YORK WATER CO quarterly report, Q3 FY2023

York Water Company 10-Q Summary

Business Context and Reporting Period

The York Water Company provides regulated water service and wastewater collection and treatment in south-central Pennsylvania. The filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. The company served approximately 71,521 water customers and 6,018 wastewater customers on average during the third quarter.

Key Financial Metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Operating revenue	$18.767 million	$15.811 million	$52.935 million	$44.950 million
Operating income	$8.433 million	$6.856 million	$22.367 million	$18.728 million
Net income	$7.568 million	$5.681 million	$17.745 million	$14.569 million
Basic and diluted EPS	$0.53	$0.40	$1.24	$1.05
Cash flow from operations	Not separately provided	Not separately provided	$23.407 million	$17.311 million

Operating margin was approximately 44.9% in Q3 2023 versus 43.4% in Q3 2022, and approximately 42.2% for the first nine months versus 41.7% in the prior-year period. Net margin was approximately 40.3% in Q3 versus 35.9%, and 33.5% for nine months versus 32.4%.

Operating expenses were $10.334 million in Q3 and $30.568 million for nine months, up 15.4% and 16.6%, respectively.
Interest expense increased to $1.850 million in Q3 and $5.041 million for nine months, primarily from higher debt balances and interest rates.
Capital expenditures were $46.342 million for the first nine months, compared with $34.050 million in 2022. The company expects approximately $16.000 million of additional 2023 construction expenditures, excluding unapproved acquisitions.
Cash and cash equivalents were approximately $1 thousand at September 30, 2023. The company had $18.080 million drawn on its $50.000 million unsecured revolving credit facility and a $2.209 million cash-management-account overdraft.
Gross long-term debt was $170.450 million, compared with $142.110 million at December 31, 2022; the balance-sheet long-term portion was $167.769 million after discounts and issuance costs.
Debt represented 43.9% of total capitalization at September 30, 2023, compared with 40.7% at year-end 2022. Equity represented 56.1%, compared with 59.3%.
Standard & Poor’s affirmed an A- credit rating with a stable outlook and adequate liquidity.

Material Changes Versus the Prior Comparable Period

Revenue increased 18.7% in Q3 and 17.8% for nine months, primarily reflecting the PPUC-approved rate increase effective March 1, 2023 and customer growth. The rate order was designed to provide approximately $11.6 million of additional annual water revenue and $1.9 million of wastewater revenue.
The distribution system improvement charge reset to zero when the new rates became effective, reducing revenue by approximately $0.661 million in Q3 and $1.352 million for nine months versus 2022.
Water customer counts increased by 960 in Q3 and 1,035 for nine months; wastewater customer counts increased by 377 and 404, respectively, primarily from acquisitions and internal growth.
Per-capita consumption declined approximately 0.6% in Q3 but increased approximately 1.1% for the first nine months.
Net income increased 33.2% in Q3 and 21.8% for nine months. Higher revenue exceeded increases in treatment, pumping, wages, depreciation, maintenance, insurance, outside services and wastewater expenses.
Operating cash flow increased $6.096 million, while investing cash use increased to $46.377 million from $36.876 million, primarily because of higher utility-plant additions.
The company issued $40.000 million of 5.50% senior notes due 2053 and used the approximately $39.829 million of net proceeds to refinance line-of-credit borrowings. The line of credit was renewed and extended to September 2025.

Guidance, Outlook, Risks and Unusual Items

Management expects revenue to continue benefiting from the March 2023 rate increase, customer growth and acquisitions. It does not expect to collect a DSIC or file a rate-increase request in 2023.
Depreciation and amortization is expected to rise as utility-plant investment continues. Treatment, maintenance and other operating costs are expected to increase moderately, while interest expense is expected to remain higher because of increased debt and interest rates.
Management expects the effective tax rate to remain generally consistent with the 5.8% reported for the first nine months, although the rate remains sensitive to taxable income and deductions under IRS tangible-property regulations.
Pennsylvania officials placed York County under a drought warning in September 2023 and other counties under drought watch. The company implemented mandatory restrictions on nonessential water use; prolonged restrictions could reduce demand and revenue and increase operating costs.
The company has approximately $39.626 million committed for the Lake Williams dam spillway project, with $9.576 million remaining to be incurred at September 30, 2023.
Lead customer-owned service-line replacement costs totaled approximately $1.671 million and are recorded as a regulatory asset. The company estimates total costs of approximately $1.800 million, subject to revision and future rate recovery.
The company expects to contribute the remaining $0.389 million of its 2023 pension contribution during the fourth quarter.
Future acquisitions remain subject to regulatory approvals. Announced transactions could add approximately 1,075 water and wastewater customers, but management expects the acquisitions to be immaterial to overall results.
The interest-rate swap had a $0.303 million liability at September 30, 2023. A credit-rating or other default event at that date could have required approximately $0.372 million of immediate payment.
Key risks include regulatory rate relief and recovery of regulatory assets, drought and weather, customer demand, interest rates, access to financing, capital requirements, acquisitions, environmental obligations, cybersecurity and credit-rating changes.

Most Important Facts to Verify

Whether drought restrictions materially affect water consumption, operating costs and fourth-quarter revenue.
The timing and final cost of the Lake Williams dam project and other capital expenditures, and the amount funded with debt versus operating cash flow.
Availability and cost of the revolving credit facility as the company’s cash balance remains minimal and debt capitalization increases.
PPUC approval and timing for announced acquisitions and future recovery of regulatory assets, including lead-service-line costs.
The sustainability of earnings growth after considering higher interest expense, rising operating costs, the DSIC reset and the unusually favorable tax effects from tangible-property deductions.
The terms and compliance requirements of outstanding debt, the interest-rate swap and related credit-rating provisions.