THE YORK WATER COMPANY Forward-looking Statements
Certain statements contained in this report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements include certain information relating to the Company's business strategy and future prospects; including, but not limited to:
• the amount and timing of rate changes and other regulatory matters
including the recovery of costs recorded as regulatory assets;
• expected profitability and results of operations;
• trends;
• goals, priorities and plans for, and cost of, growth and expansion;
• strategic initiatives;
• availability of water supply;
• water usage by customers; and
• the ability to pay dividends on common stock and the rate of those
dividends.
The forward-looking statements in this report reflect what the Company currently anticipates will happen. What actually happens could differ materially from what it currently anticipates will happen. The Company does not intend to make a public announcement when forward-looking statements in this report are no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason. Important matters that may affect what will actually happen include, but are not limited to:
• changes in weather, including drought conditions or extended periods of
heavy precipitation;
• natural disasters, including pandemics such as the current outbreak of
the novel strain of coronavirus known as "COVID-19" and its variants and
the effectiveness of the Company's pandemic plans;
• levels of rate relief granted;
• the level of commercial and industrial business activity within the
Company's service territory;
• construction of new housing within the Company's service territory and
increases in population;
• changes in government policies or regulations, including the tax code;
• the ability to obtain permits for expansion projects;
• material changes in demand from customers, including the impact of
conservation efforts which may impact the demand of customers for water;
• changes in economic and business conditions, including interest rates;
• loss of customers;
• changes in, or unanticipated, capital requirements;
• the impact of acquisitions;
• changes in accounting pronouncements;
• changes in the Company's credit rating or the market price of its common
stock; and
• the ability to obtain financing.
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General Information
The primary business of the Company is to impound, purify to meet or exceed safe
drinking water standards and distribute water. The Company also owns and
operates three wastewater collection systems and eight wastewater collection and
treatment systems. The Company operates within its franchised water and
wastewater territory, which covers portions of 54 municipalities within three
counties in south-central
Water service is supplied through the Company's own distribution system. The
Company obtains the bulk of its water supply for its primary system for
The Company's water business is somewhat dependent on weather conditions, particularly the amount and timing of precipitation. Revenues are particularly vulnerable to weather conditions in the summer months. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping golf courses and sports fields irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions from governmental authorities. Despite the Company's adequate water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact revenues. The Company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.
The Company's business does not require large amounts of working capital and is not dependent on any single customer or a very few customers for a material portion of its business. Increases in revenues are generally dependent on the Company's ability to obtain rate increases from the PPUC in a timely manner and in adequate amounts and to increase volumes of water sold through increased consumption and increases in the number of customers served. The Company continuously looks for water and wastewater acquisition and expansion opportunities both within and outside its current service territory as well as additional opportunities to enter into bulk water contracts with municipalities and other entities to supply water.
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. Under this optional program, customers pay a fixed monthly fee, and the Company will repair or replace damaged customer service lines, as needed, subject to an annual maximum dollar amount. The Company continues to review and consider opportunities to expand both initiatives.
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Results of Operations
Three Months EndedMarch 31, 2023 Compared With Three Months EndedMarch 31, 2022
Net income for the first quarter of 2023 was
Operating revenues for the first quarter of 2023 increased
Operating expenses for the first quarter of 2023 increased
Interest on debt for the first quarter of 2023 increased
Allowance for funds used during construction increased
Other income (expenses), net for the first quarter of 2023 reflects decreased
expenses of
Income taxes for the first quarter of 2023 increased
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Rate Matters
See Note 9 to the financial statements included herein for a discussion of rate matters.
The Company does not expect to collect a distribution system improvement charge or file a rate increase request in 2023.
Acquisitions and Growth
On
On
On
On
In total, these acquisitions are expected to be immaterial to Company results. The Company is also pursuing other bulk water contracts and acquisitions in and around its service territory to help offset any potential declines in per capita water consumption and to grow its business.
On
Capital Expenditures
For the three months ended
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The Company anticipates construction expenditures for the remainder of 2023 of
approximately
Liquidity and Capital Resources
Cash
The Company manages its cash through a cash management account that is directly
connected to its line of credit. Excess cash generated automatically pays down
outstanding borrowings under the line of credit arrangement. If there are no
outstanding borrowings, the cash is used as an earnings credit to reduce banking
fees. Likewise, if additional funds are needed beyond what is generated
internally for payroll, to pay suppliers, to fund capital expenditures, or to
pay debt service, funds are automatically borrowed under the line of credit. As
of
Accounts Receivable
The accounts receivable balance tends to follow the change in revenues but is
also affected by the timeliness of payments by customers and the level of the
reserve for doubtful accounts. In the three months ended
Internally-generated Funds
The amount of internally-generated funds available for operations and
construction depends on the Company's ability to obtain timely and adequate rate
relief, changes in regulations including taxes, customers' water usage, weather
conditions, customer growth and controlled expenses. During the first three
months of 2023, the Company generated
Common Stock
Common stockholders' equity as a percent of the total capitalization was 57.8%
as of
The Company has the ability to issue approximately
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Credit Line
Historically, the Company has borrowed under its line of credit before
refinancing with long-term debt or equity capital. As of
The Company has taken steps to manage the risk of reduced credit availability. It has established a committed line of credit with a 2-year revolving maturity that cannot be called on demand. There is no guarantee that the Company will be able to obtain sufficient lines of credit with favorable terms in the future. If the Company is unable to obtain sufficient lines of credit or to refinance its line of credit borrowings with long-term debt or equity when necessary, it may have to eliminate or postpone capital expenditures. Management believes the Company will have adequate capacity under its current line of credit to meet anticipated financing needs throughout 2023.
Long-term Debt
On
The Company's total long-term debt as a percentage of the total capitalization,
defined as total common stockholders' equity plus total long-term debt, was
42.2% as of
Income Taxes, Deferred Income Taxes and Uncertain Tax Positions Under the Internal Revenue Service TPR, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return. This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable. It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions. The Company expects to continue to expense these asset improvements in the future.
The Company's effective tax rate will largely be determined by the level of eligible asset improvements expensed for tax purposes that would have been capitalized for tax purposes prior to the implementation of TPR.
The Company has a substantial deferred income tax asset primarily due to the excess accumulated deferred income taxes on accelerated depreciation from the 2017 Tax Act and the differences between the book and tax balances of the customers' advances for construction and contributions in aid of construction and deferred compensation plans. The Company does not believe a valuation allowance is required due to the expected generation of future taxable income during the periods in which those temporary differences become deductible.
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The Company has seen an increase in its deferred income tax liability amounts primarily as a result of the accelerated depreciation deduction available for federal tax purposes which creates differences between book and tax depreciation expense. The Company expects this trend to continue as it makes significant investments in capital expenditures subject to accelerated depreciation or TPR.
The Company has determined there are no uncertain tax positions that require
recognition as of
Credit Rating
On
Physical and Cyber Security
The Company maintains security measures at its facilities, and collaborates with federal, state, and local authorities and industry trade associations regarding information on possible threats and security measures for water and wastewater utility operations. The costs incurred are expected to be recoverable in water and wastewater rates and are not expected to have a material impact on its business, financial condition, or results of operations.
The Company relies on information technology systems in connection with the operation of the business, especially with respect to customer service, billing, accounting, and in some cases, the monitoring and operation of treatment, storage, and pumping facilities. In addition, the Company relies on these systems to track utility assets and to manage maintenance and construction projects, materials and supplies, and human resource functions. The information technology systems may be vulnerable to damage or interruption from cyber security attacks or other cyber-related events, including, but not limited to, power loss, computer systems failures, internet, telecommunications or data network failures, physical and electronic loss of data, computer viruses, intentional security breaches, hacking, denial of service actions, misappropriation of data, and similar events. In some cases, administration of certain functions may be outsourced to third-party service providers that could also be targets of cyber security attacks. A loss of these systems, or major problems with the operation of these systems, could harm the business, financial condition, and results of operations of the Company through the loss or compromise of customer, financial, employee, or operational data, disruption of billing, collections or normal field service activities, disruption of electronic monitoring and control of operational systems, and delays in financial reporting and other normal management functions.
Possible impacts associated with a cyber security attack or other events may include remediation costs related to lost, stolen, or compromised data, repairs to data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation, and reputational damage.
The Company has implemented processes, procedures, and controls to prevent or limit the effect of these possible events and maintains insurance to help defray costs associated with cyber security attacks. The Company has not experienced a material impact on business or operations from these attacks. Although the Company does not believe its systems are at a materially greater risk of cyber security attacks than other similar organizations and despite the implementation of robust security measures, the Company cannot provide assurance that the insurance will fully cover the costs of a cyber security event, and its robust security measures do not guarantee that reputation and financial results will not be adversely affected by such an incident.
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Environmental Matters
The Company was granted approval by the PPUC to modify its tariff to include the
cost of the annual replacement of up to 400 lead customer-owned service lines
over nine years from the agreement. The tariff modification allows the Company
to replace customer-owned service lines at its own initial cost. The Company
will record the costs as a regulatory asset to be recovered in future base rates
to customers, over a four-year period. The cost for the customer-owned lead
service line replacements was approximately
Labor Relations
The current union contract expired on
Critical Accounting Estimates
The methods, estimates, and judgments the Company used in applying its
accounting policies have a significant impact on the results reported in its
financial statements. The Company's accounting policies require management to
make subjective judgments because of the need to make estimates of matters that
are inherently uncertain. The Company's most critical accounting estimates
include regulatory assets and liabilities, revenue recognition, accounting for
its pension plans, and income taxes. There has been no significant change in
accounting estimates or the method of estimation during the quarter ended
Off-Balance Sheet Arrangements
The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses. The Company does not use securitization of receivables or unconsolidated entities. For risk management purposes, the Company uses a derivative financial instrument, an interest rate swap agreement discussed in Note 5 to the financial statements included herein. The Company does not engage in trading or other risk management activities, does not use other derivative financial instruments for any purpose, has no guarantees and does not have material transactions involving related parties.
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