YORK WATER CO annual report, FY2022

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The York Water Company: FY2022 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2022. York Water is a regulated water and wastewater utility operating in 54 municipalities across three south-central Pennsylvania counties. It served 76,731 customers at year-end, up from 73,144, and had approximately 208,000 people in its service territory. Average daily water availability was 40.8 million gallons versus consumption of approximately 21.1 million gallons.

Financial performance and key metrics

  • Operating revenue: $60.061 million, up 9.0% from $55.119 million in 2021. Growth was driven primarily by customer additions and $2.243 million of distribution system improvement charge revenue.
  • Operating expenses: $35.578 million, up 12.2% from $31.723 million. Increases included depreciation, wastewater treatment, wages, water treatment, distribution maintenance, and billing services.
  • Operating income: $24.483 million, compared with $23.396 million in 2021. Operating margin was approximately 40.8%, versus 42.4% in 2021.
  • Net income: $19.580 million, up 15.3% from $16.984 million. Basic and diluted EPS increased to $1.40 from $1.30.
  • Net margin: 32.6%, compared with 30.8% in 2021 and a five-year average of 28.8%, aided substantially by lower income taxes.
  • Income taxes: $15,000, down 98.7% from $1.120 million. The effective tax rate was 0.1%, primarily because of deductions under IRS tangible property regulations.
  • Cash flow: Net cash provided by operations was $22.018 million, down from $22.959 million. The decline reflected higher accounts receivable and unbilled revenue, partially offset by higher net income and lower taxes paid.
  • Capital investment: Construction expenditures were $50.532 million and acquisitions totaled $3.388 million, compared with $34.409 million and $11.991 million, respectively, in 2021.
  • Liquidity: Cash and cash equivalents were $1,000 at year-end. The Company had $29.740 million outstanding under a $50 million committed unsecured line of credit, maturing in September 2024, and a $3.175 million cash overdraft recorded in accounts payable.
  • Debt and capitalization: Total debt was $142.110 million, including line-of-credit borrowings, compared with $149.190 million in 2021. Long-term debt represented 40.7% of total capitalization, down from 49.4%; common equity represented 59.3%, up from 50.6%.
  • Shareholder returns: The quarterly dividend increased 4.0% in the fourth quarter to $0.2027 per share. The 2022 dividend payout ratio was 56.2% of net income.

Material changes versus the prior comparable period

  • Customer count increased by 3,587, including substantial wastewater growth from the West Manheim Township acquisition.
  • Water customers increased by 798 on average, while wastewater customers increased by 2,284 on average.
  • The Company completed several small water and wastewater acquisitions and added approximately 97,800 feet of water mains and 114,100 feet of wastewater mains.
  • Utility plant increased to $549.141 million from $485.750 million, reflecting significant infrastructure investment and acquisitions.
  • The Company completed an underwritten offering of 1,121,940 common shares and received net proceeds of $43.970 million, primarily used to repay line-of-credit borrowings and for general corporate purposes.
  • The $7.5 million, 8.43% Senior Notes due December 2022 were retired using line-of-credit borrowings.
  • Interest expense increased 3.8% to $5.114 million as a result of higher interest rates and debt balances. The weighted-average line-of-credit borrowing rate increased to 2.11% from 1.30%.
  • Return on year-end common equity declined to 9.5% from 11.1%, primarily because the equity base increased following the public stock offering.

Guidance, outlook, risks, contingencies, and unusual items

  • Management expects 2023 revenue to benefit from new water and wastewater rates effective March 1, 2023, designed to produce approximately $11.6 million and $1.9 million of additional annual revenue, respectively. The 4.91% DSIC reset to zero when the new rates took effect.
  • Planned construction and acquisition expenditures are approximately $60.6 million for 2023 and $47.1 million for 2024, excluding unapproved acquisitions. Funding is expected to come primarily from internally generated cash, supplemented by debt, equity, credit-line borrowings, and customer contributions.
  • The Lake Williams dam spillway project has an estimated total commitment of approximately $39.2 million, with $26.2 million remaining to be incurred at December 31, 2022.
  • On February 24, 2023, the Company issued $40 million of 5.50% senior notes due 2053 and received approximately $39.83 million of net proceeds to refinance line-of-credit borrowings.
  • Pending acquisitions of CMV Sewage, MESCO, and Conewago Industrial Park are expected to close in the second half of 2023, subject to regulatory approvals, and are expected to be immaterial to results.
  • Key risks include weather and drought restrictions, customer usage and conservation, delays or insufficiency in PPUC rate relief, rising interest rates, access to financing, inflationary construction and treatment costs, supply-chain delays, environmental requirements, pension performance, customer collection trends, cyberattacks, and the ability to obtain permits for expansion projects.
  • The Company expects higher 2023 depreciation, operating costs, and interest expense. Management believes liquidity and credit facilities will be adequate for anticipated 2023 needs.
  • Standard & Poor’s affirmed an A- credit rating with a stable outlook on August 9, 2022. Management reported compliance with debt covenants and no material legal proceedings.
  • The filing states that COVID-19 had no material impact on operations, financial performance, liquidity, workforce, or supply chain through the filing date, although future effects remain uncertain.

Most important facts for an investor to verify

  • Whether the March 1, 2023 rate increases offset the DSIC reset and higher operating, capital, and financing costs.
  • The pace and funding mix of the $60.6 million 2023 capital program, including remaining Lake Williams dam expenditures.
  • Refinancing and interest-rate exposure associated with the $29.7 million credit-line balance, variable-rate debt, and the transition from LIBOR to SOFR.
  • Whether operating cash flow improves from the 2022 decline and remains sufficient to fund dividends and capital expenditures.
  • The sustainability of the 0.1% effective tax rate, which benefited from IRS tangible property regulation deductions and may vary materially by period.
  • Regulatory approval and closing of pending acquisitions and the Company’s ability to obtain timely recovery of regulatory assets and infrastructure costs.
  • Customer receivables and allowance adequacy, given higher receivables and continued elevated collection risk.
  • Execution of the upcoming union contract negotiations, scheduled to occur before the existing contract expires on April 30, 2023.