The York Water Company — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three and nine months ended September 30, 2021. The York Water Company is a Pennsylvania-regulated water and wastewater utility serving portions of 51 municipalities in south-central Pennsylvania. The company operates water distribution facilities, two wastewater collection systems, and five wastewater collection and treatment systems.
Financial Performance and Key Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Operating revenue | $14.503 million | $14.257 million | $41.385 million | $40.454 million |
| Operating income | $6.684 million | $7.021 million | $17.940 million | $18.930 million |
| Net income | $4.794 million | $4.704 million | $12.983 million | $12.888 million |
| Diluted EPS | $0.36 | $0.36 | $0.99 | $0.99 |
| Net margin | 33.1% | 33.0% | 31.4% | 31.9% |
| Operating margin | 46.1% | 49.2% | 43.4% | 46.8% |
Third-quarter revenue increased 1.7%, while net income increased 1.9%. Nine-month revenue rose 2.3%, but net income increased only 0.7% because operating costs rose faster than revenue and the prior-year period included a $515 thousand life-insurance gain that did not recur.
Operating expenses increased 8.1% in the third quarter and 8.9% for the first nine months. Major increases included wages, depreciation, wastewater treatment, insurance, water treatment and distribution-system maintenance, and outside services. The effective tax rate declined to 11.5% from 16.0% in the third quarter and to 7.7% from 13.9% for the first nine months, primarily because of higher deductions under the IRS tangible property regulations.
Net cash provided by operating activities was $18.476 million for the first nine months, compared with $16.306 million in the prior-year period. Capital expenditures were $27.434 million, compared with $15.973 million in 2020. Financing activities provided $3.957 million, including $37.452 million of long-term debt proceeds and $28.960 million of long-term debt repayments. Dividends paid were $7.344 million.
At September 30, 2021, total assets were $430.748 million, common stockholders’ equity was $150.660 million, and long-term debt was $132.197 million on the balance sheet. Total long-term debt before discounts and issuance costs was $135.062 million, including $15.192 million outstanding under the committed line of credit. Cash and cash equivalents were approximately $1 thousand; liquidity was primarily provided through the company’s cash-management arrangement and an unsecured $50 million line of credit. The line of credit was renewed during the quarter and extended to September 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $246 thousand in the third quarter and $931 thousand for the first nine months, primarily from the distribution system improvement charge, customer growth, wastewater acquisitions, and expanded billing and collection services.
- The distribution system improvement charge generated $255 thousand in third-quarter revenue and $280 thousand for the first nine months, compared with no such revenue in 2020. The tariff included a 2.60% DSIC effective October 1, 2021.
- Average water customers increased by 760 in the third quarter and 775 for the first nine months; average wastewater customers increased by 256 and 298, respectively.
- Per-capita consumption declined approximately 1.8% in the third quarter but increased approximately 1.1% for the first nine months; residential demand decreased for the nine-month period.
- Utility plant additions increased substantially, resulting in higher depreciation and increased borrowings. Debt as a percentage of total capitalization rose to 47.3% from 46.9% at December 31, 2020.
- The company issued $1.612 million of common stock through dividend reinvestment, direct stock, and employee purchase plans. No shares were repurchased.
- Accounts receivable, net, declined to $3.935 million from $5.184 million at year-end 2020, while the allowance for doubtful accounts increased to $856 thousand from $655 thousand.
Guidance, Outlook, Risks, and Unusual Items
Management expects modest revenue growth for the remainder of 2021 from the DSIC, customer growth, and acquisitions. It expects depreciation to continue increasing because of capital investment, while water and wastewater treatment, maintenance, and other operating costs are expected to rise at a moderate rate. Interest expense is expected to be slightly higher because of continued line-of-credit borrowings.
The company expects approximately $7.6 million of additional 2021 construction expenditures, excluding unapproved acquisitions. It expects to fund these needs primarily with internally generated cash, with additional funding from line-of-credit borrowings, stock plans, and customer advances and contributions. Management believes it has adequate liquidity and access to capital markets for anticipated 2021 and 2022 needs.
The company does not expect to file a base-rate increase request in 2021. Growth remains dependent on timely and adequate Pennsylvania Public Utility Commission rate relief, customer usage, weather, customer additions, acquisitions, and controlled expenses.
- COVID-19 has not materially affected operations, financial performance, liquidity, or supply chains to date, but future effects on demand, collections, economic conditions, and regulation remain uncertain.
- Weather, drought restrictions, conservation, commercial and industrial activity, customer losses, regulatory decisions, permitting, capital requirements, interest rates, financing availability, and credit ratings could materially affect results.
- The company’s interest-rate swap had a $2.203 million liability fair value at September 30, 2021. A credit-rating or other default trigger at that date could have required approximately $2.232 million of immediate payment. Standard & Poor’s affirmed the company’s A- rating with a stable outlook on October 8, 2021.
- The company relies on LIBOR for certain financing arrangements. LIBOR cessation is expected for most relevant rates by June 30, 2023, and the successor rate and its effect on borrowing costs remain uncertain.
- Lead-service-line replacement costs of approximately $1.307 million were recorded as a regulatory asset; total estimated customer-owned replacement costs are approximately $1.5 million.
- Pending acquisitions are expected to be immaterial individually and are subject to regulatory approval. Several transactions are expected to close in 2021 or 2022 and collectively would add water and wastewater customers.
- The company expects to contribute the remaining $575 thousand of its planned $2.3 million pension contribution during the fourth quarter of 2021.
Investor Verification Priorities
- Verify the sustainability of revenue growth from the DSIC, customer additions, acquisitions, and billing services relative to declining or uneven consumption trends.
- Track whether operating-cost inflation, depreciation, and wastewater-treatment costs continue to outpace revenue growth and pressure margins.
- Review capital-expenditure requirements, line-of-credit utilization, debt refinancing needs, and the company’s target debt-to-capitalization range of approximately 46% to 50%.
- Assess the recoverability and timing of regulatory assets, including lead-service-line costs and interest-rate-swap amounts.
- Monitor rate-case activity, PPUC decisions, DSIC treatment, and the effect of any future regulatory changes.
- Evaluate COVID-19-related collections, the elevated allowance for doubtful accounts, customer demand, and any future supply-chain or labor disruptions.
- Confirm the replacement benchmark for LIBOR and the resulting impact on the line of credit and interest-rate swap.