The York Water Company 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with unaudited quarterly data for the fourth quarter. The York Water Company is a regulated water and wastewater utility serving 39 municipalities in York County and nine in Adams County, Pennsylvania. The Pennsylvania Public Utility Commission regulates rates, service territory, financing, billing and related operating matters.
At year-end, the Company served approximately 66,087 customers and a population of approximately 194,000. Average daily water availability was 35.4 million gallons versus average daily consumption of approximately 18.5 million gallons.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenues | $47.089 million | $45.900 million | +2.6% |
| Operating expenses | $24.428 million | $23.823 million | +2.5% |
| Operating income | $22.661 million | $22.077 million | +2.6% |
| Net income | $12.489 million | $11.484 million | +8.8% |
| Basic earnings per share | $0.97 | $0.89 | +9.0% |
| Net margin | 26.5% | 25.0% | Improved |
| Cash flow from operations | $20.710 million | $18.766 million | +10.4% |
| Capital expenditures | $13.844 million | $14.139 million | -2.1% |
| Long-term debt, including current portion | $87.542 million | $84.885 million | +3.1% |
Residential revenue was $29.682 million, commercial and industrial revenue was $13.822 million, and other revenue was $3.585 million. Average daily water consumption increased modestly from 18.327 million gallons to 18.507 million gallons, while per-capita consumption declined 0.1%.
Total assets were $313.491 million and common stockholders' equity was $109.070 million at December 31, 2015. Debt represented 44.5% of total capitalization, compared with 44.8% in 2014. The Company held $2.879 million of cash and had no outstanding borrowings under its $29 million of unsecured credit lines at year-end.
Operating cash flow exceeded capital expenditures by approximately $6.866 million before acquisitions, dividends, debt financing and share repurchases. The Company paid $7.682 million in dividends and repurchased $2.546 million of common stock during the year.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the February 2014 rate increase, increased customers from acquisitions, and additional usage associated with an emergency interconnection with a neighboring municipality.
- Operating expenses increased $605,000, driven principally by higher depreciation, water-treatment chemical usage, pension expense, sediment hauling, insurance, information technology planning and credit-card fees.
- Net income benefited from lower retirement expenses, reduced charitable contributions and lower income taxes. The effective tax rate declined to 27.5% from 29.8%, primarily because of the IRS tangible property regulations.
- 2014 included a non-recurring $316,000 gain on the sale of land; no comparable gain was recorded in 2015.
- The Company issued $10 million of Series 2015 bonds, receiving approximately $9.5 million of net proceeds. Proceeds were used to redeem the PEDFA Series A 2004 bonds and fund part of the 2015 capital program.
- Customer count increased to 66,087 at year-end from 65,102, and the Company completed several small water-system acquisitions during 2015.
- The quarterly dividend increased 4.0% in the fourth quarter to $0.1555 per share. The annual dividend declared per share increased to $0.6040 from $0.5788.
Guidance, outlook, risks and unusual items
Management expected 2016 revenue to increase modestly because of additional water and wastewater customers from announced acquisitions. It projected construction and acquisition expenditures of approximately $20.1 million in 2016 and $13.1 million in 2017, excluding acquisitions not yet approved. Funding is expected to come primarily from internally generated cash, supplemented by credit-line borrowings, stock-plan proceeds, customer contributions and potentially debt or equity offerings.
Management expected 2016 depreciation expense to rise with continued investment and other operating expenses to increase moderately. The expected 2016 effective tax rate was approximately 28% to 32% because of continued deductions under the IRS tangible property regulations.
- Rate recovery is subject to PPUC approval. Delayed or inadequate rate relief could limit recovery of infrastructure investment and operating costs.
- Weather, drought restrictions, rainfall, conservation and seasonal demand can affect water consumption and revenue.
- The Company remains geographically concentrated in central and southern Pennsylvania and is exposed to local economic and demographic conditions.
- The $12 million variable-rate PEDFA debt is hedged with an interest-rate swap, but the bonds may be tendered and could require repayment if they cannot be remarketed. The related letter of credit expires June 30, 2017 and is reviewed annually.
- The Company expects to armor one of its dams between 2017 and 2019 at an estimated cost of approximately $5 million, with the second dam expected to follow one or two years later.
- The defined-benefit pension plans were underfunded by $7.634 million at year-end. The Company planned a $2.3 million pension contribution in 2016.
- The Company reported no material legal proceedings, no material off-balance-sheet arrangements and no unresolved SEC staff comments.
- Risks also include environmental and water-quality regulation, dam failure, contamination, cybersecurity, labor relations, acquisition integration, access to capital and potential changes in tax rules.
The financial statements received an unqualified audit opinion, and the independent auditor also concluded that internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Confirm the sustainability and timing of future PPUC rate relief, including potential recovery of the $3.887 million IRS tangible-property-regulation regulatory liability.
- Review the $20.1 million 2016 capital program, dam-armoring expenditures and the planned funding mix.
- Monitor refinancing, remarketing and letter-of-credit risk associated with the $12 million variable-rate bond issue.
- Assess pension funding requirements and sensitivity to discount rates and investment returns.
- Evaluate whether customer growth and acquisitions can offset declining per-capita consumption.
- Reconcile the reported fourth-quarter results with full-year performance, recognizing that the filing presents annual audited results and quarterly data as unaudited.