The York Water Company 2015 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
The York Water Company operates regulated water and wastewater systems in south-central Pennsylvania, serving portions of York and Adams counties. The filing covers the three and nine months ended September 30, 2015. Financial statements are unaudited and amounts are in thousands of dollars except per-share data.
Financial Performance and Key Metrics
| Metric | Three Months Ended Sept. 30 | Nine Months Ended Sept. 30 |
|---|---|---|
| Operating revenue | $12,368, up 2.5% | $35,472, up 3.1% |
| Operating income | $6,353 | $17,169 |
| Operating margin | 51.4% | 48.4% |
| Net income | $3,520, up 14.8% | $8,973, up 13.1% |
| Net margin | 28.5% | 25.3% |
| Basic EPS | $0.28 | $0.70 |
| Cash dividends declared per share | $0.1495 | $0.4485 |
- Nine-month operating expenses were $18,303, up 3.1%, driven principally by higher depreciation, water-treatment chemical usage, pension expense, building maintenance, and other operating costs.
- Nine-month operating cash flow was $13,616, compared with $13,954 in the prior-year period.
- Capital expenditures were $10,271, and acquisitions of water systems totaled $94 during the first nine months.
- Cash and cash equivalents were $1,148 at September 30, 2015, compared with $1,488 at December 31, 2014. Current assets were $10,159 and current liabilities were $6,260.
- Long-term debt, including the current portion, was $87,552 at September 30, compared with $84,885 at year-end 2014. Debt represented 44.9% of total capitalization versus 44.8% at year-end.
- The company had $29,000 of unsecured committed credit lines and no outstanding borrowings under those facilities at September 30, 2015.
- Net utility plant increased to $260,079 from $253,194 at December 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher consumption from an emergency interconnection with a neighboring municipality, the effect of the February 2014 rate increase, and approximately 866 additional average customers during the nine-month period.
- Net income increased despite the absence of a $316 prior-year gain on the sale of land.
- Income-tax expense declined substantially because the IRS tangible property regulations permitted deductions for certain asset improvements. The effective tax rate declined to 28.3% from 38.6% for the quarter and to 30.7% from 38.3% for the nine months.
- The company issued $10,000 of 2015 York County Industrial Development Authority revenue bonds in July. Net proceeds were approximately $9,500 and were used to redeem 2004 bonds and fund part of 2015 capital expenditures.
- Nine-month interest expense decreased 1.4% because of the 2014 bond refinancing, although third-quarter interest expense increased 1.4% as debt outstanding increased.
- The company repurchased and retired 118,812 shares during the nine months for $2,495. As of September 30, 704,204 shares remained available under the repurchase authorization.
- Average daily water availability was approximately 35.4 million gallons versus average daily consumption of approximately 18.9 million gallons at September 30.
Outlook, Commentary, Risks, and Unusual Items
- Management expects fourth-quarter revenue to be slightly lower than each of the first three quarters because of seasonal consumption declines and the expected end of the emergency interconnection. Weather and regulatory actions could affect results.
- Management expects depreciation to continue increasing with utility-plant investment and other expenses to rise moderately as the distribution system is maintained and extended and additional systems are acquired.
- Management expects a full-year effective tax rate of approximately 30% to 33%, subject to the level and timing of eligible asset improvements placed in service.
- Approximately $2,500 of additional 2015 construction expenditures were anticipated, excluding potential acquisitions. Funding was expected to come primarily from internally generated funds, with additional support from credit lines, stock purchase plans, and customer contributions.
- The company stated that cash could be fully utilized during 2015 or the first quarter of 2016, after which its cash-management facility is expected to provide liquidity for operations, capital expenditures, acquisitions, and potential share repurchases.
- The PPUC’s earnings benchmark prevented collection of the distribution system improvement charge in 2015; management indicated this may continue into 2016 and could delay the next rate filing.
- Pending acquisitions and agreements include wastewater assets expected to close in the first quarter of 2016 and water assets expected to add approximately 120 customers in the first quarter and 200 customers in the second quarter of 2016. Management expects these transactions to be immaterial to overall results.
- The interest-rate swap hedges $12,000 of variable-rate debt and expires October 1, 2029. Its fair-value liability was $2,663 at September 30. A credit-rating or other default could have required approximately $2,827 of immediate payment; the company’s A- rating had a stable outlook.
- Key risks include weather and drought restrictions, customer demand and conservation, rate relief, regulatory approvals, capital requirements, interest rates, credit availability, acquisitions, and the ability to maintain the company’s credit rating.
Important Facts for Investors to Verify
- Confirm the sustainability of earnings growth after the temporary tax benefit from the IRS tangible property regulations and the end of the emergency interconnection.
- Evaluate whether operating cash flow will continue to fund capital expenditures, dividends, debt service, acquisitions, and share repurchases without increased reliance on credit facilities.
- Review the maturity, refinancing, covenant, and interest-rate exposure associated with the company’s $87,552 of debt and $29,000 of committed credit lines.
- Assess the regulatory timing and potential economic impact of future PPUC rate actions and the continued suspension of the DSIC.
- Monitor the $2,663 interest-rate-swap liability, its credit-rating covenant, and the related letter-of-credit renewal requirements.
- Verify the completion, regulatory approvals, and customer additions associated with pending acquisitions and the company’s projected 2016 capital needs.