The York Water Company: Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
The York Water Company supplies drinking water and operates two wastewater collection and treatment systems in Pennsylvania. Its service territory covers municipalities in York and Adams Counties, and the business is regulated by the Pennsylvania Public Utility Commission. This unaudited Form 10-Q covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014. Dollar amounts are in thousands except per-share data.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $11,209 | $10,571 | 6.0% |
| Operating income | $5,134 | $4,758 | 7.9% |
| Operating margin | 45.8% | 45.0% | Up approximately 80 bps |
| Income before taxes | $3,764 | $3,379 | 11.4% |
| Net income | $2,528 | $2,111 | 19.8% |
| Net margin | 22.6% | 20.0% | Up approximately 260 bps |
| Basic EPS | $0.20 | $0.16 | 25.0% |
| Cash dividends declared per share | $0.1495 | $0.1431 | 4.5% |
| Cash flow from operations | $3,232 | $2,187 | 47.9% |
| Capital expenditures | $2,920 | $2,007 | 45.5% |
At March 31, 2015, total assets were $304,302, common stockholders’ equity was $105,749, and total debt including current maturities was $84,874. Debt represented 44.5% of total capitalization, compared with 44.8% at December 31, 2014. Cash and cash equivalents were $468, down from $1,488 at year-end 2014. The Company had no outstanding borrowings under its $29,000 of unsecured credit lines at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue increased $638, primarily because of the February 28, 2014 rate increase. Average water customers increased by 616 to 64,600, while average wastewater customers increased by 268 to 633.
- Per-capita water consumption decreased 1.8% year over year, partially offsetting customer growth and rate-related revenue increases.
- Operating expenses increased $262, or 4.5%, largely due to higher pension expense, depreciation, pumping-station maintenance, chemical usage, distribution-system maintenance, and rate-case expenses.
- Interest expense declined $55 because of 2014 bond refinancing at lower rates.
- Income tax expense declined $32, and the effective tax rate decreased to 32.8% from 37.5%, primarily because of deductions associated with the IRS tangible property regulations.
- Operating cash flow increased $1,045, mainly because the tax accounting change reduced current income-tax payments.
- Utility plant additions increased $913. The Company funded first-quarter construction expenditures through internally generated funds and stock-plan proceeds.
- The Company issued $577 of common stock through dividend reinvestment, direct stock, and employee stock purchase plans and did not repurchase shares during the quarter. As of March 31, 2015, 823,016 shares remained available under the repurchase authorization.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2015 construction expenditures of approximately $11,200, excluding potential acquisitions. Funding is expected to come primarily from internally generated funds, with additional support from line-of-credit borrowings, stock-plan proceeds, customer advances, and contributions.
- The Company does not expect to collect a distribution system improvement charge or file a rate increase request in 2015.
- Management expects revenue to increase slightly during the remainder of 2015 because of higher summer demand and additional customers from acquisitions. It expects depreciation to rise and other operating costs to increase moderately.
- Management expects an effective tax rate of approximately 30% to 33% for the remainder of 2015, subject to the level of eligible asset improvements placed in service.
- The Company expects to refinance the 2004A bonds in 2015 to benefit from low interest rates. It also planned to renew or extend its credit lines, including a $5,000 facility maturing in June 2015.
- Standard & Poor’s affirmed the Company’s A- credit rating with a stable outlook and adequate liquidity on March 20, 2015.
- The Company’s $12,000 variable-rate debt is economically converted to fixed rate through an interest-rate swap expiring October 1, 2029. The swap had a $2,844 liability at March 31, 2015; a credit-rating downgrade below BBB- could have required approximately $2,934 of immediate payment if the applicable default provisions were triggered.
- The Company contributed the expected $2,300 to its pension plans during the first quarter and did not expect additional 2015 contributions.
- Pending or recently completed acquisitions are expected to be immaterial to total results. The Company also has acquisitions under regulatory review, including the SYC wastewater assets, Newberry Farms water assets, and Margaretta Mobile Home Park water assets.
- Key operating risks include weather and drought restrictions, customer water consumption, regulatory rate relief, permitting, capital requirements, financing availability, interest rates, credit ratings, customer growth, acquisitions, and changes in tax or accounting rules.
Important Facts for Investors to Verify
- Confirm the effect and durability of the 2014 rate increase, particularly against the 1.8% decline in per-capita consumption.
- Monitor progress and funding for the approximately $11,200 of planned 2015 capital expenditures.
- Verify refinancing of the 2004A bonds and renewal or extension of the $29,000 credit-line capacity.
- Assess liquidity after the Company’s expected cash balance is fully utilized and reliance on its cash-management facility increases.
- Evaluate the sustainability of the lower effective tax rate under the IRS tangible property regulations.
- Review the interest-rate swap liability, letter-of-credit renewal, and related downgrade or default triggers.
- Track PPUC approvals and the timing and customer additions associated with pending acquisitions.
- Consider seasonality, rainfall, drought restrictions, conservation, and summer demand when annualizing first-quarter results.