The York Water Company: Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2020. The York Water Company is a regulated Pennsylvania water and wastewater utility serving portions of York and Adams Counties. Its primary business is water collection, treatment and distribution, supplemented by wastewater operations, billing and collection services, and a service-line protection program.
The interim financial statements are unaudited. Management stated that COVID-19 had not materially affected workforce, operations, financial performance, liquidity or supply chains through June 30, 2020, although the ultimate impact remained uncertain.
Financial performance and key metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Operating revenue | $13.320 million | $13.048 million | $26.197 million | $24.879 million |
| Operating income | $6.293 million | $6.074 million | $11.909 million | $11.360 million |
| Net income | $4.182 million | $3.717 million | $8.184 million | $6.530 million |
| Diluted EPS | $0.32 | $0.28 | $0.63 | $0.50 |
| Net cash from operating activities | Not separately provided | Not separately provided | $9.747 million | $8.570 million |
- Second-quarter revenue increased 2.1%, operating income increased 3.6%, and net income increased 12.5% year over year.
- Six-month revenue increased 5.3%, operating income increased 4.8%, and net income increased 25.3% year over year.
- Approximate operating margins were 47.2% for the quarter and 45.5% for the six-month period. Approximate net margins were 31.4% and 31.2%, respectively.
- Water customers averaged 68,790 in the second quarter, up from 68,213 in 2019. Average wastewater customers increased to 3,028 from 2,297, primarily due to acquisitions.
- Per-capita consumption declined approximately 3.7% in the quarter and 2.6% for the six-month period, with residential demand increasing while commercial and industrial demand declined.
Balance sheet, cash flow, debt and liquidity
- Total assets were $376.149 million at June 30, 2020, compared with $363.529 million at December 31, 2019. Net utility plant increased to $321.761 million from $313.224 million.
- Cash and cash equivalents were only $2 thousand because the company uses a cash-management account linked to its credit facilities. Accounts receivable, net, were $4.971 million, and unbilled revenue was $2.687 million.
- Six-month operating cash flow was $9.747 million, versus $8.570 million in the prior-year period. Utility plant additions were $8.986 million, compared with $8.018 million.
- Total long-term debt, before discounts, issuance costs and current maturities, was $105.996 million. The long-term portion reported on the balance sheet was $96.575 million, with $6.500 million classified as current debt.
- The company had $9.626 million outstanding under lines of credit and maintained aggregate unsecured commitments of $41.500 million. The weighted-average line-of-credit rate was 1.51% at June 30, 2020.
- Debt represented 43.3% of total capitalization, compared with 43.7% at year-end 2019. Standard & Poor’s affirmed an A- rating with a stable outlook and adequate liquidity.
- The company expects to fund approximately $12.600 million of additional 2020 capital expenditures primarily through internally generated funds, supplemented by credit facilities, stock plans and customer contributions.
Material changes versus the prior comparable period
- Revenue benefited from the March 1, 2019 rate increase, customer growth and changed consumption patterns. The six-month comparison also benefited from the absence of a prior-year $249 thousand distribution system improvement charge reduction.
- Operating expenses increased 0.8% in the quarter and 5.7% for six months. The six-month increase reflected higher depreciation, wastewater treatment, uncollectible-account provisions, purchased power, treatment chemicals, wages and health insurance.
- Interest expense declined 10.8% in the quarter and 10.4% for six months, primarily because of debt refinancing, despite higher average line-of-credit borrowings.
- The six-month period included a nonrecurring $515 thousand gain on life insurance. Management does not anticipate similar gains at this time.
- Effective income tax rates declined to 12.7% from 15.2% for the quarter and to 12.6% from 17.3% for six months, primarily because of higher deductions under the IRS tangible property regulations and the nontaxable life-insurance gain.
- The company completed the Felton Borough wastewater asset acquisition on April 9, 2020, adding approximately 130 wastewater customers at a purchase price and acquisition cost of approximately $908 thousand. Management considers the acquisition immaterial to results.
- The company renewed or extended three credit facilities to 2022, but certain facilities now carry higher spreads, unused-commitment fees or interest-rate floors.
Guidance, outlook, risks and unusual items
- Management expects modest revenue growth for the remainder of 2020 from summer demand, customer growth and acquisitions, but results remain sensitive to COVID-19, weather, commercial and industrial activity, regulatory actions and conservation.
- The company does not expect to collect a distribution system improvement charge or file a rate-increase request in 2020.
- Management expects depreciation and other operating costs to rise as the company continues investing in utility plant and infrastructure. Additional uncollectible-account expense may result from the pandemic.
- Shutoff procedures for delinquent customers were paused beginning March 13, 2020, and late-payment charges were not being billed. Residential demand may increase while commercial and industrial demand may decline.
- The $6.500 million, 10.05% Senior Notes have a mandatory tender date of September 30, 2020. The company plans to use credit facilities or a potential debt issuance to meet the obligation.
- An interest-rate swap hedges $12.000 million of variable-rate debt. Its June 30, 2020 fair-value liability was $3.001 million. A credit-rating or other default event could have required an approximately $3.157 million immediate payment; the company’s A- rating remained above the required BBB- threshold.
- The company estimates approximately $1.300 million of future customer-owned lead service-line replacement costs. All known company-owned lead service lines had been replaced by June 30, 2020.
- The union contract expired April 30, 2020. The parties agreed to continue operating under its terms while negotiating a replacement agreement.
- Pending or planned acquisitions expected to close in 2020 or 2021 could add approximately 2,300 wastewater customers and approximately 110 water customers, subject to regulatory approvals. Management expects the acquisitions to be immaterial to overall results.
Important facts for investors to verify
- Whether COVID-19 produces sustained commercial and industrial volume declines, higher delinquencies or increased allowance-for-uncollectible-account expense.
- The refinancing or repayment of the $6.500 million Senior Notes due for mandatory tender in September 2020.
- Availability, pricing and maturity terms of the company’s credit facilities, particularly as line-of-credit borrowings increase.
- Progress on the approximately $12.600 million of planned second-half 2020 capital expenditures and the resulting effect on debt and capitalization.
- Regulatory approval and closing status of pending water and wastewater acquisitions and any associated integration or capital requirements.
- Future rate relief, regulatory recovery of deferred costs, and the absence of a planned 2020 rate filing or DSIC revenue.
- The effect of the nonrecurring $515 thousand life-insurance gain and unusually low effective tax rates on year-over-year earnings comparability.