The York Water(YORW) - 2021 Q1 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements This section presents the unaudited interim financial statements for The York Water Company, including balance sheets, statements of income, common stockholders' equity, and cash flows, along with accompanying notes detailing accounting policies, financial instrument fair values, debt, revenue recognition, and other financial commitments Balance Sheets (Unaudited) | ASSETS (in thousands) | Mar. 31, 2021 | Dec. 31, 2020 | | :-------------------- | :------------ | :------------ | | Net utility plant | $350,548 | $343,623 | | Total current assets | $10,437 | $16,290 | | Total Assets | $409,389 | $406,957 | | EQUITY AND LIABILITIES (in thousands) | Mar. 31, 2021 | Dec. 31, 2020 | | :------------------------------------ | :------------ | :------------ | | Total common stockholders' equity | $145,010 | $143,252 | | Long-term debt | $122,087 | $123,573 | | Total current liabilities | $12,356 | $11,993 | | Total Stockholders' Equity and Liabilities | $409,389 | $406,957 | - Total assets increased by $2,432 thousand from December 31, 2020, to March 31, 2021, primarily driven by an increase in net utility plant[10] - Total current assets decreased significantly from $16,290 thousand to $10,437 thousand, mainly due to a decrease in restricted cash and accounts receivable[10] Statements of Income (Unaudited) | Income Statement (in thousands) | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :------------------------------ | :------------------------------ | :------------------------------ | | Operating Revenues | $13,081 | $12,877 | | Operating Expenses | $7,727 | $7,261 | | Operating Income | $5,354 | $5,616 | | Income before income taxes | $3,997 | $4,571 | | Net Income | $3,705 | $4,002 | | Basic Earnings Per Share | $0.28 | $0.31 | | Diluted Earnings Per Share | $0.28 | $0.31 | - Net income decreased by $297 thousand (7.4%) from $4,002 thousand in Q1 2020 to $3,705 thousand in Q1 2021[16] - Operating revenues increased by $204 thousand (1.6%) year-over-year, while operating expenses increased by $466 thousand (6.4%)[16] Statements of Common Stockholders' Equity (Unaudited) | Common Stockholders' Equity (in thousands) | Dec 31, 2020 | Mar 31, 2021 | | :----------------------------------------- | :----------- | :----------- | | Balance | $143,252 | $145,010 | | Net income | - | $3,705 | | Cash dividends declared | - | $(2,448) | | Issuance of common stock | - | $473 | | Stock-based compensation | - | $28 | - Total common stockholders' equity increased from $143,252 thousand at December 31, 2020, to $145,010 thousand at March 31, 2021, driven by net income and common stock issuances, partially offset by cash dividends[19] Statements of Cash Flows (Unaudited) | Cash Flows (in thousands) | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :------------------------ | :------------------------------ | :------------------------------ | | Operating Activities | $6,597 | $4,742 | | Investing Activities | $(7,431) | $(3,858) | | Financing Activities | $(4,113) | $(884) | | Net change in cash | $(4,947) | $0 | | Cash at end of period | $55 | $2 | - Net cash provided by operating activities increased to $6,597 thousand in Q1 2021 from $4,742 thousand in Q1 2020[22] - Net cash used in investing activities significantly increased to $7,431 thousand in Q1 2021 from $3,858 thousand in Q1 2020, primarily due to higher utility plant additions[22] - Net cash used in financing activities increased to $4,113 thousand in Q1 2021 from $884 thousand in Q1 2020, mainly due to higher repayments of long-term debt and changes in cash overdraft position[22] Notes to Interim Financial Statements 1. Basis of Presentation - Interim financial statements are unaudited and reflect normal recurring accruals, but do not include all disclosures of annual statements[25] - Operating results for Q1 2021 are not indicative of the full year, and the ultimate impact of COVID-19 remains uncertain[26] 2. Accounts Receivable and Contract Assets | Accounts Receivable (in thousands) | Mar. 31, 2021 | Dec. 31, 2020 | Change | | :--------------------------------- | :------------ | :------------ | :----- | | Accounts receivable – customers | $4,416 | $5,633 | $(1,217) | | Other receivables | $314 | $206 | $108 | | Less: allowance for doubtful accounts | $(714) | $(655) | $(59) | | Accounts receivable, net | $4,016 | $5,184 | $(1,168) | | Unbilled revenue | $2,876 | $2,847 | $29 | - Net accounts receivable decreased by $1,168 thousand, primarily due to changes in customer accounts receivable[27] - Unbilled revenue saw a slight increase of $29 thousand, reflecting normal timing differences[27] 3. Common Stock and Earnings Per Share | Shares for EPS Calculation | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :------------------------- | :------------------------------ | :------------------------------ | | Weighted average common shares, basic | 13,055,871 | 13,009,596 | | Effect of dilutive securities: Employee stock-based compensation | 2,690 | 2,263 | | Weighted average common shares, diluted | 13,058,561 | 13,011,859 | - No shares were repurchased during the three months ended March 31, 2021, or 2020, with 618,004 shares remaining authorized for repurchase under the program[29] 4. Debt | Long-Term Debt (in thousands) | Mar. 31, 2021 | Dec. 31, 2020 | | :---------------------------- | :------------ | :------------ | | 8.43% Senior Notes, Series D, due 2022 | $7,500 | $7,500 | | Variable Rate Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2008A, due 2029 | $12,000 | $12,000 | | 3.00% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series A of 2019, due 2036 | $10,500 | $10,500 | | 3.10% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series B of 2019, due 2038 | $14,870 | $14,870 | | 3.23% Senior Notes, due 2040 | $15,000 | $15,000 | | 4.00% - 4.50% York County Industrial Development Authority Exempt Facilities Revenue Bonds, Series 2015, due 2029 - 2045 | $10,000 | $10,000 | | 4.54% Senior Notes, due 2049 | $20,000 | $20,000 | | 3.24% Senior Notes, due 2050 | $30,000 | $30,000 | | Committed Line of Credit, due 2022 | $5,170 | $6,700 | | Total long-term debt | $125,040 | $126,570 | | Long-term portion | $122,087 | $123,573 | - Total long-term debt decreased slightly from $126,570 thousand at December 31, 2020, to $125,040 thousand at March 31, 2021[31] - The committed line of credit balance decreased from $6,700 thousand to $5,170 thousand[31] 5. Interest Rate Swap Agreement - The Company uses an interest rate swap to convert $12,000 thousand variable-rate debt to a fixed rate of 3.16%, expiring October 1, 2029[32][36] - The swap resulted in a gain of $(431) thousand for the three months ended March 31, 2021, compared to a loss of $712 thousand in the prior year[34] - The agreement requires a credit rating of at least BBB- with Standard & Poor's; a violation could trigger immediate payment if the derivative is in a liability position (which it was as of March 31, 2021, at approximately $2,237 thousand)[35] 6. Fair Value of Financial Instruments | Fair Value Measurements (in thousands) | Mar. 31, 2021 | Dec. 31, 2020 | | :------------------------------------- | :------------ | :------------ | | Interest Rate Swap Liability | $2,209 | $2,731 | - The fair value of the interest rate swap liability decreased from $2,731 thousand at December 31, 2020, to $2,209 thousand at March 31, 2021[39][40] - The estimated fair value of total long-term debt was approximately $136,000 thousand at March 31, 2021, compared to its carrying value of $125,040 thousand[40] 7. Commitments - The Company completed the replacement of all known company-owned lead service lines within four years as per a consent order with the Pennsylvania Department of Environmental Protection[42] - PPUC approved a tariff modification to recover costs for replacing up to 400 customer-owned lead service lines annually over nine years, with costs recorded as a regulatory asset[43] - Costs for customer-owned lead service line replacements were approximately $1,222 thousand through March 31, 2021, with an estimated total cost of $1,500 thousand[43] 8. Revenue | Revenue by Service and Customer Type (in thousands) | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :-------------------------------------------------- | :------------------------------ | :------------------------------ | | Water utility service: Residential | $8,145 | $8,077 | | Water utility service: Commercial and industrial | $3,310 | $3,341 | | Water utility service: Fire protection | $806 | $801 | | Wastewater utility service: Residential | $471 | $410 | | Wastewater utility service: Commercial and industrial | $79 | $76 | | Billing and revenue collection services | $119 | $15 | | Collection services | $0 | $14 | | Other revenue | $10 | $5 | | Total Revenue from Contracts with Customers | $12,940 | $12,739 | | Rents from regulated property | $141 | $138 | | Total Operating Revenue | $13,081 | $12,877 | - Total operating revenue increased by $204 thousand (1.6%) year-over-year, primarily driven by residential water utility service and a significant increase in billing and revenue collection services[45] - Revenue recognition for utility service, billing and revenue collection, collection service, and service line protection plans are detailed, with most performance obligations satisfied over time or at a point in time[46][47][48][49] 9. Rate Matters - The PPUC authorized a rate increase effective March 1, 2019[50] - The Distribution System Improvement Charge (DSIC) allows for recovery of qualified infrastructure replacement costs, but the Company has not collected DSIC revenues since March 1, 2019, due to earnings exceeding the regulatory benchmark[51] 10. Pensions | Components of Net Periodic Pension Cost (in thousands) | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :--------------------------------------------------- | :------------------------------ | :------------------------------ | | Service cost | $271 | $234 | | Interest cost | $302 | $364 | | Expected return on plan assets | $(913) | $(799) | | Amortization of actuarial loss | $121 | $92 | | Amortization of prior service credit | $(3) | $(3) | | Rate-regulated adjustment | $797 | $687 | | Net periodic pension expense | $575 | $575 | - Net periodic pension expense remained constant at $575 thousand for both Q1 2021 and Q1 2020[52] - The Company contributed $575 thousand to its pension plans in Q1 2021 and expects to contribute an additional $1,725 thousand during the remainder of 2021[53] 11. Stock-Based Compensation - The York Water Company Long-Term Incentive Plan (LTIP) allows for granting various stock-based awards, with a maximum of 100,000 shares over its ten-year life[54] - Stock-based compensation expense was $28 thousand for Q1 2021, down from $37 thousand in Q1 2020[57] - No long-term stock-based awards were granted, vested, or forfeited during Q1 2021[57] 12. Income Taxes | Effective Tax Rate | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :----------------- | :------------------------------ | :------------------------------ | | Effective Tax Rate | 7.3% | 12.4% | - The effective tax rate decreased to 7.3% in Q1 2021 from 12.4% in Q1 2020, primarily due to higher deductions from the IRS tangible property regulations (TPR)[59] - The TPR allows the Company to deduct certain asset improvement costs previously capitalized, reducing income tax expense and currently payable income taxes[58] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and operational results for the three months ended March 31, 2021, compared to the same period in 2020, including forward-looking statements, business overview, COVID-19 impact, detailed financial performance, acquisitions, capital expenditures, and liquidity Forward-looking Statements - The report contains forward-looking statements regarding business strategy, profitability, growth plans, and regulatory matters, which are subject to material differences from actual outcomes[60][61] - Key factors that may affect future results include rate changes, regulatory matters, weather conditions, natural disasters (like COVID-19), economic conditions, and the ability to obtain financing[62][65] General Information - The Company's primary business is impounding, purifying, and distributing water, along with owning and operating wastewater collection and treatment systems in south-central Pennsylvania[63] - Water supply is primarily from Codorus Creek and supplemented by a pipeline from the Susquehanna River, with an average daily availability of 35.6 million gallons and consumption of 19.7 million gallons as of March 31, 2021[64] - The Company's business is regulated by the PPUC and is somewhat dependent on weather conditions, with minimum customer charges in place to cover fixed costs[63][66] Impact of COVID-19 - The Company, an essential business, continued normal operations with enhanced safety procedures and social distancing[70] - In compliance with PPUC orders, the Company paused shut-off procedures and late payment charges for delinquent customers from March 13, 2020, resuming normal procedures in January 2021[71] - To date, COVID-19 has had no material impact on the Company's workforce, operations, financial performance, liquidity, or supply chain, though future impacts remain uncertain[73] Results of Operations Three Months Ended March 31, 2021 Compared With Three Months Ended March 31, 2020 - Net income decreased by $297 thousand (7.4%) to $3,705 thousand, primarily due to a non-recurring gain on life insurance in 2020 and higher expenses, partially offset by lower income taxes and higher operating revenues[74] - Operating revenues increased by $204 thousand (1.6%) to $13,081 thousand, driven by customer base growth (824 water, 345 wastewater customers) and additional billing services[75] - Operating expenses increased by $466 thousand (6.4%) to $7,727 thousand, mainly due to higher depreciation ($150k), wastewater treatment ($95k), water treatment and distribution maintenance ($79k), and insurance ($67k)[76] - Interest on debt increased by $19 thousand (1.6%) to $1,214 thousand due to higher long-term debt outstanding, despite a lower weighted average interest rate on lines of credit (1.30% in 2021 vs 2.84% in 2020)[77] - Allowance for funds used during construction increased by $161 thousand to $262 thousand due to a higher volume of eligible construction[78] - Income taxes decreased by $277 thousand (48.7%) due to higher deductions from IRS tangible property regulations (TPR), resulting in an effective tax rate of 7.3% in Q1 2021 compared to 12.4% in Q1 2020[82] Rate Matters - The Company does not expect to file a rate increase request in 2021[84] Acquisitions and Growth - The Company has several pending acquisitions expected to close in 2021, adding approximately 90 wastewater and 60 water customers from R.T. Barclay, Inc., 1,800 wastewater customers from West Manheim Township, 50 water and wastewater customers from Country View Manor Community, LLC, and 90 water and wastewater customers from Letterkenny Industrial Development Authority and Franklin County General Authority[85][86][87][88] - These acquisitions are expected to be immaterial to overall Company results, but contribute to offsetting declines in per capita water consumption and business growth[89] - An emergency interconnect agreement with Dallastown-Yoe Water Authority is expected to be approved in 2021, leading to water main construction and potential water supply or payments[91] Capital Expenditures - The Company invested $7,431 thousand in construction expenditures during Q1 2021 for routine items and infrastructure improvements[92] - Anticipated construction expenditures for the remainder of 2021 are approximately $26,100 thousand, including main extensions, an elevated water tank, software upgrades, and a wastewater treatment plant[93] - Funding for capital expenditures is expected to come primarily from internally-generated funds, line of credit borrowings, stock purchase plans, and customer advances/contributions[93] Liquidity and Capital Resources Cash - The Company manages cash through a cash management account linked to its line of credit, automatically paying down borrowings or providing funds as needed[94] - As of March 31, 2021, the Company had $5,170 thousand borrowed on its line of credit and a cash balance of $55 thousand[94] Accounts Receivable - Accounts receivable decreased in Q1 2021 due to improved timeliness of customer payments[95] - The allowance for doubtful accounts remains elevated due to management's assessment of the COVID-19 pandemic's potential impact and PPUC regulations[95] Internally-generated Funds - Internally-generated funds from operations increased to $6,597 thousand in Q1 2021 from $4,742 thousand in Q1 2020, primarily due to higher net income (adjusted for non-cash gain) and improved payment timeliness[96] Credit Lines - As of March 31, 2021, the Company maintained an unsecured line of credit of $50,000 thousand at LIBOR plus 1.05%, with $5,170 thousand outstanding[97] - The Company expects to extend the line of credit maturity to 2023 under similar terms and believes it has adequate capacity for anticipated financing needs in 2021[97][98] Long-term Debt - The Company's long-term debt as a percentage of total capitalization was 46.3% as of March 31, 2021, down from 46.9% at December 31, 2020, targeting a ratio between 46% and 50%[100] - The variable rate line of credit and interest rate swap use LIBOR, which is expected to cease by June 30, 2023; the Company anticipates a successor rate but cannot yet estimate the financial impact[101] Income Taxes, Deferred Income Taxes and Uncertain Tax Positions - The Company's effective tax rate is largely determined by eligible asset improvements expensed under IRS tangible property regulations (TPR)[102][103] - A substantial deferred income tax asset exists due to excess accumulated deferred income taxes from the 2017 Tax Act and book/tax differences, with no valuation allowance deemed necessary[104] - Deferred income tax liabilities have increased due to accelerated depreciation deductions for federal tax purposes, a trend expected to continue with significant capital investments[105] Common Stock - Common stockholders' equity as a percentage of total capitalization was 53.7% at March 31, 2021, compared to 53.1% at December 31, 2020, with a target ratio between 50% and 54%[107] Credit Rating - Standard & Poor's affirmed the Company's credit rating at A- with a stable outlook on October 21, 2020[108] - Maintaining the credit rating depends on adequate rate relief, balanced funding of capital expenditures, and strong cash flow generation[108] Physical and Cyber Security - The Company maintains security measures at facilities and collaborates with authorities on threats, with costs expected to be recoverable in rates and not materially impact financials[109] - Reliance on IT systems for operations, billing, and customer service exposes the Company to cyber security risks, which could lead to data loss, operational disruption, and reputational damage[110][111] - Processes, procedures, and insurance are in place to mitigate cyber security risks, and no material impact has been experienced to date, though full coverage or prevention is not guaranteed[112] Environmental Matters - The Company completed the replacement of all known company-owned lead service lines as per a 2016 consent order with the Pennsylvania Department of Environmental Protection[113] - PPUC approval allows the Company to recover costs for replacing up to 400 customer-owned lead service lines annually over nine years, with costs recorded as a regulatory asset[114] - Costs for customer-owned lead service line replacements were approximately $1,222 thousand through March 31, 2021, with an estimated total cost of $1,500 thousand[114] Critical Accounting Estimates - Critical accounting estimates include regulatory assets and liabilities, revenue recognition, accounting for pension plans, and income taxes[115] - There has been no significant change in accounting estimates or methods during Q1 2021[115] Off-Balance Sheet Arrangements - The Company does not use off-balance sheet transactions or arrangements that would materially affect its financial condition or results of operations[116] - The only derivative financial instrument used for risk management is an interest rate swap agreement[116] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company - The Company has no applicable quantitative and qualitative disclosures about market risk[117] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures, concluding they were effective as of the end of the reporting period. No material changes to internal control over financial reporting occurred during the quarter - The Company's disclosure controls and procedures were evaluated as effective by management, including the CEO and CFO, as of the end of the reporting period[118] - No material changes to the Company's internal control over financial reporting occurred during the most recent fiscal quarter[119] PART II - Other Information Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, certifications from the CEO and CFO, and XBRL-related documents - Exhibits include Amended and Restated Articles of Incorporation and By-Laws, as well as certifications from the Chief Executive Officer and Chief Financial Officer under the Securities Exchange Act of 1934 and Sarbanes-Oxley Act of 2002[122] - XBRL Instance Document and Taxonomy Extension files (Schema, Calculation, Definition, Label, Presentation Linkbases) are also included as exhibits[122] Signatures This section contains the required signatures of the registrant's principal executive officer and principal financial and accounting officer, certifying the filing of the report - The report is signed by Joseph T. Hand, Principal Executive Officer, and Matthew E. Poff, Principal Financial and Accounting Officer, on May 4, 2021[126]