The York Water Company: FY2023 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2023. York Water is a regulated water and wastewater utility serving portions of 56 municipalities in four south-central Pennsylvania counties. It supplies drinking water and operates three wastewater collection systems and ten wastewater collection and treatment systems. The company is regulated by the Pennsylvania Public Utility Commission.
Customers increased to 77,893 at year-end from 76,731, while average daily water availability was approximately 41.0 million gallons versus consumption of approximately 21.8 million gallons.
Financial performance and key metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenue | $71.031 million | $60.061 million | 18.3% increase |
| Operating income | $29.531 million | $24.483 million | 20.6% increase |
| Net income | $23.757 million | $19.580 million | 21.3% increase |
| Basic and diluted EPS | $1.66 | $1.40 | 18.6% increase |
| Operating margin | 41.6% | 40.8% | Improved |
| Net income margin | 33.4% | 32.6% | Improved |
| Cash flow from operations | $31.908 million | $22.018 million | 44.9% increase |
| Capital expenditures | $64.640 million | $50.532 million | 27.9% increase |
Revenue growth was driven primarily by water and wastewater rate increases effective March 1, 2023 and customer growth. The distribution system improvement charge reset to zero when the new rates became effective, reducing 2023 revenue by approximately $1.994 million relative to the prior year comparison.
Operating expenses rose 16.6% to $41.500 million, reflecting higher depreciation and amortization, water and wastewater treatment costs, wages, insurance, maintenance, outside services, fuel and uncollectible-account expense. Interest expense increased 37.8% to $7.047 million due to higher debt and interest rates. The effective income tax rate increased to 5.1% from 0.1%, partly offsetting operating gains.
Common equity was $221.178 million at year-end, compared with $207.183 million in 2022. Total debt, including $30.273 million drawn under the committed line of credit, was $182.643 million before discounts and issuance costs; the balance-sheet long-term portion was $180.007 million. Debt represented 45.2% of capitalization, up from 40.7%, while equity represented 54.8%, down from 59.3%.
Cash and cash equivalents were only $1 thousand because the company uses a cash-management account linked to its line of credit. The company had a $50 million unsecured committed credit facility, with $30.273 million outstanding at December 31, 2023, bearing interest at 6.51% at year-end and maturing in September 2025. Management stated that current credit capacity should meet 2024 financing needs.
Material changes versus the prior comparable period
- Revenue increased 18.3% and net income increased 21.3%, primarily from the March 2023 rate increase and customer growth.
- Operating cash flow increased by $9.890 million to $31.908 million.
- Capital investment increased by $14.108 million. The company invested approximately $40 million to complete armoring and spillway replacement at Lake Williams Dam, with additional sitework expected in 2024.
- The company issued $40 million of 5.50% senior notes due 2053 and used the proceeds to refinance interim line-of-credit borrowings.
- Long-term debt as a percentage of capitalization increased by 4.5 percentage points, reflecting capital spending and greater use of debt financing.
- The quarterly dividend increased 4.0% in the fourth quarter, from $0.2027 to $0.2108 per share. The 2023 dividend payout ratio was 49.3% of net income.
- The company completed the acquisition of Conewago Industrial Park Water and Sewer Company, adding approximately 30 commercial and industrial customers. Management considers the acquisition immaterial to results.
Guidance, outlook, risks and unusual items
Management expects a modest increase in 2024 revenue from a full year at the new rates and additional customers from acquisitions and service-territory growth. The company does not expect to file a rate increase request in 2024. It expects depreciation and amortization, treatment, maintenance and other operating costs to increase, and expects interest expense to remain higher because of continued borrowings and elevated interest rates.
Planned construction and acquisition expenditures are approximately $42.2 million in 2024 and $46.1 million in 2025, excluding acquisitions not yet approved. Funding is expected to come primarily from internally generated funds, supplemented by credit-line borrowings, potential debt or equity offerings, stock-plan proceeds and customer advances or contributions.
Pennsylvania officials placed York County under a drought watch and maintained drought watches or warnings in Adams and Franklin counties in January 2024. The company implemented voluntary restrictions on nonessential water use. Prolonged dry conditions could reduce consumption and revenue while increasing operating costs.
Other key risks include the need for timely and adequate PPUC rate relief, inflation in construction and operating costs, interest-rate and refinancing risk, regulatory and environmental requirements, lead-service-line replacement obligations, pension assumptions and asset performance, weather variability, water supply conditions, customer credit losses and cybersecurity incidents. The company reported no material cybersecurity breach, no material legal proceedings and no off-balance-sheet arrangements with material effects.
The company estimates 2024 lead customer-owned service-line replacement costs at approximately $1.9 million, subject to adjustment. The costs are recorded as a regulatory asset for future recovery through rates. The company also expects to contribute approximately $1.556 million to its pension plans in 2024.
Subsequent to year-end, the company completed a small wastewater acquisition adding approximately 180 customers and entered into a $40 million private placement of 5.67% senior notes due 2054. The new debt was used to refinance line-of-credit borrowings.
Most important facts for investors to verify
- Whether the March 2023 rate increase and future PPUC actions are sufficient to offset higher treatment, maintenance, labor, depreciation and financing costs.
- The pace of debt growth, refinancing requirements in 2025 and the effect of variable interest rates on interest expense and dividend capacity.
- The timing and cost of remaining Lake Williams Dam sitework and other planned capital expenditures.
- The duration and severity of drought restrictions and their effect on water consumption, revenue and operating costs.
- The recoverability and amortization timing of regulatory assets, including income taxes, pension items, lead-service-line replacements and other deferred costs.
- Progress and regulatory approval status for the announced acquisitions and the company’s ability to fund growth while maintaining its A- credit rating.