The York Water Company: Q3 2020 Form 10-Q Summary
Business context and reporting period
The York Water Company is a Pennsylvania-regulated water and wastewater utility serving portions of 50 municipalities in south-central Pennsylvania. The filing covers the three and nine months ended September 30, 2020. The interim financial statements are unaudited.
The company operated normally during the COVID-19 pandemic, although residential demand increased while commercial and industrial demand declined. The company serves approximately 69,000 water customers and more than 3,000 wastewater customers.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Operating revenue | $14.257 million | $13.680 million | 4.2% | $40.454 million | $38.559 million | 4.9% |
| Operating income | $7.021 million | $6.715 million | 4.6% | $18.930 million | $18.075 million | 4.7% |
| Net income | $4.704 million | $4.483 million | 4.9% | $12.888 million | $11.013 million | 17.0% |
| Diluted EPS | $0.36 | $0.35 | 2.9% | $0.99 | $0.85 | 16.5% |
| Operating margin | 49.2% | 49.1% | +0.2 pts. | 46.8% | 46.9% | -0.1 pts. |
| Net margin | 33.0% | 32.8% | +0.2 pts. | 31.9% | 28.6% | +3.3 pts. |
Operating expenses increased 3.9% in the quarter and 5.1% year to date, driven primarily by higher depreciation, wastewater treatment costs, and provisions for uncollectible accounts. These increases were partly offset by lower wages, health insurance, and maintenance costs.
Interest expense declined 12.3% in the quarter and 11.0% year to date due primarily to debt refinancing and lower line-of-credit borrowing rates. The effective tax rate was 16.0% in Q3 and 13.9% for the first nine months, compared with 11.7% and 15.1%, respectively, in the prior-year periods.
Operating cash flow was $16.306 million for the first nine months of 2020, compared with $13.553 million in the prior-year period. Capital expenditures were $15.973 million, and wastewater acquisitions used $1.158 million. Net cash provided by financing activities was $11.052 million, resulting in cash of $10.901 million at September 30, 2020, compared with $2,000 at year-end 2019.
Total long-term debt, before discounts and issuance costs, was $119.870 million at September 30, 2020, compared with $104.042 million at December 31, 2019. Debt represented 45.9% of total capitalization, compared with 43.7% at year-end 2019. The company had no borrowings outstanding under its line of credit at September 30, 2020.
Material changes versus the prior comparable period
- Revenue increased from higher residential consumption, customer growth, the March 2019 rate increase, and wastewater acquisitions. Per-capita consumption declined 1.4% year to date but increased 0.6% in the third quarter.
- Residential demand increased as employees teleworked or were furloughed, while commercial and industrial demand declined.
- Net income benefited from lower interest expense and, for the nine-month period, a nonrecurring $515,000 gain on life insurance. Management does not anticipate similar gains.
- The allowance for doubtful accounts increased by $172,000 from year-end 2019 to $477,000, reflecting slower customer payments and COVID-19-related collection risk.
- The company completed acquisitions of Felton Borough wastewater assets, adding approximately 130 customers, and Letterkenny Township Municipal Authority wastewater assets, adding approximately 180 customers. Both acquisitions were described as immaterial to results.
- Utility plant increased to $330.486 million from $313.224 million at December 31, 2019, reflecting ongoing infrastructure investment.
Guidance, outlook, risks, contingencies, and unusual items
- The company expects modest revenue growth for the remainder of 2020 from customer additions and acquisitions, but results remain exposed to COVID-19, economic conditions, weather, customer usage, and regulatory actions.
- The company does not expect to collect a distribution system improvement charge or file a rate increase request in 2020.
- Remaining 2020 capital expenditures are expected to be approximately $12.2 million, excluding potential acquisitions. Funding is expected to come primarily from internally generated funds, with additional support from debt, equity plans, and customer contributions.
- The company entered into a $50 million unsecured committed line of credit maturing in September 2022 at LIBOR plus 1.05%; no amount was outstanding at September 30, 2020.
- On September 30, 2020, the company issued $30 million of 3.24% unsecured senior notes due 2050 and received approximately $29.838 million of net proceeds. Proceeds were used for refinancing, acquisitions, and general corporate purposes.
- COVID-19-related shut-off procedures and late-payment charges were suspended under Pennsylvania Public Utility Commission requirements. The company expected to resume normal procedures for most customers around November 9, 2020, while continuing protections for designated protected customers.
- Amblebrook development commitments of approximately $6.0 million were expected to be paid in the fourth quarter of 2020. Additional capital spending will be required for the related systems.
- All known company-owned lead service lines had been replaced. Customer-owned lead service-line replacement costs recorded as a regulatory asset totaled approximately $1.174 million, with estimated remaining or total program costs subject to adjustment.
- The company uses an interest-rate swap to convert $12 million of variable-rate debt to a substantially fixed rate. The swap had a $2.919 million fair-value liability at September 30, 2020; a credit-rating or other default trigger could have required approximately $3.045 million of immediate payment.
- Management reported no material COVID-19 impact to date on operations, liquidity, supply chain, or financial performance, but acknowledged that the ultimate effects remain uncertain. Standard & Poor’s affirmed an A- rating with a stable outlook on April 9, 2020.
Most important facts for investors to verify
- Whether COVID-19-related payment delinquencies and the increased allowance for doubtful accounts continue to pressure cash collections.
- The timing and regulatory approval of planned 2021 acquisitions and the extent to which they contribute to customer and revenue growth.
- Progress on the approximately $12.2 million of remaining 2020 capital expenditures and the $6.0 million Amblebrook commitment.
- Future rate relief, regulatory recovery of deferred assets, and the absence of a planned 2020 rate increase or DSIC revenue.
- Debt leverage, refinancing needs, interest-rate exposure, and compliance with debt and interest-rate-swap covenants.
- The effect of the nonrecurring $515,000 life-insurance gain on year-to-date earnings comparisons.
- Weather, water usage, drought restrictions, commercial and industrial demand, and changes in regulatory requirements.