The York Water Company: Q1 2012 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 seven municipalities in Adams County, Pennsylvania. The unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company reported 62,888 average customers during the quarter and had approximately 12.8 million common shares outstanding as of May 8, 2012.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Water operating revenues | $9.669 million | $9.645 million | 0.2% |
| Operating income | $4.427 million | $4.586 million | (3.5%) |
| Operating margin | 45.8% | 47.5% | Down 170 bps |
| Net income | $1.941 million | $2.139 million | (9.3%) |
| Basic EPS | $0.15 | $0.17 | Down $0.02 |
| Net margin | 20.1% | 22.2% | Down 210 bps |
| Cash flow from operations | $3.322 million | $4.815 million | (31.0%) |
| Capital expenditures | $2.076 million | $2.103 million | (1.3%) |
Operating expenses increased 3.6% to $5.242 million, led by higher salaries and wages, distribution-system maintenance, depreciation, and lower capitalized overhead. These increases were partly offset by a $55,000 reduction in power expense. Interest expense declined slightly to $1.310 million, while the effective income tax rate increased to 36.8% from 35.2%.
Cash and cash equivalents were $4.090 million at March 31, 2012, compared with $4.006 million at December 31, 2011. Total assets were $274.596 million. Total debt, including current maturities, was $85.006 million, representing 46.9% of total capitalization, compared with 47.2% at year-end 2011. The company had no borrowings outstanding under its $29.0 million aggregate unsecured credit lines.
Quarterly dividends declared were $0.1336 per share, compared with $0.1310 in the prior-year quarter. The company paid $1.709 million of dividends during the quarter.
Material changes versus the prior comparable period
- Revenue was essentially flat despite a 3.7% decline in total per-capita water volume sold. Customer growth and residential revenue increases offset lower commercial and industrial revenue.
- Net income declined $198,000, primarily because expense growth exceeded the modest revenue increase.
- Operating cash flow declined $1.493 million, principally reflecting the full $1.593 million 2012 pension contribution and less favorable working-capital changes.
- Average customers increased by 332, from 62,556 to 62,888.
- The company issued 32,718 shares under its dividend reinvestment, direct stock, and employee stock purchase plans, compared with 22,933 shares in the prior-year quarter.
- The interest-rate swap’s fair-value liability declined to $2.426 million from $2.842 million at December 31, 2011.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects revenue to increase during the remainder of 2012 as a result of higher summer demand, but results remain sensitive to weather, water usage, conservation, drought restrictions, rate relief, and commercial and industrial activity.
- Construction expenditures are expected to total approximately $10.0 million for the remainder of 2012. Funding is expected to come primarily from internally generated cash, with additional support from credit lines, stock-plan proceeds, the distribution surcharge, customer advances, and contributions.
- Management expects operating expenses to rise moderately, with depreciation continuing to increase as utility-plant investment proceeds. Interest expense is expected to remain generally consistent with 2011.
- The company expects to close the Asbury Pointe wastewater acquisition in the second quarter of 2012, adding approximately 240 customers subject to regulatory approval. Additional water-asset acquisitions are expected to close in the second and third quarters and are expected to be immaterial to total results.
- In November 2011, mercury was discovered in an out-of-service tank. The company incurred $184,000 of known remediation costs through March 31, 2012, is working with the Pennsylvania Department of Environmental Protection and the EPA, and expects no customer service disruption.
- The company uses an interest-rate swap to convert its $12.0 million variable-rate debt exposure to an effectively fixed rate. A credit-rating downgrade below BBB- could require approximately $2.643 million of immediate payment if the swap were in a liability position. The company was in compliance with the rating requirement at quarter-end.
- The company’s $13.0 million committed credit line was renewed in April 2012 through May 2014. Management also planned to extend or renew its other $11.0 million and $5.0 million lines. The related letter of credit supporting variable-rate bonds expires May 6, 2013, with an extension under negotiation.
- The company states that it was in compliance with debt covenants, had effective disclosure controls, and had no material off-balance-sheet arrangements.
Investor verification items
- Verify the sustainability of revenue and cash flow given declining per-capita water consumption and seasonal dependence on summer demand.
- Review the timing, regulatory approvals, funding, and integration of the planned wastewater and water-asset acquisitions.
- Assess the approximately $10.0 million remaining 2012 capital program against internally generated cash and available credit capacity.
- Monitor renewal of the $5.0 million and $11.0 million credit lines and extension of the letter of credit supporting the variable-rate debt.
- Evaluate interest-rate-swap collateral and termination exposure, including the $2.426 million reported fair-value liability and credit-rating covenant.
- Track mercury-remediation costs and regulatory closure of the affected tank.
- Confirm future Pennsylvania Public Utility Commission rate actions, since the company has not determined when to file its next rate request.