Business Context and Reporting Period
The York Water Company filed this unaudited Form 10-Q for the three months ended March 31, 2023. The company provides regulated water and wastewater services across portions of 54 municipalities in south-central Pennsylvania and is regulated by the Pennsylvania Public Utility Commission.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $15.401 million | $14.240 million | 8.2% increase |
| Operating income | $5.418 million | $5.298 million | 2.3% increase |
| Net income | $3.653 million | $3.859 million | 5.3% decrease |
| Basic and diluted EPS | $0.26 | $0.29 | Decrease |
| Operating margin | 35.2% | 37.2% | Lower |
| Net margin | 23.7% | 27.1% | Lower |
| Cash flow from operations | $6.224 million | $5.333 million | 16.7% increase |
| Capital expenditures | $10.581 million | $7.504 million | 40.9% increase |
Revenue growth primarily reflected a rate increase effective March 1, 2023 and customer growth. Average water customers increased by 1,156 to 71,151, while average wastewater customers increased by 429 to 5,895. The distribution system improvement charge contributed $271,000 in the quarter versus $404,000 in the prior-year quarter and reset to zero when new base rates became effective.
Operating expenses increased 11.6% to $9.983 million, driven principally by higher depreciation, wages, water treatment, insurance, wastewater treatment, and billing and collection costs. Interest expense increased 16.7% to $1.513 million. The allowance for funds used during construction increased to $749,000 from $295,000.
The effective income tax rate was 12.9%, compared with a benefit rate of 6.4% in the prior-year period, primarily because of lower deductions under the Internal Revenue Service tangible property regulations.
At March 31, 2023, total assets were $524.502 million and common stockholders’ equity was $208.398 million. Long-term debt, net of discounts and issuance costs, was $149.598 million, compared with $139.465 million at December 31, 2022. Total debt before discounts and issuance costs was $152.370 million. Cash and cash equivalents were $166,000, and the company had no outstanding borrowings under its $50 million unsecured line of credit.
Material Changes Versus the Prior Comparable Period
- Revenue increased $1.161 million, or 8.2%, primarily from the March 2023 rate increase and customer growth.
- Net income declined $206,000, or 5.3%, despite higher revenue, because expense growth and income taxes more than offset operating revenue gains.
- Operating expenses increased $1.041 million, or 11.6%.
- Operating cash flow increased $891,000, while capital expenditures increased $3.077 million.
- The company issued $40 million of 5.50% unsecured senior notes due February 24, 2053. Net proceeds of approximately $39.829 million were used primarily to refinance line-of-credit borrowings used for capital projects.
- Debt as a percentage of total capitalization increased to 42.2% from 40.7% at December 31, 2022; equity represented 57.8% of total capitalization versus 59.3% at year-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects revenue to benefit during the remainder of 2023 from higher rates, higher summer demand, customer growth, and acquisitions. The company does not expect to collect a distribution system improvement charge or file a rate increase request in 2023.
- Management expects depreciation and interest expense to rise as utility investment and long-term debt increase. Management also expects the effective tax rate to be lower later in 2023 if eligible tangible-property-regulation deductions increase.
- Remaining 2023 construction expenditures are expected to be approximately $45.7 million, excluding potential acquisitions. The company expects to fund these expenditures primarily with internally generated funds, supplemented by line-of-credit borrowings, stock-plan proceeds, customer advances, and contributions.
- The company has committed approximately $39.205 million to armor and replace the Lake Williams dam spillway, with $22.212 million remaining to be incurred at March 31, 2023.
- Four pending acquisitions are expected to close in 2023, subject to regulatory approval, and are expected to add approximately 100 water customers, 490 wastewater customers, and approximately 30 commercial and industrial water and wastewater customers. Management expects the acquisitions to be immaterial to overall results.
- Lead customer-owned service-line replacement costs totaled approximately $1.559 million through March 31, 2023 and are recorded as a regulatory asset. The company estimates total replacement costs of approximately $1.8 million, subject to adjustment.
- The company’s interest-rate swap had a fair-value liability of $791,000 at March 31, 2023. A credit-rating downgrade below BBB- could have required approximately $827,000 of immediate payment if applicable default provisions were triggered. Standard & Poor’s affirmed an A- rating with a stable outlook in August 2022.
- The current union contract expired April 30, 2023. Management and union leadership are operating under the expired agreement while negotiating a replacement and expect no service interruption.
- Key risks include weather and drought restrictions, customer usage, regulatory rate relief, interest rates, financing availability, capital requirements, environmental obligations, cyberattacks, credit-rating changes, and the ability to recover regulatory assets through future rates.
Important Facts for Investors to Verify
- Verify the timing and realized revenue impact of the March 1, 2023 water and wastewater rate increases.
- Monitor whether operating-cost inflation, higher depreciation, and increased interest expense continue to outpace revenue growth.
- Assess funding needs and execution risk for the remaining 2023 capital program and Lake Williams dam spillway project.
- Confirm regulatory approval and closing dates for the four pending acquisitions.
- Track debt levels, refinancing requirements, line-of-credit availability, and compliance with debt covenants.
- Evaluate the recoverability and timing of regulatory assets, including lead-service-line costs and interest-rate-swap amounts.
- Monitor the union negotiations and any potential effect on operating costs or service continuity.
- Consider seasonal water demand, drought restrictions, customer conservation, and weather-related revenue variability.