Business Context and Reporting Period
The York Water Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates wastewater collection and treatment systems. Its operations are regulated primarily by the Pennsylvania Public Utility Commission.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $13.048 million, up 8.5% | $24.879 million, up 5.1% |
| Operating income | $6.074 million, up 14.2% | $11.360 million, up 8.6% |
| Net income | $3.717 million, up 12.5% | $6.530 million, up 10.7% |
| Diluted EPS | $0.28, versus $0.26 | $0.50, versus $0.46 |
| Operating margin | 46.5%, versus 44.2% | 45.7%, versus 44.2% |
| Net margin | 28.5%, versus 27.5% | 26.2%, versus 24.9% |
| Cash flow from operations | Not separately provided | $8.570 million, versus $8.531 million |
- Revenue growth was primarily driven by water and wastewater rate increases effective March 1, 2019 and customer growth. Average customers increased by 507 in the quarter and 583 for the six-month period.
- Per-capita consumption declined approximately 2.3% in the quarter and 2.0% year to date.
- Operating expenses increased 4.0% in the quarter and 2.3% year to date, principally from higher depreciation, wages, maintenance, pumping costs and taxes.
- Income taxes increased materially in the quarter to $664,000 from $270,000; the effective tax rate was 15.2% versus 7.6%. Year-to-date tax expense was $1.365 million, with a 17.3% effective rate versus 16.2%.
- Capital expenditures were $8.018 million through June 30, including routine infrastructure work and dam improvements.
- At June 30, total assets were $351.851 million, common equity was $129.114 million, long-term debt excluding current maturities was $96.085 million, and cash was $2,000.
- Total long-term debt was $98.745 million before discounts and issuance costs. Debt represented 43.3% of total capitalization, compared with 43.2% at December 31, 2018.
- The company had $2.368 million outstanding under lines of credit and a $1.430 million cash overdraft. Aggregate unsecured committed credit lines totaled $41.5 million, with stated borrowing rates of LIBOR plus 1.15% to LIBOR plus 1.25%.
- Cash dividends declared were $0.1733 per share for the quarter and $0.3466 per share for the six months, compared with $0.1666 and $0.3332, respectively, in 2018.
Material Changes Versus the Prior Comparable Period
- The March 2019 rate order increased annual water revenues by approximately $3.361 million and wastewater revenues by approximately $289,000. The distribution system improvement charge reset to zero when the new rates became effective.
- Revenue benefited from rate increases and customer growth but was reduced by approximately $21,000 in the quarter and $305,000 year to date for the customer tax-benefit surcharge. The company is required to return approximately $2.117 million to customers through February 2020.
- Interest expense declined 5.8% in the quarter and 4.3% year to date, primarily because the company refinanced $11 million of high-rate 2019 senior notes with $20 million of 4.54% senior notes due 2049.
- Depreciation and amortization increased $309,000 in the quarter and $359,000 year to date because of continued investment in utility plant.
- The company generated operating cash flow comparable to the prior year, but investing cash usage increased because capital expenditures rose from $6.606 million to $8.018 million.
- The company adopted lease accounting guidance on January 1, 2019; management identified no material leases and reported no material effect.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects approximately $9.5 million of additional 2019 construction expenditures, excluding unapproved acquisitions. Funding is expected to come primarily from internally generated cash, with additional support from credit lines, stock plans, customer advances and contributions.
- Management expects revenue growth for the remainder of 2019 from the new rates, higher summer demand, customer additions and acquisitions, but notes that weather, regulatory actions and declining consumption could affect results.
- Depreciation is expected to continue increasing as utility investment proceeds. Interest expense may rise because of additional line-of-credit borrowings and higher short-term rates, partially offset by the senior-note refinancing.
- The company does not expect to collect a distribution system improvement charge or file a rate-increase request during 2019.
- Several wastewater acquisitions are pending regulatory approval, including a Jacobus Borough transaction expected to close in the third quarter of 2019 and other transactions expected in 2020. Management expects the identified acquisitions to be immaterial to overall results.
- The company expects to contribute the remaining $1.150 million required for its pension plans during the last two quarters of 2019.
- The interest-rate swap hedges $12 million of variable-rate debt and had a $2.200 million fair-value liability at June 30, 2019. A credit-rating or other default event could have required approximately $2.351 million of immediate payment. Standard & Poor’s affirmed the company’s A- rating with a stable outlook on April 5, 2019.
- The company completed replacement of all known company-owned lead service lines. It estimates approximately $910,000 of remaining customer-owned lead-line replacement costs, subject to adjustment, with recovery expected through future rates.
- Key risks include weather and drought restrictions, customer conservation, regulatory and rate decisions, capital requirements, access to financing, interest rates, credit ratings, environmental compliance and cybersecurity events.
- The filing contains an inconsistency regarding renewed credit-line maturities: the debt note states dates in 2021, while the liquidity discussion refers to dates in 2020. The filing text does not provide a clear resolution.
Important Facts for Investors to Verify
- Confirm the effective economics and duration of the March 1, 2019 rate increase and the $2.117 million customer tax-benefit surcharge.
- Verify the maturity dates and available capacity of all committed credit facilities, given the discrepancy between the debt note and MD&A.
- Assess whether declining per-capita consumption, weather variability and the zeroed DSIC could offset rate-driven revenue growth.
- Review the company’s capital-expenditure plan, expected financing mix and potential effect on leverage and equity issuance.
- Monitor the interest-rate swap liability, its credit-rating covenant and potential collateral or termination exposure.
- Track regulatory approvals and closing dates for the pending wastewater acquisitions.
- Evaluate the assumptions supporting regulatory-asset recovery, lead-service-line costs, pension contributions and the company’s effective tax rate.