Item 1A. Risk Factors.
Not applicable.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
Source of Water Supply
The Company obtains the bulk of its water supply for its primary system for York and Adams Counties from both the South Branch and East Branch of the Codorus Creek,
which together have an average daily flow of approximately 73.0 million gallons from a combined watershed area of approximately 117 square miles. The Company owns two impounding dams on this primary system located in York and Springfield Townships
adjoining the Borough of Jacobus to the south. The lower dam, the Lake Williams Impounding Dam, creates a reservoir covering approximately 165 acres containing about 870 million gallons of water. The upper dam, the Lake Redman Impounding Dam,
creates a reservoir covering approximately 290 acres containing about 1.3 billion gallons of water. The Company supplements these reservoirs with a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional
supply of 12.0 million gallons per day, or MGD.
The Company obtains its water supply for its system for Franklin County from the Roxbury Dam on the Conodoguinet Creek, which has an average daily flow of
approximately 26.0 million gallons from a watershed area of approximately 33 square miles. The Company has a reservoir on this system which holds up to approximately 330 million gallons of water.
The Company also owns satellite groundwater systems in York and Adams Counties. The systems consist of eleven wells capable of providing a combined safe yield of
approximately 637,000 gallons per day.
As of December 31, 2022, the Company’s present average daily availability was 40.8 million gallons, and daily consumption was approximately 21.1 million gallons.
Pumping Stations
The Company’s main pumping station is located in Spring Garden Township, York County, on the south branch of the Codorus Creek about four miles downstream from the
Company’s lower impounding dam. The pumping station houses pumping equipment with a combined permitted capacity of 42.0 MGD. A large diesel backup generator is installed to provide power to the pumps in the event of an emergency. The untreated
water is pumped approximately two miles to the filtration plant through pipes owned by the Company.
The Susquehanna River Pumping Station is located on the western shore of the Susquehanna River in York County, several miles south of Wrightsville. The pumping
station houses pumping equipment with a combined permitted capacity of 12.0 MGD. The pumping station pumps water from the Susquehanna River approximately 15 miles through a combination of 30 inch and 36 inch ductile iron main to the Company’s
upper impounding dam, located at Lake Redman.
The Lake Redman Pumping Station is located in York Township, York County, adjacent to Lake Redman. The pumping station is designed to provide a redundant source with
permitted capacity to pump 20.0 MGD of untreated water through a company-owned 36 inch force main approximately 3.5 miles to the filtration plant, meeting the Company’s daily consumption needs.
Treatment Facilities
The Company’s primary water filtration plant is located in Spring Garden Township, York County, about one-half mile south of the City of York. Water at this plant is
filtered through twelve dual media filters having a rated capacity of 39.0 MGD, with a maximum supply of 42.0 MGD for short periods if necessary.
The Company’s sediment recycling facility is located adjacent to this water filtration plant. This state of the art facility employs cutting edge technology to remove
fine, suspended solids from untreated water. The Company estimates that through this energy-efficient, environmentally friendly process, approximately 600 tons of sediment will be removed annually, thereby improving the quality of the Codorus
Creek watershed.
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The Company also operates a water filtration plant in Greene Township, Franklin County. Water at this plant is filtered through filters having a rated capacity of
1.16 MGD.
Based on a total average daily consumption in 2022 of approximately 21.1 million gallons, the Company believes the water pumping and filtering facilities are
adequate to meet present and anticipated demands.
The Company has eight wastewater treatment facilities located in three counties within south-central Pennsylvania. The wastewater treatment plants range
from small extended aeration package plants to three larger facilities that utilize Biological Nutrient Removal/tertiary treatment technology, and have a combined permitted flow capacity of 772,500 gallons. With a projected maximum daily demand
of 314,000 gallons, the plants’ flow paths offer both capacity and operational redundancy for maintenance, high flow events, and potential growth.
Distribution and Collection
The distribution systems of the Company have approximately 1,065 miles of water main lines which range in diameter from 2 inches to 36 inches. The distribution
systems include booster stations and standpipes and reservoirs capable of storing approximately 59.4 million gallons of potable water. All booster stations are equipped with at least two pumps for protection in case of mechanical failure.
Following a deliberate study of customer demand and pumping capacity, the Company installed standby generators at all critical booster stations to provide an alternate energy source or emergency power in the event of an electric utility
interruption.
The eleven wastewater collection systems of the Company have approximately 94 miles of gravity collection mains and pressure force mains along with redundant sewage
pumping stations.
Other Properties
The Company’s distribution center and material and supplies warehouse are located in Springettsbury Township and are composed of three one-story concrete block
buildings aggregating 30,680 square feet.
The administrative and executive offices of the Company are located in one three-story and one two-story brick and masonry buildings, containing a total of
approximately 21,861 square feet, in the City of York, Pennsylvania.
All of the Company’s properties described above are held in fee by the Company. There are no material encumbrances on such properties.
In 1976, the Company entered into a Joint Use and Park Management Agreement with York County under which the Company licensed use of certain of its lands and waters
for public park purposes for a period of 50 years. Under the agreement, York County has agreed not to erect a dam upstream on the East Branch of the Codorus Creek or otherwise obstruct the flow of the creek.
Item 3. Legal Proceedings.
There are no material legal proceedings involving the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Market Information
The common stock of The York Water Company is traded on the NASDAQ Global Select Market under the symbol YORW.
Shareholders of record (excluding individual participants in securities positions listings) as of December 31, 2022 numbered approximately 1,890.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item with respect to securities authorized for issuance under equity compensation plans is set forth in Part III, Item 12 of this
Annual Report.
Purchases of Equity Securities by the Company
The Company did not repurchase any of its securities during the fourth quarter of 2022.
Item 6. Reserved.
(All dollar amounts are stated in thousands of dollars.)
Overview
The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States, operated continuously since 1816. The Company also owns and
operates three wastewater collection systems and eight wastewater collection and treatment systems. The Company is a purely regulated water and wastewater utility. Profitability is largely dependent on water revenues. Due to the size of the
Company and the limited geographic diversity of its service territory, weather conditions, particularly precipitation, economic, and market conditions can have an adverse effect on revenues. The Company experienced increased revenues in 2022
compared to 2021 primarily due to an increase in the number of customers and revenues from the distribution system improvement charge, or DSIC.
The Company’s business does not require large amounts of working capital and is not dependent on any single customer or a very few customers for a material portion of
its business. In 2022, operating revenue was derived from the following sources and in the following percentages: residential, 65%; commercial and industrial, 27%; and other, 8%, which is primarily from the provision for fire service, but includes
other water and wastewater service-related income. The diverse customer mix helps to reduce volatility in consumption.
The Company seeks to grow revenues by increasing the volume of water sold through increases in the number of customers served, making timely and prudent investments in
infrastructure replacements, expansion and improvements, and timely filing for rate increases. The Company continuously looks for acquisition and expansion opportunities both within and outside its current service territory as well as through
contractual services and bulk water supply. The Company’s wastewater business provides additional opportunities to expand.
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The Company has entered into agreements with municipalities to provide billing and collection services. The Company also has a service line protection program on a
targeted basis. The Company continues to review and consider opportunities to expand both initiatives to further diversify the business.
In addition to increasing revenue, the Company consistently focuses on minimizing costs without sacrificing water quality or customer service. Paperless billing,
expanding online services, negotiation of favorable electric, banking, and other costs, as well as taking advantage of the Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act, and the Internal Revenue Service, or IRS, tangible property regulations,
or TPR, are examples of the Company’s recent efforts to minimize costs.
Impact of COVID-19
On March 11, 2020, the World Health Organization characterized an outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic. The Company has taken steps,
consistent with directions from federal, state, and local authorities, to mitigate known risks with the health and safety of its employees and customers as its first priority.
The Company is an essential, life-sustaining business and has continued normal operations. Although most restrictions have been lifted, the Company continues to
monitor guidance from federal, state, and local authorities. Any new restrictions are not expected to materially impede the Company’s ability to complete its planned capital expenditures or acquisitions. The Company has not experienced any
material supply chain disruptions. The Company has been informed of longer lead times for some items, although this does not impact daily operating supplies. The Company maintains an adequate inventory of critical repair parts which are available
as needed. The Company continues to maintain relationships with its vendors to identify issues in a timely manner while also seeking out additional vendor relationships to diversify its supply chain. The Company has addressed the longer lead
times by placing orders proactively with its vendors to align with current lead times. If the delays increase materially or if certain materials and supplies become unavailable, the Company may re-prioritize some of its capital projects or
experience higher operating expenses or capital costs. The Company believes it has sufficient liquidity and access to the capital markets if needed.
To date, there has been no material impact on the Company’s workforce, operations, financial performance, liquidity, or supply chain as a result of COVID-19. However,
the ultimate duration and severity of the pandemic or its effects on the economy, the capital and credit markets, or the Company’s workforce, customers, and suppliers, as well as governmental and regulatory responses, are uncertain.
Performance Measures
Company management uses financial measures including operating revenues, net income, earnings per share and return on equity to evaluate its financial performance.
Additional statistical measures including number of customers, customer complaint rate, annual customer rates and the efficiency ratio are used to evaluate performance quality. These measures are calculated on a regular basis and compared with
historical information, budget and the other publicly-traded water and wastewater companies.
The Company’s performance in 2022 was strong under the above measures. Operating revenues increased in 2022 compared to 2021 primarily due to an increase in the
number of customers and revenues from the DSIC. The increase in operating revenues offset the increases in operating expenses. The Company incurred lower income taxes primarily due to a higher deduction for the tax benefit under the IRS TPR. The
overall effect was an increase in net income in 2022 over 2021 of 15.3% and a return on year end common equity of 9.5%. The return on year end common equity was strong but lower than the 2021 result of 11.1% and the five-year historical average of
11.0% due to an increase in common equity from an underwritten public stock offering completed in 2022.
The efficiency ratio, which is calculated as net income divided by revenues, is used by management to evaluate its ability to control expenses. Over the five previous
years, the Company’s ratio averaged 28.8%. In 2022, the ratio was higher than the average at 32.6% due primarily to lower income taxes than are included in the historical average. Management is confident that its ratio will compare favorably to
that of its peers. Management continues to look for ways to decrease expenses and increase efficiency as well as to file for rate increases promptly when needed.
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2022 Compared with 2021
Net income for 2022 was $19,580, an increase of $2,596, or 15.3%, from net income of $16,984 for 2021. The primary contributing factors to the increase were higher
operating revenues and lower income taxes, which were partially offset by higher expenses.
Operating revenues for 2022 increased $4,942, or 9.0%, from $55,119 for 2021 to $60,061 for 2022. The increase was primarily due to growth in the customer base and
revenues from the DSIC of $2,243. The average number of wastewater customers served in 2022 increased as compared to 2021 by 2,284 customers, from 3,325 to 5,609 customers, primarily due to the West Manheim Township acquisition. The average
number of water customers served in 2022 increased as compared to 2021 by 798 customers, from 69,622 to 70,420 customers. Total per capita consumption for 2022 was approximately 1.2% higher than the same period of last year. The Company expects
revenues for 2023 to increase due to an increase in rates effective March 1, 2023, and the continued increase in the number of water and wastewater customers from acquisitions and growth within the Company’s service territory. Any slowdown
resulting from COVID-19 or economic factors or changes in consumption patterns could impact results. Other regulatory actions and weather patterns could also impact results.
Operating expenses for 2022 increased $3,855, or 12.2%, from $31,723 for 2021 to $35,578 for the corresponding 2022 period. The increase was primarily due to higher
expenses of approximately $1,280 for depreciation, $732 for wastewater treatment, $522 for wages, $499 for water treatment, $442 for distribution system maintenance, and $222 for billing and revenue collection services. Other expenses increased by
a net of $272. The increased expenses were partially offset by $114 for lower pension administration expenses. In 2023, the Company expects depreciation expense to continue to rise due to additional investment in utility plant, and other expenses
to increase as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.
Interest on debt for 2022 increased $188 or 3.8%, from $4,926 for 2021 to $5,114 for 2022. The increase was primarily due to an increase in interest rates and
long-term debt outstanding. The average debt outstanding under the lines of credit was $13,428 for 2022 and $11,487 for 2021. The weighted average interest rate on the lines of credit was 2.11% for 2022 and 1.30% for 2021. Interest expense for
2023 is expected to be higher due to continued borrowings and expected increases in interest rates.
Allowance for funds used during construction increased $280, from $1,221 in 2021 to $1,501 in 2022 due to a higher volume of eligible construction. Allowance for
funds used during construction in 2023 is expected to increase based on a projected increase in the amount of eligible construction.
Other income (expenses), net for 2022 reflects decreased expenses of $373 as compared to 2021. Lower retirement expenses of approximately $660 due mostly to an
increase in the discount rate, were the primary reason for the decrease. Lower earnings on life insurance policies of $145 and higher charitable contributions of $58 partially offset the decrease. Other expenses increased by a net of $84. In
2023, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.
Income taxes for 2022 decreased $1,105, or 98.7%, compared to 2021 primarily due to higher deductions from the IRS TPR. The Company’s effective tax rate was 0.1% for
2022 and 6.2% for 2021. The Company’s effective tax rate for 2023 will be largely determined by the level of eligible asset improvements expensed for tax purposes under TPR each period.
Rate Matters
See Note 10 to the Company’s financial statements included herein for a discussion of its rate matters.
Effective January 1, 2023, the Company’s tariff included a DSIC on revenues of 4.91%. The DSIC reset to zero when new rates took effect on March 1,
2023.
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Acquisitions and Growth
See Note 2 to the Company’s financial statements included herein for a discussion of completed acquisitions included in financial results.
On November 9, 2022, the Company signed an agreement to purchase the wastewater collection and treatment assets of CMV Sewage Co., Inc. in Chanceford Township, York
County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second half of 2023 at which time the Company will add approximately 280 wastewater
customers.
On June 9, 2022, the Company signed an agreement to purchase the wastewater collection and treatment assets of MESCO, Inc. in Monaghan Township, York County,
Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second half of 2023 at which time the Company will add approximately 180 wastewater customers.
On April 28, 2022, the Company signed an agreement to purchase the water assets and wastewater collection and treatment assets of Conewago Industrial Park Water &
Sewer Company in Donegal Township, Lancaster County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second half of 2023 at which time the
Company will add approximately 30 commercial and industrial water and wastewater customers.
In total, these acquisitions are expected to be immaterial to Company results. The Company is also pursuing other bulk water contracts and acquisitions in and around
its service territory to help offset any potential declines in per capita water consumption and to grow its business.
On May 10, 2017, the Company signed an emergency interconnect agreement with Dallastown-Yoe Water Authority. The effectiveness of this agreement is contingent upon
receiving approval from all required regulatory authorities. Approval is expected to be granted in 2023 at which time the Company will begin construction of a water main extension to a single point of interconnection and either supply a minimum
agreed upon amount of water to the authority, receive a payment in lieu of water, or provide water during an emergency, at current tariff rates.
Capital Expenditures
During 2022, the Company invested $50,532 in construction expenditures for routine items, armoring and replacing the spillway of the Lake Williams dam, and wastewater
treatment plant construction as well as various replacements and improvements to infrastructure. In addition, the Company invested $3,388 in the acquisition of multiple water and wastewater systems. The Company replaced approximately 61,000 feet
of main in 2022. The Company was able to fund construction expenditures using internally-generated funds, line of credit borrowings, cash generated from the underwritten common stock offering, proceeds from its stock purchase plans and customer
advances and contributions from developers, municipalities, customers, or builders. See Notes 1, 4 and 5 to the Company’s financial statements included herein.
The Company anticipates construction and acquisition expenditures for 2023 and 2024 of approximately $60,600 and $47,100, respectively, exclusive of any acquisitions
not yet approved. In addition to routine transmission and distribution projects, a portion of the anticipated 2023 and 2024 expenditures will be for additional main extensions, armoring and replacing the spillway of the Lake Williams dam,
wastewater treatment plant construction, water treatment plant upgrades, and various replacements of infrastructure. The Company intends to use primarily internally-generated funds for its anticipated 2023 and 2024 construction and fund the
remainder through line of credit borrowings, potential debt and equity offerings, proceeds from its stock purchase plans and customer advances and contributions (see Note 1 to the Company’s financial statements included herein). Customer advances
and contributions are expected to account for between 5% and 10% of funding requirements in 2023 and 2024. The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2023 and 2024, to fund
anticipated construction and acquisition expenditures.
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Liquidity and Capital Resources
Cash
The Company manages its cash through a cash management account that is directly connected to its line of credit. Excess cash generated automatically pays down
outstanding borrowings under the line of credit arrangement. If there are no outstanding borrowings, the cash is used as an earnings credit to reduce banking fees. Likewise, if additional funds are needed beyond what is generated internally for
payroll, to pay suppliers, to fund capital expenditures, or to pay debt service, funds are automatically borrowed under the line of credit. As of December 31, 2022, the Company borrowed $29,740 under its line of credit and incurred a cash
overdraft on its cash management account of $3,175, which was recorded in accounts payable. The cash management facility connected to the line of credit is expected to provide the necessary liquidity and funding for the Company’s operations,
capital expenditures, and acquisitions for the foreseeable future.
Restricted Cash
At December 31, 2020, the Company held $5,000 in restricted cash which was the bid deposit for a potential acquisition which became unrestricted in the first quarter
of 2021.
Accounts Receivable
The accounts receivable balance tends to follow the change in revenues but is also affected by the timeliness of payments by customers and the level of the reserve for
doubtful accounts. In 2022, higher revenue levels as compared to 2021 and a slight weakening in the timeliness of payments resulted in an increase in accounts receivable – customers. A reserve is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated based on inactive accounts with outstanding balances. Management periodically evaluates the adequacy of the reserve based on past experience, agings of the receivables, adverse situations that
may affect a customer’s ability to pay, current economic conditions, and other relevant factors. During 2022, management’s assessment included consideration of the COVID-19 pandemic along with past trends during times of economic instability and
regulations from the PPUC regarding customer collections, including the aging of balances in payment agreements, and determined its allowance for doubtful accounts should remain elevated compared to historical norms. If the status of these factors
deteriorates, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its internally-generated funds.
Internally-generated Funds
The amount of internally-generated funds available for operations and construction depends on the Company’s ability to obtain timely and adequate rate relief, changes
in regulations, customers’ water usage, weather conditions, customer growth and controlled expenses. In 2022, the Company generated $22,018 internally as compared to $22,959 in 2021. The decrease from 2021 was primarily due to the increase in
accounts receivable – customers partially offset by higher net income and lower income taxes paid.
Common Stock
On April 5, 2022, the Company closed an underwritten public offering of 975,600 shares of its common stock, with an offering price of $41 per share. On April 7, 2022,
the Company closed on the full exercise of the underwriter’s option to purchase an additional 146,340 shares of its common stock at the same price. Janney Montgomery Scott LLC was the underwriter in the offering. The Company received net proceeds
in the offering, after deducting offering expenses and underwriters’ discounts and commissions, of $43,970. The net proceeds were used to repay the Company’s borrowings under its line of credit agreement incurred to fund capital expenditures and
acquisitions, and for general corporate purposes.
Common stockholders’ equity as a percent of the total capitalization was 59.3% as of December 31, 2022, compared with 50.6% as of December 31, 2021. Based on the
equity percentage falling to fifty percent, the Company completed the underwritten common stock offering, increasing equity as a percentage of total capitalization. The Company expects to use long-term debt for its future financing needs and allow
the debt percentage to trend upward until it approaches fifty percent before considering additional equity. It is the Company’s general intent to target equity between fifty and fifty-five percent of total capitalization.
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The Company has the ability to issue approximately $4,000 of additional shares of its common stock or debt securities remaining under an effective
“shelf” Registration Statement on Form S-3 on file with the Securities and Exchange Commission subject to market conditions at the time of any such offering.
Credit Line
Historically, the Company has borrowed under its lines of credit before refinancing with long-term debt or equity capital. As of December 31, 2022, the Company
maintained an unsecured line of credit in the amount of $50,000 at an interest rate of LIBOR plus 1.05% with an unused commitment fee and an interest rate floor which matures September 2024. The Company had $29,740 in outstanding borrowings under
its line of credit as of December 31, 2022. The interest rate on line of credit borrowings as of December 31, 2022 was 5.17%. In the third quarter of 2022, the Company renewed its committed line of credit and extended the maturity date to
September 2024. As part of the renewal, the interest rate changed from LIBOR plus 1.05% to a successor rate of the Secured Overnight Financing Rate, or SOFR, plus 1.17% on January 1, 2023, in advance of the likely discontinuation of LIBOR in
2023. No other terms or conditions of the line of credit agreement were modified. The Company expects to renew this line of credit as it matures under similar terms and conditions.
The Company has taken steps to manage the risk of reduced credit availability. It has established a committed line of credit with a 2-year revolving maturity that
cannot be called on demand. There is no guarantee that the Company will be able to obtain sufficient lines of credit with favorable terms in the future. If the Company is unable to obtain sufficient lines of credit or to refinance its line of
credit borrowings with long-term debt or equity, when necessary, it may have to eliminate or postpone capital expenditures. Management believes the Company will have adequate capacity under its current line of credit to meet financing needs
throughout 2023.
Long-term Debt
The Company’s loan agreements contain various covenants and restrictions. Management believes it is currently in compliance with all of these restrictions. See Note
6 to the Company’s financial statements included herein for additional information regarding these restrictions.
The 8.43% Senior Notes, Series D had a maturity date of December 18, 2022. The Company retired the $7,500 notes using funds available under its line of credit.
The Company’s total long-term debt as a percentage of the total capitalization, defined as total common stockholders’ equity plus total long-term debt, was 40.7% as of
December 31, 2022, compared with 49.4% as of December 31, 2021. Based on the debt percentage reaching fifty percent, the Company completed an underwritten common stock offering in April 2022 and repaid its line of credit, decreasing long-term debt
as a percentage of total capitalization. The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward. A debt to total capitalization ratio between forty-five and fifty percent has
historically been acceptable to the PPUC in rate filings. See Note 6 to the Company’s financial statements included herein for the details of its long-term debt outstanding as of December 31, 2022.
The variable rate line of credit and the interest rate swap of the Company use the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the rates.
The United Kingdom’s Financial Conduct Authority (UK FCA), which regulates LIBOR, has previously announced that it intends to stop encouraging or compelling banks to submit rates for the calculation of LIBOR rates after 2021. On January 4, 2022,
the UK FCA announced that certain dollar-denominated LIBOR settings, including the 1-month setting used by the Company’s variable line of credit and interest rate swap, would be calculated through June 30, 2023. This indicates that the continuation
of LIBOR on the current basis is not guaranteed after that date and, based on the foregoing, it appears likely that LIBOR will be discontinued or modified. As part of the renewal of its line of credit in the third quarter of 2022, the agreement
was amended to change the reference rate from LIBOR to SOFR on January 1, 2023. In the fourth quarter of 2022, the interest rate swap agreement was amended to change the reference rate from LIBOR to SOFR effective with the discontinuance of
LIBOR. The margin for both agreements were established at the historical spread between LIBOR and SOFR to minimize the impact on the Company’s financial position, results of operations and cash flows upon this change. The Company is not aware of
any additional modifications that need to be made to existing agreements before the discontinuance of LIBOR.
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Income Taxes, Deferred Income Taxes and Uncertain Tax Positions
Under the Internal Revenue Service TPR, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and
depreciated for tax purposes as an expense on its income tax return. This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently
payable. It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions. The Company expects to continue to expense these asset improvements in the
future.
The Company’s effective tax rate will largely be determined by the level of eligible asset improvements expensed for tax purposes that would have been capitalized for
tax purposes prior to the implementation of the TPR.
On July 8, 2022, the Pennsylvania budget for the fiscal year ending June 30, 2023 was signed into law. A provision within the tax code bill included with the budget
provides for an annual phase-down of the Pennsylvania corporate net income tax rate of one percentage point in the first year beginning January 1, 2023 from 9.99% to 8.99%, and a one-half percentage point each year thereafter until it reaches 4.99%
beginning January 1, 2031. The Company has remeasured the state portion of the Company’s deferred income taxes. The effect, net of the federal benefit, of $3 was recognized in income for the year ended December 31, 2022. Deferred income taxes
for differences that are recognized for ratemaking purposes on a cash or flow-through basis were remeasured with offsetting changes to regulatory assets and liabilities on the balance sheet as of December 31, 2022. The Company expects any savings
in its Pennsylvania current income taxes to be returned to its customers through the rate making process or as a future negative surcharge on their bills.
The Company has a substantial deferred income tax asset primarily due to the excess accumulated deferred income taxes on accelerated depreciation from the 2017 Tax Act
and the differences between the book and tax balances of the customers’ advances for construction and contributions in aid of construction and deferred compensation plans. The Company does not believe a valuation allowance is required due to the
expected generation of future taxable income during the periods in which those temporary differences become deductible.
The Company has seen an increase in its deferred income tax liability amounts primarily as a result of the accelerated depreciation deduction available for federal tax
purposes which creates differences between book and tax depreciation expense. The Company expects this trend to continue as it makes significant investments in capital expenditures subject to accelerated depreciation or TPR.
The Company has determined there are no uncertain tax positions that require recognition as of December 31, 2022. See Note 14 to the Company’s financial statements
included herein for additional details regarding income taxes.
Credit Rating
On August 9, 2022, Standard & Poor’s affirmed the Company’s credit rating at A-, with a stable outlook and adequate liquidity. The Company’s ability to maintain
its credit rating depends, among other things, on adequate and timely rate relief, which it has been successful in obtaining, its ability to fund capital expenditures in a balanced manner using both debt and equity and its ability to generate cash
flow. In 2023, the Company’s objectives are to continue to maximize its funds provided by operations and maintain a strong capital structure in order to be able to attract capital.
Physical and Cyber Security
The Company maintains security measures at its facilities, and collaborates with federal, state, and local authorities, and industry trade associations
regarding information on possible threats and security measures for water and wastewater utility operations. The costs incurred are expected to be recoverable in water and wastewater rates and are not expected to have a material impact on its
business, financial condition, or results of operations.
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The Company relies on information technology systems in connection with the operation of the business, especially with respect to customer service,
billing, accounting, and in some cases, the monitoring and operation of treatment, storage, and pumping facilities. In addition, the Company relies on these systems to track utility assets and to manage maintenance and construction projects,
materials and supplies, and human resource functions. The information technology systems may be vulnerable to damage or interruption from cyber security attacks or other cyber-related events, including, but not limited to, power loss, computer
systems failures, internet, telecommunications or data network failures, physical and electronic loss of data, computer viruses, intentional security breaches, hacking, denial of service actions, misappropriation of data, and similar events. In
some cases, administration of certain functions may be outsourced to third-party service providers that could also be targets of cyber security attacks. A loss of these systems, or major problems with the operation of these systems, could harm the
business, financial condition, and results of operations of the Company through the loss or compromise of customer, financial, employee, or operational data, disruption of billing, collections or normal field service activities, disruption of
electronic monitoring and control of operational systems, and delays in financial reporting and other normal management functions.
Possible impacts associated with a cyber security attack or other events may include remediation costs related to lost, stolen, or compromised data,
repairs to data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation, and reputational damage.
The Company has implemented processes, procedures, and controls to prevent or limit the effect of these possible events and maintains insurance to help
defray costs associated with cyber security attacks. The Company has not experienced a material impact on business or operations from these attacks. Although the Company does not believe its systems are at a materially greater risk of cyber
security attacks than other similar organizations and despite the implementation of robust security measures, the Company cannot provide assurance that the insurance will fully cover the costs of a cyber security event, and its robust security
measures do not guarantee that reputation and financial results will not be adversely affected by such an incident.
Environmental Matters
The Company was granted approval by the PPUC to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned
service lines over nine years from the agreement. The tariff modification allows the Company to replace customer-owned service lines at its own initial cost. The Company will record the costs as a regulatory asset to be recovered in future base
rates to customers, over a four-year period. The cost for the customer-owned lead service line replacements was approximately $1,518 and $1,351 through December 31, 2022 and 2021, respectively, and is included as a regulatory asset. Based on its
experience, the Company estimates that lead customer-owned service lines replacements will cost $1,700. This estimate is subject to adjustment as more facts become available.
Dividends
During 2022, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 56.2% and 48.5%, respectively. During
2021, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 58.3% and 42.7%, respectively. During the fourth quarter of 2022, the Board of Directors increased the dividend by 4.00% from
$0.1949 per share to $0.2027 per share per quarter.
The Company’s Board of Directors declared a dividend in the amount of $0.2027 per share at its February 2023 meeting. The dividend is payable on April 14, 2023 to
shareholders of record as of February 28, 2023. While the Company expects to maintain this dividend amount in 2023, future dividends will be dependent upon the Company’s earnings, financial condition, capital demands and other factors and will be
determined by the Company’s Board of Directors. See Note 6 to the Company’s financial statements included herein for restrictions on dividend payments.
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Inflation
The Company is affected by inflation, most notably by the continually increasing costs incurred to maintain and expand its service capacity. The cumulative effect of
inflation results in significantly higher facility replacement costs which must be recovered from future cash flows. The ability of the Company to recover this increased investment in facilities is dependent upon future rate increases, which are
subject to approval by the PPUC. The Company can provide no assurances that its rate increases will be approved by the PPUC; and, if approved, the Company cannot guarantee that these rate increases will be granted in a timely or sufficient manner
to cover the investments and expenses for which the rate increase was sought.
Critical Accounting Estimates
The methods, estimates, and judgments the Company used in applying its accounting policies have a significant impact on the results reported in its financial
statements. The Company’s accounting policies require management to make subjective judgments because of the need to make estimates of matters that are inherently uncertain. The Company’s most critical accounting estimates include: revenue
recognition and accounting for its pension plans.
Revenue Recognition
Operating revenues include amounts billed to metered water and certain wastewater customers on a cycle basis and unbilled amounts based on both actual and estimated
usage from the latest meter reading to the end of the accounting period. Estimates are based on average daily usage for those particular customers. The unbilled revenue amount is recorded as a current asset on the balance sheet. Actual results
could differ from these estimates and would result in operating revenues being adjusted in the period in which the actual usage is known. Based on historical experience, the Company believes its estimate of unbilled revenues is reasonable.
Pension Accounting
Accounting for defined benefit pension plans requires estimates of future compensation increases, mortality, the discount rate, and expected return on plan assets as
well as other variables. These variables are reviewed annually with the Company’s pension actuary. The Company used compensation increases of 2.5% to 3.0% in 2021 and 2022.
The Company adopted a new mortality table in 2019, the Pri-2012, using the white collar table for the administrative and general plan and the blue collar table for the
union plan. In 2021, the Company adopted the MP-2021 mortality improvement scale, which slightly increased the life expectancy of pension plan participants, resulting in a slight increase to the pension benefit obligation, and ultimately, a
decrease in the Company’s funded status of the plans.
The Company selected its December 31, 2022 and 2021 discount rates based on the FTSE Pension Liability Index. This index uses spot rates for durations out to 30 years
and matches them to expected disbursements from the plan over the long term. The Company believes this index most appropriately matches its pension obligations. The present values of the Company’s future pension obligations were determined using
a discount rate of 5.00% at December 31, 2022 and 2.65% at December 31, 2021.
Adopting a new mortality table that represents a change in life expectancy and choosing a different discount rate normally changes the amount of pension expense and
the corresponding liability. In the case of the Company, these items change its liability, but do not have an impact on its pension expense. The PPUC, in a previous rate settlement, agreed to grant recovery of the Company’s contribution to the
pension plans in customer rates. As a result, under the accounting standards regarding rate-regulated activities, expense in excess of the Company’s pension plan contribution can be deferred as a regulatory asset and expensed as contributions are
made to the plans and are recovered in customer rates. Therefore, these changes affect regulatory assets rather than pension expense.
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The Company’s estimate of the expected return on plan assets is primarily based on the historic returns and projected future returns of the asset classes represented
in its plans. The target allocation of pension assets is 50% to 70% equity securities, 30% to 50% fixed income securities, and 0% to 10% cash reserves. The Company used 6.50% as its expected rate of return in 2021 and 2022. A decrease in the
expected pension return would normally cause an increase in pension expense; however due to the aforementioned rate settlement, the Company’s expense would continue to be equal to its contributions to the plans. The change would instead be
recorded in regulatory assets.
Lower discount rates and underperformance of assets could cause future required contributions and expense to increase substantially. If this were to happen, the
Company would have to consider changes to its pension plan benefits and possibly request additional recovery of expenses through increased rates charged to customers. See Note 11 to the Company’s financial statements included herein for additional
details regarding the pension plans.
Off-Balance Sheet Transactions
The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial condition, results
of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses. The Company does not use securitization of receivables or unconsolidated entities. For risk management purposes, the Company uses
a derivative financial instrument, an interest rate swap agreement discussed in Note 7 to the financial statements included herein. The Company does not engage in trading or other risk management activities, does not use other derivative financial
instruments for any purpose, has no material lease obligations, no guarantees and does not have material transactions involving related parties.
Impact of Recent Accounting Pronouncements
There are currently no recent accounting pronouncements that are expected to have a material impact to the Company’s financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements.
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) 20
Balance Sheets 21
Statements of Income 23
Statements of Common Stockholders’ Equity 24
Statements of Cash Flows 25
Notes to Financial Statements 26
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
The York Water Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of The York Water Company (the “Company”) as of December 31, 2022 and 2021, the related statements of
income, common stockholders’ equity, and cash flows for the years then ended and the related notes and financial statement schedule listed in Item 15(a)2 (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit
matters.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2003.
York, Pennsylvania
March 7, 2023
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THE YORK WATER COMPANY
Balance Sheets
(In thousands of dollars, except per share amounts)
ASSETS
Plant acquisition adjustments (9,178 ) (3,637 )
CURRENT ASSETS:
Cash and cash equivalents 1 1
Recoverable income taxes 882 894
Materials and supplies inventories, at cost 2,335 1,917
OTHER LONG-TERM ASSETS:
The accompanying notes are an integral part of these statements.
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THE YORK WATER COMPANY
Balance Sheets
(In thousands of dollars, except per share amounts)
STOCKHOLDERS’ EQUITY AND LIABILITIES
COMMON STOCKHOLDERS’ EQUITY:
PREFERRED STOCK, authorized 500,000 shares, no shares issued – –
COMMITMENTS – –
CURRENT LIABILITIES:
Current portion of long-term debt – 7,500
Accrued compensation and benefits 1,541 1,575
Deferred regulatory liabilities 593 607
DEFERRED CREDITS:
Total Stockholders’ Equity and Liabilities $ 510,595 $ 458,853
The accompanying notes are an integral part of these statements.
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THE YORK WATER COMPANY
Statements of Income
(In thousands of dollars, except per share amounts)
Year Ended December 31
OPERATING EXPENSES:
Taxes other than income taxes 1,380 1,288
OTHER INCOME (EXPENSES):
Allowance for funds used during construction 1,501 1,221
Other income (expenses), net – (373 )
Basic Earnings Per Share $ 1.40 $ 1.30
Diluted Earnings Per Share $ 1.40 $ 1.30
The accompanying notes are an integral part of these statements.
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THE YORK WATER COMPANY
Statements of Common Stockholders’ Equity
(In thousands of dollars, except per share amounts)
For the Years Ended December 31, 2022
and 2021
Common Stock Shares Common Stock Amount Retained Earnings Total
The accompanying notes are an integral part of these statements.
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THE YORK WATER COMPANY
Statements of Cash Flows
(In thousands of dollars, except per share amounts)
Year Ended December 31
CASH FLOWS FROM OPERATING ACTIVITIES:
Stock-based compensation 279 213
Increase in deferred income taxes 4 164
Changes in assets and liabilities:
(Increase) decrease in accounts receivable and unbilled revenues (3,005 ) 235
(Increase) decrease in recoverable income taxes 12 (173 )
Increase in accrued interest 6 –
Net cash provided by operating activities 22,018 22,959
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of water and wastewater systems (3,388 ) (11,991 )
Net cash used in investing activities (53,920 ) (46,400 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of customer advances (972 ) (926 )
Changes in cash overdraft position 1,429 483
Net cash provided by financing activities 31,902 18,440
Net change in cash, cash equivalents, and restricted cash – (5,001 )
Cash, cash equivalents, and restricted cash at beginning of year 1 5,002
Cash, cash equivalents, and restricted cash at end of year $ 1 $ 1
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 4,041 $ 4,056
Income taxes – 714
Supplemental disclosure of non-cash investing and financing activities:
The accompanying notes are an integral part of these statements.
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Notes to Financial Statements
(In thousands of dollars, except per share amounts)
1. Significant Accounting Policies
The primary business of The York Water Company, or the Company, is to impound,
purify and distribute water. The Company also owns and operates threewastewater collection systems and eight wastewater collection and treatment systems. The Company operates within its franchised territory located in three counties within south-central Pennsylvania and is subject to regulation by the Pennsylvania Public Utility Commission, or PPUC.
The following summarizes the significant accounting policies employed by The York Water Company.
Utility Plant and Depreciation
The cost of additions includes contracted cost, direct labor and fringe benefits, materials, overhead and, for certain utility plant, allowance for funds
used during construction. In accordance with regulatory accounting requirements, water and wastewater systems acquired are recorded at estimated original cost of utility plant when first devoted to utility service and the applicable depreciation is
recorded to accumulated depreciation. The difference between the estimated original cost less applicable accumulated depreciation, and the purchase price and acquisition costs, is recorded as an acquisition adjustment within utility plant as
permitted by the PPUC. At December 31, 2022 and 2021, utility plant includes a net credit acquisition adjustment of $9,178 and $3,637, respectively. For those amounts approved by the PPUC, the net acquisition adjustment is being amortized over the remaining life of the respective
assets. Certain amounts are still awaiting approval from the PPUC before amortization will commence. Amortization amounted to $67 for
each of the years ended December 31, 2022 and 2021.
Upon normal retirement of depreciable property, the estimated or actual cost of the asset is credited to the utility plant account, and such amounts,
together with the cost of removal less salvage value, are charged to the reserve for depreciation. To the extent the Company recovers cost of removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset
is reported. Gains or losses from abnormal retirements are reflected in income currently.
The straight-line remaining life method is used to compute depreciation on utility plant cost, exclusive of land and land rights. Annual provisions for
depreciation of transportation and mechanical equipment included in utility plant are computed on a straight-line basis over the estimated service lives. Such provisions are charged to clearing accounts and apportioned therefrom to operating
expenses and other accounts in accordance with the Uniform System of Accounts as prescribed by the PPUC.
The Company charges to maintenance expense the cost of repairs and replacements and renewals of minor items of property. Maintenance of transportation
equipment is charged to clearing accounts and apportioned from there in a manner similar to depreciation. The cost of replacements, renewals, and betterments of units of property is capitalized to the utility plant accounts.
The following remaining lives are used for financial reporting purposes:
December 31 Approximate range
Utility Plant Asset Category 2022 2021 of remaining lives
Operations structures, reservoirs, and water tanks 87,218 73,462 10 – 56 years
Office, transportation, and operating equipment 18,128 16,856 2 – 21 years
Land and other non-depreciable assets 3,938 3,714 –
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The effective rate of depreciation was 2.38%
in 2022 and 2.33% in 2021, on average utility plant, net of customers’ advances and contributions. Larger depreciation provisions resulting from allowable accelerated
methods are deducted for tax purposes.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents except for those instruments earmarked to fund construction expenditures or repay long-term debt.
The Company periodically maintains cash balances in major financial institutions in excess of the federally insured limit by the Federal Deposit Insurance
Corporation (FDIC). The Company has not experienced any losses and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash
The Company considers any cash account that it cannot access on demand due to contractual or legal reasons to be restricted cash.
At December 31, 2022 and 2021, the Company held no
restricted cash.
Accounts Receivable
Accounts receivable are stated at outstanding balances, less a reserve for doubtful accounts. The reserve for doubtful accounts is established through
provisions charged against income. Accounts deemed to be uncollectible are charged against the reserve and subsequent recoveries, if any, are credited to the reserve. The reserve for doubtful accounts is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the reserve is based on past experience, agings of the receivables, adverse situations that may affect a customer’s ability to pay, current
economic conditions, and other relevant factors. This evaluation is inherently subjective. Unpaid balances remaining after the stated payment terms are considered past due.
Materials and Supplies Inventories
Materials and supplies inventories are stated at cost. Costs are determined using the average cost method.
Note Receivable
Note receivable is recorded at cost and represents amounts due from a municipality for construction of water mains in their municipality. Management,
considering current information and events regarding the borrowers’ ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms
of the note agreement. When a note is considered to be impaired, the carrying value of the note is written down. The amount of the impairment is measured based on the present value of expected future cash flows discounted at the note’s effective
interest rate.
Regulatory Assets and Liabilities
The Company is subject to the provisions of generally accepted accounting principles regarding rate-regulated entities. The accounting standards provide
for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are reflected in current customer rates or are considered probable of being included in future rates. The regulatory assets or liabilities
are then relieved as the cost or credit is reflected in rates. Regulatory assets represent costs that are expected to be fully recovered from customers in future rates while regulatory liabilities represent amounts that are expected to be refunded
to customers in future rates. These deferred costs have been excluded from the Company’s rate base and, therefore, no return is being earned on the unamortized balances.
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Regulatory assets and liabilities are comprised of the following:
December 31 Remaining Recovery
Assets
Utility plant retirement costs 9,060 7,245 5 years
Customer-owned lead service line replacements 1,260 1,161 Various
Service life study expenses 24 3 5 years
Rate case filing expenses 395 17 4 years
Liabilities
Postretirement benefits 14,906 11,870 Not yet known
The regulatory asset for income taxes includes (a) deferred state income taxes related primarily to differences between book and tax depreciation expense,
(b) deferred income taxes related to the differences that arise between specific asset improvement costs capitalized for book purposes and deducted as a repair expense for tax purposes, and (c) deferred income taxes associated with the gross-up of
revenues related to the differences. These assets are recognized for ratemaking purposes on a cash or flow-through basis and will be recovered in rates as they reverse.
The Company uses regulatory accounting treatment to defer the mark-to-market unrealized gains and losses on its interest rate swap to reflect that the gain
or loss is included in the ratemaking formula when the transaction actually settles. The value of the swap as of the balance sheet date is recorded as part of other deferred credits. Realized gains or losses on the swap will be recorded as interest
expense in the statement of income over its remaining term of 7 years.
Utility plant retirement costs represents costs already incurred for the removal of assets, which are expected to be recovered over a five-year period in rates, through depreciation expense.
The Company was granted approval by the PPUC to modify its tariff to replace lead customer-owned service lines that were discovered when the Company
replaced its lead service lines, and to include the cost of the annual replacement of up to 400 lead customer-owned service lines whenever
they are discovered, regardless of the material used for the company-owned service line over nine years. The tariff modification allows
the Company to replace customer-owned service lines at its own initial cost and record the costs as a regulatory asset to be recovered in future base rates to customers. The recovery period was established in the most recent rate order at four years beginning March 1, 2023. The recovery period for the customer-owned lead service line replacements completed subsequent to the most recent
rate order will begin after the next rate order.
Service life study expenses are deferred and amortized over their remaining life of five years. Rate case filing expenses are deferred and amortized over their remaining life offour years.
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Pursuant to the Tax Cuts and Jobs Act of 2017, or 2017 Tax Act, customers’ advances for construction and contributions in aid of construction are
considered taxable income. The Company’s tariff allows the Company to record these income taxes for inclusion in rate base. This asset is recognized for ratemaking purposes on a cash or flow-through basis and will be recovered in rates as it
reverses. In November 2021, the Infrastructure Investment and Jobs Act of 2021, or 2021 Infrastructure Act, repealed the tax treatment of customers’ advances for construction and contributions in aid of construction made after December 31, 2020.
Under normalization rules applicable to public utility property included in the 2017 Tax Act, the excess accumulated deferred income taxes on accelerated
depreciation from lowering of the enacted federal statutory corporate tax rate is recorded as a regulatory liability. The benefit will be given back to customers in rates over the remaining regulatory life of the property.
The regulatory liability for income taxes includes deferred taxes related to excess accumulated deferred income taxes on accelerated depreciation, other
postretirement benefits, customers’ advances for construction and contributions in aid of construction, and bad debts, as well as deferred investment tax credits. These liabilities will be given back to customers in rates, as tax deductions occur
over the next 1 to 50
years.
The regulatory liability for the Internal Revenue Service, or IRS, tangible property regulations, or TPR, catch-up deduction represents the tax benefits
realized on the Company’s 2014 income tax return for qualifying capital expenditures made prior to 2014. The period over which it will be given back to customers in rates was established in a rate order at 15 years beginning March 1, 2019.
Postretirement benefits include the difference between contributions and deferred pension expense and the overfunded status of the pension plans. The
overfunded status represents the difference between the projected benefit obligation and the fair market value of the assets. This liability will change in future years based on the amount of contributions made and market returns. The liability
will be given back to customers in rates over some period determined by the PPUC in a future rate filing.
Other Assets
Other assets consist mainly of the cash value of life insurance policies held as an investment by the Company for reimbursement of costs and benefits
associated with its supplemental retirement and deferred compensation programs.
Deferred Debt Expense
Deferred debt expense is amortized on a straight-line basis over the term of the related debt and is presented on the balance sheet as a direct reduction
from long-term debt.
Customers’ Advances for Construction
Customer advances are cash payments from developers, municipalities, customers, or builders for construction of utility plant, and are refundable upon
completion of construction, as operating revenues are earned. If the Company loans funds for construction to the customer, the refund amount is credited to the note receivable rather than paid out in cash. After all refunds to which the customer is
entitled are made, any remaining balance is transferred to contributions in aid of construction.
Contributions in Aid of Construction
Contributions in Aid of Construction is composed of (i) direct, non-refundable contributions from developers, customers, or builders for construction of
water infrastructure and (ii) customer advances that have become non-refundable. Contributions in aid of construction are deducted from the Company’s rate base, and therefore, no return is earned on property financed with contributions. The PPUC
requires that contributions received remain on the Company’s balance sheets indefinitely as a long-term liability.
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Interest Rate Swap Agreement
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest
rate risk. The Company utilizes an interest rate swap agreement to effectively convert its variable-rate debt to a fixed rate. Interest rate swaps are contracts in which a series of interest rate cash flows are exchanged over a prescribed period.
The notional amount on which the interest payments are based is not exchanged. The Company has designated the interest rate swap agreement as a cash flow hedge, classified as a financial derivative used for non-trading activities.
The accounting standards regarding accounting for derivatives and hedging activities require companies to recognize all derivative instruments as either
assets or liabilities at fair value on the balance sheets. In accordance with the standards, the interest rate swap is recorded on the balance sheets in other deferred credits at fair value.
The Company uses regulatory accounting treatment rather than hedge accounting to defer the unrealized gains and losses on its interest rate swap. These
unrealized gains and losses are recorded as a regulatory asset. Based on current ratemaking treatment, the Company expects the gains and losses to be recognized in rates and in interest expense as the swap settlements occur. Swap settlements are
recorded in the income statement with the hedged item as interest expense. Swap settlements resulted in the reclassification from regulatory assets to interest expense of $247 in 2022 and $372 in 2021. The overall swap result was a gain of $1,133 in 2022 and $274 in 2021. During the year ending
December 31, 2023, the Company expects to reclassify $32 (before tax) from regulatory assets to interest expense.
The interest rate swap will expire on October 1, 2029.
Stock-Based Compensation
The Company records compensation expense in the financial statements for stock-based awards based on the grant date fair value of those awards.
Stock-based compensation expense is recognized over the requisite service periods of the awards on a straight-line basis, which is generally commensurate with the vesting term. Forfeitures are recognized as they occur.
Income Taxes
Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes.
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. To the extent such income taxes increase or decrease future rates, an offsetting regulatory asset or liability has been recorded.
Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. As of December
31, 2022 and 2021,
deferred investment tax credits amounted to $428 and $463, respectively.
The Company filed for a change in accounting method under the IRS TPR effective in 2014. Under the change in accounting method, the Company is permitted
to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return. The Company was permitted to make this deduction for prior years (the “catch-up
deduction”) and each year going forward, beginning with 2014 (the “ongoing deduction”). After receiving approval from the PPUC in a rate order, the Company began to recognize the catch-up deduction, recorded as a regulatory liability, over 15 years beginning March 1, 2019. The ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense,
and a reduction in the amount of income taxes currently payable. The catch-up deduction resulted in a decrease in current income taxes payable and an increase to regulatory liabilities. Both the ongoing and catch-up deductions resulted in increases
to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions.
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The 2017 Tax Act, among other things, reduces the federal statutory corporate tax rate for tax years beginning in 2018 from 34% to 21%, treats customers’ advances for
construction and contributions in aid of construction as taxable income, eliminates certain deductions, and eliminates bonus depreciation on qualified water and wastewater property. This resulted in the remeasurement of the federal portion of the
Company’s deferred taxes as of December 31, 2017 to the 21% rate. The effect was recognized in income for the year ended December 31,