The York Water Company: Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter and six months ended June 30, 2015. The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates two wastewater systems. The company is regulated by the Pennsylvania Public Utility Commission, including rate setting, financing, service territory, and billing practices.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Operating revenues | $11.895 million | $11.768 million | $23.104 million | $22.339 million |
| Operating income | $5.682 million | $5.800 million | $10.816 million | $10.558 million |
| Net income | $2.925 million | $2.757 million | $5.453 million | $4.868 million |
| Basic EPS | $0.22 | $0.22 | $0.42 | $0.38 |
| Operating margin | 47.8% | 49.3% | 46.8% | 47.3% |
| Net margin | 24.6% | 23.4% | 23.6% | 21.8% |
- Operating revenues increased 1.1% in the second quarter and 3.4% for the first six months. The six-month increase primarily reflected the February 2014 rate increase, while second-quarter growth reflected higher consumption, an emergency interconnection, and customer growth.
- Net income increased 6.1% in the second quarter and 12.0% year to date. Lower income taxes were the principal earnings benefit.
- Operating expenses increased 4.1% in the quarter and 4.3% year to date, driven by higher wages, pension and depreciation expense, chemical usage, information technology planning, maintenance, insurance, legal fees, and rate-case expenses.
- Net cash provided by operating activities was $7.983 million for the first six months, compared with $7.410 million in the prior-year period. The increase primarily reflected lower income taxes paid following implementation of the IRS tangible property regulations.
- Capital expenditures for utility plant were $5.886 million, and acquisitions of water systems used $89 thousand. Management expects approximately $5.9 million of additional 2015 construction expenditures, excluding potential acquisitions.
- Cash and cash equivalents were $1.029 million at June 30, 2015, compared with $1.488 million at December 31, 2014. The company expects its cash balance to be fully utilized during 2015 and to rely on its cash-management facility as needed.
- Total debt, including current maturities, was $84.863 million at June 30, 2015, versus $84.885 million at year-end 2014. Debt represented 44.2% of total capitalization, compared with 44.8% at year-end.
- The company had $29 million of unsecured committed credit lines and no outstanding borrowings under those lines at June 30, 2015. The facilities mature in May 2017 and June 2016.
- Stockholders’ equity was $107.330 million at June 30, 2015, compared with $104.563 million at December 31, 2014. Cash dividends declared were $0.1495 per share for the quarter and $0.2990 per share year to date.
Material changes versus the prior comparable period
- The effective income tax rate declined to 31.6% for the quarter and 32.2% for the six months, from 38.5% and 38.1%, respectively, primarily because of deductions permitted under the IRS tangible property regulations. Management expects a 30% to 33% effective tax rate for the remainder of 2015.
- Second-quarter operating income declined $118 thousand despite higher revenue because operating expenses rose faster than revenue. Six-month operating income increased $258 thousand.
- Interest expense declined 1.3% in the quarter and 2.8% year to date because of the 2014 bond refinancing, although management expects interest expense to increase later in 2015 because of additional long-term debt and possible line-of-credit borrowings.
- Average customers served increased by 822 in the quarter and by 721 for the first six months, primarily due to acquisitions. Six-month wastewater customers increased by 132 following the East Prospect acquisition.
- The company completed three small water-system acquisitions during 2015, adding approximately 180 customers in total. Management stated that their impact was immaterial to consolidated results.
- No distribution system improvement charge revenue was recorded in the quarter or year to date. The company does not expect to collect a DSIC or file a rate-increase request during 2015.
Guidance, outlook, risks, and unusual items
- Management expects modest revenue growth during the remainder of 2015 from additional customers and a continuing emergency interconnection, subject to weather and regulatory developments.
- The company expects depreciation and other operating expenses to increase as infrastructure investment and acquisitions continue. It expects allowance for funds used during construction to decline modestly.
- On July 23, 2015, the company received approximately $9.5 million of net proceeds from $10 million of YCIDA revenue bonds bearing interest at 4.00% to 4.50%. Proceeds were used to redeem the 2004 PEDFA bonds and fund part of 2015 capital expenditures.
- The company uses a $12 million interest-rate swap to convert variable-rate debt effectively to a fixed rate. The swap had a $2.325 million liability at June 30, 2015 and expires in October 2029. A credit-rating or other default event on that date could have required approximately $2.434 million of immediate payment.
- Standard & Poor’s affirmed the company’s A- rating with a stable outlook and adequate liquidity on March 20, 2015. The swap requires a minimum BBB- rating.
- Key risks include weather and drought restrictions, water consumption trends, customer and industrial activity, rate-relief timing and adequacy, permitting, capital requirements, financing availability, interest rates, credit ratings, regulatory changes, pension-related market returns, and the ability to recover regulatory assets.
- Pending acquisitions and agreements remain subject to regulatory approvals, including a wastewater acquisition expected to close in the first quarter of 2016 and several mobile-home-park water acquisitions expected during 2015 or 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lower tax rate under the IRS tangible property regulations is sustainable and how it affects deferred taxes and regulatory assets.
- The timing and terms of the July 2015 bond financing, including redemption of the 2004 PEDFA debt and the resulting change in interest expense.
- Future rate-case activity, the continued absence of DSIC revenue, and the company’s ability to recover regulatory assets.
- Actual 2015 capital expenditures, acquisition spending, and reliance on credit lines after available cash is utilized.
- The interest-rate swap liability, related credit-rating covenant, letter-of-credit renewal, and potential liquidity requirements.
- Weather, drought restrictions, water consumption, customer growth, and the financial contribution of completed and pending acquisitions.