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. The unaudited filing covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company had approximately 63,056 average customers in the second quarter and 62,972 in the first six months.
Financial Performance and Position
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Water operating revenues | $10.352 million | $10.452 million | $20.021 million | $20.097 million |
| Operating income | $5.052 million | $5.162 million | $9.479 million | $9.748 million |
| Net income | $2.204 million | $2.458 million | $4.145 million | $4.597 million |
| Basic EPS | $0.17 | $0.19 | $0.32 | $0.36 |
| Operating margin | 48.8% | 49.4% | 47.3% | 48.5% |
| Net margin | 21.3% | 23.5% | 20.7% | 22.9% |
| Cash dividends declared per share | $0.1336 | $0.1310 | $0.2672 | $0.2620 |
Six-month net cash provided by operating activities was $6.764 million, down from $8.596 million in 2011. Utility plant additions were $5.553 million, compared with $4.124 million, and net cash used in financing activities was $2.335 million. Cash and cash equivalents declined to $2.899 million at June 30, 2012 from $4.006 million at December 31, 2011.
At June 30, 2012, total assets were $276.639 million and common stockholders’ equity was $97.077 million. Total debt, including current maturities, was $84.996 million, representing 46.7% of total capitalization, versus 47.2% at December 31, 2011. The company had no borrowings under its $29.0 million of unsecured credit lines. Long-term debt excluding current maturities was $84.954 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 1.0% and six-month revenue decreased 0.4%, primarily reflecting lower residential and overall water usage.
- Second-quarter net income declined 10.3%; six-month net income declined 9.8%.
- Operating expenses increased 0.2% in the quarter and 1.9% year to date, driven by higher depreciation, wages, maintenance, pumping, and other operating costs. Lower doubtful-account expense partially offset the increases.
- The effective income tax rate increased to 38.6% in the quarter and 37.8% for the six months, compared with 34.4% and 34.8%, respectively, in 2011. Management attributed the increase primarily to the absence of state bonus-depreciation deductibility available in 2011.
- Six-month water volume sold per capita decreased approximately 1.8%, although customer counts increased by approximately 350 year over year.
- Net plant additions increased, while operating cash flow declined partly because the company paid its entire $1.593 million 2012 pension contribution during the first half.
Guidance, Outlook, Risks, and Unusual Items
- Effective July 1, 2012, the company began billing a 2.24% distribution surcharge for qualifying infrastructure replacement costs. Management expected higher summer demand and the surcharge to support revenue for the remainder of 2012.
- Management projected approximately $6.5 million of additional construction expenditures for the remainder of 2012, funded primarily with internally generated cash, stock-plan proceeds, the surcharge, and customer contributions.
- The company expected depreciation to continue increasing with utility-plant investment, other operating expenses to rise moderately, and the effective tax rate to remain elevated through 2012.
- The company completed the acquisition of the Asbury Pointe wastewater facilities on July 31, 2012, adding approximately 240 wastewater customers for approximately $305,000. Additional small water-system acquisitions were expected to close or begin service later in 2012.
- A storage tank containing a small amount of mercury remained out of service. No customer service disruption or water-supply contamination was identified. Remediation costs totaled $186,000 through June 30, 2012, with approximately $50,000 of additional capital spending expected pending regulatory approval.
- The company used an interest-rate swap to effectively fix the rate on $12.0 million of variable-rate debt. The swap had a fair-value liability of $2.969 million at June 30, 2012. A credit-rating or other default event could have required approximately $3.278 million of immediate payment; management stated that the company was in compliance.
- The company’s principal risks include weather and drought restrictions, water demand, regulatory rate relief, capital requirements, interest rates, access to financing, credit ratings, permits, customer growth, and changes in government policies or tax law.
- Management stated that liquidity was adequate for 2012 and into 2013, but future refinancing or credit availability could affect capital expenditures and operations.
Important Facts for Investors to Verify
- Whether the 2.24% distribution surcharge and any future rate filing provide sufficient revenue recovery for rising capital and operating costs.
- The sustainability of operating cash flow after the large 2012 pension contribution and planned capital expenditures.
- The interest-rate swap’s liability, settlement obligations, credit-rating covenant, and May 2014 letter-of-credit expiration.
- The timing, purchase accounting, and financial contribution of the wastewater and other announced acquisitions.
- The resolution and final cost of the mercury tank remediation.
- Trends in residential water consumption, weather-related demand, drought restrictions, and customer growth.
- The company’s ability to maintain debt near 50% of capitalization while funding infrastructure investment and dividends.