YORK WATER CO quarterly report, Q1 FY2022

The York Water Company — Q1 2022 Form 10-Q Summary

Business context and reporting period

The filing covers the three months ended March 31, 2022. York Water provides regulated water service and wastewater collection and treatment in portions of 51 municipalities across three Pennsylvania counties. The company is regulated by the Pennsylvania Public Utility Commission.

All dollar amounts are in thousands, except per-share data, customer counts, rates, and percentages. The interim financial statements are unaudited.

Key financial metrics

Metric	Q1 2022	Q1 2021	Change
Operating revenue	$14,240	$13,081	+8.9%
Operating expenses	$8,942	$7,727	+15.7%
Operating income	$5,298	$5,354	-1.0%
Operating margin	37.2%	40.9%	Down 3.7 percentage points
Net income	$3,859	$3,705	+4.2%
Net margin	27.1%	28.3%	Down 1.2 percentage points
Diluted EPS	$0.29	$0.28	+3.6%
Cash flow from operations	$5,333	$6,597	-19.2%
Capital expenditures	$7,504	$7,431	+1.0%
Long-term debt, including current portion	$151,499	Not clearly provided for prior period in the filing text

At March 31, 2022, total assets were $468,912, common stockholders’ equity was $154,420, cash and cash equivalents were $1, and total long-term debt before discounts and issuance costs was $154,276. The company had $34,406 outstanding under its $50,000 unsecured line of credit and a $7,500 current debt maturity.

Revenue from contracts with customers increased to $14,112 from $12,940. The increase included $404 of distribution system improvement charge revenue, compared with none in the prior-year quarter. Average water customers increased by 586 to 69,995, while average wastewater customers increased by 2,171 to 5,466, primarily because the company began operating the West Manheim Township wastewater collection system in January 2022.

Material changes versus the prior comparable period

Revenue increased $1,159, primarily from customer growth, the DSIC surcharge, higher per-capita consumption, and expanded wastewater operations.
Operating expenses increased $1,215. Management attributed the increase primarily to higher depreciation of approximately $306, wastewater treatment costs of $300, distribution system maintenance of $199, wages of $141, and outside services of $101.
Operating income declined modestly despite revenue growth because expenses increased faster than revenue.
Interest expense increased $83 to $1,297, principally because of higher debt outstanding. Average line-of-credit borrowings were $32,524 versus $6,821 in Q1 2021.
The effective income tax rate decreased to negative 6.4% from 7.3%, primarily because of higher deductions under the Internal Revenue Service tangible property regulations. This produced an income tax benefit of $231 versus tax expense of $292 in the prior-year quarter.
Cash flow from operations decreased $1,264, primarily because the prior-year benefit from collections and accounts receivable timing did not recur.
Common stockholders’ equity increased to $154,420 from $152,622 at December 31, 2021, after net income, dividends, stock-plan issuances, and stock-based compensation.

Cash flow, liquidity, debt, and capital resources

Operating cash flow of $5,333 funded part of $7,504 of capital expenditures. Financing activities provided $2,171, including $13,375 of debt proceeds and $8,289 of debt repayments.
The company’s cash management account is linked to its line of credit. At March 31, 2022, the company reported $1 of cash and a $593 cash overdraft recorded in accounts payable.
On April 5 and April 7, 2022, the company issued an aggregate 1,121,940 shares at $41 per share, including the underwriter’s full over-allotment exercise. Net proceeds were approximately $44,000 and were used primarily to repay line-of-credit borrowings and for general corporate purposes.
Management expects interest expense to decrease after repayment of the line of credit with the April equity proceeds. The company expects to extend the line’s maturity into 2024 under similar terms.
The company expects approximately $35,300 of additional 2022 capital expenditures, excluding unapproved acquisitions. It expects to fund these expenditures primarily with internally generated funds, equity proceeds, line-of-credit borrowings, and customer advances and contributions.
Common equity and debt each represented approximately 50% of total capitalization at March 31, 2022. Management targets an equity ratio of 50% to 54% and historically considers a debt-to-capitalization ratio of 46% to 50% acceptable for PPUC rate filings.

Guidance, outlook, risks, contingencies, and unusual items

The company expects 2022 revenue to benefit from customer additions, acquisitions and internal growth, the DSIC, and higher summer demand. It expects to file a rate increase request in 2022.
Effective April 1, 2022, the tariff included a DSIC surcharge of 4.15%.
Management expects depreciation to continue increasing with utility-plant investment and expects water and wastewater treatment, maintenance, and other operating costs to rise moderately.
Remaining 2022 capital expenditures include routine infrastructure work, main extensions, replacements and improvements, and armoring and replacing the Lake Williams dam spillway. Approximately $39,205 remained to be incurred under the spillway project commitment at March 31, 2022.
The company expects several water and wastewater acquisitions to close in 2022, subject to regulatory approvals. A separate Conewago Industrial Park acquisition is expected to close in the first quarter of 2023. Management expects the identified acquisitions to be immaterial to overall results.
COVID-19 had not materially affected the company’s workforce, operations, financial performance, liquidity, or supply chain as of the filing date. Longer supply lead times could increase costs or delay and reprioritize capital projects.
Key operating risks include weather and drought restrictions, customer water demand, rate relief, regulatory changes, interest rates, access to financing, customer growth, construction and permitting requirements, acquisitions, cyberattacks, and potential changes to the LIBOR benchmark.
The company’s interest-rate swap had a $1,500 fair-value liability at March 31, 2022 and would have required approximately $1,523 of payment if a specified default had occurred. The swap expires in October 2029 and requires a minimum Standard & Poor’s rating of BBB-; the company’s rating was A- with a stable outlook.
Lead customer-owned service-line replacement costs recorded as a regulatory asset totaled approximately $1,401, with an estimated total cost of $1,450. The estimate may change as additional facts become available.
The company had no material off-balance-sheet arrangements and reported no material change in internal control over financial reporting.

Important facts for investors to verify

Confirm the final impact of the April 2022 equity offering, including the repayment of the line of credit, revised share count, capitalization ratios, and future dilution.
Track the timing and outcome of the expected 2022 rate filing and the effect of the 4.15% DSIC surcharge.
Evaluate whether operating-cost growth, particularly wastewater treatment, maintenance, depreciation, and labor, continues to outpace revenue growth.
Monitor funding and execution of the approximately $35,300 remaining 2022 capital program and the $39,205 Lake Williams spillway commitment.
Verify regulatory approvals and closing dates for the pending acquisitions and the expected contribution to customer growth and revenue.
Assess liquidity, refinancing needs, and the cost impact of any LIBOR replacement under the credit facility and interest-rate swap.
Review the sustainability of the unusually negative effective tax rate, which depends on the level of qualifying asset-improvement deductions.
Monitor drought, weather, COVID-19 or supply-chain developments, lead-service-line obligations, cyber risks, and the company’s ability to recover regulatory assets through future rates.