YORK WATER CO annual report, FY2020

The York Water Company — FY2020 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2020. York Water is a regulated Pennsylvania water and wastewater utility serving portions of 51 municipalities in three counties. It supplied water and operated wastewater systems for an estimated service-territory population of approximately 202,000 at year-end. The company served 72,681 customers, up from 71,411 in 2019.

Financial performance and key metrics

Metric	2020	2019	Change
Operating revenue	$53.852 million	$51.578 million	+4.4%
Operating expenses	$29.421 million	$27.792 million	+5.9%
Operating income	$24.431 million	$23.786 million	+2.7%
Net income	$16.598 million	$14.402 million	+15.2%
Basic and diluted EPS	$1.27	$1.11	+14.4%
Net margin	30.8%	27.9%	+2.9 percentage points
Net cash from operating activities	$20.235 million	$18.881 million	+7.2%
Capital expenditures	$32.123 million	$18.425 million	+74.3%

Revenue consisted primarily of residential water service, which represented 66% of operating revenue, followed by commercial and industrial revenue at 26% and other revenue at 8%. Average daily water consumption was approximately 19.9 million gallons versus average daily availability of 35.6 million gallons.

Operating expenses increased primarily from depreciation, uncollectible-account provisions, wastewater treatment, outside services, water-treatment chemicals, and purchased power. These increases were partly offset by lower health-insurance, plant-maintenance, and wage costs. The effective income-tax rate declined to 10.8% from 13.5%, primarily because of IRS tangible-property-regulation deductions and a nontaxable life-insurance gain.

Liquidity, capital structure, and dividends

Net utility plant increased to $343.623 million from $313.224 million.
Total assets were $406.957 million, compared with $363.529 million at December 31, 2019.
Total long-term debt, including the line of credit, was $126.570 million before discounts and issuance costs, compared with $104.042 million. Debt represented 46.9% of total capitalization versus 43.7% in 2019.
The company issued $30 million of 3.24% senior notes due 2050 and used the proceeds partly to refinance $6.5 million of 10.05% notes due in 2020 and line-of-credit borrowings.
The company maintained a $50 million unsecured committed line of credit maturing in September 2022; $6.7 million was outstanding at year-end at an interest rate of 1.30%. Management stated that available liquidity was adequate for 2021.
Cash and cash equivalents were $2 thousand. Restricted cash was $5.0 million, representing a bid deposit for a potential acquisition expected to become unrestricted in the first quarter of 2021. The company also reported a $1.263 million cash-management-account overdraft.
Capital expenditures and acquisitions totaled approximately $33.3 million in 2020. Internally generated funds were $20.235 million.
Planned construction and acquisition expenditures are approximately $36 million in 2021 and $40 million in 2022, excluding unapproved acquisitions. Funding is expected to come primarily from internally generated funds, with additional line-of-credit borrowings, stock-plan proceeds, customer contributions, and possible debt or equity offerings.
The quarterly dividend increased 4.0% in the fourth quarter, from $0.1802 to $0.1874 per share. The 2020 dividend payout ratio was 57.2% of net income.

Material changes versus 2019

Revenue increased despite total per-capita consumption declining approximately 1.1%, reflecting residential-demand growth, the March 2019 rate increase, customer growth, and consumption-pattern changes. Commercial and industrial demand declined during the COVID-19 period.
The distribution-system improvement charge contributed no revenue in 2020 versus $249 thousand in 2019 after resetting to zero when new base rates became effective in March 2019.
Net income benefited from a $515 thousand non-recurring life-insurance gain, lower interest expense, and lower income taxes. No similar life-insurance gain is expected in 2021.
Accounts receivable increased, and the allowance for doubtful accounts rose to $655 thousand from $305 thousand because customer payment timeliness weakened during the pandemic.
Utility plant additions increased materially, and the company completed wastewater acquisitions in Felton Borough and Letterkenny Township. These acquisitions were described as immaterial to results.
The company issued 41,088 shares under dividend-reinvestment, direct-stock-purchase, and employee stock-purchase plans and did not repurchase shares.

Guidance, outlook, risks, and unusual items

Management expects a modest revenue increase in 2021 from customer additions and acquisitions, but results may be affected by COVID-19, economic conditions, weather, consumption patterns, and regulatory actions.
Depreciation is expected to continue rising with additional utility-plant investment; other operating costs are expected to increase moderately. Interest expense is expected to be slightly higher because of additional debt and line-of-credit borrowings.
The company expects to close several pending acquisitions in 2021, including projects expected to add approximately 1,800 wastewater customers, 90 wastewater and 60 water customers, and approximately 50 combined water and wastewater customers. Management expects the acquisitions to be immaterial to overall results.
The company is completing design and permitting for Lake Williams dam spillway work, with construction expected to begin in 2022 at an estimated total cost of approximately $27 million. Lake Redman will be reviewed after Lake Williams work is completed.
COVID-19 had not materially affected workforce, operations, financial performance, liquidity, or supply chains through the filing date. Shut-offs and late-payment charges were suspended during much of 2020 and generally resumed for most customers in January 2021, while certain protected customers remain subject to restrictions.
The company completed replacement of all known company-owned lead service lines. Remaining customer-owned lead-line replacements are estimated at approximately $1.5 million and are expected to be recovered through future rates.
The company is exposed to LIBOR-transition risk for variable-rate debt and its interest-rate swap. Management could not estimate the effect of a successor benchmark and noted that borrowing costs could increase.
The company’s interest-rate swap had a fair-value liability of approximately $2.731 million at year-end. A downgrade below BBB- could have required an immediate payment of approximately $2.830 million; Standard & Poor’s affirmed an A- rating with a stable outlook.
Material risks include dependence on PPUC rate relief, weather and drought, customer demand, economic conditions, financing availability, environmental requirements, pension assumptions, cyber events, and the ability to recover regulatory assets through future rates.

Most important facts for investors to verify

Whether planned 2021–2022 capital spending and the approximately $27 million Lake Williams spillway project remain on schedule and within budget.
Whether the company can maintain adequate rate relief and recover regulatory assets while funding substantially higher capital expenditures.
Trends in residential versus commercial and industrial water demand, customer collections, and the allowance for doubtful accounts.
Availability and refinancing terms of the $50 million credit facility, including the 2022 maturity and LIBOR replacement provisions.
The impact of the non-recurring $515 thousand life-insurance gain and unusually low 2020 effective tax rate on future earnings comparability.
Progress and regulatory approval status of pending acquisitions and bulk-water opportunities.
The filing reports no material legal proceedings, no critical audit matters, and effective disclosure controls and internal control over financial reporting.