The York Water Company: 2022 Q2 Form 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 51 municipalities. The unaudited filing covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Year-over-year change |
|---|
| Operating revenue | $14.899 million | $13.801 million | 8.0% |
| Operating income | $6.574 million | $5.902 million | 11.4% |
| Net income | $5.029 million | $4.484 million | 12.2% |
| Diluted EPS | $0.36 | $0.35 | 2.9% |
| Operating margin | 44.1% | 42.8% | Expanded |
| Net margin | 33.8% | 32.5% | Expanded |
| Metric | Six months 2022 | Six months 2021 | Year-over-year change |
|---|
| Operating revenue | $29.139 million | $26.882 million | 8.4% |
| Operating income | $11.872 million | $11.256 million | 5.5% |
| Net income | $8.888 million | $8.189 million | 8.5% |
| Diluted EPS | $0.65 | $0.63 | 3.2% |
| Operating margin | 40.7% | 41.9% | Contracted |
| Net margin | 30.5% | 30.5% | Stable |
- Q2 revenue growth reflected customer additions, including the West Manheim Township acquisition, and $558 thousand of distribution system improvement charge revenue. Six-month DSIC revenue was $962 thousand.
- Q2 operating expenses increased 5.4% to $8.325 million, primarily from higher depreciation, insurance, water treatment and wages. A $221 thousand one-time wastewater treatment reimbursement partially offset expenses.
- Six-month operating expenses increased 10.5% to $17.267 million, outpacing revenue growth, with higher depreciation, wages, insurance, water treatment, maintenance and outside services.
- Six-month effective income tax rate was negative 0.7%, compared with 5.2% in 2021, primarily because of higher deductions under the IRS tangible property regulations.
Cash flow, debt and liquidity
- Six-month cash flow from operations was $11.013 million, down from $12.102 million in 2021, primarily because of higher accounts receivable and unbilled revenue.
- Capital expenditures were $19.004 million, compared with $16.043 million in the prior-year period. The company expects approximately $26 million of additional 2022 construction expenditures, excluding unapproved acquisitions.
- Cash and cash equivalents were $2.644 million at June 30, 2022, compared with approximately $1 thousand at December 31, 2021.
- Total long-term debt was $119.870 million, including $7.500 million of current maturities, versus $149.190 million at year-end 2021. The company had no line-of-credit borrowings at quarter-end.
- An April 2022 equity offering of 1.12194 million shares generated net proceeds of $43.970 million, which were used principally to repay line-of-credit borrowings.
- Debt represented 37.3% of total capitalization at June 30, 2022, compared with 49.4% at year-end 2021; equity represented 62.7%, compared with 50.6%.
- The company maintained a $50 million unsecured line of credit and stated that it expects adequate liquidity and access to capital markets for anticipated 2022 and 2023 needs.
Material changes, outlook and risks
- The company filed a Pennsylvania rate request on May 27, 2022, seeking annual water-rate increases of $18.854 million, or 33.8%, and wastewater-rate increases of $1.457 million, or 35%. The request was under PPUC review, with any approved increases effective no later than March 1, 2023; approval of the requested amounts is not assured.
- Effective July 1, 2022, the tariff included a DSIC of 4.91% of applicable revenues.
- Management expects revenue growth during the remainder of 2022 from customer additions, acquisitions, DSIC revenue and higher summer demand. It expects depreciation and other operating costs to continue increasing.
- Pending acquisitions are expected to add customers, including approximately 180 wastewater customers from MESCO and approximately 30 commercial and industrial customers from Conewago Industrial Park, subject to regulatory approval. Several other acquisitions were expected to close in 2022.
- The company has approximately $39.205 million committed for the Lake Williams dam spillway project, with $35.066 million remaining to be incurred at June 30, 2022.
- The interest-rate swap had a $1.135 million fair-value liability at June 30, 2022. A credit-rating violation or other default could have required an approximately $1.173 million payment. The swap expires October 1, 2029.
- The company’s A- credit rating had a stable outlook as of the latest cited rating action. LIBOR discontinuation after June 30, 2023 could affect the cost of variable-rate debt and the interest-rate swap, although successor-rate provisions are expected to apply.
- DEP terminated the company’s lead-related consent order in June 2022 after determining that all requirements were completed. Customer-owned lead-service-line replacement costs recorded as a regulatory asset totaled approximately $1.482 million, with estimated total costs of $1.700 million.
- Key risks include PPUC rate relief, weather and drought conditions, customer usage, interest rates, financing availability, construction costs, acquisitions, regulatory changes, supply-chain delays, COVID-19 effects and cybersecurity incidents.
Important facts for investors to verify
- Outcome and timing of the pending PPUC water and wastewater rate request.
- Whether projected 2022 capital expenditures and the Lake Williams dam project remain within budget.
- Cash flow conversion as receivables, regulatory assets and construction spending increase.
- Future financing needs after the equity offering and the planned balance between debt and equity.
- Completion, regulatory approval and financial contribution of pending acquisitions.
- Impact of LIBOR replacement, interest-rate movements and the swap liability.
- Whether higher operating costs, lower per-capita consumption or adverse weather pressure future margins.
