The York Water Company — Form 10-Q Summary
Business Context and Reporting Period
The York Water Company is a regulated water utility serving 39 municipalities in York County and eight municipalities in Adams County, Pennsylvania. It also operates wastewater facilities. The filing covers the three and nine months ended September 30, 2012; the interim financial statements are unaudited.
At September 30, 2012, the Company reported approximately 63,398 average third-quarter customers and average daily water availability of 35.0 million gallons versus daily consumption of approximately 18.6 million gallons.
Financial Performance and Position
| Metric | Three Months Ended Sept. 30 | Change | Nine Months Ended Sept. 30 | Change |
|---|---|---|---|---|
| Operating revenues | $11.025 million | +5.5% | $31.046 million | +1.6% |
| Operating income | $5.781 million | +9.5% | $15.260 million | +1.6% |
| Net income | $2.760 million | +16.8% | $6.905 million | -0.8% |
| Basic EPS | $0.22 | From $0.19 | $0.54 | From $0.55 |
| Cash dividends per share declared | $0.1336 | +2.0% | $0.4008 | +2.0% |
- Third-quarter operating margin was approximately 52.4%, compared with 50.5% in the prior-year quarter. Nine-month operating margin was approximately 49.2%, essentially unchanged from 2011.
- Third-quarter net margin was approximately 25.0%, compared with 22.6% in 2011. Nine-month net margin was approximately 22.2%, compared with 22.8% in 2011.
- Nine-month operating cash flow was $12.194 million, down from $13.295 million. The decline primarily reflected higher income taxes paid and other working-capital changes.
- Nine-month capital expenditures were $8.785 million, and acquisitions of water and wastewater systems used $0.463 million. Net cash used in investing activities was $9.224 million.
- Cash and cash equivalents were $3.725 million at September 30, 2012, versus $4.006 million at December 31, 2011.
- Total assets were $280.720 million, up from $274.219 million at year-end 2011. Net utility plant increased to $238.531 million from $232.277 million.
- Total debt, including current maturities, was $84.985 million. Debt represented 46.3% of total capitalization, compared with 47.2% at December 31, 2011.
- The Company had $29.0 million of unsecured committed credit lines and no outstanding borrowings under those lines at September 30, 2012. Management stated that liquidity was adequate for anticipated 2012 and 2013 needs.
- Standard & Poor’s affirmed an A- credit rating with a stable outlook on April 26, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the PPUC-authorized distribution surcharge and customer growth. The surcharge contributed approximately $0.240 million of incremental third-quarter revenue and $0.260 million for the first nine months.
- Average customers increased by 664 in the third quarter and by 455 for the first nine months. These gains were partly offset by lower per-capita water consumption, down 2.1% in the quarter and 1.9% year to date.
- Third-quarter expenses increased only 1.4%, while operating income rose 9.5%. Lower power, health insurance and life insurance-related expenses helped offset higher depreciation, maintenance, labor and other costs.
- Nine-month operating expenses increased 1.7%, primarily due to higher depreciation, distribution-system maintenance, salaries and wages, and reduced capitalized overhead. Lower doubtful-account provisions and power costs partly offset these increases.
- Income taxes increased 25.4% in the third quarter and 10.7% for the first nine months. Effective tax rates rose to 38.1% and 37.9%, respectively, primarily because state tax deductions for bonus depreciation available in 2011 were not available in 2012.
- The Company completed acquisitions of Asbury Pointe wastewater facilities and York Starview water facilities, adding approximately 240 customers from each system. The reported results were immaterial to total Company results.
Outlook, Risks, Contingencies and Unusual Items
- Effective October 1, 2012, the distribution surcharge increased to 3.09%. Management expected the higher surcharge to offset declining consumption and anticipated relatively consistent revenue for the remainder of 2012.
- Management expected depreciation to continue increasing because of utility-plant investment, while most other operating expenses were expected to remain consistent with the first nine months. The Company did not anticipate additional power-curtailment credits.
- The Company anticipated approximately $2.8 million of additional construction expenditures during the remainder of 2012, funded primarily with internally generated cash, surcharge revenues, stock-plan proceeds, customer advances and contributions.
- The Company expects to file a rate-increase request in 2013. Future results depend materially on the timing and adequacy of PPUC rate relief, customer growth and water consumption.
- Weather conditions, drought restrictions, conservation, commercial and industrial activity, housing growth, regulatory changes, permits, interest rates, financing availability and credit ratings could materially affect results.
- A tank discovered to contain a small amount of mercury in November 2011 remains out of service. No water-supply contamination or customer disruption was reported. Remediation costs totaled $0.186 million through September 30, 2012; a possible reline and strengthening project could require approximately $0.050 million, subject to DEP approval.
- The Company’s $12.0 million variable-rate debt is economically converted to fixed-rate exposure through an interest-rate swap. The swap had a $3.002 million fair-value liability at September 30, 2012 and could require approximately $3.218 million of payment if specified default or credit-rating provisions were triggered. The Company’s A- rating remained compliant.
- The Company had contributed the full expected $1.593 million to its pension plans for 2012 and expected no additional contributions during the remainder of the year.
- The Company stated that it had no material off-balance-sheet arrangements, guarantees, lease obligations or related-party transactions and that its disclosure controls were effective.
Important Facts for Investors to Verify
- Confirm the amount and timing of any 2013 PPUC rate filing and the treatment of regulatory assets and surcharge revenues.
- Monitor whether continued declines in per-capita consumption offset customer growth and rate-related revenue increases.
- Assess funding for planned capital expenditures, future acquisitions and the Company’s targeted debt-to-capitalization ratio near 50%.
- Review renewal of the $5.0 million credit line maturing in June 2013 and the $12.0 million bond letter of credit and larger credit facilities maturing or expiring in 2014.
- Track DEP approval, remediation costs and the return-to-service plan for the mercury-affected tank.
- Evaluate exposure to the interest-rate swap, including its $3.002 million fair-value liability, expected $0.356 million of settlements reclassified to interest expense over the next 12 months, and credit-rating covenant.
- Verify whether higher effective tax rates and the expected expiration of bonus depreciation after January 1, 2013 affect future cash flow and earnings.