The York Water Company: Q1 2016 Form 10-Q Summary
Business context and reporting period
The York Water Company provides regulated water service across 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania, and operates two wastewater systems. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015. The company is regulated by the Pennsylvania Public Utility Commission.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenues | $11.278 million | $11.209 million | +$69 thousand, +0.6% |
| Operating expenses | $6.064 million | $6.075 million | -$11 thousand, -0.2% |
| Operating income | $5.214 million | $5.134 million | +$80 thousand, +1.6% |
| Net income | $2.486 million | $2.528 million | -$42 thousand, -1.7% |
| Basic EPS | $0.19 | $0.20 | Decrease |
| Operating cash flow | $3.324 million | $3.232 million | +$92 thousand, +2.8% |
| Capital expenditures and water-system acquisitions | $1.926 million | $2.920 million | -$994 thousand |
| Cash and cash equivalents | $3.217 million | $468 thousand | +$2.749 million |
Approximate operating margin was 46.2% in Q1 2016 versus 45.8% in Q1 2015. Approximate net margin was 22.0% versus 22.6%. Cash dividends declared increased to $0.1555 per share from $0.1495.
At March 31, 2016, total assets were $311.218 million, common stockholders’ equity was $110.294 million, and total long-term debt before discounts, issuance costs, and current maturities was $87.531 million. Debt represented 44.2% of total capitalization, compared with 44.5% at December 31, 2015. The company had $29.0 million of unsecured credit lines and no outstanding borrowings under those lines.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from customer growth and higher sewer billing and collection service revenue. Average customers served increased by 1,018, from 65,233 to 66,251.
- Per capita consumption decreased 2.3%, partially offsetting the benefit of customer growth.
- Operating expenses declined slightly. Lower health insurance, maintenance, and other costs offset higher depreciation and wage expense.
- Depreciation and amortization increased by $78 thousand, while income tax expense increased by $77 thousand. The effective tax rate increased to 34.6% from 32.8%.
- Interest expense increased by $21 thousand due to higher debt outstanding following the July 2015 bond issuance.
- Operating cash flow was higher, while capital investment was lower than in Q1 2015. Financing cash outflows decreased because Q1 2015 included significant debt issuance and repayment activity.
- The company completed the acquisition of the Crestview Mobile Home Park water assets in March 2016, adding approximately 120 customers. Prior acquisitions added approximately 225 customers in aggregate. Management stated that the acquisitions were immaterial to total results.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects revenue to increase slightly for the remainder of 2016, supported by higher summer demand, customer growth, and acquisitions, but noted exposure to weather, regulatory actions, and consumption trends.
- Depreciation is expected to continue increasing as the company invests in utility plant. Other operating costs are expected to rise moderately.
- The company expects a 2016 effective tax rate of approximately 28% to 32%, although the rate will vary with the level of qualifying asset improvements under the IRS tangible property regulations.
- The company does not expect to file a rate increase request in 2016. Earnings above the regulatory benchmark are expected to prevent collection of the distribution system improvement charge during 2016.
- Planned 2016 capital expenditures for the remainder of the year were approximately $15.3 million, excluding unapproved acquisitions. Funding is expected to come primarily from internally generated funds, with additional support from credit lines, stock plans, customer advances, and contributions.
- The company expects to use its $3.217 million cash balance during 2016 and rely thereafter on its cash management facility and credit lines. Management believes liquidity is adequate for anticipated 2016 needs.
- Three pending acquisitions were expected to close in the fourth quarter of 2016 or, for Westwood Mobile Home Park, begin service in Q2 2016, subject to regulatory approvals. The company estimated these transactions would add approximately 1,930 customers in aggregate and be immaterial to results.
- The company maintains an interest rate swap that effectively fixes the rate on $12.0 million of variable-rate debt. The swap had a $2.933 million fair-value liability at March 31, 2016 and could require approximately $3.129 million of payment if specified default or credit-rating provisions were triggered. Standard & Poor’s affirmed the company’s A- rating with a stable outlook.
- The company’s water demand is sensitive to rainfall, drought restrictions, conservation, economic activity, customer growth, and commercial and industrial usage. Future rate relief, financing availability, interest rates, capital needs, acquisitions, and regulatory changes could materially affect results.
- Stockholders approved a long-term incentive plan on May 2, 2016, effective July 1, 2016, authorizing up to 100,000 shares for stock-based awards.
Important facts for investors to verify
- Whether the expected 28% to 32% tax rate and related tax benefits are achieved during the remainder of 2016.
- The timing and regulatory approval of pending water and wastewater acquisitions.
- Actual 2016 capital spending and the resulting use of cash, credit lines, and additional equity.
- Changes in customer consumption, weather conditions, drought restrictions, and customer growth.
- Whether the company maintains access to its $29.0 million credit facilities and renews the facilities maturing in 2016 and 2017.
- The fair value and credit provisions of the interest rate swap, including the potential payment obligation if a triggering event occurs.
- The effect of delayed rate relief and the continued inability to collect the distribution system improvement charge.
- The potential dilution and expense effects of the new long-term incentive plan.