Business Context and Reporting Period
The York Water Company is a regulated water and wastewater utility serving portions of 54 municipalities in south-central Pennsylvania. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. The company is regulated by the Pennsylvania Public Utility Commission (PPUC).
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|
| Operating revenue | $18.8 million | $14.9 million | +26.0% |
| Operating income | $8.5 million | $6.6 million | +29.5% |
| Net income | $6.5 million | $5.0 million | +29.7% |
| Diluted EPS | $0.45 | $0.36 | +25.0% |
| Operating margin | 45.4% | 44.1% | +1.3 pts. |
| Net margin | 34.8% | 33.8% | +1.0 pt. |
| Metric | Six Months 2023 | Six Months 2022 | Change |
|---|
| Operating revenue | $34.2 million | $29.1 million | +17.3% |
| Operating income | $13.9 million | $11.9 million | +17.4% |
| Net income | $10.2 million | $8.9 million | +14.5% |
| Diluted EPS | $0.71 | $0.65 | +9.2% |
| Operating margin | 40.8% | 40.7% | +0.1 pt. |
| Net margin | 29.8% | 30.5% | -0.7 pts. |
- Six-month net cash provided by operating activities was $14.6 million, compared with $11.0 million in 2022.
- Capital expenditures were $29.7 million, primarily for the Lake Williams dam spillway and infrastructure improvements. Investing cash outflow was $29.8 million.
- Financing activities provided $15.2 million, including $66.4 million of long-term debt proceeds and $48.0 million of debt repayments. Dividends paid were $5.8 million.
- Cash and cash equivalents remained approximately $1 thousand because the company operates a cash-management arrangement linked to its credit facility.
- Total long-term debt was $160.5 million at June 30, 2023, compared with $142.1 million at December 31, 2022. Debt represented 43.0% of total capitalization, versus 40.7% at year-end 2022.
- The company had $8.1 million outstanding under its $50.0 million unsecured revolving credit facility. The borrowing rate was 6.33% at June 30, 2023.
- Total assets were $543.5 million and stockholders’ equity was $212.5 million at June 30, 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected PPUC-approved water and wastewater rate increases effective March 1, 2023, customer growth, and higher per-capita consumption. The average water customer count increased by 989 in the quarter, while wastewater customers increased by 406.
- The rate increase was partly offset by the reset of the distribution system improvement charge to zero on March 1, 2023. The DSIC reduced revenue by approximately $558 thousand in the quarter and $691 thousand for the six months compared with 2022.
- Operating expenses increased 23.1% in the quarter and 17.2% for the six months. Major drivers included depreciation and amortization, water and wastewater treatment, wages, distribution maintenance, insurance, and the absence of a prior-year wastewater treatment reimbursement.
- Interest expense increased 39.3% in the quarter and 27.5% for the six months because of higher debt balances and interest rates.
- On February 24, 2023, the company issued $40.0 million of 5.50% senior notes due 2053. Net proceeds of approximately $39.8 million were used to refinance line-of-credit borrowings.
- The effective tax rate rose to 9.9% from 3.2% in the quarter and to 11.0% from negative 0.7% for the six months, primarily because of lower deductions under the IRS tangible property regulations.
Guidance, Outlook, Risks, and Unusual Items
- Management does not expect to collect a DSIC or file a rate-increase request in 2023.
- Management expects revenue to benefit during the remainder of 2023 from approved rate increases, higher summer demand, customer growth, and acquisitions. Results remain sensitive to weather, drought restrictions, regulatory actions, economic conditions, and water consumption.
- Management expects depreciation and amortization and interest expense to continue increasing as capital investment and debt outstanding rise. It expects the effective tax rate to be lower in the remainder of 2023 than in the first six months because of anticipated higher eligible tax deductions.
- Additional 2023 construction expenditures are expected to be approximately $30.4 million, excluding potential acquisitions. The company expects to use internally generated funds, credit-line borrowings, stock-plan proceeds, and customer advances and contributions.
- The Lake Williams dam project has approximately $39.6 million of committed expenditures, with $14.0 million remaining as of June 30, 2023.
- Pennsylvania issued a drought watch on June 15, 2023, requesting a voluntary 5% to 10% reduction in nonessential water use. Prolonged or intensified drought conditions could reduce revenue and net income.
- The company has multiple pending water and wastewater acquisitions expected to add customers in 2023 and 2024; completion depends on regulatory approvals. Management expects the acquisitions to be immaterial to overall results.
- The company maintains an interest-rate swap on $12.0 million of variable-rate debt. The swap liability had a fair value of $516 thousand at June 30, 2023; a credit-rating breach could have required approximately $600 thousand of immediate payment. Standard & Poor’s affirmed the company’s A- rating with a stable outlook on July 26, 2023.
- Lead customer-owned service-line replacement costs of approximately $1.6 million have been recorded as a regulatory asset. The company estimates total replacement costs of approximately $1.8 million, subject to adjustment.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the sustainability of rate-driven revenue growth after the DSIC reset and assess the timing and amount of future PPUC rate relief.
- Monitor debt-funded capital spending, the 6.33% revolving-credit borrowing rate, upcoming credit-line maturity extension, and the trend toward higher leverage.
- Evaluate whether operating-cost inflation, treatment costs, depreciation, and interest expense could offset future revenue gains.
- Track drought conditions, customer consumption, and any restrictions that could affect summer volumes.
- Verify regulatory approvals and closing dates for pending acquisitions and their expected customer additions.
- Assess recoverability and timing of regulatory assets, including lead-service-line costs and interest-rate-swap adjustments.
- Review the company’s ability to fund approximately $30.4 million of additional 2023 construction expenditures while maintaining its credit rating and dividend policy.
