The York Water Company — Q1 2018 Form 10-Q Summary
Business Context and Reporting Period
The York Water Company provides regulated water service across 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania, and operates wastewater collection and treatment systems in York County. The company is regulated by the Pennsylvania Public Utility Commission. This unaudited filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Financial Highlights
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $11.644 million | $11.290 million | +3.1% |
| Operating income | $5.140 million | $5.162 million | -0.4% |
| Operating margin | 44.1% | 45.7% | Down 160 basis points |
| Net income | $2.594 million | $2.581 million | +0.5% |
| Net margin | 22.3% | 22.9% | Down 60 basis points |
| Basic and diluted EPS | $0.20 | $0.20 | Stable |
| Cash dividends declared per share | $0.1666 | $0.1602 | +4.0% |
| Cash flow from operations | $5.438 million | $4.952 million | +9.8% |
| Capital expenditures | $3.026 million | $6.413 million | Down 52.8% |
Revenue growth reflected a $480 thousand distribution system improvement charge, approximately $125 thousand from the 2017 West York Borough wastewater acquisition, and customer growth. These benefits were partly offset by approximately 0.8% lower per-capita consumption and a $411 thousand regulatory liability recorded for expected customer benefit from federal tax-rate reductions.
Operating expenses increased 6.1% to $6.504 million. The principal increases were wastewater operating costs, depreciation, distribution-system maintenance, and water-treatment costs. Interest expense increased 3.6% to $1.364 million, primarily because of line-of-credit borrowings. Income-tax expense declined 9.0% to $871 thousand, and the effective tax rate decreased to 25.1% from 27.0%, principally due to the 2017 Tax Cuts and Jobs Act, partly offset by fewer eligible asset improvements.
Balance Sheet, Debt and Liquidity
- Total assets were $333.102 million at March 31, 2018, compared with $332.030 million at December 31, 2017.
- Net utility plant increased to $290.507 million from $288.787 million.
- Stockholders’ equity increased to $120.448 million from $119.405 million.
- Total long-term debt was $91.692 million before discounts and issuance costs, including $11.044 million classified as current. The long-term portion was $77.993 million.
- The company had $5.259 million outstanding under its lines of credit and a $628 thousand cash-management-account overdraft at March 31, 2018. Reported cash and cash equivalents were $2 thousand.
- Unsecured lines of credit totaled $41.5 million, with interest rates ranging from LIBOR plus 1.20% to LIBOR plus 1.25%. Management expects to renew or extend facilities expiring in 2018.
- Debt as a percentage of total capitalization was 43.2%, compared with 43.7% at December 31, 2017. Management expects the ratio to trend upward toward approximately 50% before considering additional equity.
- Standard & Poor’s affirmed the company’s A- credit rating with a stable outlook and adequate liquidity on February 9, 2018.
Material Changes, Outlook and Unusual Items
- Management expects 2018 revenue to increase modestly from DSIC collections, higher summer demand, and continued customer growth and acquisitions. Results remain subject to weather, customer consumption, regulatory actions and the treatment of tax benefits.
- Effective April 1, 2018, the company’s tariff included a DSIC surcharge of 3.80%.
- Management expects operating-expense growth to outpace revenue growth in the short term, with depreciation rising as utility-plant investment continues and costs increasing for water treatment, system maintenance and operation of the West York Borough wastewater system.
- The company expects interest expense to increase because of continued line-of-credit borrowings and higher short-term interest rates.
- Expected 2018 capital expenditures for the remainder of the year were approximately $19.5 million, excluding potential acquisitions. Funding is expected to come primarily from internally generated cash, with additional line-of-credit borrowings, stock-plan proceeds, and customer advances and contributions.
- The company adopted the new revenue-recognition standard, pension-cost presentation guidance, stock-compensation modification guidance and cash-flow classification guidance on January 1, 2018. Management reported no material impact on results, financial position or cash flows, except for required presentation and disclosure changes.
- The company’s interest-rate swap had a March 31, 2018 fair-value liability of $1.872 million. If a credit-rating or other default provision had been triggered on that date, an approximately $1.907 million payment could have been required. The company was rated A-, above the swap’s BBB- minimum.
- The company is replacing known company-owned lead service lines under a Pennsylvania Department of Environmental Protection consent order. Costs incurred through March 31, 2018 were approximately $1.681 million, with approximately $310 thousand of additional company-owned-line costs expected. Customer-owned lead-line replacement costs recorded as a regulatory asset were approximately $221 thousand; longer-term estimates remain subject to adjustment.
- The PPUC declared currently effective rates and riders temporary for a six-month trial period, potentially extendable by six months, while it evaluates the effects of the 2017 Tax Act and possible customer refunds or other rate adjustments.
- Pending growth initiatives include a wastewater-asset acquisition expected to add approximately 30 commercial and industrial customers and a proposed Dallastown-Yoe Water Authority interconnection, both subject to regulatory approvals.
Investor Verification Checklist
- Verify the PPUC’s final treatment of federal tax-rate benefits, including any refunds, surcharges or changes to regulatory liabilities.
- Monitor renewal and extension of the company’s 2018-expiring credit facilities and the refinancing of line-of-credit borrowings.
- Assess whether the planned approximately $19.5 million of remaining 2018 capital expenditures can be funded without materially increasing leverage or equity issuance.
- Track actual operating-cost growth, particularly depreciation, water treatment, distribution maintenance and West York Borough wastewater expenses.
- Review progress and final costs for company-owned and customer-owned lead service-line replacements.
- Consider weather, water consumption, drought restrictions, customer growth, rate relief and regulatory approvals when assessing revenue outlook.
- Confirm the status and financial impact of the pending wastewater acquisition and Dallastown-Yoe interconnection.