The York Water Company: Q3 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 systems in portions of York County. The company also provides municipal billing and collection services and a targeted service-line protection program. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018. Amounts are in thousands except per-share data.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $12,698 | $12,692 | $36,368 | $36,236 |
| Operating income | $6,429 | $6,452 | $16,887 | $17,448 |
| Net income | $3,800 | $3,931 | $9,699 | $9,447 |
| Diluted EPS | $0.29 | $0.31 | $0.75 | $0.74 |
| Operating margin | 50.6% | 50.8% | 46.4% | 48.2% |
| Net margin | 29.9% | 31.0% | 26.7% | 26.1% |
| Cash dividends declared per share | $0.1666 | $0.1602 | $0.4998 | $0.4806 |
For the nine months, operating cash flow was $14,410 versus $15,416 in the prior-year period. Capital expenditures were $10,664 versus $20,628, resulting in net investing cash usage of $10,556 versus $21,100. Financing activities used $3,854, including $6,426 of dividends paid. Ending cash remained $2, reflecting the company’s cash-management arrangement and use of credit facilities.
At September 30, 2018, total assets were $340,350 and common equity was $124,272. Total debt, before discounts and issuance costs, was $92,913, including $6,502 outstanding under lines of credit and $1,000 of short-term borrowings. Current maturities of long-term debt were $11,041. The company maintained $41,500 of unsecured credit lines, with a weighted-average borrowing rate of 3.35%. Debt represented 42.8% of total capitalization, compared with 43.7% at December 31, 2017. Standard & Poor’s affirmed an A- rating with a stable outlook and adequate liquidity.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income declined 3.3% to $3,800, while nine-month net income increased 2.7% to $9,699.
- Revenue was essentially flat in the third quarter and increased 0.4% year to date. DSIC revenue, customer growth and the West York Borough wastewater acquisition supported revenue, while lower per-capita consumption and a tax-related customer benefit reduced reported revenue.
- Operating expenses increased 0.5% in the third quarter and 3.7% year to date. Year-to-date increases included depreciation, distribution-system maintenance, wastewater operating costs, wages and benefits, water treatment, information technology and consulting expenses.
- Interest expense increased 2.3% in the quarter and 3.2% year to date, primarily because of higher line-of-credit borrowings and rates.
- The allowance for funds used during construction fell to $53 in Q3 and $176 year to date, from $311 and $630, respectively, due to lower eligible construction activity.
- The effective tax rate declined to 19.6% from 22.0% in Q3 and to 17.6% from 26.7% year to date, primarily reflecting the 2017 Tax Act and eligible tax deductions under the IRS tangible property regulations.
- The company adopted new revenue-recognition and pension-cost presentation standards on January 1, 2018. Revenue recognition and cash flows were not materially affected; pension presentation moved non-service components from operating expenses to other pension costs.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects approximately $6,000 of additional 2018 construction expenditures, excluding unapproved acquisitions, funded primarily through internally generated cash, credit borrowings, stock plans and customer contributions. Management believes available credit facilities and capital-market access will meet anticipated 2018 and 2019 needs.
- Management expects operating expenses to outpace revenue growth in the short term, with depreciation and water-treatment and distribution-system costs continuing to rise. Interest expense is expected to remain higher because of line-of-credit borrowings and short-term rates.
- A tentative PPUC settlement would provide approximately $3,361 of annual water-rate revenue and $289 of annual wastewater-rate revenue beginning March 1, 2019, subject to approval. The company also agreed to return approximately $2,117 to customers through a negative surcharge related to the 2017 Tax Act and recorded a $1,314 regulatory liability at September 30, 2018.
- The DSIC was 4.82% of revenues effective October 1, 2018. DSIC revenue was $512 in Q3 and $1,428 year to date, versus $405 and $467 in the comparable periods.
- The company is replacing lead service lines under a Pennsylvania DEP consent order. Company-owned replacements cost approximately $2,059 through September 30, 2018, with approximately $112 of additional cost expected. Customer-owned replacements generated a regulatory asset of approximately $264; the nine-year replacement estimate of $1,040 remains subject to revision.
- The company’s $12,000 variable-rate debt is economically hedged through an interest-rate swap expiring October 1, 2029. The swap liability was $1,573 at September 30, 2018; a credit-rating or other default event could have required approximately $1,598 of immediate payment.
- Weather, drought restrictions, customer water consumption, regulatory rate relief, interest rates, capital requirements, financing availability, credit ratings, environmental compliance and changes in tax or accounting rules could materially affect results.
- Subsequent to quarter-end, the company agreed to acquire the Jacobus Borough Sewer Authority’s wastewater collection assets, subject to regulatory approval. Closing is expected in the third quarter of 2019 and would add approximately 700 wastewater customers. A separate wastewater acquisition is expected to add approximately 30 commercial and industrial customers in 2019.
Important Facts for Investors to Verify
- Whether the PPUC approves the tentative rate settlement and the related $2,117 customer refund mechanism.
- The pace of capital spending, line-of-credit borrowings and the resulting debt-to-capitalization ratio.
- Whether operating-cost growth continues to exceed revenue growth and pressures operating margins.
- The effect of weather, conservation and lower per-capita consumption on water volumes and revenue.
- The final cost and regulatory recovery of company-owned and customer-owned lead service-line replacements.
- The renewal or refinancing of the $11,041 of current debt maturities and the $10,000 credit line maturing in September 2019.
- Progress and regulatory approval of the announced wastewater acquisitions and the Dallastown-Yoe interconnect project.