The York Water Company: Q1 2013 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, along with one wastewater collection and treatment system. The unaudited filing covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. The company served an average of 63,810 customers during the quarter, up from 62,888.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenues | $10.069 million | $9.669 million | Up 4.1% |
| Operating income | $4.773 million | $4.427 million | Up 7.8% |
| Net income | $2.139 million | $1.941 million | Up 10.2% |
| Basic earnings per share | $0.17 | $0.15 | Up $0.02 |
| Operating margin | 47.4% | 45.8% | Improved |
| Net margin | 21.2% | 20.1% | Improved |
| Cash flow from operations | $4.060 million | $3.322 million | Up 22.2% |
| Capital expenditures and system acquisitions | $2.469 million | $2.076 million | Increased |
Revenue growth was primarily driven by the Pennsylvania distribution system improvement charge, which contributed $328,000 in the quarter, and customer growth. Per-capita water volume was generally consistent with the prior-year quarter, with higher industrial consumption offset by lower commercial and residential consumption.
Operating expenses increased 1.0% to $5.296 million. Depreciation and amortization rose approximately $85,000, and customer accounts expense increased approximately $35,000, partly offset by lower distribution-system maintenance expense and the absence of prior-year rate-case expense. Income taxes increased 13.4% to $1.281 million, and the effective tax rate rose to 37.5% from 36.8%.
Cash and cash equivalents were $4.554 million at March 31, 2013, compared with $4.012 million at December 31, 2012. The company had $29 million of unsecured credit lines available and no borrowings outstanding under those lines. Long-term debt, including the current portion, was $84.964 million, and debt represented 45.7% of total capitalization, compared with 46.0% at year-end 2012. Total assets were $283.280 million, and stockholders’ equity was $100.753 million.
Cash dividends declared were $0.1383 per share, compared with $0.1336 in the prior-year quarter. The company issued $776,000 of common stock through stock plans and repurchased and retired 10,639 shares for $197,000.
Material Changes Versus the Prior Comparable Period
- Revenue increased $400,000, supported by the $328,000 distribution surcharge and approximately 922 additional average customers.
- Net income increased $198,000, or 10.2%, despite higher depreciation and income taxes.
- Operating cash flow increased $738,000, primarily due to improved collections and lower cash interest paid resulting from payment timing.
- Capital spending increased by approximately $393,000, including $2.442 million of utility plant additions and $27,000 for a water-system acquisition.
- The company completed the acquisition of the Windy Brae Mobile Home Park water assets, adding approximately 135 customers for purchase price and acquisition costs of approximately $27,000. The impact on consolidated results was immaterial.
- The board authorized a repurchase program for up to 1.2 million shares; 1,189,361 shares remained available at March 31, 2013.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected moderate revenue growth for the remainder of 2013 from continuation of the distribution surcharge, higher summer demand, and a potential rate increase expected to become effective during the fourth quarter. The company planned to file a rate-increase request in the second quarter of 2013. Effective April 1, 2013, the tariff included a 3.39% distribution surcharge.
Planned construction expenditures for the remainder of 2013 were approximately $11.7 million, excluding potential acquisitions. Management expected to fund these needs primarily with cash on hand and internally generated funds, supplemented by credit facilities, stock-plan proceeds, the distribution surcharge, customer advances, and contributions. Management believed available credit capacity would be adequate for 2013.
The company’s interest-rate swap effectively converts $12 million of variable-rate debt to a fixed rate. The swap had a fair-value liability of $2.621 million at March 31, 2013. A credit-rating violation or other default could have required an approximately $2.759 million payment at that date. Standard & Poor’s affirmed the company’s A- rating with a stable outlook and adequate liquidity in April 2013.
A water-storage tank remained out of service after mercury was discovered during a 2011 cleaning. Testing indicated compliance with safe drinking-water standards, and the company requested Pennsylvania Department of Environmental Protection approval to return the tank to service. Costs incurred through March 31, 2013 were $186,000. If approval is denied, relining, strengthening, or replacement may require additional capital spending; management reported no service disruption.
The labor contract expired April 30, 2013. The parties agreed to continue operating under the expired contract while negotiating, and management expected no service interruption. The company also noted exposure to weather, drought restrictions, water demand, regulatory decisions, interest rates, financing availability, capital requirements, credit ratings, and the recovery of regulatory assets.
Important Facts for Investors to Verify
- Whether the planned rate filing produces the expected relief and whether a rate increase becomes effective in the fourth quarter of 2013.
- The sustainability of revenue growth given lower residential and commercial per-capita consumption and weather sensitivity.
- Funding of the approximately $11.7 million remaining 2013 capital program and any resulting increase in debt or share repurchases.
- Renewal or extension of the $5 million credit line maturing in June 2013 and the company’s continued access to its $29 million credit facilities.
- DEP approval and potential future costs associated with returning the mercury-affected tank to service.
- The effect of the interest-rate swap liability, letter-of-credit renewal, and credit-rating requirements.
- Progress of labor negotiations and the potential impact on operating costs or service continuity.
- The company’s ability to maintain its dividend and stock-repurchase plans while funding capital expenditures.