Business Context and Reporting Period
The York Water Company filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company impounds, treats, and distributes water in 39 municipalities in York County and seven municipalities in Adams County, Pennsylvania, serving approximately 62,659 customers on average during the first nine months. Financial amounts below are in thousands of dollars, except per-share data.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2011 | Three Months Ended Sept. 30, 2010 | Nine Months Ended Sept. 30, 2011 | Nine Months Ended Sept. 30, 2010 |
|---|---|---|---|---|
| Water operating revenues | $10,451 | $10,487 | $30,548 | $29,251 |
| Operating income | $5,279 | $5,604 | $15,027 | $14,924 |
| Net income | $2,364 | $2,670 | $6,961 | $6,853 |
| Basic earnings per share | $0.19 | $0.21 | $0.55 | $0.54 |
| Cash dividends declared per share | $0.131 | $0.128 | $0.393 | $0.384 |
| Net cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $13,295 | $10,619 |
Operating margin was approximately 50.5% in the third quarter and 49.2% for the first nine months of 2011, compared with approximately 53.4% and 51.0%, respectively, in the comparable 2010 periods. Net margin was approximately 22.6% in the third quarter and 22.8% for the first nine months, compared with approximately 25.5% and 23.4% in 2010.
- At September 30, 2011, total assets were $267,541, including net utility plant of $231,056 and cash and cash equivalents of $3,861.
- Total debt, including current maturities, was $85,078, compared with $85,173 at December 31, 2010. Debt represented 47.4% of total capitalization, versus 48.3% at year-end 2010.
- Stockholders’ equity was $94,449, compared with $91,257 at December 31, 2010.
- The company maintained $29,000 of unsecured credit lines and had no borrowings under those lines at September 30, 2011.
- Capital expenditures were $6,794 for the first nine months. Net cash used in investing activities was $6,761, while net cash used in financing activities was $4,000.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined $36, or 0.3%, primarily because per-capita water volume declined approximately 2.9% due to record rainfall. The November 2010 rate increase and modest customer growth substantially offset lower consumption.
- First-nine-month revenue increased $1,297, or 4.4%, primarily from the rate increase effective November 4, 2010, despite a 1.4% decline in per-capita consumption. Average customers increased by 207.
- Third-quarter net income decreased $306, or 11.5%, as higher operating expenses, pension and retirement costs, depreciation, and debt interest outweighed lower income taxes.
- First-nine-month net income increased $108, or 1.6%, as higher revenue exceeded increased operating expenses and interest expense.
- Operating expenses rose 5.9% in the third quarter and 8.3% for the first nine months. Key drivers included higher pension expense, depreciation, doubtful-account provisions, distribution-system maintenance, and wages.
- Interest expense increased 10.1% in the third quarter and 9.6% for the first nine months, primarily due to the 5.00% Senior Notes, Series 2010A, issued in October 2010. The increase was partly offset by lower line-of-credit borrowings and other debt reductions.
- The effective tax rate declined to 36.4% from 38.0% in the third quarter and to 35.4% from 38.2% for the first nine months, primarily because bonus depreciation was deductible for state purposes in 2011.
- Operating cash flow increased $2,676, or approximately 25.2%, to $13,295, primarily reflecting lower income taxes paid and higher deferred income taxes.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fourth-quarter revenue to remain consistent with the first nine months, while noting that regulatory actions and weather could affect results.
- The company did not expect to file a base-rate increase request in 2011. The latest PPUC rate order, effective November 4, 2010, was designed to produce approximately $3,400 of additional annual revenue.
- Remaining 2011 construction expenditures were estimated at approximately $2,900. Management expected to fund them primarily with internally generated cash, stock-plan proceeds, and line-of-credit borrowings if needed.
- Management stated that available credit capacity was adequate for capital needs through the remainder of 2011 and 2012. The $5,000 committed line of credit matures in June 2012; other committed facilities mature in May 2013.
- The company’s $12,000 variable-rate debt is economically converted to fixed-rate exposure through an interest-rate swap. The swap had a fair-value liability of $2,695 at September 30, 2011, compared with $1,341 at December 31, 2010. A downgrade below BBB- could have required approximately $3,016 of immediate payment; management stated that the company was in compliance with the rating requirement.
- The swap expires October 1, 2029. The related letter of credit expires May 6, 2013 and is reviewed annually. Failure to renew it could require immediate reimbursement for tendered bonds, reclassification of debt as current, and possible swap termination.
- Record rainfall reduced water usage: first-nine-month rainfall was nearly 19 inches above the comparable 2010 period, and September rainfall was 10 inches above September 2010. Prolonged dry weather could increase usage but also lead to conservation or drought restrictions.
- Management identified risks related to rate relief, customer demand, weather, regulation, permits, capital requirements, interest rates, credit ratings, financing availability, and customer payment performance. The company increased its allowance for doubtful accounts because of slower customer payments.
- Pension contributions of $1,593 had been completed by September 30, 2011, and no additional fourth-quarter contribution was expected. Pension expense increased to $1,194 for the first nine months from $913 in 2010.
- The interim financial statements are unaudited and include only normal recurring accruals. Results for the interim period are not necessarily indicative of full-year results.
Most Important Facts for Investors to Verify
- Whether the PPUC provides timely and sufficient future rate relief to offset rising operating, pension, depreciation, and financing costs.
- Whether customer consumption and collections recover after unusually high rainfall and whether doubtful-account expense continues to increase.
- The funding mix and timing for approximately $2,900 of remaining 2011 capital expenditures and future infrastructure investment.
- The renewal of the $5,000 credit line in June 2012 and the May 2013 letter-of-credit and other credit-facility maturities.
- The fair value, collateral or rating-related obligations, and potential cash exposure associated with the interest-rate swap.
- Whether the company can maintain debt near 50% of capitalization while continuing dividend payments and equity issuance through its stock plans.
- The impact of deferred regulatory assets, deferred taxes, pension assumptions, and future accounting-standard changes on reported earnings and cash flow.