and customer growth.
- Third-quarter net income decreased $225, or 8.2%, to $2,535. Operating expenses rose 5.7% to $5,545, driven primarily by higher depreciation, power, and health-insurance costs.
- For the first nine months, revenue increased $672, or 2.2%, and net income increased $111, or 1.6%. Revenue growth reflected the distribution surcharge, wastewater revenue, and approximately 669 additional average water customers, partly offset by a 1.4% decline in per-capita consumption.
- Nine-month operating expenses increased 3.1% to $16,277, primarily because of higher depreciation, health-insurance, wastewater-system, billing, and collection costs.
- Operating cash flow increased $1,473, or 12.1%, from $12,194 to $13,667. Investing cash use declined to $6,100 from $9,224, while financing cash use increased to $4,784 from $3,251 because of share repurchases and higher dividends.
- The company repurchased and retired 94,414 shares during the first nine months for $1,772; 1,105,586 shares remained available under the 1.2 million-share authorization at September 30, 2013.
Guidance, Outlook, Risks, and Unusual Items
- Effective October 1, 2013, the distribution surcharge increased to 4.11%. Management expected fourth-quarter revenue to remain generally consistent with the first nine months, subject to regulatory actions and weather.
- Management expected approximately $3,300 of additional 2013 construction expenditures, excluding potential acquisitions. Funding was expected to come primarily from cash and internally generated funds, supplemented by stock-plan proceeds, the surcharge, customer advances, and contributions.
- A tentative rate-case settlement would provide approximately $4,972 of additional annual water revenue and $28 of wastewater revenue, subject to Pennsylvania Public Utility Commission approval, with an expected effective date of February 28, 2014.
- The company signed agreements to acquire wastewater assets serving approximately 430 customers in total, with closings expected in the first quarter of 2014 subject to regulatory approval. Management expected the acquisitions to be immaterial to total company results.
- The company expects cash to decline in 2014 because of higher capital expenditures, possible share repurchases, and higher income-tax payments following the expected expiration of bonus depreciation provisions.
- The company’s $12,000 variable-rate debt is effectively fixed through an interest-rate swap expiring October 1, 2029. The swap liability had a fair value of $1,941 at September 30, 2013. A credit-rating or other default trigger at that date could have required approximately $1,948 of immediate payment.
- A water tank containing a small amount of mercury remains out of service pending Pennsylvania Department of Environmental Protection approval. Testing indicated compliance with safe drinking-water standards, and no customer-service disruption was reported. If approval is not obtained, relining, strengthening, or replacement may require additional capital spending.
- The union contract expired April 30, 2013. The parties continued operating under its terms while negotiating, and management expected no service interruption.
- Key operating risks include weather and drought restrictions, water consumption trends, rate-relief outcomes, regulatory approvals, capital requirements, interest rates, credit availability, customer payment performance, acquisitions, and changes in tax or accounting rules.
Important Facts for Investors to Verify
- Whether the PPUC approved the tentative rate settlement and the timing and amount of resulting rate increases.
- Whether the planned wastewater acquisitions closed in the first quarter of 2014 and their effect on customer counts and earnings.
- Actual 2014 capital expenditures, cash usage, tax payments, and reliance on credit facilities.
- Continuation and financial effect of the 4.11% distribution surcharge and future regulatory treatment of infrastructure investment.
- Status and potential cost of returning the mercury-affected tank to service or replacing it.
- Progress on labor negotiations and any impact on operating costs or service continuity.
- The interest-rate swap’s fair value, collateral or termination exposure, and continued compliance with its BBB- minimum rating requirement.