The York Water Company — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018; it is an annual report rather than a quarterly filing. The York Water Company is a regulated water and wastewater utility serving York and Adams Counties, Pennsylvania. It operates water distribution facilities, three wastewater collection systems, and two wastewater treatment systems, with rates and significant operating matters regulated by the Pennsylvania Public Utility Commission.
At year-end, the Company served approximately 70,263 customers and a population of 199,000. Average daily water consumption was approximately 19.5 million gallons versus average daily availability of 35.4 million gallons.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $48.437 million | $48.589 million | Down 0.3% |
| Operating expenses | $25.920 million | $24.896 million | Up 4.1% |
| Operating income | $22.517 million | $23.693 million | Down 5.0% |
| Net income | $13.376 million | $12.974 million | Up 3.1% |
| Basic and diluted EPS | $1.04 | $1.01 | Up $0.03 |
| Operating cash flow | $18.372 million | $20.111 million | Down 8.6% |
| Capital expenditures | $16.882 million | $24.602 million | Down 31.4% |
| Effective income tax rate | 15.7% | 25.9% | Down 10.2 points |
| Return on year-end common equity | 10.6% | 10.9% | Down 0.3 points |
Management’s efficiency ratio, defined as net income divided by revenue, was 27.6% in 2018, above the five-year average of 25.2%. The lower tax rate was the primary factor supporting the increase in net income despite lower revenue and higher operating costs.
Residential customers generated 65% of operating revenue, commercial and industrial customers 28%, and other sources 7%. Year-end common stockholders’ equity was $126.195 million, total assets were $345.140 million, and cash and cash equivalents were only $2 thousand.
Debt, liquidity, dividends, and capital resources
- Total long-term debt, including the current portion and line-of-credit borrowings, was $95.908 million at December 31, 2018, compared with $92.833 million at December 31, 2017.
- Debt represented 43.2% of total capitalization, compared with 43.7% in 2017. Management expects the ratio to trend toward approximately 50% before considering additional equity.
- The Company maintained unsecured lines of credit totaling $41.5 million and had $9.508 million outstanding at year-end. The weighted-average borrowing rate was 3.60%.
- The cash management account had a $1.070 million overdraft at year-end. Management stated that current credit facilities should provide adequate liquidity through 2019, but future refinancing and credit availability are not guaranteed.
- Capital expenditures were funded through operating cash flow, line-of-credit borrowings, stock issuance, and customer advances or contributions.
- Planned construction and acquisition expenditures were approximately $21.479 million for 2019 and $21.209 million for 2020, excluding unapproved acquisitions.
- The quarterly dividend increased 4.02% in the fourth quarter, from $0.1666 to $0.1733 per share. The annual dividend declared per share was $0.6731, and the 2018 dividend payout ratio based on net income was 65.0%.
- Standard & Poor’s affirmed an A- credit rating with a stable outlook on February 9, 2018.
Material changes versus the prior comparable period
- Revenue declined $152 thousand, primarily because the Company recorded a $1.600 million reduction in revenue to return federal tax-reform benefits to customers. The decline was partly offset by $1.072 million of DSIC revenue, customer growth, and wastewater revenue from the West York Borough acquisition.
- Per-capita water consumption declined approximately 1.0%, although average water customers increased by 671 and average wastewater customers increased by 279.
- Operating expenses increased $1.024 million, led by higher distribution maintenance, depreciation, wages and benefits, information technology, wastewater operating costs, purchased power, and water treatment.
- Interest expense increased $161 thousand as average line-of-credit borrowings rose to $7.206 million from $3.132 million.
- AFUDC declined $635 thousand to $229 thousand because eligible construction volume was lower than in 2017.
- Income tax expense declined $2.052 million, primarily due to the Tax Cuts and Jobs Act and the IRS tangible property regulations deduction. The Company recorded $1.307 million of 2018 tax benefits from the ongoing IRS deduction.
- Operating cash flow declined $1.739 million, primarily because of higher income taxes paid and changes in working capital and regulatory assets.
- Capital expenditures decreased from $24.602 million to $16.882 million, while the Company replaced or relined approximately 50,000 feet of main.
- No shares were repurchased in 2018, compared with 37,229 shares repurchased and retired in 2017.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2019 revenue to increase because of rate changes effective March 1, 2019, continued customer growth, and wastewater acquisitions. The filing does not provide formal earnings guidance.
- The PPUC authorized annual revenue increases of approximately $3.361 million for water and $289 thousand for wastewater, effective March 1, 2019. The DSIC reset to zero when the new base rates became effective.
- The Company agreed to return approximately $2.117 million of tax-reform-related benefits to customers through a negative surcharge from March 2019 through February 2020. A $1.764 million regulatory liability was recorded at year-end 2018.
- The Company expected to refinance its $11 million of high-cost senior notes due February 2019. On January 31, 2019, it issued $20 million of 4.54% senior notes due 2049; net proceeds of approximately $19.820 million were used to refinance those notes and certain line-of-credit borrowings.
- Pending or planned wastewater acquisitions in 2019 and 2020 were expected to add customers but were described as immaterial to overall results. Completion depends on regulatory approvals.
- The Company expects to finalize dam spillway plans in 2019 and begin armoring one dam in 2020. Estimated cost is approximately $5.5 million per dam.
- Principal operating risks include weather and drought, reduced water consumption, customer growth, regulatory rate relief, environmental requirements, interest rates, credit availability, capital requirements, acquisitions, and cyber security incidents.
- The Company exceeded the lead action level in 2016 and entered into a consent order with the Pennsylvania Department of Environmental Protection. All known company-owned lead service lines had been replaced by December 31, 2018. Estimated future customer-owned lead service-line replacement costs under the applicable tariff were approximately $910 thousand.
- The Company had an underfunded pension position of $887 thousand at year-end and planned to contribute $2.300 million to the plans in 2019.
- The interest-rate swap was in a liability position with a fair value of $1.815 million. A credit-rating decline below BBB- could require immediate payment of approximately $1.852 million under the swap provisions.
- The independent auditor reported that the financial statements were fairly presented and that internal control over financial reporting was effective. No material legal proceedings were reported.
Important facts for investors to verify
- Confirm the effect of the March 1, 2019 rate increase, DSIC reset, and tax-benefit surcharge on subsequent revenue and cash flow.
- Review the January 2019 refinancing, including the reduction in interest costs and the treatment of refinanced line-of-credit borrowings.
- Assess whether declining per-capita consumption, weather conditions, conservation, or drought restrictions could offset customer growth and rate increases.
- Monitor funding of the approximately $21 million annual capital program, debt-to-capitalization trends, line-of-credit renewals, and compliance with debt covenants.
- Track regulatory approval and closing status for the pending wastewater acquisitions and the potential Dallastown-Yoe interconnection.
- Evaluate the cost, timing, and rate recovery of dam armoring, lead service-line replacements, environmental compliance, and pension contributions.
- Review the Company’s substantial regulatory assets and liabilities, including whether future rate recovery or customer refunds remain probable.