10-Q: York Water Q3 Net Income Rises, YTD Profit Dips Amid Higher Costs

The York Water Company reported a 5.8% increase in Q3 net income, reaching $6.2 million, but a 1.9% decline in year-to-date net income to $14.9 million, driven by rising operating expenses and interest on debt.

Summary

• Net income for the third quarter of 2025 increased by 5.8% to $6.2 million, up from $5.9 million in the same period of 2024.
• Year-to-date net income for the nine months ended September 30, 2025, decreased by 1.9% to $14.9 million, compared to $15.2 million in the prior year.
• Operating revenues grew by 3.3% to $20.4 million in Q3 2025 and by 3.4% to $58.0 million for the nine months, primarily due to customer base growth and Distribution System Improvement Charge (DSIC) revenues.
• Operating expenses increased by 6.7% in Q3 and 5.7% year-to-date, mainly due to higher distribution system maintenance, depreciation, amortization, wages, and benefits.
• Interest on debt rose significantly by 16.6% in Q3 and 15.4% year-to-date, driven by increased long-term debt outstanding and higher interest rates.
• The company's effective tax rate was a benefit of (10.4)% for Q3 2025 and (3.3)% year-to-date, primarily due to higher deductions from IRS tangible property regulations.
• Average water customers increased by 1,101 in Q3 and 1,165 year-to-date, while wastewater customers increased by 530 in Q3 and 469 year-to-date, partly due to acquisitions.
• Total per capita water consumption decreased by approximately 3.2% in Q3 and 1.1% year-to-date compared to the same periods last year.
• The company filed a rate increase request on May 30, 2025, seeking a 28.9% increase in water rates ($20.3 million) and a 44.5% increase in wastewater rates ($3.9 million), effective no later than March 1, 2026.
• Standard & Poor's affirmed the company's credit rating at Awith a stable outlook on July 30, 2025.

Sentiment

Score: 5

Explanation: The company shows mixed results with Q3 net income growth but a year-to-date decline, driven by rising expenses and interest costs. Revenue growth is positive, supported by customer additions and DSIC, but per capita consumption is down. The stable credit rating and successful line of credit renewal are strengths, while the pending large rate increase and potential drought impacts introduce uncertainty.

Positives

• Net income for the third quarter of 2025 increased by 5.8% to $6.2 million.
• Operating revenues increased by 3.3% in Q3 and 3.4% year-to-date, driven by customer growth and DSIC revenues.
• The customer base expanded with an increase of 1,101 water customers and 530 wastewater customers in Q3 2025.
• Revenues from the Distribution System Improvement Charge (DSIC) significantly increased to $673,000 in Q3 2025 and $1.59 million year-to-date.
• The company recorded an income tax benefit of $583,000 in Q3 and $478,000 year-to-date, primarily due to higher deductions from IRS tangible property regulations.
• Standard & Poor's affirmed the company's strong credit rating at Awith a stable outlook on July 30, 2025.
• The committed line of credit was renewed in Q3 2025, extending its maturity date to September 2027, providing continued liquidity.
• Internally-generated funds from operations increased to $21.4 million for the nine months ended September 30, 2025, up from $20.4 million in the prior year.
• Management believes the company has adequate capacity under its current line of credit to meet anticipated financing needs throughout 2025 and 2026.
• The Pennsylvania Public Utility Commission (PPUC) approved a tariff modification allowing the company to recover costs for replacing lead customer-owned service lines as a regulatory asset.

Negatives

• Net income for the nine months ended September 30, 2025, decreased by 1.9% to $14.9 million.
• Basic Earnings Per Share for the nine months ended September 30, 2025, decreased to $1.03 from $1.06 in the prior year.
• Operating expenses increased significantly by 6.7% in Q3 and 5.7% year-to-date, impacting profitability.
• Interest on debt increased substantially by 16.6% in Q3 and 15.4% year-to-date, due to higher debt outstanding and rising interest rates.
• Allowance for funds used during construction decreased by $83,000 in Q3 and $1.1 million year-to-date, reflecting a lower volume of eligible construction.
• Total per capita water consumption decreased by 3.2% in Q3 and 1.1% year-to-date, potentially impacting future revenue growth.
• The company's debt to total capitalization ratio increased to 49.1% as of September 30, 2025, from 47.4% at December 31, 2024.
• The interest rate swap agreement was in a liability position of $510,000 as of September 30, 2025.
• A drought watch was declared for Franklin County on October 10, 2025, calling for a voluntary 5-10% reduction in nonessential water use, which could negatively impact future revenues.
• The substantial rate increase request (28.9% for water, 44.5% for wastewater) is subject to PPUC approval and may not be granted in the amount requested, if at all.

Risks

• Changes in weather or climate, including drought conditions or extended periods of heavy precipitation, can impact water usage and revenues.
• Natural disasters, including pandemics, and the effectiveness of the company's pandemic plans pose operational and financial risks.
• The level of rate relief granted by the PPUC is uncertain and may not be sufficient to cover costs or provide adequate returns.
• Changes in government policies or regulations, including the tax code, could adversely affect financial results.
• The ability to obtain permits for expansion projects is crucial for growth and subject to regulatory approvals.
• Material changes in demand from customers, including the impact of conservation efforts, may negatively affect water sales.
• Changes in economic and business conditions, including interest rates, can impact borrowing costs and customer affordability.
• The company faces risks related to changes in, or unanticipated, capital requirements for infrastructure investment.
• Cyber security attacks or other cyber-related events could lead to loss or compromise of data, disruption of services, and financial harm.
• Insurance may not fully cover the costs associated with a cyber security event, and robust security measures do not guarantee protection against reputational and financial damage.
• The estimate for lead customer-owned service line replacements ($2.1 million) is subject to adjustment as more facts become available.
• Drought watch conditions, such as the one declared for Franklin County, could potentially impact future revenues, operating expenses, and net income depending on their length and severity.
• The company's ability to obtain sufficient lines of credit with favorable terms in the future or to refinance its line of credit borrowings with long-term debt or equity is not guaranteed, potentially leading to postponed capital expenditures.

Future Outlook

The company anticipates modest revenue increases for the remainder of 2025 due to the Distribution System Improvement Charge (DSIC) and customer growth from acquisitions and organic expansion. Depreciation and amortization expenses are expected to continue rising with further utility plant investments, and other operating expenses are projected to increase due to water/wastewater treatment and distribution system maintenance costs. Interest expense is also expected to climb due to higher long-term debt. The effective tax rate is projected to increase in the final quarter as eligible asset improvements expensed under IRS tangible property regulations are expected to be lower. Management plans approximately $10 million in additional construction expenditures for the remainder of 2025 and believes it has adequate credit facilities and access to capital markets to fund anticipated construction and acquisition expenditures through 2026.

Management Comments

• Operating results for the three and nine months ended September 30, 2025, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2025.
• The company expects to use long-term debt for future financing needs, allowing the debt percentage to trend upward until it approaches fifty percent before considering additional equity, targeting equity between fifty and fifty-five percent of total capitalization.
• Management believes the company will have adequate capacity under its current line of credit to meet anticipated financing needs throughout 2025 and 2026.
• The company expects to continue expensing asset improvements under the IRS tangible property regulations in the future.
• The company's objectives are to continue maximizing funds provided by operations and maintaining a strong capital structure to attract capital.
• The company has not experienced a material impact on business or operations from cyber security attacks.
• Despite robust security measures, the company cannot provide assurance that insurance will fully cover the costs of a cyber security event, and these measures do not guarantee that reputation and financial results will not be adversely affected by such an incident.

Industry Context

The York Water Company operates in the highly regulated U.S. water and wastewater utility sector, characterized by significant capital investment requirements for infrastructure maintenance and expansion. The industry typically sees stable demand but faces challenges from declining per capita consumption, rising operational costs, and the need for timely rate relief from regulatory bodies like the PPUC. The company's strategy of growth through acquisitions and infrastructure upgrades (like lead service line replacement) is consistent with broader industry trends aimed at consolidating smaller systems and improving service reliability. The reliance on DSIC mechanisms highlights the industry's need for predictable cost recovery for ongoing capital improvements, while the impact of weather conditions and drought watches underscores the inherent environmental sensitivities of water utilities.

Comparison to Industry Standards

• The filing does not provide specific comparisons to other comparable companies, projects, or global benchmarks within the water and wastewater utility industry.
• The company's credit rating of Awith a stable outlook from Standard & Poor's is generally considered strong within the utility sector, indicating a solid financial position and ability to access capital markets.
• The target equity to total capitalization ratio of 50-55% is a common financial management strategy for regulated utilities, balancing debt leverage with financial stability, and is acceptable to the PPUC.
• The company's average daily water availability of 41.1 million gallons against an average daily consumption of 24.1 million gallons suggests a healthy supply margin, which is a key operational metric for water utilities.

Corporate Governance

Stakeholder Impact

• Shareholders: Potential for increased dividends (as cash dividends declared increased), but diluted EPS decreased year-to-date. The pending rate increase could boost future profitability, but its approval is uncertain. Share repurchase program remains authorized but unused.
• Customers: Face potential significant rate increases (28.9% for water, 44.5% for wastewater) if the PPUC approves the company's request. Benefit from infrastructure improvements, including lead service line replacements, with costs recovered through rates. Subject to voluntary water use reductions during drought watches.
• Employees: Benefit from stock-based compensation awards under the Long-Term Incentive Plan. Increased operating expenses include higher wages and benefits.
• Creditors: The company's credit rating of Awith a stable outlook indicates a strong ability to meet debt obligations. Long-term debt increased, and the debt to total capitalization ratio trended upward, but management aims to keep it within acceptable regulatory limits.
• Suppliers: Increased capital expenditures and operating expenses suggest continued demand for materials, supplies, and services.

Next Steps

• The Pennsylvania Public Utility Commission (PPUC) will continue its review of the company's rate increase request, with any approved increase effective no later than March 1, 2026.
• The company expects to close the acquisition of wastewater assets of Pine Run Retirement Community in Q2 2026.
• The company expects to close the acquisition of water assets of Eagle View Manufactured Housing Community in Q2 2026.
• The company expects to close the acquisition of wastewater assets of CMV Sewage Co., Inc. in Q2 2026.
• The company expects to close the acquisition of wastewater assets of Margaretta Mobile Home Park in Q4 2026.
• The company anticipates approximately $10 million in construction expenditures for the remainder of 2025, focusing on main extensions, enterprise software upgrades, and infrastructure improvements.
• Management will continue to monitor and manage the impact of weather patterns, economic conditions, and regulatory actions on future results.

Key Dates

Recommendation

The York Water Company demonstrates stability as a regulated utility with consistent revenue growth driven by customer expansion and infrastructure investment. The strong credit rating and management's proactive approach to capital management are positives. However, the year-to-date decline in net income and EPS, coupled with rising operating expenses and interest costs, presents headwinds. The significant pending rate increase request, while crucial for future profitability and capital recovery, introduces regulatory uncertainty. Declining per capita consumption and potential drought impacts are also factors to monitor. Given the mixed financial performance and the balance of opportunities and challenges, a 'hold' recommendation is appropriate for investors seeking stable, dividend-paying exposure to the utility sector, awaiting clarity on the rate case outcome and sustained improvement in profitability metrics.

Keywords

Water Utility, Wastewater Utility, Pennsylvania Public Utility Commission, Rate Increase, SEC Filing, 10-Q, Financial Results, Utility Plant, Capital Expenditures, Customer Growth, Drought, Credit Rating, Long-Term Debt, Operating Revenue, Net Income, EPS, DSIC, Cyber Security, Regulatory Assets, Stock-Based Compensation