10-Q: York Water Company Reports Mixed Results in Second Quarter 2024 Amidst Rising Expenses

York Water Company's second quarter 2024 net income decreased by 23.5% compared to the same period last year, primarily due to increased operating expenses and interest on debt.

Summary

• York Water Company's net income for the second quarter of 2024 was $4.993 million, a decrease of $1.531 million or 23.5% compared to the same period in 2023.
• The decrease in net income was primarily due to higher operating expenses, increased interest on debt, and lower allowance for funds used during construction, partially offset by lower pension costs.
• Operating revenues for the second quarter of 2024 decreased slightly by 0.1% to $18.750 million, mainly due to lower per capita consumption, which was partially offset by customer base growth.
• Operating expenses for the second quarter of 2024 increased by 14.0% to $11.688 million, driven by higher costs in distribution system maintenance, uncollectible accounts, depreciation, wages, wastewater treatment, and purchased power.
• Interest on debt for the second quarter of 2024 increased by 30.1% to $2.183 million due to increased long-term debt and higher interest rates.
• For the first six months of 2024, net income was $9.320 million, a decrease of 8.4% compared to the same period in 2023.
• Operating revenues for the first six months of 2024 increased by 6.5% to $36.378 million, primarily due to a rate increase effective March 1, 2023, and customer base growth.
• Operating expenses for the first six months of 2024 increased by 14.2% to $23.101 million, driven by higher costs in distribution system maintenance, depreciation, wages, uncollectible accounts, and wastewater treatment.
• Interest on debt for the first six months of 2024 increased by 34.9% to $4.306 million due to increased long-term debt and higher interest rates.
• The company expects a modest revenue increase for the remainder of the year due to a distribution system improvement charge, higher summer demand, and customer growth.
• The company anticipates construction expenditures of approximately $21.3 million for the remainder of 2024.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like customer growth and strategic acquisitions, but the significant decrease in net income and increase in expenses indicate a negative trend. The company is facing challenges in managing costs and debt, which is concerning from an investment perspective.

Positives

• The company experienced growth in its customer base for both water and wastewater services.
• Operating revenues for the first six months of 2024 increased by 6.5% due to a rate increase and customer growth.
• The company has a distribution system improvement charge (DSIC) in place, which will contribute to future revenues.
• The company has secured a $40 million private placement of senior notes at 5.67% to refinance line of credit borrowings.
• The company has a committed line of credit of $50 million, providing financial flexibility.
• The company's credit rating was affirmed at Aby Standard & Poors with a stable outlook.
• The company is actively pursuing acquisitions and bulk water contracts to expand its business.

Negatives

• Net income decreased significantly in the second quarter and for the first six months of 2024.
• Operating expenses increased substantially in both the second quarter and the first six months of 2024.
• Interest on debt increased significantly due to higher debt levels and interest rates.
• Per capita water consumption decreased by approximately 2.8% in the second quarter and 2.5% in the first six months of 2024.
• Allowance for funds used during construction decreased due to a lower volume of eligible construction.
• The company's pension contribution was limited to the deductible amount, impacting pension costs.

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 business.
• The company faces risks related to cyber security attacks and potential disruptions to information technology systems.
• The company's ability to obtain permits for expansion projects could impact growth.
• Material changes in demand from customers, including the impact of conservation efforts, could affect revenues.
• Changes in economic and business conditions, including interest rates, could impact financial performance.
• The company's ability to maintain its credit rating depends on adequate rate relief and balanced funding of capital expenditures.
• The company's reliance on a single line of credit exposes it to potential credit availability risks.

Future Outlook

The company expects a modest revenue increase for the remainder of the year due to the distribution system improvement charge, higher summer demand, and customer growth from acquisitions and within its service territory. The company anticipates construction expenditures of approximately $21.3 million for the remainder of 2024. The company expects interest expense to increase due to the increase in long-term debt outstanding. The company expects the effective tax rate to be lower in the remainder of the year due to higher levels of eligible asset improvements expensed for tax purposes.

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.
• The company continues to review and consider opportunities to expand both initiatives.
• The company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2024 and 2025, to fund anticipated construction and acquisition expenditures.

Industry Context

The York Water Company operates in the regulated water and wastewater utility industry, which is generally considered stable but is subject to regulatory oversight and economic conditions. The company's performance is influenced by factors such as weather patterns, customer growth, and the ability to obtain rate increases. The company's strategy of pursuing acquisitions and bulk water contracts is consistent with industry trends aimed at expanding service territories and diversifying revenue streams.

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.
• Companies like Middlesex Water Company (MSEX) and SJW Group (SJW) also operate in regulated environments and face similar challenges related to capital expenditures, rate approvals, and customer growth.
• The company's debt-to-capitalization ratio of 46.2% is within the range of what is considered acceptable for regulated utilities.
• The company's focus on infrastructure improvements and acquisitions is consistent with industry best practices for maintaining and expanding service capabilities.
• The company's use of a distribution system improvement charge (DSIC) is a common mechanism in the industry to recover infrastructure costs without filing for a full rate case.
• The company's credit rating of Ais a strong indicator of its financial health and stability compared to industry peers.

Management Changes

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the increase in expenses.
• Employees may be affected by changes in compensation and benefits.
• Customers may see changes in rates due to the distribution system improvement charge and future rate filings.
• Suppliers and creditors may be impacted by the company's financial performance and ability to meet its obligations.

Next Steps

• The company will continue to pursue acquisitions and bulk water contracts.
• The company will complete the armoring and replacement of the Lake Williams dam spillway.
• The company will continue to invest in infrastructure improvements and replacements.
• The company will monitor and manage its debt levels and interest expenses.
• The company will seek regulatory approvals for pending acquisitions.
• The company will extend the maturity of its line of credit into 2026.

Key Dates

Keywords

water utility, wastewater utility, rate increase, capital expenditures, acquisitions, operating expenses, net income, debt, pension, regulatory, customer growth, distribution system improvement charge, cyber security, credit rating