Business Context and Reporting Period
The York Water Company filed an unaudited Form 10-Q for the three months ended March 31, 2021. The company provides regulated water and wastewater services across portions of 51 municipalities in south-central Pennsylvania and is regulated by the Pennsylvania Public Utility Commission.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $13.081 million | $12.877 million | +1.6% |
| Operating income | $5.354 million | $5.616 million | -4.7% |
| Operating margin | 40.9% | 43.6% | Down 270 bps |
| Net income | $3.705 million | $4.002 million | -7.4% |
| Net margin | 28.3% | 31.1% | Down 280 bps |
| Basic and diluted EPS | $0.28 | $0.31 | -$0.03 |
| Cash flow from operations | $6.597 million | $4.742 million | +$1.855 million |
| Utility plant additions | $7.431 million | $3.858 million | +$3.573 million |
Operating expenses increased 6.4% to $7.727 million, principally due to higher depreciation, wastewater treatment, water treatment and distribution maintenance, and insurance costs. Interest expense increased 1.6% to $1.214 million. The effective income tax rate declined to 7.3% from 12.4%, primarily because of higher deductions under the IRS tangible property regulations.
At March 31, 2021, total assets were $409.389 million, common stockholders’ equity was $145.010 million, and long-term debt was $122.087 million on the balance sheet. Total long-term debt before discounts and issuance costs was $125.040 million, including $5.170 million outstanding under the company’s line of credit. Cash and cash equivalents were $55 thousand.
The company paid $2.448 million in dividends during the quarter and declared dividends of $0.1874 per share. Total debt represented 46.3% of total capitalization, compared with 46.9% at December 31, 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased $204 thousand, primarily from customer growth, acquisitions completed during 2020, higher residential demand, and additional billing and revenue collection services. Average water customers increased by 824 and average wastewater customers increased by 345.
- Per capita consumption was approximately 0.1% lower year over year, although residential demand increased.
- Net income declined $297 thousand because the prior-year period included a non-recurring $515 thousand life insurance gain and because operating and interest expenses increased.
- Operating cash flow improved $1.855 million, aided by stronger collections and the absence of the prior-year non-cash life insurance gain when reconciling net income to cash flow.
- Capital expenditures nearly doubled to $7.431 million, contributing to increased financing needs.
- Debt issuance proceeds of $11.648 million and debt repayments of $13.178 million resulted in a net reduction in long-term debt and line-of-credit borrowings during the quarter.
- The fair value of the interest rate swap liability decreased to $2.209 million from $2.731 million at December 31, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Management expects modest revenue growth for the remainder of 2021 from higher summer demand, customer growth, and acquisitions, but noted uncertainty from COVID-19, weather, consumption patterns, and regulatory actions.
- The company does not expect to file a rate increase request in 2021. No distribution system improvement charge revenue was recorded because earnings exceeded the applicable regulatory benchmark.
- Capital expenditures for the remainder of 2021 are estimated at approximately $26.1 million, excluding potential acquisitions. Funding is expected to come primarily from internally generated funds, with additional financing from cash, line-of-credit borrowings, stock plans, and customer advances or contributions.
- Management expects depreciation and other operating expenses to continue increasing as the company invests in utility plant and incurs higher water and wastewater treatment and infrastructure maintenance costs.
- COVID-19 had not materially affected operations, financial performance, liquidity, workforce, or supply chain through the filing date. Customer shut-off procedures and late-payment charges generally resumed in January 2021, while certain protected-customer payment arrangements remained in effect.
- The company has several pending acquisitions expected to close in 2021, subject to regulatory approvals. Management expects their impact on results to be immaterial.
- The company maintains a $50 million unsecured revolving credit facility, with $5.170 million outstanding at March 31, 2021. Management expects to extend the facility’s maturity into 2023 and believes current capacity is adequate for 2021 needs.
- The interest rate swap converts $12 million of variable-rate debt to an effectively fixed rate and expires October 1, 2029. A credit-rating or other default could have required approximately $2.237 million of payment as of March 31, 2021.
- LIBOR discontinuation could affect the cost of variable-rate borrowings; the company has not yet determined the successor benchmark or quantified the impact.
- Customer-owned lead service-line replacement costs totaled approximately $1.222 million and are recorded as a regulatory asset. The company estimates total costs of approximately $1.5 million, subject to adjustment.
- Management identified weather, drought, regulatory rate relief, customer usage, interest rates, financing availability, credit ratings, cyberattacks, environmental compliance, and future capital requirements as material risks.
Important Facts for Investors to Verify
- Whether revenue growth and customer additions offset continued increases in operating expenses and depreciation.
- The timing and funding of the approximately $26.1 million of planned 2021 capital expenditures.
- Availability and renewal terms of the revolving credit facility and the company’s ability to refinance borrowings on favorable terms.
- The effect of future PPUC rate decisions and recovery of regulatory assets, including lead-service-line replacement costs.
- Changes in customer collections, allowance for doubtful accounts, and demand following the expiration of COVID-19 customer protections.
- The effect of weather, drought restrictions, conservation, and commercial or industrial demand on water usage and revenue.
- The successor benchmark for LIBOR and any resulting change in interest expense.
- Progress and regulatory approval status for pending acquisitions and the Dallastown-Yoe interconnection project.