The York Water Company — Q1 2019 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2019. The York Water Company provides regulated water service across 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania, and operates wastewater collection and treatment systems in portions of York County. The company is regulated by the Pennsylvania Public Utility Commission.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenues | $11.831 million | $11.644 million | Up 1.6% |
| Operating income | $5.286 million | $5.140 million | Up 2.8% |
| Net income | $2.813 million | $2.594 million | Up 8.4% |
| Basic and diluted EPS | $0.22 | $0.20 | Up $0.02 |
| Operating cash flow | $5.589 million | $5.438 million | Up 2.8% |
| Capital expenditures | $3.273 million | $3.026 million | Up 8.2% |
- Operating margin was approximately 44.7%, compared with 44.1% in the prior-year quarter. Net margin was approximately 23.8%, compared with 22.3%.
- Income taxes declined to $701,000 from $871,000, and the effective tax rate decreased to 19.9% from 25.1%, primarily because of higher deductions under the IRS tangible property regulations and lower state income taxes.
- Cash and cash equivalents were $2,000 at March 31, 2019. Current assets were $8.650 million, compared with current liabilities of $10.380 million, indicating reliance on operating cash flow and credit facilities for liquidity.
- Total long-term debt, including current maturities, was $96.798 million. Debt represented 43.2% of total capitalization; common equity represented 56.8%.
- The company had $409,000 outstanding under lines of credit and a $529,000 cash overdraft at quarter-end. It maintained aggregate unsecured lines of credit of $41.5 million, with borrowing rates of LIBOR plus 1.15% to LIBOR plus 1.25%.
- Cash dividends declared increased to $0.1733 per share from $0.1666. Dividends paid during the quarter were $2.239 million.
Material changes versus the prior comparable period
- Revenue growth primarily reflected a rate increase effective March 1, 2019 and customer growth. Average customers increased by 658, from 69,699 to 70,357.
- The rate increase was partly offset by the reset of the distribution system improvement charge to zero on March 1, 2019. DSIC revenue declined to $249,000 from $480,000.
- Per-capita consumption decreased approximately 1.6% year over year.
- Operating expenses increased 0.6% to $6.545 million. Higher wages, depreciation, purchased power, technology costs and other taxes were substantially offset by lower health insurance, wastewater operating and water treatment costs.
- Interest expense decreased 2.7% to $1.327 million following refinancing of $11.0 million of higher-rate senior notes with 4.54% senior notes.
- On January 31, 2019, the company issued $20.0 million of senior notes due 2049, receiving approximately $19.820 million net of issuance costs. Proceeds refinanced the 10.17% and 9.60% notes due in February 2019 and line-of-credit borrowings.
- Net cash used in financing activities declined to $2.316 million from $2.520 million, while investing cash outflows increased to $3.273 million from $2.918 million.
Guidance, outlook, risks and unusual items
- Management expects 2019 revenue to benefit from higher rates, greater summer demand, customer additions and acquisitions, but notes that weather, regulatory actions and consumption trends could materially affect results.
- The company does not expect to collect a DSIC or file a rate increase request in 2019.
- Planned construction expenditures for the remainder of 2019 are approximately $17.0 million, excluding potential acquisitions. Funding is expected to come primarily from internally generated cash, with additional line-of-credit borrowings, stock-plan proceeds, customer advances and contributions.
- Management expects adequate credit facilities and capital-market access for 2019 needs, but warns that unfavorable credit availability or refinancing conditions could require postponement of capital expenditures.
- The company expects interest expense to increase during the remainder of 2019 because of additional line-of-credit borrowings, partly offset by the recent refinancing. Depreciation is also expected to rise with continued utility-plant investment.
- The company must return approximately $2.117 million to customers through a negative surcharge related to the 2017 Tax Act. Revenue was reduced by $284,000 in the quarter, and $257,000 of surcharge benefits were returned to customers.
- The company’s interest-rate swap had a $2.010 million liability at March 31, 2019. A credit-rating or other default event could have required an immediate payment of approximately $2.045 million. Standard & Poor’s affirmed an A- rating with a stable outlook on April 5, 2019.
- All known company-owned lead service lines required under a Pennsylvania environmental consent order had been replaced by March 31, 2019. Customer-owned replacements had cost approximately $345,000, with an estimated total cost of $910,000 subject to adjustment.
- Pending wastewater acquisitions expected in 2019 and 2020 would add approximately 30, 700, 130 and 1,800 customers, respectively; management expects the acquisitions to be immaterial to overall results and notes that regulatory approvals remain required.
- Key risks include weather and drought restrictions, lower water consumption, rate-regulatory outcomes, interest rates, financing availability, capital requirements, environmental compliance and cybersecurity. No material cybersecurity impact had occurred as of the filing.
Important facts for investors to verify
- Confirm the effective revenue and earnings impact of the March 1, 2019 rate order and the related tax-benefit surcharge.
- Monitor per-capita consumption, summer weather and customer growth, particularly because DSIC revenue was reset to zero.
- Review funding of the approximately $17.0 million remaining 2019 capital program and the planned renewal or extension of credit facilities.
- Track debt-to-capitalization trends, line-of-credit borrowings and compliance with debt covenants.
- Assess the interest-rate swap liability, its $2.045 million potential close-out exposure and the company’s A- credit rating.
- Verify regulatory approvals and closing dates for the announced wastewater acquisitions and interconnect project.
- Evaluate the recoverability of regulatory assets, including customer-owned lead-line replacement costs and tax-related balances.