The York Water Company: 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
The filing covers the unaudited three and nine months ended September 30, 2016. The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates two wastewater systems. The company is regulated primarily by the Pennsylvania Public Utility Commission.
Unless otherwise noted, amounts are in thousands of dollars except per-share data. The company served an average of 66,747 customers during the third quarter and 66,526 during the first nine months, compared with 65,809 and 65,544, respectively, in the comparable 2015 periods.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Operating revenues | $12,601 vs. $12,368 | $35,699 vs. $35,472 |
| Operating income | $6,414 vs. $6,353 | $17,323 vs. $17,169 |
| Net income | $3,571 vs. $3,520 | $8,904 vs. $8,973 |
| Basic EPS | $0.27 vs. $0.28 | $0.69 vs. $0.70 |
| Cash dividends declared per share | $0.1555 vs. $0.1495 | $0.4665 vs. $0.4485 |
Operating margin was approximately 50.9% in the third quarter and 48.5% for the first nine months, compared with approximately 51.4% and 48.4% in the respective 2015 periods. Net margin was approximately 28.3% for the quarter and 24.9% year to date, compared with approximately 28.5% and 25.3% in 2015.
- Third-quarter revenue increased 1.9%, primarily from higher consumption, customer growth and higher sewer collection service revenue. Per-capita consumption increased 0.8%.
- Nine-month revenue increased 0.6%, as customer growth and sewer billing revenue offset a 1.6% decline in per-capita consumption. The prior-year period included a nonrecurring emergency interconnection that increased water usage.
- Third-quarter operating expenses increased 2.9%, driven principally by higher depreciation, health insurance and wages.
- Nine-month operating expenses increased 0.4%, with higher depreciation, wages and pension administration costs partly offset by lower accounting, information technology and rate-case expenses.
- Interest on debt increased 1.2% for the quarter and 1.7% year to date, reflecting higher short-term rates and the additional long-term debt issued in July 2015.
Cash Flow, Capital Spending, Debt and Liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Operating cash flow, nine months | $14,016 | $13,616 |
| Capital expenditures and water-system acquisitions | $8,331 | $10,365 |
| Net cash used in financing activities | $3,007 | $3,602 |
| Ending cash balance | $6,199 | $1,148 |
Cash increased by $3,320 during the first nine months of 2016. The company funded capital expenditures primarily through internally generated funds, stock-plan proceeds and customer advances. It expects approximately $4,000 of additional 2016 construction expenditures, excluding potential acquisitions.
- Total long-term debt was $87,509 at September 30, 2016, compared with $87,542 at December 31, 2015. The reported long-term portion, net of discounts, issuance costs and current maturities, was $84,584.
- Debt represented 43.5% of total capitalization, compared with 44.5% at year-end 2015. Management expects the ratio to trend upward toward approximately 50% before considering additional equity.
- The company had four unsecured committed credit lines totaling $41,500, priced at LIBOR plus 1.20% to 1.25%, with maturities from June 2017 through May 2018. No borrowings were outstanding at September 30.
- Management expects the $6,199 cash balance to be fully utilized in the first quarter of 2017, after which credit facilities and other sources are expected to provide liquidity.
- Standard & Poor’s affirmed the company’s A- rating with a stable outlook and adequate liquidity on March 30, 2016.
Material Changes, Outlook and Unusual Items
- Management expects fourth-quarter revenue to be below each of the first three quarters because seasonal declines in consumption should exceed customer growth. It does not expect to file a rate increase request in 2016.
- Management expects a 2016 effective tax rate of approximately 28% to 32%. The nine-month rate rose to 31.9% from 30.7% because fewer asset improvements qualified for the IRS tangible property regulation tax benefit.
- The company renewed and expanded its credit facilities during 2016, including a new $10,000 committed line maturing in September 2017.
- An interest-rate swap effectively fixes the rate on $12,000 of variable-rate debt. The swap had a $3,118 liability at September 30, 2016; a credit-rating breach or other default could have required approximately $3,314 of immediate payment. The swap expires October 1, 2029.
- Lead testing exceeded the EPA action-level allowance by one sample: six properties exceeded 15 parts per billion, versus five permitted exceedances. The company plans free water testing, flushing credits and replacement of all remaining company-owned lead service lines within three to four years. Estimated costs are approximately $71 for testing and flushing credits over four years and $4,600 for service-line replacements.
- The company is committed to approximately $10,079 for an additional raw-water pumping station and force main, of which $10,037 remained to be incurred at September 30.
- Pending or planned acquisitions include West York wastewater assets, Stockham’s Village water assets and other systems. The company expects these acquisitions to be immaterial to overall results; completion remains subject to regulatory approvals where applicable.
- The company repurchased and retired 16,849 shares during the quarter at an average price of $28.17. Approximately 685,155 shares remained available under the repurchase authorization.
- The interim financial statements contain only normal recurring adjustments, and management stated that operating results for the interim periods are not necessarily indicative of full-year results.
Key Investor Verification Items
- Verify the timing and funding of the expected $4,000 remaining 2016 capital program and the additional pumping-station commitment.
- Monitor cash utilization, credit-line availability and maturities beginning in 2017, particularly the June and September 2017 facilities.
- Assess the cost, regulatory treatment and potential rate recovery of lead-service-line replacements and related customer credits.
- Track future PPUC rate proceedings and the continued absence of the distribution system improvement charge.
- Review interest-rate exposure, the $3,118 swap liability, credit-rating requirements and the 2018 letter-of-credit renewal.
- Evaluate the effect of declining per-capita consumption, weather, customer growth and pending acquisitions on revenue.
- Confirm the company’s ability to sustain dividends and share repurchases while maintaining its targeted capital structure.