SEC Form 10-Q filed by York Water Company

From time to time, the Company files applications for rate increases with the PPUC and is granted rate relief as a result of such requests.  Most recently, the PPUC authorized an increase in rates effective March 1, 2023.  The Company anticipates that it will file a rate increase request in 2025.

For the three months ended March 31, 2025 and 2024, the statement of income includes $72 and $43 of stock-based compensation, respectively, and related recognized tax benefits of $20 and $12, respectively.  Total stock-based compensation related to nonvested awards not yet recognized is $313 at March 31, 2025, which will be recognized over the remaining three year vesting period.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations. (In thousands of dollars, except per share amounts)

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 eleven wastewater collection and treatment systems.  The Company operates within its franchised water and wastewater territory, which covers portions of 57 municipalities within four counties in south-central Pennsylvania.  The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, for both water and wastewater in the areas of billing, payment procedures, dispute processing, terminations, service territory, debt and equity financing and rate setting.  The Company must obtain PPUC approval before changing any practices associated with the aforementioned areas.

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 York and Adams Counties from both the South Branch and East Branch of the Codorus Creek, which together have an average daily flow of approximately 73.0 million gallons from a combined watershed area of approximately 117 square miles.  The Company has two reservoirs on this primary system, Lake Williams and Lake Redman, which together hold up to approximately 2.5 billion gallons of water.  The Company supplements these reservoirs with a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional supply of 12.0 million gallons of untreated water per day.  The Company obtains its water supply for its system for Franklin County from the Roxbury Dam on the Conodoguinet Creek, which has an average daily flow of approximately 26.0 million gallons from a watershed area of approximately 33 square miles.  The Company has a reservoir on this system which holds up to approximately 330 million gallons of water.  The Company also owns fifteen wells which are capable of providing a safe yield of approximately 923,000 gallons per day to supply water to the customers of its groundwater satellite systems in York, Adams, and Lancaster Counties.  As of March 31, 2025, the Company’s average daily availability was 41.1 million gallons, and average daily consumption was approximately 23.7 million gallons.  The Company’s service territory had an estimated population of 212,000 as of December 31, 2024.  Industry within the Company’s service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergent, barbells, and motorcycles.

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.

Results of Operations

Three Months Ended March 31, 2025 Compared

With Three Months Ended March 31, 2024

Net income for the first quarter of 2025 was $3,638, a decrease of $689, or 15.9%, from net income of $4,327 for the same period of 2024.  The primary contributing factors to the decrease were a lower allowance for funds used during construction, higher operating expenses, and higher interest on debt, which were partially offset by higher operating revenues and lower pension costs.

Operating revenues for the first quarter of 2025 increased $828, or 4.7%, from $17,628 for the three months ended March 31, 2024 to $18,456 for the corresponding 2025 period.  The primary reason for the increase was growth in the customer base.  The average number of water customers served in 2025 increased as compared to 2024 by 1,238 customers, from 71,948 to 73,186 customers.  The average number of wastewater customers served in 2025 increased as compared to 2024 by 358 customers, from 6,354 to 6,712 customers, primarily due to acquisitions.  There was increased revenues from the distribution system improvement charge, or DSIC, allowed by the PPUC of $386.  The DSIC allows the Company to add a charge to customers’ water bills for qualified replacement costs of certain infrastructure without submitting a rate filing.  Total per capita consumption for 2025 was approximately 3.2% higher than the same period of last year.  For the remainder of the year, the Company expects revenues to show a modest increase due to the revenues from the DSIC.  An increase in the number of water and wastewater customers from acquisitions and growth within the Company’s service territory are also expected to add to revenues.  Other regulatory actions, weather patterns, and economic conditions could impact results.

Operating expenses for the first quarter of 2025 increased $760, or 6.7%, from $11,413 for the first quarter of 2024 to $12,173 for the corresponding 2025 period.  The increase was primarily due to higher expenses of approximately $481 for depreciation and amortization, $106 for distribution system maintenance, $76 for water treatment, $65 for wages and benefits, and $56 for purchased power.  Other operating expenses increased by a net of $167.  The increase was partially offset by reduced insurance expense of $191. For the remainder of the year, the Company expects depreciation and amortization expense to continue to rise due to additional investment in utility plant, and other expenses to increase as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.  Weather patterns could further increase operating expenses.

Interest on debt for the first quarter of 2025 increased $296, or 13.9%, from $2,123 for the first quarter of 2024 to $2,419 for the corresponding 2025 period.  The increase was primarily due to higher interest rates.  The average debt outstanding under the line of credit was $19,163 for the first quarter of 2025 and $20,875 for the first quarter of 2024.  The weighted average interest rate on the line of credit was 5.49% for the quarter ended March 31, 2025 and 4.08% for the quarter ended March 31, 2024.  Interest expense for the remainder of the year is expected to increase due to the higher interest rates on long-term debt outstanding.

Allowance for funds used during construction decreased $949, from $1,134 in the first quarter of 2024 to $185 in the corresponding 2025 period due to a lower volume of eligible construction.  Allowance for funds used during construction for the remainder of the year is expected to increase based on a projected increase in the amount of eligible construction.

Other income (expenses), net for the first quarter of 2025 reflects increased expenses of $5 as compared to the same period of 2024.  The increase was primarily due to higher retirement expenses of approximately $11, which were partially offset by higher earnings on life insurance policies of approximately $5.  Other expenses decreased by a net of $1.  For the remainder of the year, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.

Income tax expense for the first quarter of 2025 decreased $130 as compared to the same period of 2024 due to lower taxable income.  The Company’s effective tax rate was 11.5% for the first quarter of 2025 and 12.2% for the first quarter of 2024.  The Company’s effective tax rate for the remainder of the 2025 will largely be determined by the level of eligible asset improvements expensed for tax purposes under Internal Revenue Service tangible property regulations, or TPR, each period.  The Company expects the level to be higher in the remainder of the year than the first quarter, lowering the effective tax rate.

Cash

Accounts Receivable

Internally-generated Funds

Common Stock

Credit Line

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 2025.

Long-term Debt

The Company’s loan agreements contain various covenants and restrictions.  Management believes it is currently in compliance with all of these restrictions.  See Note 6 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 for additional information regarding these restrictions.

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 48.0% as of March 31, 2025, compared with 47.4% as of December 31, 2024.  The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward.  A debt to total capitalization ratio between forty-five and fifty percent has historically been acceptable to the PPUC in rate filings.

Income Taxes, Deferred Income Taxes and Uncertain Tax Positions

Under the IRS 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 income before income taxes and 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 Tax Cuts and Jobs Act of 2017 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.

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 March 31, 2025.

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 the Company’s 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.

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 material lease obligations, no guarantees and does not have material transactions involving related parties.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Item 4.

Controls and Procedures.

 

PART II - OTHER INFORMATION

During the quarter ended March 31, 2025, no director or officer of the Company, nor the Company itself, adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.