The York Water Company — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended June 30, 2013. The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates one wastewater collection and treatment system. The interim financial statements are unaudited and should be read with the 2012 Form 10-K. Amounts are in thousands of dollars unless otherwise stated.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenues | $10,737 | $10,352 | $20,806 | $20,021 |
| Operating income | $5,301 | $5,052 | $10,074 | $9,479 |
| Net income | $2,342 | $2,204 | $4,481 | $4,145 |
| Basic EPS | $0.18 | $0.17 | $0.35 | $0.32 |
| Cash dividends per share declared | $0.1383 | $0.1336 | $0.2766 | $0.2672 |
- Second-quarter revenue increased 3.7% and net income increased 6.3%. Six-month revenue increased 3.9% and net income increased 8.1%.
- Calculated operating margin was approximately 49.4% for the quarter and 48.4% for the six months. Calculated net margin was approximately 21.8% and 21.5%, respectively.
- Revenue growth was driven primarily by the distribution system improvement charge, customer growth, and, for the six-month period, additional wastewater revenue. Water volume sold per capita declined 1.7% in the quarter and 0.8% year to date.
- Operating expenses increased 2.6% in the quarter and 1.8% year to date, principally because of higher depreciation and amortization. Six-month expenses also reflected higher wastewater, insurance, and customer-account costs.
- Net cash provided by operating activities was $7,484 for the first six months, compared with $6,764 in the prior-year period. Capital expenditures were $4,115, and cash used for investing activities was $3,628.
- Cash and cash equivalents were $4,180 at June 30, 2013, compared with $4,012 at December 31, 2012.
- Total debt, including current maturities, was $84,957 at June 30, 2013, compared with $84,975 at year-end 2012. Debt represented 45.9% of total capitalization, versus 46.0% at December 31, 2012.
- The Company had $29,000 of unsecured committed credit lines and no outstanding borrowings under those facilities at June 30, 2013.
- Common stockholders’ equity was $100,332 at June 30, 2013, compared with $99,825 at December 31, 2012.
Material Changes Versus the Prior Comparable Period
- The distribution system improvement charge contributed $340 of second-quarter revenue and $667 of six-month revenue, compared with $18 in the corresponding 2012 periods. The tariff surcharge was 3.59% effective July 1, 2013.
- Average customers served increased by 924 in the second quarter and 692 for the first six months, primarily from acquisitions.
- Depreciation and amortization increased by $216 in the quarter and $301 for the six-month period, reflecting utility-plant investment.
- The Company repurchased and retired 82,413 shares during the quarter for $1,549, or approximately $18.79 per share, and 93,052 shares year to date for $1,746. The March 2013 authorization permits repurchases of up to 1,200,000 shares; 1,106,948 remained available at June 30.
- The Company acquired the Windy Brae Mobile Home Park water assets for approximately $30, adding approximately 135 customers. The acquisition was immaterial to total results.
- The Company renewed $29,000 of committed credit facilities, extending $24,000 of facilities to May 2015 and the remaining $5,000 facility to June 2014.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects moderate revenue growth for the remainder of 2013 from the surcharge, higher summer demand, and a potential rate increase. Management also expects depreciation to continue rising and other operating expenses to increase moderately.
- Planned construction expenditures for the remainder of 2013 were approximately $7,200, excluding potential acquisitions. Funding is expected to come primarily from cash and internally generated funds, supplemented by credit facilities, stock-plan proceeds, the surcharge, and customer contributions.
- A May 29, 2013 rate filing seeks annual water-rate increases of $7,116, or 16.8%, and wastewater-rate increases of $28, or 25%. The Pennsylvania Public Utility Commission was reviewing the request; any approved increase would be effective no later than March 1, 2014. Approval and the requested amount are not assured.
- The Company signed an agreement to acquire the East Prospect Borough Authority wastewater assets. Closing, expected in the fourth quarter of 2013, is subject to regulatory approvals and would add approximately 400 wastewater customers. The expected financial effect is immaterial.
- The Company uses a $12,000 interest-rate swap to convert variable-rate debt to an effectively fixed rate. The swap liability was $2,034 at June 30, 2013, compared with $2,836 at year-end 2012. A credit-rating or other default event could have required an immediate payment of approximately $2,097.
- Standard & Poor’s affirmed the Company’s A- credit rating with a stable outlook and adequate liquidity. The swap requires a minimum BBB- rating.
- A water-storage tank containing a small amount of mercury discovered in 2011 remains out of service pending Pennsylvania Department of Environmental Protection approval. Testing indicated compliance with safe drinking-water standards; cumulative costs were $186, with no costs incurred in 2013. If approval is not obtained, relining, strengthening, or replacement may require additional capital spending.
- The union contract expired April 30, 2013. The parties agreed to continue operating under its terms while negotiating, and management expects no service interruption.
- Results are exposed to weather, drought restrictions, water consumption, regulatory decisions, interest rates, financing availability, credit ratings, capital requirements, and changes in commercial and industrial activity.
- The Company had contributed $1,593 to its pension plans through June 30 and did not expect additional 2013 contributions at the filing date.
Important Facts for Investors to Verify
- Outcome, timing, and recoverability of the pending PPUC rate case and continuation of surcharge revenues.
- Funding and execution of approximately $7,200 of planned second-half capital expenditures and any future acquisitions.
- Availability and renewal terms of the $29,000 credit facilities, including the June 2014 maturity.
- Interest-rate swap valuation, potential collateral or termination payments, and the May 2015 letter-of-credit expiration.
- DEP approval and potential remediation or replacement costs for the out-of-service storage tank.
- Impact of declining per-capita water consumption, weather conditions, drought restrictions, and customer growth on revenue.
- Progress of labor negotiations and any effect on operating costs or service continuity.