The York Water Company: Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
The company provides regulated water service across 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania, and operates wastewater systems in York County. This unaudited filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company had 13,025,339 shares outstanding as of May 5, 2020.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $12.877 million | $11.831 million | +8.8% |
| Operating income | $5.616 million | $5.286 million | +6.2% |
| Net income | $4.002 million | $2.813 million | +42.3% |
| Basic and diluted EPS | $0.31 | $0.22 | +$0.09 |
| Operating margin | 43.6% | 44.7% | Down approximately 1.1 points |
| Net margin | 31.1% | 23.8% | Up approximately 7.3 points |
| Cash flow from operations | $4.742 million | $5.589 million | Down $0.847 million |
| Capital expenditures | $3.858 million | $3.273 million | +17.9% |
Revenue growth primarily reflected the March 1, 2019 rate increase and customer growth. Average water customers increased by 529 to 68,585, while wastewater customers increased by 649 to 2,950, primarily following the Jacobus Borough acquisition. Per-capita consumption declined approximately 1.4%.
Operating expenses increased 10.9% to $7.261 million, driven principally by higher depreciation, health insurance, distribution system maintenance, wastewater treatment, wages, and purchased power. Interest expense declined 9.9% to $1.195 million due mainly to debt refinancing, despite greater average line-of-credit borrowings.
Net income benefited from a non-recurring $515,000 life-insurance gain and a lower effective tax rate of 12.4%, compared with 19.9% in the prior-year quarter. The lower tax rate reflected higher deductions under the IRS tangible property regulations and the non-taxable life-insurance gain.
At March 31, 2020, total assets were $369.436 million, common stockholders’ equity was $136.289 million, and total debt before discounts, issuance costs, and current maturities was $104.348 million. The debt-to-total-capitalization ratio was 43.4%, compared with 43.7% at December 31, 2019.
Cash and cash equivalents were only $2,000 because the company uses a cash-management account connected to its credit facilities. Line-of-credit borrowings were $7.978 million, and the cash-management account had a $763,000 overdraft. The company maintained $41.5 million of unsecured credit lines, with a weighted-average borrowing rate of 2.71% at March 31, 2020. Standard & Poor’s affirmed an A- rating with a stable outlook and adequate liquidity on April 9, 2020.
Material Changes Versus the Prior Comparable Period
- Operating revenue increased $1.046 million, primarily from the prior rate increase and customer growth, partly offset by the elimination of the distribution system improvement charge, which reduced revenue by $249,000.
- Operating expenses rose $716,000, exceeding revenue growth on a percentage basis and reducing the operating margin.
- Net income increased $1.189 million, substantially aided by the $515,000 life-insurance gain and lower income taxes.
- Operating cash flow declined from $5.589 million to $4.742 million, principally because receivables and unbilled revenue increased with higher revenue.
- Capital expenditures increased to $3.858 million, and utility plant increased to $316.945 million from $313.224 million at year-end.
- Cash dividends declared increased to $0.1802 per share from $0.1733 per share.
- The fair value of the interest-rate swap liability increased to $2.895 million from $2.248 million at December 31, 2019.
Guidance, Outlook, Risks, and Unusual Items
Management expects modest revenue growth for the remainder of 2020 from higher summer demand, customer growth, and acquisitions, but noted that COVID-19, economic conditions, weather, consumption patterns, and regulatory actions could materially affect results. The company does not expect to collect a distribution system improvement charge or file a rate-increase request during 2020.
Planned 2020 construction expenditures for the remainder of the year were approximately $20.3 million, excluding potential acquisitions. Funding is expected to come primarily from internally generated funds, supplemented by line-of-credit borrowings, stock-plan proceeds, and customer advances or contributions. Management expects customer advances and contributions to fund approximately 5% to 10% of the remaining requirements.
The company continued normal operations during the COVID-19 pandemic and reported no material impact through the filing date on its workforce, operations, financial performance, liquidity, or supply chain. It paused customer shutoffs for delinquency beginning March 13, 2020 and stopped billing late-payment charges. Management warned that residential demand could rise while commercial and industrial demand declines, and that uncollectible accounts could increase.
The company expects depreciation and other operating costs to rise during the remainder of 2020. Interest expense is also expected to increase because of continued line-of-credit borrowings. Management believes existing credit facilities and capital-market access will provide adequate liquidity, but stated that future credit availability and refinancing terms are not guaranteed.
The company’s interest-rate swap effectively fixes the rate on $12.0 million of variable-rate debt. The swap was in a liability position of approximately $3.136 million as of March 31, 2020 for purposes of a potential default-related payment if required. The swap contains a minimum BBB- credit-rating requirement; the company’s A- rating remained above that threshold.
All known company-owned lead service lines had been replaced by March 31, 2020. Customer-owned replacements had cost approximately $1.078 million, with an estimated total cost of approximately $1.3 million, subject to adjustment and future regulatory recovery.
On April 9, 2020, the company acquired Felton Borough wastewater assets for approximately $882,000, adding about 130 customers. Management expects the acquisition to be immaterial to results. Additional wastewater acquisitions were expected to close in 2020, subject to regulatory approvals.
Key Facts Investors Should Verify
- Whether COVID-19 caused sustained commercial and industrial demand declines, higher residential demand, increased arrears, or additional bad-debt expense after March 31, 2020.
- The sustainability of the 42.3% net-income increase after excluding the non-recurring $515,000 life-insurance gain and favorable tax-rate effects.
- Progress against the approximately $20.3 million remaining 2020 capital-expenditure plan and the resulting increase in debt and interest expense.
- Renewal and extension of the company’s credit lines and its ability to refinance borrowings on acceptable terms.
- Future PPUC rate relief, recovery of regulatory assets, and the timing of any future rate filings or surcharge mechanisms.
- The effect of weather, water consumption, economic conditions, and customer collections on revenue and liquidity.
- The fair value, settlement requirements, and credit-rating triggers associated with the interest-rate swap.