The York Water Company — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended June 30, 2017. The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates wastewater collection and treatment systems. The company is regulated by the Pennsylvania Public Utility Commission.
The company served an average of 66,976 water customers and 2,285 wastewater customers during the second quarter. Two acquisitions completed in early 2017 added approximately 80 water customers and 1,700 wastewater customers.
Financial Performance and Liquidity
All dollar amounts below are in thousands, except per-share data.
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Operating revenues | $12,254 | $11,820 | $23,544 | $23,098 |
| Operating income | $5,529 | $5,695 | $10,386 | $10,909 |
| Net income | $2,935 | $2,847 | $5,516 | $5,333 |
| Diluted EPS | $0.23 | $0.23 | $0.43 | $0.42 |
| Operating cash flow | Not provided | Not provided | $9,366 | $8,256 |
| Capital expenditures | Not provided | Not provided | $13,867 | $5,009 |
- Second-quarter revenue increased 3.7%, while six-month revenue increased 1.9%.
- Second-quarter net income rose 3.1%; six-month net income rose 3.4%.
- Approximate operating margin declined to 45.1% in the quarter from 48.2% and to 44.1% for the six months from 47.2%, reflecting higher operating expenses.
- Approximate net margin was 24.0% in the quarter versus 24.1% and 23.4% for the six months versus 23.1%.
- Cash flow from operations increased $1,110, or 13.4%, year over year, primarily due to lower income taxes paid and higher depreciation.
- Cash used in investing activities was $14,339, including utility plant additions and system acquisitions. Cash provided by financing activities was $766.
- Cash and cash equivalents declined to $2 at June 30, 2017 from $4,209 at December 31, 2016. The company also had a $1,083 cash overdraft and $3,507 outstanding under its lines of credit.
- Total long-term debt, before discounts and issuance costs, was $90,973 at June 30, 2017 versus $87,488 at year-end 2016. Debt represented 44.1% of total capitalization, compared with 43.4% at year-end.
- The company maintained $41,500 of unsecured credit lines. Management stated that available facilities and capital-market access should be adequate for anticipated 2017 and 2018 needs.
- Cash dividends declared per share increased to $0.1602 in the quarter and $0.3204 for the six months, compared with $0.1555 and $0.3110, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue benefited from $188 of second-quarter and $250 of six-month revenue from the West York Borough wastewater acquisition, $62 of distribution system improvement charge revenue, and customer growth.
- Per-capita consumption declined 3.1% in the quarter and 2.1% for the six months.
- Operating expenses increased 9.8% in the quarter and 7.9% for the six months. Key increases included wastewater operating costs, health insurance, depreciation, wages, legal expenses, water treatment costs, and power costs.
- Interest expense increased modestly because of line-of-credit borrowings and higher short-term rates.
- The effective income tax rate decreased to 31.8% from 34.2% in the quarter and to 29.7% from 34.4% for the six months, primarily because of deductions available under the IRS tangible property regulations.
- The company repurchased 37,229 shares for $1,263 during the first six months, including 12,900 shares during the quarter. Approximately 618,004 shares remained authorized for repurchase at June 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2017 revenue to benefit from the DSIC, higher summer demand, and additional water and wastewater customers, although regulatory actions and weather could affect results.
- The company expected an effective tax rate of approximately 28% to 32% for 2017 and did not expect to file a base-rate increase request during 2017.
- Remaining 2017 construction expenditures were estimated at approximately $9,000, excluding potential acquisitions. Management expected to use internally generated funds, credit lines, stock-plan proceeds, and customer advances and contributions.
- The company committed approximately $11,598 for a raw-water pumping station and force main, with $3,490 remaining to be incurred at June 30, 2017.
- Following a Lead and Copper Rule exceedance, the company agreed to replace all remaining company-owned lead service lines within approximately three and a half years. Estimated additional company-owned replacement costs were approximately $1,600. Customer-owned replacement costs were recorded as regulatory assets and remain subject to uncertainty.
- The interest-rate swap had a fair-value liability of $2,263 at June 30, 2017. A credit-rating or other default event could have required approximately $2,401 of immediate payment. Standard & Poor’s affirmed the company’s A- rating with a stable outlook.
- The union contract expired April 30, 2017; both parties continued operating under the expired agreement while negotiating.
- The company’s principal risks include weather and drought restrictions, water demand, regulatory rate relief, environmental requirements, capital needs, interest rates, refinancing and credit availability, customer growth, acquisitions, permits, and changes in tax or accounting rules.
Investor Verification Checklist
- Verify the sustainability and recoverability of regulatory assets, including lead-service-line replacement costs and interest-rate-swap settlements.
- Monitor the effect of higher capital spending, increasing debt, and limited reported cash on future financing needs and dividend capacity.
- Confirm renewal or refinancing of the $10,000 credit line scheduled to mature in September 2017 and the June 2018 maturity of another $7,500 facility.
- Assess whether customer growth and the DSIC offset lower per-capita consumption and rising operating costs.
- Track the timing, cost, and regulatory approval of planned acquisitions, the Dallastown-Yoe interconnect, and the raw-water pumping station project.
- Evaluate exposure to lead-service-line obligations, potential changes in estimated customer-owned replacement costs, and compliance with the Pennsylvania consent order.
- Review the company’s pending assessment and implementation of new revenue-recognition and pension-cost presentation standards.