The York Water Company 2011 Second-Quarter Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2011. The York Water Company provides regulated water service to 39 municipalities in York County and seven municipalities in Adams County, Pennsylvania. The company is regulated by the Pennsylvania Public Utility Commission and obtains water from the Codorus Creek watershed, reservoirs, and a Susquehanna River pipeline.
The interim financial statements are unaudited and include normal recurring adjustments. Results for the interim periods are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Water operating revenues | $10.452 million | $9.748 million | $20.097 million | $18.764 million |
| Operating income | $5.162 million | $5.045 million | $9.748 million | $9.320 million |
| Net income | $2.458 million | $2.344 million | $4.597 million | $4.183 million |
| Basic earnings per share | $0.19 | $0.18 | $0.36 | $0.33 |
| Dividends declared per share | $0.131 | $0.128 | $0.262 | $0.256 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $8.596 million | $6.414 million |
Calculated margins were approximately 49.4% operating and 23.5% net for the second quarter, and 48.5% operating and 22.9% net for the first six months. Total assets were $264.762 million at June 30, 2011, including net utility plant of $229.542 million and cash and cash equivalents of $3.144 million.
Total debt, including current maturities, was $85.088 million at June 30, 2011, compared with $85.173 million at December 31, 2010. Debt represented 47.7% of total capitalization, compared with 48.3% at year-end 2010. The company had $29 million of unsecured credit lines and no outstanding borrowings under those lines at June 30, 2011. Long-term debt had an estimated fair value of approximately $93 million versus a carrying value of $85.088 million.
Capital expenditures were $4.124 million in the first six months. The company expects approximately $6.6 million of additional construction expenditures during the remainder of 2011. Cash flow from operations, equity issuance, customer advances, and available credit facilities are expected to fund these requirements.
Material changes versus the prior comparable periods
- Second-quarter revenue increased 7.2%, and first-half revenue increased 7.1%, primarily because of the rate increase effective November 4, 2010, which was designed to produce approximately $3.4 million of annual revenue.
- Second-quarter net income increased 4.9%, while first-half net income increased 9.9%.
- Operating expenses increased 12.5% in the second quarter and 9.6% in the first half. Major contributors included higher doubtful-account provisions, distribution-system maintenance, pension expense, depreciation, salaries, and benefits.
- Interest expense increased 9.5% in the second quarter and 9.4% in the first half, primarily because of the 5.00% Senior Notes, Series 2010A, issued in October 2010.
- Water volume per capita declined 1.8% in the second quarter and 0.6% in the first half, mainly because of lower residential consumption. Commercial and industrial consumption was slightly higher year over year.
- The average customer count increased by 165 in the second quarter and by 217 in the first half.
- The effective income tax rate declined to 34.4% in the second quarter and 34.8% in the first half, from 37.9% and 38.3%, respectively, primarily because of the deductibility of bonus depreciation for state tax purposes.
- Operating cash flow increased to $8.596 million from $6.414 million, aided substantially by higher deferred income taxes, a non-cash expense.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not expect to file a base-rate increase request in 2011. It expected revenue to benefit from the November 2010 rate increase and higher summer demand.
- Management expected depreciation to continue increasing because of plant investment and expected other operating expenses to remain generally consistent with first-half levels.
- The company expects to contribute the remaining $1.329 million of its projected $1.593 million 2011 pension contribution during the final two quarters.
- Customer payment timeliness had deteriorated, resulting in higher accounts receivable risk and an increased allowance for doubtful accounts. A one-time second-quarter adjustment was made for inactive accounts expected to be written off.
- The company uses a $12 million interest-rate swap to effectively fix the rate on variable-rate debt. The swap had a $1.415 million fair-value liability at June 30, 2011, and a credit-rating covenant requiring at least BBB- from Standard & Poor’s. A downgrade below that level could have required approximately $1.514 million of immediate payment if the swap remained in a liability position.
- The swap expires October 1, 2029. The company expects to reclassify approximately $355,000 from regulatory assets to interest expense over the next 12 months as swap settlements occur.
- The company’s $12 million variable-rate bond is supported by a letter of credit currently expiring May 6, 2013. Failure to renew the letter of credit could accelerate reimbursement obligations, cause some debt to be classified as current, and potentially terminate the swap.
- Water demand and revenue are sensitive to weather. Drought warnings or restrictions, conservation, or unfavorable rainfall could reduce consumption and revenue despite adequate water supply.
- Other risks include the ability to obtain timely rate relief, financing availability, interest-rate changes, credit-rating changes, regulatory requirements, permits, capital needs, customer growth, and commercial and industrial activity.
- The company reported no material off-balance-sheet arrangements, guarantees, lease obligations, securitizations, or related-party transactions. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Important facts investors should verify
- Whether the November 2010 rate increase and summer demand offset declining residential usage and any drought-related restrictions.
- The trend in customer payment delays, inactive-account write-offs, and doubtful-account expense.
- Progress against the approximately $6.6 million second-half 2011 capital-expenditure plan and the resulting use of cash.
- Completion of the remaining $1.329 million 2011 pension contribution.
- Compliance with debt covenants, the BBB- swap rating requirement, and renewal of the letter of credit and credit facilities.
- The effect of the interest-rate swap’s liability, settlements, and regulatory accounting on future interest expense and liquidity.
- Future PPUC rate actions, regulatory changes, water-demand trends, and the company’s ability to maintain its targeted capital structure and dividend payments.