The York Water Company: FY2011 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2011, with comparative information for 2010 and 2009. The York Water Company is a regulated water utility serving 39 municipalities in York County and seven municipalities in Adams County, Pennsylvania. It also began providing sewer-billing services and signed an agreement to acquire a wastewater collection and treatment system, subject to regulatory approval.
At year-end, the Company served approximately 62,738 customers and a population of approximately 187,000. Average daily water availability was 35.0 million gallons versus consumption of approximately 18.5 million gallons.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Water operating revenues | $40.629 million | $39.005 million | +4.2% |
| Operating expenses | $20.754 million | $19.238 million | +7.9% |
| Operating income | $19.875 million | $19.767 million | +0.5% |
| Net income | $9.084 million | $8.929 million | +1.7% |
| Basic earnings per share | $0.71 | $0.71 | Flat |
| Net cash provided by operating activities | $17.474 million | $14.755 million | +18.4% |
| Construction expenditures | $9.472 million | $10.541 million | -10.1% |
| Total assets | $274.219 million | $259.931 million | +5.5% |
| Long-term debt, including current portion | $85.017 million | $85.173 million | -0.2% |
Operating margin was approximately 48.9%, compared with 50.7% in 2010. Net margin was approximately 22.4%, compared with 22.9% in 2010. Return on year-end common equity was 9.5%, consistent with 2010.
Cash and cash equivalents were $4.006 million at December 31, 2011. The Company had $29.0 million of unsecured credit lines and no outstanding borrowings under those lines at year-end. Debt represented 47.2% of total capitalization, compared with 48.3% in 2010. Common stockholders’ equity was $95.265 million.
Cash flow from operations exceeded capital expenditures by approximately $8.0 million. Financing cash outflows included $6.667 million of dividends paid and $156,000 of long-term debt repayments. The Company funded 2011 construction expenditures through internally generated funds, stock-plan proceeds and customer advances.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of an 8.7% rate increase effective November 4, 2010, partially offset by lower water consumption.
- Per-capita water usage declined approximately 1.7%, mainly because of record rainfall, including approximately 22 additional inches versus 2010. Average customers served increased by 203.
- Operating expenses increased $1.516 million, driven principally by depreciation, pension expense, distribution-system maintenance, tank remediation and doubtful-account provisions.
- Interest on debt increased 7.1% to $5.254 million, primarily because of the $15 million of 5.00% Senior Notes issued in October 2010.
- Income tax expense declined 11.1% to $4.959 million, reducing the effective tax rate to 35.3% from 38.5%, largely because bonus depreciation remained deductible for state tax purposes.
- Deferred regulatory assets increased to $23.114 million from $15.821 million, primarily reflecting postretirement benefits, income taxes and unrealized swap losses.
- The Company’s pension deficit increased to $11.765 million from $7.270 million, principally due to actuarial losses and a lower discount rate.
- The quarterly dividend was increased 2% to $0.1336 per share in the fourth quarter. 2011 represented the fifteenth consecutive annual dividend increase.
Guidance, Outlook, Risks and Unusual Items
Management expected 2012 revenues to remain consistent with 2011 and interest expense to remain generally consistent. The Company expected a lower effective tax rate to continue if bonus depreciation remained deductible; a higher rate could result if bonus depreciation reverted to 2009 levels.
Planned construction and acquisition expenditures were approximately $12.040 million for 2012 and $13.660 million for 2013. Management expected to fund at least half through internal cash generation, with the balance from credit lines, stock-plan proceeds, potential debt or equity issuance, the distribution surcharge and customer contributions.
The Company agreed to acquire the Asbury Pointe wastewater system, expected to add approximately 240 customers following regulatory approval. It also signed agreements to acquire Section A Water Corporation and York Starview, LP, expected to add approximately 100 and 240 customers, respectively. Management characterized these acquisitions as immaterial to total Company results.
During routine tank cleaning, the Company discovered a small amount of mercury in a tank that was not in service. The tank remained out of service while the Company worked with the DEP and EPA on removal and disposal. No water-supply disruption was reported or expected, and $168,000 of known remediation costs was recorded in 2011 operating expenses.
Key risks include dependence on PPUC approval and timing of rate relief; weather, rainfall, drought restrictions and conservation; water-quality and environmental requirements; local economic concentration; capital-market and credit availability; pension funding; customer collections; cybersecurity; dam safety; and interest-rate and remarketing risk on the $12 million variable-rate PEDFA bonds. The related interest-rate swap had a December 31, 2011 fair-value liability of $2.842 million and a credit-rating trigger requiring at least BBB-.
The filing reports no material legal proceedings, no unresolved SEC staff comments and no material off-balance-sheet transactions. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the sustainability and regulatory recovery of the rate increase that drove 2011 revenue growth despite declining usage.
- Monitor 2012 weather, consumption trends, customer growth and any subsequent PPUC rate filing.
- Review funding requirements for the $12.040 million 2012 capital program and the Company’s planned mix of operating cash, debt and equity.
- Assess renewal of the $5 million credit line maturing in June 2012 and the May 2013 expiration of the letter of credit supporting the variable-rate bonds.
- Evaluate the increase in pension underfunding and the potential effect of lower discount rates or investment underperformance on future contributions.
- Track mercury-tank remediation, dam-armoring plans estimated at approximately $6 million per dam, and the recoverability of related costs through rates.
- Verify regulatory approvals, purchase prices and integration risks for the announced wastewater and water-system acquisitions.
- Consider dividend restrictions under debt agreements and the Company’s ability to maintain its long history of annual dividend increases.