The York Water Company 2021 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a quarterly filing. York Water is a regulated water and wastewater utility serving portions of 51 municipalities in south-central Pennsylvania. It provides water treatment and distribution, wastewater collection and treatment, municipal billing and collection services, and a targeted service-line protection program. The Pennsylvania Public Utility Commission regulates rates, financing, service territories, and related operating matters.
Customer accounts increased from 72,681 to 73,144 during 2021. Average daily water availability was 39.6 million gallons versus approximately 20.1 million gallons of consumption. The company had approximately 999 miles of water mains and 73 miles of wastewater mains at year-end.
Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $55.119 million | $53.852 million | +2.4% |
| Operating expenses | $31.723 million | $29.421 million | +7.8% |
| Operating income | $23.396 million | $24.431 million | -4.2% |
| Net income | $16.984 million | $16.598 million | +2.3% |
| Basic and diluted EPS | $1.30 | $1.27 | +2.4% |
| Net income margin | 30.8% | 30.8% | Stable |
| Cash flow from operations | $22.959 million | $20.235 million | +13.5% |
| Capital expenditures | $34.409 million | $32.123 million | +7.1% |
| Acquisitions of wastewater systems | $11.991 million | $1.176 million | Higher in 2021 |
Revenue growth was driven primarily by customer growth, the distribution system improvement charge, or DSIC, which contributed $627,000 in 2021, and higher billing and collection services. Residential water revenue was essentially flat, while commercial and industrial water revenue increased.
Operating expenses increased primarily because of higher depreciation, insurance, wastewater treatment, wages, and water treatment and distribution maintenance costs. Interest expense increased to $4.926 million from $4.707 million. Allowance for funds used during construction increased to $1.221 million from $530,000. A $515,000 nonrecurring life-insurance gain recorded in 2020 did not recur.
The effective income tax rate declined to 6.2% from 10.8%, primarily because of larger deductions under the Internal Revenue Service tangible property regulations. Management reported a return on year-end common equity of 11.1%, compared with 11.6% in 2020.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were approximately $1,000 at December 31, 2021; the company manages liquidity through a cash management account linked to its line of credit.
- The company had $29.320 million outstanding under a $50 million unsecured committed line of credit, with a maturity in September 2023 and an interest rate of 1.30% at year-end.
- Total long-term debt, including the line of credit, was $149.190 million, compared with $126.570 million in 2020. The current portion of long-term debt was $7.500 million.
- Debt represented 49.4% of total capitalization, compared with 46.9% in 2020; common equity represented 50.6%, compared with 53.1%.
- Management is considering an equity offering in 2022 to support the targeted capital structure and reduce reliance on line-of-credit borrowings. The company has an effective shelf registration permitting up to $50 million of additional common stock or debt securities, subject to market conditions.
- Standard & Poor’s affirmed an A- rating with a stable outlook and adequate liquidity in October 2021.
- Cash dividends declared were $9.909 million in 2021. The quarterly dividend was increased 4.0% to $0.1949 per share during the fourth quarter.
Material Changes Versus 2020
- Revenue increased 2.4%, while operating expenses increased 7.8%, resulting in lower operating income despite higher net income.
- Net income increased 2.3%, primarily because of higher revenue and substantially lower income taxes.
- Operating cash flow increased by $2.724 million to $22.959 million.
- Utility plant increased to $485.750 million from $438.670 million, reflecting capital investment and acquisitions.
- Debt increased by approximately $22.620 million, primarily due to capital expenditures and the acquisition of the West Manheim wastewater collection assets.
- The pension plans shifted from a $2.209 million funded surplus in 2020 to a $14.054 million funded surplus in 2021, primarily because of investment returns and actuarial changes.
- The allowance for doubtful accounts increased to $855,000 from $655,000, reflecting management’s assessment of customer payment risks and pandemic-related collection effects.
Guidance, Outlook, Risks, and Unusual Items
- Management expects modest revenue growth in 2022 from the DSIC, customer growth, and pending acquisitions. The tariff DSIC was 3.19% of revenues effective January 1, 2022.
- The company expects to file a rate increase request with the PPUC in 2022. Revenue growth and recovery of infrastructure costs depend on timely and adequate regulatory approval.
- Planned construction and acquisition expenditures are approximately $44 million in 2022 and $50 million in 2023, excluding unapproved acquisitions. Funding is expected to come from internal cash generation, debt, equity offerings, the line of credit, and customer advances and contributions.
- The company finalized plans to armor and replace the Lake Williams dam spillway, with construction expected to begin in 2022 at an estimated total cost of approximately $32 million.
- Several acquisitions were expected to close in 2022, subject to regulatory approval, including assets in Franklin and York Counties. Management characterized the expected impact as immaterial to overall results.
- COVID-19 had not materially affected workforce, operations, financial performance, liquidity, or supply chains through the filing date, although future demand, collection patterns, supply availability, and regulatory responses remain uncertain.
- Key risks include weather and drought, changes in water consumption, customer losses, rate-case outcomes, inflation, interest-rate increases, access to capital, construction costs, environmental requirements, cyberattacks, pension assumptions, and potential changes to LIBOR. The company cannot yet estimate the effect of a successor benchmark rate for LIBOR-linked debt and swaps.
- The company previously exceeded a lead action level but reported no subsequent exceedances and completed replacement of known company-owned lead service lines. Customer-owned replacements are estimated to cost approximately $1.4 million and are recorded as a regulatory asset for recovery through future rates.
- The audit firm issued an unqualified opinion and identified no critical audit matters. Management concluded that disclosure controls and internal control over financial reporting were effective.
Facts Investors Should Verify
- Whether the 2022 rate filing receives timely and sufficient PPUC approval to support planned capital investment and inflation recovery.
- Progress, final cost, and regulatory treatment of the Lake Williams spillway project and other major capital projects.
- Refinancing or repayment plans for the $29.320 million line-of-credit balance and the $7.500 million debt maturity in 2022.
- Whether an equity offering is completed and how it affects leverage, earnings per share, and dividend capacity.
- Closing dates, purchase prices, and regulatory approvals for the pending water and wastewater acquisitions.
- The effect of higher interest rates and the transition from LIBOR on borrowing costs and the interest-rate swap.
- Changes in customer collections, the allowance for doubtful accounts, water consumption, drought conditions, and COVID-19-related demand patterns.