York Water Company 10-Q Summary
Business Context and Reporting Period
The York Water Company provides regulated water and wastewater services in south-central Pennsylvania, serving portions of 56 municipalities across four counties. It also provides billing, collection, and service-line protection services. This unaudited Form 10-Q covers the three months ended March 31, 2024, filed May 7, 2024. The company is regulated by the Pennsylvania Public Utility Commission.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $17.628 million | $15.401 million | 14.5% |
| Operating income | $6.215 million | $5.418 million | 14.7% |
| Net income | $4.327 million | $3.653 million | 18.5% |
| Diluted EPS | $0.30 | $0.26 | 15.4% |
| Net cash from operations | $6.138 million | $6.224 million | (1.4%) |
| Capital expenditures | $8.457 million | $10.581 million | (20.1%) |
| Long-term debt, carrying amount | $189.613 million | $180.007 million at Dec. 31, 2023 | 5.3% |
| Cash and cash equivalents | $3.321 million | $0.001 million at Dec. 31, 2023 | Increase |
Operating margin was approximately 35.3%, compared with 35.2% in the prior-year quarter. Net margin was approximately 24.5%, compared with 23.7%. The effective income tax rate was 12.2%, compared with 12.9%.
Operating cash flow nearly covered capital expenditures, producing negative operating cash flow less capital expenditures of approximately $2.319 million before financing activities. Financing activities provided $5.684 million, including $49.919 million of debt proceeds and $40.192 million of debt repayments. The company paid $3.019 million in dividends.
At March 31, 2024, common stockholders’ equity was $222.931 million and total assets were $602.287 million. Common equity represented 53.7% of total capitalization, while long-term debt represented 46.3%.
Material Changes Versus the Prior Comparable Period
- Revenue increased $2.227 million, primarily from the March 1, 2023 water and wastewater rate increase and customer growth. The increase was partly offset by the $271,000 decline in DSIC revenue after the DSIC reset to zero.
- Average water customers increased by 797 to 71,948, and average wastewater customers increased by 459 to 6,354, primarily due to acquisitions.
- Per capita consumption decreased approximately 2.2% year over year.
- Operating expenses increased $1.430 million, including higher distribution-system maintenance, depreciation and amortization, wages, insurance, wastewater treatment, outside services, and purchased power.
- Interest expense increased $610,000, or 40.3%, due to higher debt outstanding and higher interest rates.
- Allowance for funds used during construction increased $385,000 to $1.134 million because of higher eligible construction activity.
- The company completed two immaterial acquisitions: approximately 180 wastewater customers from MESCO, Inc. and approximately 90 water customers from Longstown Mobile Estates.
- In February 2024, the company issued $40 million of 5.67% unsecured senior notes due 2054. Net proceeds of approximately $39.833 million were used primarily to refinance line-of-credit borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Management expects modest revenue growth for the remainder of 2024 from higher summer demand, customer additions, acquisitions, and service-territory growth. Weather, regulatory actions, economic conditions, and consumption trends could affect results.
- The company does not expect to file a rate increase request in 2024. The most recent rate order became effective March 1, 2023 and authorized approximately $11.6 million of annual water revenue increases and $1.9 million of annual wastewater revenue increases.
- Operating expenses and depreciation are expected to rise as the company invests in and maintains its infrastructure. Interest expense is also expected to increase because of higher long-term debt.
- The company anticipates approximately $33.7 million of additional 2024 construction expenditures, excluding acquisitions not yet approved. The Lake Williams dam spillway project had approximately $1.777 million remaining under existing commitments at March 31, 2024.
- Management expects to use internally generated funds, line-of-credit borrowings, stock-plan proceeds, customer advances, and contributions to fund capital needs. Management believes available credit facilities and capital-market access will be adequate during 2024.
- The company had no line-of-credit borrowings at March 31, 2024 and maintained a $50 million unsecured facility priced at SOFR plus 1.17%. It expects to extend the facility’s maturity into 2026 under similar terms.
- The interest-rate swap had a $458,000 liability fair value and mitigates exposure on $12 million of variable-rate debt. A credit-rating-triggered default on March 31, 2024 could have required approximately $476,000 of payment; the company’s S&P rating was A- with a stable outlook.
- Lead customer-owned service-line replacement costs totaled approximately $1.819 million and were recorded as a regulatory asset. The company estimates total replacement costs of approximately $1.9 million, subject to adjustment and future rate recovery.
- Pennsylvania returned all counties to normal drought status on March 6, 2024. Future drought restrictions could reduce water usage and revenue, while severe weather could increase costs.
- Forward-looking results depend on rate relief, water supply, weather and climate, customer demand, acquisitions, capital requirements, interest rates, credit availability, regulation, and cybersecurity. The company reported no material cybersecurity impact during the period.
Important Facts for Investors to Verify
- Confirm the sustainability of revenue growth following the 2023 rate increase, particularly with per capita consumption down 2.2%.
- Monitor leverage, interest expense, refinancing needs, and the company’s plan to allow debt capitalization to approach approximately 50%.
- Assess whether operating cash flow can fund planned capital expenditures and dividend obligations without materially increasing debt.
- Track completion costs and remaining commitments for the Lake Williams dam project and other infrastructure programs.
- Verify regulatory recovery of lead-service-line costs and other regulatory assets.
- Review the timing and regulatory approvals for pending acquisitions expected in 2024 and 2025.
- Monitor the company’s A- credit rating, line-of-credit renewal, interest-rate exposure, and swap-related collateral or default requirements.
- Consider the sensitivity of revenue and expenses to summer weather, drought restrictions, water consumption, and treatment costs.