The York Water Company — FY2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017. The York Water Company is a regulated water and wastewater utility serving York and Adams Counties, Pennsylvania. It operates water supply, treatment and distribution systems, three wastewater collection systems and two wastewater treatment systems. The company serves approximately 198,000 people and had 69,604 customers at year-end.
The company is regulated principally by the Pennsylvania Public Utility Commission, including rate setting, financing, service territories and customer billing practices. Revenue is affected by customer growth, authorized rate relief, weather and water consumption.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenues | $48.589 million | $47.584 million | +2.1% |
| Operating expenses | $26.116 million | $24.696 million | +5.7% |
| Operating income | $22.473 million | $22.888 million | -1.8% |
| Net income | $12.974 million | $11.846 million | +9.5% |
| Basic and diluted EPS | $1.01 | $0.92 | +9.8% |
| Operating margin | 46.3% | 48.1% | Down |
| Net margin | 26.7% | 24.9% | Up |
| Cash dividends declared per share | $0.6472 | $0.6267 | +3.3% |
Residential revenue was $31.184 million, commercial and industrial revenue was $13.729 million, and other revenue was $3.676 million. Management reported a 10.9% return on year-end common equity, compared with 10.4% in 2016.
- Net cash provided by operating activities was $20.111 million, compared with $19.365 million in 2016.
- Capital expenditures were $24.602 million, and acquisitions of water and wastewater systems were $0.472 million.
- Investing activities used $25.074 million of cash.
- Cash at year-end was $2 thousand, compared with $4.209 million at year-end 2016. The company also reported a $0.769 million cash overdraft in its cash management account.
- Total assets were $332.030 million and stockholders’ equity was $119.405 million at December 31, 2017.
- Long-term debt, including current maturities, was $92.833 million; short-term borrowings were $1.000 million. Debt represented 43.7% of total capitalization.
- The company maintained $41.5 million of unsecured bank lines of credit and had $6.389 million outstanding under those lines at year-end, including $5.389 million under a committed facility and $1.000 million under another line.
- Standard & Poor’s affirmed an A- credit rating with a stable outlook in April 2017.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by $0.899 million of distribution system improvement charge revenue, $0.626 million from the West York Borough wastewater acquisition and customer growth. These benefits were partly offset by approximately 4.6% lower per-capita consumption.
- The West York Borough acquisition added approximately 1,700 wastewater customers and increased wastewater operating expenses by approximately $0.718 million.
- Operating expenses increased due principally to higher wastewater operating costs, depreciation, health insurance, maintenance and wages. Management expects expense growth to outpace revenue growth in the short term.
- Income taxes declined $0.866 million, or 16.0%, to $4.543 million. The effective tax rate decreased to 25.9% from 31.3%, primarily because of IRS tangible property regulation deductions and the impact of the 2017 Tax Cuts and Jobs Act.
- Allowance for funds used during construction increased to $0.864 million from $0.228 million, primarily because of construction of a pumping station and force main.
- Capital spending rose substantially from $13.158 million in 2016 to $24.602 million in 2017, increasing reliance on credit lines and other financing sources.
- Long-term debt increased from $87.488 million to $92.833 million, while the debt-to-capitalization ratio increased from 43.4% to 43.7%.
- The company repurchased and retired 37,229 shares in 2017 and issued 56,171 shares through its stock purchase and dividend reinvestment plans.
Guidance, outlook, risks and unusual items
- Management expects 2018 revenue to increase modestly because of the DSIC and continued customer additions from acquisitions and service-territory growth. Weather, tax changes and other regulatory actions could affect results.
- Effective January 1, 2018, the tariff included a DSIC of 4.51% of revenues. Management expected to file a base-rate increase request in 2018.
- Planned construction and acquisition expenditures are approximately $22.564 million in 2018 and $19.755 million in 2019, excluding unapproved acquisitions. Funding is expected to come primarily from internal cash generation, with additional use of credit lines, equity plans, customer advances and potentially debt or equity offerings.
- The company expects operating expenses, particularly depreciation and costs to treat water and maintain infrastructure, to rise faster than revenue in the near term. Interest expense is also expected to increase because of credit-line borrowings and higher short-term rates.
- The company exceeded the federal lead action level in 2016 testing at six properties, although the exceedance was 1 part per billion and two rounds of 2017 testing were below the action level. Under a Pennsylvania DEP consent order, the company must replace all known company-owned lead service lines within four years. Approximately $0.535 million of additional company-owned replacement costs were expected, with further customer-owned replacement costs subject to uncertainty.
- The company expects to finalize dam spillway improvement plans in 2018 and begin armoring one dam in 2019. Estimated cost is approximately $5.5 million per dam.
- The $12.000 million variable-rate PEDFA bonds are supported by a letter of credit expiring June 30, 2019 and may be tendered by holders. If tendered bonds cannot be remarketed, the company could face an accelerated payment obligation. An interest-rate swap mitigates benchmark-rate exposure but does not eliminate spread, counterparty or termination risk.
- The company has contractual obligations totaling approximately $160.302 million, including $92.833 million of debt, $54.776 million of estimated long-term-debt interest, $2.300 million of planned defined-benefit contributions and other obligations.
- The company paid dividends continuously since 1816 and increased the quarterly dividend by 4.0% in the fourth quarter to $0.1666 per share. Future dividends remain subject to earnings, financial condition, capital requirements, debt covenants and regulatory considerations.
- Principal risks include delayed or inadequate PPUC rate relief, weather and drought, lower water consumption, regulatory and environmental requirements, water contamination, dam safety, cybersecurity, access to capital, interest rates, pension obligations, tax-law interpretations and limited common-stock trading liquidity.
Most important facts for investors to verify
- Whether the anticipated 2018 rate filing and DSIC treatment provide sufficient recovery for rising capital expenditures and operating costs.
- The timing, cost and rate recovery of lead service-line replacements and dam spillway improvements.
- Liquidity available under the $41.5 million credit facilities, including renewals due in June and September 2018.
- The remarketing status, letter-of-credit renewal and potential tender exposure of the $12.0 million variable-rate bonds.
- Whether lower per-capita consumption, weather conditions or conservation materially pressure revenue growth.
- The effect of the 2017 Tax Cuts and Jobs Act and PPUC treatment of associated tax benefits and regulatory liabilities.
- The sustainability of dividend growth while capital spending, debt and short-term borrowings remain elevated.
- The filing reports no material legal proceedings, and the independent auditor concluded that the financial statements were fairly presented and internal control over financial reporting was effective.