YORK WATER CO quarterly report, Q1 FY2017

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The York Water Company: Q1 2017 Form 10-Q Summary

Business Context and Reporting Period

The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates wastewater collection and treatment systems. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. The company is regulated by the Pennsylvania Public Utility Commission.

Financial Performance and Position

  • Revenue: Operating revenue was $11.290 million, up $12 thousand, or 0.1%, from $11.278 million. West York Borough wastewater revenue contributed $62 thousand, partly offset by a 0.9% decline in per-capita consumption.
  • Profitability: Operating income was $4.857 million, down from $5.214 million. Net income was $2.581 million, up 3.8% from $2.486 million. Basic and diluted earnings per share were $0.20 versus $0.19.
  • Margins: Operating margin was approximately 43.0%, compared with 46.2% in the prior-year quarter. Net margin was approximately 22.9%, compared with 22.0%.
  • Expenses: Operating expenses increased 6.1% to $6.433 million, primarily due to higher health insurance, wastewater operating costs, legal expenses, depreciation, maintenance materials and wages.
  • Taxes: Income tax expense declined 27.1% to $957 thousand. The effective tax rate was 27.0%, compared with 34.6%, driven by deductions under the IRS tangible property regulations.
  • Operating cash flow: Net cash provided by operating activities was $4.952 million, compared with $3.324 million.
  • Capital investment: Utility plant additions were $6.413 million and acquisitions totaled $511 thousand, resulting in $6.924 million of investing cash outflows.
  • Liquidity: Cash and cash equivalents were $440 thousand at March 31, 2017, versus $4.209 million at December 31, 2016. The company reported a $472 thousand cash overdraft in its cash management account and had no borrowings under its credit lines at quarter-end.
  • Debt and capitalization: Total long-term debt was $87.477 million, including current maturities, and debt represented 43.4% of total capitalization. The company maintained $41.5 million of unsecured credit lines.
  • Dividends and repurchases: Cash dividends declared were $0.1602 per share. The company repurchased 24,329 shares for $825 thousand during the quarter; 630,904 shares remained authorized for repurchase at March 31, 2017.

Material Changes Versus the Prior Comparable Period

  • Net income increased despite lower operating income, primarily because of the substantially lower effective tax rate and lower net other expenses.
  • Operating expenses rose $369 thousand, while revenue was essentially flat, reducing operating margin.
  • Operating cash flow increased $1.628 million, principally due to favorable changes in receivables, accounts payable and other working-capital items.
  • Capital expenditures increased substantially from $1.921 million to $6.413 million, mainly due to the additional raw-water pumping station and force-main project.
  • The company acquired Stockham's Village Mobile Home Park water assets, adding approximately 80 customers, and West York Borough wastewater assets, adding approximately 1,700 customers. Management stated that the acquisitions were immaterial to total results.
  • Average water customers increased by 1,054 to 66,667, while average wastewater customers increased by 547 to 1,185.
  • The company no longer expected to file a rate increase request in 2017, citing earnings above the regulatory benchmark and the tax benefits from the tangible property regulations. No distribution system improvement charge revenue was recorded.

Guidance, Outlook, Risks and Unusual Items

  • Management expected revenue to increase slightly for the remainder of 2017 from higher summer demand, customer growth and acquisitions, subject to weather and regulatory developments.
  • Management expected depreciation and other operating expenses to continue increasing as infrastructure investment expands and the West York system is fully integrated.
  • The company forecast a 2017 effective tax rate of approximately 28% to 32%, subject to the level and timing of eligible asset improvements.
  • Remaining 2017 construction expenditures were estimated at approximately $16.4 million, excluding unapproved acquisitions. Funding was expected to come primarily from internally generated funds, with additional line-of-credit borrowings, stock-plan proceeds and customer advances.
  • The company began borrowing under a line of credit in the second quarter of 2017 and expected debt capitalization to rise toward, but generally remain below, 50% before considering additional equity.
  • Lead and Copper Rule compliance requires enhanced testing, public education and lead-service-line replacement. The company committed to replace remaining company-owned lead service lines within four years. Additional company-owned replacement costs were estimated at $2.080 million; customer-owned replacement estimates included approximately $254 thousand under a four-year tariff mechanism and $1.040 million under a nine-year mechanism, with the latter subject to adjustment.
  • An interest-rate swap hedges $12.0 million of variable-rate debt. The swap had a $2.221 million liability fair value at March 31, 2017. A credit-rating downgrade below BBB- could have required approximately $2.353 million of immediate payment if the applicable default provisions were triggered.
  • The union contract expired April 30, 2017. The parties agreed to continue operating under its terms while negotiating a new agreement; management expected no service interruption.
  • Key risks include weather and drought restrictions, customer usage, rate relief, regulatory requirements, capital funding, interest rates, credit ratings, access to financing, acquisitions and changes in tax or accounting rules.

Important Facts for Investors to Verify

  1. Whether the company renews or extends its 2017-maturing credit facilities and the amount of second-quarter line-of-credit borrowings.
  2. The pace and cost of the raw-water pumping station and force-main project and the resulting effect on debt capitalization and depreciation.
  3. Actual 2017 tax rates and the sustainability of tax benefits under the IRS tangible property regulations.
  4. Progress and final costs of company-owned and customer-owned lead service-line replacements, including regulatory recovery.
  5. The outcome of union negotiations following the April 30, 2017 contract expiration.
  6. Future PPUC rate actions, including the timing of the next rate case and any potential restoration of the distribution system improvement charge.
  7. Changes in water consumption, weather conditions and customer growth, which may materially affect revenue and cash generation.