The York Water Company — Q3 2019 Form 10-Q Summary
Business context and reporting period
The York Water Company is a regulated Pennsylvania water and wastewater utility serving 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania. The filing covers the unaudited three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company had 12,988,567 shares outstanding as of November 7, 2019.
On August 29, 2019, the company acquired Jacobus Borough Sewer Authority wastewater collection assets for approximately $2.1 million and added approximately 700 wastewater customers. Management expects the acquisition to be immaterial to results.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Operating revenue | $13.680 million | $12.698 million | $38.559 million | $36.368 million |
| Operating income | $6.715 million | $6.429 million | $18.075 million | $16.887 million |
| Net income | $4.483 million | $3.800 million | $11.013 million | $9.699 million |
| Diluted EPS | $0.35 | $0.29 | $0.85 | $0.75 |
| Operating margin | 49.1% | 50.6% | 46.9% | 46.4% |
| Net margin | 32.8% | 29.9% | 28.6% | 26.7% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $13.553 million | $14.410 million |
Third-quarter revenue increased 7.7%, net income increased 18.0%, and diluted EPS increased from $0.29 to $0.35. For the first nine months, revenue increased 6.0%, net income increased 13.5%, and diluted EPS increased from $0.75 to $0.85.
Operating expenses increased 11.1% in the third quarter and 5.1% year to date. Nine-month increases included depreciation of $515 thousand, wages of $275 thousand, maintenance of $242 thousand, technology upgrades of $75 thousand, rate-case expense of $61 thousand, purchased power of $59 thousand, and other taxes of $58 thousand. These increases were partly offset by lower health-insurance and prior-year consulting costs.
The effective income tax rate decreased to 11.7% from 19.6% in the quarter and to 15.1% from 17.6% year to date, primarily because of increased deductions for eligible asset improvements under the IRS tangible property regulations.
Cash flow, capital investment, debt, and liquidity
- Year-to-date operating cash flow was $13.553 million, down from $14.410 million in 2018.
- Investing cash outflows were $15.372 million, including $13.284 million of utility plant additions and $2.088 million for the Jacobus wastewater acquisition.
- Year-to-date capital expenditures are expected to be followed by approximately $4.5 million of additional 2019 construction expenditures, excluding unapproved acquisitions.
- Cash and cash equivalents were $2 thousand at September 30, 2019. The company manages cash through a cash-management account linked to its credit facilities.
- Lines of credit totaled $41.5 million, with $6.958 million outstanding at September 30, 2019. The company also reported a $1.063 million cash overdraft position.
- Total long-term debt, including current maturities and before discounts and issuance costs, was $103.328 million, compared with $95.908 million at December 31, 2018. The debt-to-total-capitalization ratio was 43.9%, compared with 43.2% at year-end.
- Stockholders’ equity was $131.808 million, compared with $126.195 million at December 31, 2018. The company declared year-to-date dividends of $0.5199 per share.
- Standard & Poor’s affirmed the company’s A- credit rating with a stable outlook and adequate liquidity.
Material changes versus the prior comparable period
- A PPUC-approved rate increase became effective March 1, 2019, producing approximately $3.361 million of annual incremental water revenue and $289 thousand of annual incremental wastewater revenue.
- The distribution system improvement charge reset to zero when the new rates became effective, reducing revenue by approximately $512 thousand in Q3 and $1.179 million year to date versus 2018.
- Average water customers increased by 544 in Q3 and 561 year to date; wastewater customers increased by 230 in Q3 and 84 year to date, including the Jacobus acquisition.
- Per-capita consumption increased approximately 1.3% in Q3 but decreased approximately 0.8% year to date.
- Interest expense decreased 4.6% in Q3 and 4.4% year to date, primarily because high-rate 2019 debt maturities were refinanced with 4.54% senior notes.
- On January 31, 2019, the company issued $20 million of 4.54% senior notes due 2049, using proceeds to refinance $11 million of higher-rate notes and certain line-of-credit borrowings.
- After the quarter, the company issued $15 million of 3.23% senior notes due 2040 and completed $25.37 million of lower-rate revenue refunding bonds. These proceeds refinanced existing debt.
Guidance, outlook, risks, and unusual items
Management expects the rate increase and continued customer growth and acquisitions to support revenue for the remainder of 2019. The company does not expect to collect a distribution system improvement charge or file a rate-increase request in 2019. Depreciation is expected to continue rising with utility-plant investment, while operating costs are expected to increase moderately.
Management expects adequate liquidity and credit capacity to fund operations, capital expenditures, acquisitions, and other needs during 2019 and 2020. The company expects to use primarily internally generated funds for remaining 2019 construction, supplemented by credit-line borrowings, stock-plan proceeds, customer advances, and contributions.
- Four wastewater acquisitions expected to close in 2020 remain subject to regulatory approval and are expected to be immaterial individually and in aggregate.
- Weather, drought restrictions, conservation, customer usage, economic conditions, customer growth, regulatory rate relief, interest rates, credit availability, financing access, and future capital requirements could materially affect results.
- The company’s interest-rate swap had a $2.435 million fair-value liability at September 30, 2019. A credit-rating or other default trigger could have required approximately $2.6 million of immediate payment; the company’s A- rating was above the required BBB- minimum.
- All known company-owned lead service lines had been replaced by September 30, 2019. Customer-owned lead-line replacement costs totaled approximately $821 thousand and are recorded as a regulatory asset; the company estimates total such costs of approximately $1.1 million.
- The company agreed to return approximately $2.117 million to customers through a temporary negative surcharge related to the 2017 Tax Act. Revenue reductions related to this matter were $319 thousand year to date.
- The filing identifies cyber-security, environmental compliance, water supply, regulatory recovery, pension costs, and access to financing as risks. No material cyber-security impact was reported.
Important facts for investors to verify
- Whether PPUC rate relief and regulatory-asset recovery remain sufficient to offset rising operating, pension, infrastructure, and compliance costs.
- The sustainability of revenue growth after the DSIC reset to zero and amid lower year-to-date per-capita water consumption.
- Execution, regulatory approval, and financial contribution of planned 2020 wastewater acquisitions.
- Debt refinancing outcomes, line-of-credit utilization, covenant compliance, interest-rate exposure, and the effect of post-quarter debt transactions on leverage.
- Operating cash-flow conversion and funding of the approximately $4.5 million remaining 2019 capital program.
- Potential changes in the effective tax rate as deductions under the tangible property regulations vary.
- Remaining exposure from customer-owned lead service-line replacements and other environmental or regulatory obligations.