Business Context and Reporting Period
The York Water Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company provides regulated water service and wastewater collection and treatment in portions of 54 municipalities across three Pennsylvania counties. The Pennsylvania Public Utility Commission regulates rates, financing, service territory, and related operating practices.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Operating revenue | $15.811 million, up 9.0% | $44.950 million, up 8.6% |
| Operating income | $6.856 million; 43.4% margin | $18.728 million; 41.7% margin |
| Net income | $5.681 million, up 18.5% | $14.569 million, up 12.2% |
| Basic and diluted EPS | $0.40 | $1.05 |
| Net income margin | 35.9% | 32.4% |
| Net cash from operations | Not separately provided for the quarter | $17.311 million, versus $18.476 million |
| Capital expenditures and acquisitions | Not separately provided for the quarter | $36.876 million of investing cash outflows |
Operating expenses increased 14.5% in the quarter and 11.8% year to date, principally reflecting higher wastewater and water treatment costs, depreciation, maintenance, wages, and billing services. Income taxes were a benefit of $82,000 in the quarter and $147,000 year to date, compared with tax expense of $625,000 and $1.077 million, respectively, in the prior-year periods. The lower effective tax rates of negative 1.5% for the quarter and negative 1.0% year to date primarily resulted from deductions under the IRS tangible property regulations.
At September 30, 2022, total assets were $493.655 million and common stockholders’ equity was $204.576 million, compared with $458.853 million and $152.622 million, respectively, at December 31, 2021. Cash and cash equivalents were $1,000. Accounts receivable, net, was $5.461 million, and unbilled revenue was $3.084 million.
Total long-term debt, including current maturities and the line of credit, was $126.977 million at September 30, 2022, compared with $149.190 million at December 31, 2021. The company had $7.107 million outstanding under its $50 million unsecured revolving credit facility and a $3.608 million cash-management-account overdraft. Long-term debt represented 38.3% of total capitalization, versus 49.4% at year-end 2021; equity represented 61.7%, versus 50.6%.
Dividends declared were $0.1949 per share in the quarter and $0.5847 per share year to date. The April 2022 common-stock offering generated net proceeds of $43.970 million, primarily used to repay line-of-credit borrowings and fund capital expenditures, acquisitions, and general corporate purposes.
Material Changes Versus Prior Comparable Period
- Revenue increased due to customer growth, higher per-capita consumption, acquisitions, and distribution system improvement charge revenue of $661,000 in the quarter and $1.623 million year to date.
- Average wastewater customers increased by 2,308 in the quarter and 2,231 year to date, primarily from acquisitions. Average water customers increased by 805 in the quarter and 723 year to date.
- Operating income grew 2.6% in the quarter and 4.4% year to date, while expense growth exceeded revenue growth.
- Operating cash flow declined $1.165 million year to date, primarily because of higher accounts receivable and unbilled revenue balances.
- Investing outflows increased to $36.876 million from $27.434 million, including $34.050 million of utility plant additions and $2.826 million for acquisitions.
- The company completed a public offering of 1.122 million shares and reduced debt outstanding, materially increasing the equity proportion of capitalization.
- The company completed acquisitions in August 2022 adding approximately 140 water and wastewater customers in total. Management stated these acquisitions were immaterial to results.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The company requested annual rate increases of $18.854 million for water service and $1.457 million for wastewater service. The PPUC review was pending, with any approved increase effective no later than March 1, 2023; approval at the requested level was not assured.
- Effective October 1, 2022, the tariff included a 4.91% distribution system improvement charge.
- Management expected approximately $11 million of additional 2022 construction expenditures, excluding unapproved acquisitions, and stated that available credit facilities and capital-market access should be adequate for anticipated 2022 and 2023 needs.
- The company has committed approximately $39.205 million to armor and replace the Lake Williams dam spillway, with $29.626 million remaining to be incurred at September 30, 2022.
- Management expected depreciation and treatment, maintenance, and other operating costs to continue increasing. Interest expense was expected to rise because of additional line-of-credit borrowings and higher interest rates.
- The revolving credit facility was extended to September 2024 and will transition from LIBOR plus 1.05% to SOFR plus 1.17% on January 1, 2023. The company could not estimate the effect of successor-rate provisions in other agreements.
- The company uses a $12 million interest-rate swap expiring October 1, 2029. Its fair-value liability was $717,000 at September 30, 2022. A credit-rating or other default event could have required approximately $701,000 of immediate payment.
- Standard & Poor’s affirmed the company’s A- rating with a stable outlook and adequate liquidity. Maintaining the rating depends partly on timely rate relief, balanced debt and equity financing, and cash generation.
- The Pennsylvania DEP terminated the company’s lead-related consent order in June 2022 after determining that all requirements were completed. Customer-owned lead-line replacement costs recorded as a regulatory asset totaled approximately $1.501 million, with an estimated total cost of $1.700 million.
- COVID-19 had not materially affected operations, financial performance, liquidity, or supply chains as of the filing date, but management continued to identify pandemic, weather, drought, demand, regulatory, interest-rate, financing, acquisition, supply-chain, and cybersecurity risks.
Facts an Investor Should Verify
- Whether the PPUC approves the requested water and wastewater rate increases and the timing and amount of any resulting revenue recovery.
- Whether construction spending, particularly the Lake Williams spillway project, remains within estimates and can be funded without excessive additional debt or equity issuance.
- The effect of higher interest rates and the January 2023 transition from LIBOR to SOFR on borrowing costs and the interest-rate swap.
- Whether operating cash flow improves as receivables and unbilled revenue normalize and whether liquidity remains adequate with only $1,000 of reported cash.
- The status and regulatory approvals of pending acquisitions expected to add approximately 385 water and wastewater customers, along with their ultimate closing dates and economics.
- The sustainability of earnings growth given rising operating expenses, lower effective tax rates driven by tax deductions, weather-sensitive consumption, and regulatory recovery of costs.