The York Water Company — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2016. The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates two wastewater systems. The interim financial statements are unaudited and should be read with the 2015 Form 10-K.
- Average customers increased to 66,579 in the second quarter and 66,415 for the first six months.
- Average daily water availability was 35.4 million gallons versus consumption of approximately 18.3 million gallons.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenues | $11.820 million, down 0.6% | $23.098 million, essentially flat |
| Operating income | $5.695 million | $10.909 million |
| Operating margin | Approximately 48.2% | Approximately 47.2% |
| Net income | $2.847 million, down 2.7% | $5.333 million, down 2.2% |
| Net margin | Approximately 24.1% | Approximately 23.1% |
| Basic earnings per share | $0.23 | $0.42 |
| Cash dividends declared per share | $0.1555 | $0.3110 |
| Net cash from operating activities | Not separately provided | $8.256 million |
| Capital expenditures and water-system acquisitions | Not separately provided | $5.038 million |
- Cash and cash equivalents were $5.009 million at June 30, 2016, compared with $2.879 million at December 31, 2015.
- Total assets were $314.039 million; common stockholders’ equity was $111.977 million.
- Total long-term debt was $87.520 million before discounts, issuance costs, and current maturities. Debt represented 43.9% of total capitalization.
- The company had no borrowings under its lines of credit at June 30, 2016. Credit facilities totaled $31.5 million at quarter-end and increased to $41.5 million after a July 2016 facility was added.
- Capital expenditures expected for the remainder of 2016 were approximately $12 million, excluding potential acquisitions.
Material changes versus the prior comparable period
- Second-quarter revenue declined $75,000 and six-month revenue declined $6,000, primarily because per-capita consumption was lower and the prior-year period included a non-recurring emergency interconnection event.
- Per-capita consumption declined 3.5% in the second quarter and 2.9% for the first six months.
- Operating expenses decreased 1.4% in the quarter and 0.8% year to date, reflecting lower treatment chemicals, power, health insurance, and certain prior-year non-recurring costs. These savings were partly offset by higher depreciation.
- Depreciation and amortization increased $50,000 in the quarter and $128,000 year to date due to continued utility-plant investment.
- Interest expense increased 2.3% in the quarter and 2.0% year to date, primarily because of debt issued in July 2015.
- The effective tax rate increased to 34.2% from 31.6% in the quarter and to 34.4% from 32.2% year to date, reflecting fewer qualifying asset improvements under the IRS tangible property regulations.
- Shares issued under dividend reinvestment, direct stock, and employee purchase plans increased common shares outstanding by 55,359 during the first six months.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects slightly higher revenue during the remainder of 2016 from higher summer demand, customer growth, and acquisitions, but notes that weather and regulatory actions could materially affect results.
- Management expects a 2016 effective tax rate of approximately 28% to 32%, subject to the level and timing of eligible asset improvements.
- The company does not expect to file a rate increase request in 2016. Earnings above the regulatory benchmark are expected to prevent collection of the distribution system improvement charge during 2016.
- Management expects depreciation to continue rising and other operating costs to increase moderately as infrastructure is maintained and acquired systems are added.
- The company has a $9.799 million commitment for an additional raw-water pumping station and force main, all of which remained to be incurred at June 30, 2016.
- Completed and pending water and wastewater acquisitions are expected to be immaterial to total company results. Pending projects include approximately 200 Westwood Mobile Home Park customers, approximately 1,700 West York Borough wastewater customers, and approximately 30 commercial and industrial wastewater customers from the SYC WWTP transaction.
- The company’s $12 million variable-rate debt is economically fixed through an interest-rate swap expiring in 2029. The swap had a $3.179 million liability at June 30, 2016; a triggering default could have required approximately $3.378 million of immediate payment.
- The company’s A- credit rating with stable outlook was affirmed by Standard & Poor’s on March 30, 2016. The company reported compliance with debt covenants.
- The 2006 York County Industrial Development Authority bonds become optionally redeemable on or after October 1, 2016 and may be refinanced.
- The company’s direct-pay letter of credit supporting the 2008 bonds expires June 30, 2018 and is subject to annual renewal. Failure to renew could require immediate reimbursement for tendered bonds and could terminate the interest-rate swap.
- Key operating risks include weather and drought restrictions, water consumption trends, rate relief, regulatory approvals, customer growth, interest rates, credit availability, capital requirements, acquisitions, and changes in tax or accounting rules.
Most important facts for an investor to verify
- Whether lower per-capita consumption persists and offsets customer growth and anticipated summer demand.
- The timing and funding of the approximately $12 million remaining 2016 capital program and the $9.799 million pumping-station commitment.
- Availability and refinancing terms for the company’s credit facilities and the 2006 bonds.
- Renewal of the 2008 bond letter of credit and continued compliance with the interest-rate swap’s credit-rating provisions.
- The effect of the higher effective tax rate, IRS tangible-property deductions, and future eligible asset improvements.
- PPUC approvals and timing for pending acquisitions, future rate relief, and any eventual restoration of the distribution system improvement charge.