York Water Company 10-Q Summary
Business Context and Reporting Period
The York Water Company provides regulated water and wastewater services in portions of 51 municipalities across three counties in south-central Pennsylvania. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, filed August 5, 2021. The company served an estimated 69,532 water customers and 3,321 wastewater customers on average during the second quarter.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $13.801 million, up 3.6% | $26.882 million, up 2.6% |
| Operating income | $5.902 million, down 6.2% | $11.256 million, down 5.5% |
| Net income | $4.484 million, up 7.2% | $8.189 million, up 0.1% |
| Basic and diluted EPS | $0.35, versus $0.32 | $0.63, unchanged |
| Net cash from operating activities | Not separately provided | $12.102 million, versus $9.747 million |
| Capital expenditures | Not separately provided | $16.043 million, versus $8.986 million |
Second-quarter operating expenses increased 12.4% to $7.899 million, exceeding revenue growth and reducing the operating margin to approximately 42.8% from 47.2%. Net margin improved to approximately 32.5% from 31.4%, primarily because income taxes declined 73.7% to $160,000. For the six-month period, the operating margin was approximately 41.9%, compared with 45.5%, while net margin was approximately 30.5%, compared with 31.2%.
At June 30, 2021, total assets were $420.976 million, including net utility plant of $359.146 million. Stockholders’ equity was $147.706 million and reported long-term debt was $126.996 million, net of discounts and issuance costs. Total debt before discounts and issuance costs was $129.905 million, including $10.035 million outstanding under the line of credit. Cash was $6,000, and restricted cash was zero.
The debt-to-total-capitalization ratio was 46.8%, compared with 46.9% at December 31, 2020. The company reported an available unsecured line of credit of $50 million, with borrowings carrying an interest rate of 1.30% at June 30, 2021. The committed line of credit was subsequently renewed with maturity extended to September 2023.
The company paid $4.899 million of dividends during the first six months and declared quarterly dividends of $0.1874 per share, compared with $0.1802 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased due primarily to customer growth, higher per-capita consumption, and additional billing and collection services. Second-quarter average water customers increased by 742 and wastewater customers by 293.
- Operating expenses increased due mainly to higher wastewater treatment, insurance, depreciation, water treatment and distribution maintenance, wages, and outside services.
- Interest expense increased 5.7% in the second quarter and 3.6% year to date because of higher debt balances.
- Allowance for funds used during construction increased to $311,000 in the quarter and $573,000 year to date, reflecting greater eligible construction activity.
- The 2020 six-month period included a nonrecurring $515,000 life-insurance gain that did not recur in 2021.
- Income taxes declined because of larger deductions under the IRS tangible property regulations. The effective tax rate fell to 3.4% from 12.7% in the quarter and to 5.2% from 12.6% year to date.
- Operating cash flow increased 24.2% year to date, while capital expenditures increased approximately 78.5%.
Guidance, Outlook, Risks, and Unusual Items
- Effective July 1, 2021, the tariff included a distribution system improvement charge of 1.67%; management expects modest revenue growth from the DSIC, customer growth, and acquisitions. The company does not expect to file a base-rate increase request in 2021.
- Management expects approximately $16.5 million of additional 2021 construction expenditures, excluding potential unapproved acquisitions. Funding is expected to come primarily from internally generated funds, supplemented by borrowings, stock-plan proceeds, and customer contributions.
- Management expects depreciation and other operating costs to rise as the company invests in utility plant and incurs higher water and wastewater treatment and maintenance costs. Interest expense is expected to be slightly higher because of continued line-of-credit borrowings.
- Pending acquisitions are expected to add approximately 2,090 water and wastewater customers in aggregate, subject to regulatory approvals and stated closing schedules. Management expects the acquisitions to be immaterial to results.
- COVID-19 has not materially affected operations, liquidity, financial performance, workforce, or supply chain to date. Demand by customer class has begun reverting toward pre-pandemic levels, but future effects remain uncertain.
- Key risks include weather and drought, changes in water consumption, regulatory rate relief, customer collections, interest rates, financing availability, construction requirements, permitting, acquisitions, cyberattacks, and changes in tax or accounting rules.
- The company maintains an interest-rate swap on $12 million of variable-rate debt. The swap liability was $2.328 million at June 30, 2021; a ratings-related default could have required approximately $2.368 million of immediate payment. The company’s S&P rating was A- with a stable outlook.
- The company estimates customer-owned lead service-line replacements will cost approximately $1.5 million. Costs recorded as a regulatory asset were approximately $1.258 million at June 30, 2021.
- LIBOR cessation is expected to affect the line of credit and swap arrangements. The successor benchmark and its ultimate cost impact were not yet known.
Most Important Facts for Investors to Verify
- Whether operating-cost growth and higher depreciation continue to outpace revenue growth.
- The sustainability of earnings given the unusually low effective tax rate driven by tangible-property deductions.
- Progress and funding of the planned $16.5 million second-half capital program.
- Available borrowing capacity, refinancing needs, debt maturities, and compliance with debt covenants.
- Implementation and revenue impact of the 1.67% DSIC and the timing of pending acquisitions and regulatory approvals.
- Actual customer demand, collections, allowance for doubtful accounts, and any continuing effects from COVID-19 or weather.
- Potential exposure from the interest-rate swap, LIBOR replacement, lead-service-line obligations, and cybersecurity events.