The York Water Company: FY2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016. York Water is a regulated water and wastewater utility serving 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania. It supplies, treats, and distributes water and operates wastewater collection and treatment systems. The company serves approximately 196,000 people and had 67,052 customers at year-end.
Financial and operating metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $47.584 million | $47.089 million | +1.1% |
| Operating expenses | $24.696 million | $24.428 million | +1.1% |
| Operating income | $22.888 million | $22.661 million | +1.0% |
| Net income | $11.846 million | $12.489 million | -5.1% |
| Basic and diluted EPS | $0.92 | $0.97 | -5.2% |
| Cash flow from operations | $19.365 million | $20.710 million | -6.5% |
| Capital expenditures | $13.158 million | $13.844 million | -5.0% |
| Long-term debt, including current portion | $84.653 million | $84.562 million | Approximately flat |
| Cash and cash equivalents | $4.209 million | $2.879 million | +$1.330 million |
Operating margin was approximately 48.1%, compared with 48.1% in 2015. Net margin declined to approximately 24.9% from 26.5%, primarily because of higher income taxes. Return on year-end common equity was 10.4%, compared with 11.4% in 2015 and a five-year historical average of 10.1%.
Revenue was 63% residential, 29% commercial and industrial, and 8% other. Average daily water consumption increased to approximately 18.8 million gallons from 18.5 million gallons, while year-end customers increased by 965, or approximately 1.5%. Average customers served increased by 974, primarily from acquisitions.
The company generated $19.365 million of internally generated funds. Investing cash outflows were $12.526 million, primarily for utility plant additions. Financing cash outflows were $5.509 million, including $7.956 million of dividends paid and $1.339 million of share repurchases. The company had no borrowings under its $41.5 million of unsecured credit lines at year-end.
Debt represented 43.4% of total capitalization, compared with 44.5% in 2015. Standard & Poor's affirmed the company's A- rating with a stable outlook. The company reported compliance with its debt covenants and dividend and repurchase restrictions.
Material changes versus the prior comparable period
- Revenue increased modestly because of customer additions from acquisitions and higher sewer billing and collection service revenue. Lower per-capita consumption partially offset growth.
- Operating expenses increased $268,000, mainly from higher depreciation, wages, shareholder expenses, and maintenance. These increases were partly offset by capitalized wages and lower rate-case expense.
- Net income decreased $643,000 because income taxes increased $669,000, and the effective tax rate rose to 31.3% from 27.5%. The increase was primarily attributable to a lower volume of asset improvements qualifying for the IRS tangible property regulations tax benefit.
- Other expenses increased $176,000, principally because of higher retirement expenses. Interest expense increased $83,000 because of higher debt outstanding.
- The company completed acquisitions of Crestview Mobile Home Park and Westwood Mobile Home Park, adding approximately 120 and 200 water customers, respectively.
- Construction began on a redundant raw-water pumping station and force main designed for 20 million gallons per day. The project is expected to enter service in 2017.
- The final phase of the filtration plant upgrade was completed, increasing rated filter capacity from 31.0 million to 39.0 million gallons per day.
- Quarterly dividend declarations increased 3.0% in the fourth quarter, from $0.1555 to $0.1602 per share. Annual dividends declared increased to $0.6267 per share from $0.6040.
Guidance, outlook, risks, contingencies, and unusual items
Management expected modest revenue growth in 2017 from recently announced water and wastewater acquisitions and modest organic growth. It expected operating expenses to grow faster than revenue in the short term, with higher depreciation, distribution-system maintenance, environmental compliance costs, and wastewater integration expenses. Management projected a 2017 effective tax rate of approximately 28% to 32%.
The company anticipated construction and acquisition expenditures of approximately $22.8 million in 2017 and $15.6 million in 2018, excluding unapproved acquisitions. Funding is expected to come primarily from internally generated funds, with additional support from credit lines, stock plans, customer advances and contributions, and potentially debt or equity offerings. Management expected its cash balance to be used during the first half of 2017 and believed available credit facilities would provide adequate liquidity thereafter.
The company expected to file a rate increase request with the Pennsylvania Public Utility Commission in 2017. No distribution system improvement charge revenue was collected in 2016 or 2015 because earnings exceeded the applicable regulatory benchmark. Future results depend materially on timely and adequate rate relief.
Lead testing exceeded the applicable action level at six of 50 high-risk properties by 1 part per billion. Under a consent order with the Pennsylvania Department of Environmental Protection, the company committed to replace all remaining company-owned lead service lines within four years. Estimated additional company-owned replacement costs are approximately $2.4 million, with approximately $2.08 million of potential customer-owned line replacements under the approved tariff modification. The filing does not provide a total estimate for the separate nine-year customer-owned replacement program.
The company expects to finalize dam-armoring plans in 2017 and begin armoring one dam between 2018 and 2019. Estimated cost is approximately $5.5 million per dam. Other principal risks include regulatory approval of rates and cost recovery, drought and weather-related demand changes, water contamination, environmental requirements, access to capital, interest-rate exposure, pension funding, cybersecurity, labor negotiations, and limited trading liquidity.
The $12 million variable-rate PEDFA debt is hedged with an interest-rate swap and has a letter of credit expiring June 30, 2018, subject to annual renewal. Bondholders may tender the bonds; if they cannot be remarketed, the company could be required to fund repayment. The swap had a fair-value liability of $2.292 million at December 31, 2016.
Unusual items included a $36,000 gain on sale of land and a $2.3 million pension contribution. The company reported no material legal proceedings, no material off-balance-sheet arrangements, and received an unqualified audit opinion, including on internal control over financial reporting.
Most important facts for investors to verify
- Whether the anticipated 2017 rate filing produces timely and sufficient recovery of capital spending, lead-line replacement costs, pension costs, and other regulatory assets.
- The timing, final cost, and financing of the $22.8 million 2017 capital program, the raw-water pumping station, and dam-armoring projects.
- Execution of the lead service-line consent order and the extent to which customer-owned replacement costs are ultimately recovered through rates.
- Availability and renewal of the $41.5 million credit facilities and the June and September 2017 maturities.
- Remarketing and letter-of-credit renewal risk for the $12 million variable-rate bonds, as well as exposure under the interest-rate swap.
- The sustainability of dividends given the 68.0% net-income payout ratio, capital requirements, debt covenants, and potential reliance on borrowings.
- The effect of weather, conservation, drought restrictions, customer consumption, and local economic conditions on revenue growth.
- The impact of higher income taxes, pension obligations, environmental compliance costs, and operating expenses on future earnings and cash flow.