10-Q: York Water Company Reports Lower Net Income in Q3 2024 Due to Increased Expenses

York Water Company's net income decreased in the third quarter of 2024 compared to the same period last year, primarily due to higher operating expenses and lower construction-related credits.

Summary

• The York Water Company reported a net income of $5.863 million for the third quarter of 2024, a decrease of $1.705 million or 22.5% compared to $7.568 million in the same period of 2023.
• Operating revenues increased by $948 thousand or 5.1% to $19.715 million, driven by the distribution system improvement charge (DSIC) and customer base growth.
• Operating expenses rose by $1.326 million or 12.8% to $11.660 million, due to higher depreciation, wages, wastewater treatment, insurance, and uncollectible accounts.
• Interest on debt increased by $393 thousand or 21.2% to $2.243 million due to increased long-term debt and higher interest rates.
• The allowance for funds used during construction decreased by $830 thousand to $301 thousand due to a lower volume of eligible construction.
• Income tax expense increased by $519 thousand due to lower deductions from the Internal Revenue Service (IRS) tangible property regulations (TPR).
• For the first nine months of 2024, net income was $15.183 million, a decrease of $2.562 million or 14.4% compared to $17.745 million in the same period of 2023.
• Operating revenues for the first nine months of 2024 increased by $3.158 million or 6.0% to $56.093 million, primarily due to a rate increase effective March 1, 2023.
• Operating expenses for the first nine months of 2024 increased by $4.193 million or 13.7% to $34.761 million, driven by higher depreciation, wages, distribution system maintenance, and wastewater treatment costs.
• Interest on debt for the first nine months of 2024 increased by $1.508 million or 29.9% to $6.549 million due to increased long-term debt and higher interest rates.
• The company expects to continue to expense asset improvements in the future under the IRS TPR.
• The company's effective tax rate was 8.9% for the first nine months of 2024 and 5.8% for the first nine months of 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with revenue growth offset by increased expenses and decreased net income. The company is facing challenges with rising costs and lower construction-related credits, but is also taking steps to expand its business through acquisitions and infrastructure improvements. The overall sentiment is slightly negative due to the decrease in profitability.

Positives

• Operating revenues increased due to the DSIC and customer base growth.
• The company completed three acquisitions, expanding its customer base.
• The company renewed its committed line of credit and extended the maturity date to September 2026.
• Standard & Poors affirmed the company's credit rating at Awith a stable outlook.
• The company has a substantial deferred income tax asset due to accelerated depreciation and other factors.

Negatives

• Net income decreased due to higher operating expenses, increased interest on debt, and lower construction-related credits.
• Operating expenses increased significantly due to higher depreciation, wages, and treatment costs.
• Interest on debt increased due to higher debt levels and interest rates.
• The allowance for funds used during construction decreased due to lower construction volume.
• Income tax expense increased due to lower deductions from the IRS TPR.
• Total per capita consumption for 2024 was approximately 1.3% lower than the same period of last year.

Risks

• Changes in weather or climate, including drought conditions, could impact water usage and revenues.
• Natural disasters, including pandemics, could disrupt operations.
• The level of rate relief granted by the PPUC could affect profitability.
• Changes in government policies or regulations, including the tax code, could impact the company.
• The company's ability to obtain permits for expansion projects could affect growth.
• Material changes in demand from customers, including the impact of conservation efforts, could impact revenues.
• Changes in economic and business conditions, including interest rates, could affect the company.
• The company is exposed to cyber security risks that could disrupt operations and compromise data.
• The company's ability to maintain its credit rating depends on adequate and timely rate relief and its ability to fund capital expenditures.

Future Outlook

The company expects revenues to show a modest increase due to the DSIC and an increase in the number of water and wastewater customers from acquisitions and growth within the company's service territory. The company anticipates construction expenditures for the remainder of 2024 of approximately $9.7 million. The company expects to continue to expense asset improvements in the future under the IRS TPR. The company expects the effective tax rate to remain consistent with the first nine months for the remainder of the year. The company does not expect to file a rate increase request in 2024.

Management Comments

• The company continuously looks for water and wastewater acquisition and expansion opportunities both within and outside its current service territory.
• The company has agreements with several municipalities to provide billing and collection services.
• The company also has a service line protection program on a targeted basis in order to further diversify its business.
• Management believes the company will have adequate capacity under its current line of credit to meet anticipated financing needs throughout 2024 and 2025.
• Management believes it is currently in compliance with all loan agreement restrictions.

Industry Context

The York Water Company operates in the regulated water and wastewater utility sector, where revenue is largely dependent on rate increases approved by the PPUC and customer growth. The company's performance is also influenced by weather conditions, economic factors, and regulatory changes. The company is actively pursuing acquisitions to expand its customer base and offset potential declines in per capita water consumption.

Comparison to Industry Standards

• The York Water Company's performance is comparable to other small to mid-sized regulated water utilities in the United States.
• The company's debt-to-capitalization ratio of 46.8% is within the range typically seen in the industry and is considered acceptable by the PPUC.
• The company's focus on acquisitions and infrastructure improvements is consistent with industry trends aimed at growth and reliability.
• The company's use of a distribution system improvement charge (DSIC) is a common practice among regulated utilities to recover infrastructure costs.
• The company's credit rating of Ais a strong indicator of its financial health and stability, which is comparable to other well-managed utilities.
• The company's effective tax rate is influenced by the IRS TPR, which is a common factor affecting the tax rates of many utilities.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and its impact on earnings per share.
• Employees may be affected by changes in wages and benefits.
• Customers may be affected by rate increases and the implementation of the DSIC.
• Suppliers may be affected by changes in the company's capital expenditure plans.
• Creditors may be affected by changes in the company's debt levels and credit rating.

Next Steps

• The company will continue to pursue acquisitions of water and wastewater systems.
• The company will continue to pursue bulk water contracts with municipalities and other entities.
• The company will continue to invest in infrastructure improvements.
• The company will monitor weather conditions and their potential impact on water usage and revenues.
• The company will monitor regulatory developments and their potential impact on the business.
• The company will seek approval from regulatory authorities for pending acquisitions.

Key Dates

Keywords

water utility, wastewater utility, rate increase, acquisitions, operating expenses, net income, debt, capital expenditures, regulatory, pension, cybersecurity, drought