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PART I
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PART II
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PART III
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PART IV
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in documents incorporated by reference constitute “forward-looking statements” within the meaning
of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements include certain information relating to the Company’s business strategy and future prospects; including, but not limited to:
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the amount and timing of rate increases and other regulatory matters including the recovery of costs
recorded as regulatory assets;
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expected profitability and results of operations;
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trends;
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goals, priorities and plans for, and cost of, growth and expansion;
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strategic initiatives;
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availability of water supply;
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water usage by customers; and
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the ability to pay dividends on common stock and the rate of those dividends.
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The forward-looking statements in this Annual Report reflect what the Company currently anticipates will happen. What actually happens could differ
materially from what it currently anticipates will happen. The Company does not intend to make a public announcement when forward-looking statements in this Annual Report are no longer accurate, whether as a result of new information, what
actually happens in the future or for any other reason. Important matters that may affect what will actually happen include, but are not limited to:
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changes in weather, including drought conditions or extended periods of heavy rainfall;
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natural disasters, including pandemics such as the current outbreak of the novel strain of coronavirus
known as “COVID-19” and the effectiveness of the Company’s pandemic plans;
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levels of rate relief granted;
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the level of commercial and industrial business activity within the Company's service territory;
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construction of new housing within the Company's service territory and increases in population;
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changes in government policies or regulations, including the tax code;
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the ability to obtain permits for expansion projects;
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material changes in demand from customers, including the impact of conservation efforts which may
impact the demand of customers for water;
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changes in economic and business conditions, including interest rates;
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loss of customers;
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changes in, or unanticipated, capital requirements;
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the impact of acquisitions;
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changes in accounting pronouncements;
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changes in the Company’s credit rating or the market price of its common stock; and
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the ability to obtain financing.
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THE YORK WATER COMPANY
PART I
The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States and is duly organized under the laws of the
Commonwealth of Pennsylvania. The Company has operated continuously since 1816. The primary business of the Company is to impound, purify to meet or exceed safe drinking water standards and distribute water. The Company also owns and operates
three wastewater collection systems and five wastewater collection and treatment systems. The Company operates within its franchised water and wastewater territory, which covers portions of 51 municipalities within three counties in south-central
Pennsylvania. The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, for both water and wastewater in the areas of billing, payment procedures, dispute processing, terminations, service territory, debt and equity
financing and rate setting. The Company must obtain PPUC approval before changing any practices associated with the aforementioned areas.
Water service is supplied through the Company's own distribution system. The Company obtains the bulk of its water supply from both the South Branch and
East Branch of the Codorus Creek, which together have an average daily flow of 73.0 million gallons. This combined watershed area is approximately 117 square miles. The Company has two reservoirs, Lake Williams and Lake Redman, which together
hold up to approximately 2.2 billion gallons of water. The Company supplements its 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 of untreated
water per day. The Company also owns nine wells which are capable of providing a safe yield of approximately 597,000 gallons per day to supply water to the customers of its satellite systems in Adams County. As of December 31, 2021, the Company's
average daily availability was 39.6 million gallons, and average daily consumption was approximately 20.1 million gallons. The Company's service territory had an estimated population of 204,000 as of December 31, 2021. Industry within the
Company's service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergent, barbells, and motorcycles.
The Company's water business is somewhat dependent on weather conditions, particularly the amount and timing of rainfall. Revenues are particularly
vulnerable to weather conditions in the summer months. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping golf courses and sports fields irrigated. Conversely, prolonged
periods of dry weather could lead to drought restrictions from governmental authorities. Despite the Company’s adequate water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact
revenues. The Company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.
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. Increases in revenues are generally dependent on the Company’s ability to obtain rate increases from the PPUC in a timely manner and in adequate amounts and to increase volumes of water sold through increased
consumption and increases in the number of customers served. The Company continuously looks for water and wastewater acquisition and expansion opportunities both within and outside its current service territory as well as additional opportunities
to enter into bulk water contracts with municipalities and other entities to supply water.
The Company has agreements with several municipalities to provide sewer billing and collection services. The Company also has a service line protection
program on a targeted basis in order to further diversify its business. Under this optional program, customers pay a fixed monthly fee, and the Company will repair or replace damaged customer service lines, as needed, subject to an annual maximum
dollar amount. The Company continues to review and consider opportunities to expand both initiatives.
Competition
As a regulated utility, the Company operates within an exclusive franchised territory that is substantially free from direct competition with other
public utilities, municipalities, and other entities. Although the Company has been granted an exclusive franchise for each of its existing community water and wastewater systems, the ability of the Company to expand or acquire new service
territories may be affected by currently unknown competitors obtaining franchises to surrounding systems by application or acquisition. These competitors may include other investor-owned utilities, nearby municipally-owned utilities and sometimes
competition from strategic or financial purchasers seeking to enter or expand in the water and wastewater industry. The addition of new service territory and the acquisition of other utilities are generally subject to review and approval by the
PPUC.
Water and Wastewater Quality and Environmental Regulations
Provisions of water and wastewater service are subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act and related state
laws, and under federal and state regulations issued under these laws. In addition, the Company is subject to federal and state laws and other regulations relating to solid waste disposal, dam safety and other aspects of its operations.
The federal Safe Drinking Water Act establishes criteria and procedures for the U.S. Environmental Protection Agency, or EPA, to develop national quality
standards. Regulations issued under the Act, and its amendments, set standards on the amount of certain contaminants allowable in drinking water. Current requirements are not expected to have a material impact on the Company’s operations or
financial condition as it already meets or exceeds standards. In the future, the Company may be required to change its method of treating drinking water and may incur additional capital investments if new regulations become effective.
Under the requirements of the Pennsylvania Safe Drinking Water Act, or SDWA, the Pennsylvania Department of Environmental Protection, or DEP, regulates
the quality of the finished water supplied to customers. The DEP requires the Company to submit monthly reports showing the results of daily bacteriological and other chemical and physical analyses. As part of this requirement, the Company
conducts over 70,000 laboratory tests annually. Management believes that the Company complies with the standards established by the agency under the SDWA. The DEP assists the Company by regulating discharges into the Company’s watershed area to
prevent and eliminate pollution.
The federal Groundwater Rule establishes protections against microbial pathogens in community water supplies. This rule requires additional testing of
water from well sources, and under certain circumstances requires demonstration and maintenance of effective disinfection. The Company holds public water supply permits issued by the DEP, which establishes the groundwater source operating
conditions for its wells, including demonstrated 4-log treatment of viruses. All of the satellite systems operated by the Company are in compliance with the federal Groundwater Rule.
The Clean Water Act regulates discharges from water and wastewater treatment facilities into lakes, rivers, streams, and groundwater. The Company
complies with this Act by obtaining and maintaining all required permits and approvals for discharges from its water and wastewater facilities and by satisfying all conditions and regulatory requirements associated with the permits.
The DEP monitors the quality of wastewater discharge effluent under the provisions of the National Pollutant Discharge Elimination System, or NPDES. The
Company submits monthly reports to the DEP showing the results of its daily effluent monitoring and removal of sludge and biosolids. The Company is not aware of any significant environmental remediation costs necessary from the handling and
disposal of waste material from its wastewater operations.
Lead and copper may enter drinking water primarily through plumbing materials. The Company is required to comply with the Lead and Copper Rule
established by the EPA and administered by the DEP. The Company must monitor drinking water at customer taps for compliance with this rule. If lead concentrations exceed an action level, the Company must undertake a number of additional actions
to control corrosion, inform the public about steps they should take to protect their health and may be required to replace lead service lines under its control. See “Management’s Discussion and Analysis – Environmental Matters” for a discussion
of the Company’s compliance with the Lead and Copper rule.
The DEP and the Susquehanna River Basin Commission, or SRBC, regulate the amount of water withdrawn from streams in the watershed to assure that
sufficient quantities are available to meet the needs of the Company and other regulated users. Through its Division of Dam Safety, the DEP regulates the operation and maintenance of the Company’s impounding dams. The Company routinely inspects
its dams and prepares annual reports of their condition as required by DEP regulations. The DEP reviews these reports and inspects the Company’s dams. The DEP most recently inspected the Company’s dams in 2021.
Since 1980, the DEP has required any new dam to have a spillway that is capable of passing the design flood without overtopping the dam. The design
flood is either the Probable Maximum Flood, or PMF, or some fraction of it, depending on the size and location of the dam. PMF is very conservative and is calculated using the most severe combination of meteorological and hydrologic conditions
reasonably possible in the watershed area of a dam.
The Company engaged a professional engineer to analyze the spillway capacities at the Lake Williams and Lake Redman dams and validate the DEP’s
recommended flood design for the dams. Management presented the results of the study to the DEP in December 2004, and DEP then requested that the Company submit a proposed schedule for the actions to address the spillway capacities. Thereafter,
the Company retained an engineering firm to prepare preliminary designs for increasing the spillway capacities to pass the PMF through armoring the dams with roller compacted concrete. Management has met with the DEP on a regular basis to review
the preliminary design and discuss scheduling, permitting, and construction requirements. Recently, the DEP expressed concern regarding the stability of the Lake Williams spillway in light of current design standards. The Company is currently
completing the final design and the permitting process to armor and replace the spillway of the Lake Williams dam. The Company finalized its plans in 2021 and will begin construction in 2022 at a total cost of approximately $32 million. The Lake
Redman dam will be reviewed following the completion of the work on the Lake Williams dam.
Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally
recognized by state public utility commissions as appropriate for inclusion in establishing rates. The capital expenditures currently required as a result of water quality standards and environmental requirements have been budgeted in the
Company’s capital program and represent less than 15% of its expected total capital expenditures over the next five years. The Company is currently in compliance with wastewater environmental standards and does not anticipate any major capital
expenditures for its current wastewater business.
Growth
(All dollar amounts are stated in thousands of dollars)
The Company continues to grow its number of customers and distribution facilities.
The growth in the number of customers of the Company is due primarily to the acquisition of water and wastewater systems and organic growth. During the
year ended December 31, 2021, the Company increased its number of customers from 72,681 to 73,144. See “Management’s Discussion and Analysis – Acquisitions and Growth” for a discussion of the Company’s recent acquisitions.
The Company continues to grow its water distribution and wastewater collection systems to provide reliable service to its expanding franchised service
territory and the increasing population within that territory. During the year ended December 31, 2021, the Company installed an additional 62,375 feet of water distribution mains and acquired an additional 171,587 feet of wastewater collection
mains resulting in 999 miles of water mains and 73 miles of wastewater mains as of December 31, 2021.
The Company’s growth in revenues is primarily a result of customer growth and increases in water and wastewater rates. During the year ended December
31, 2021, the Company recognized revenue of $55,119, an increase of $1,267, or 2.4%, as compared to $53,852 during the year ended December 31, 2020. In 2021, 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. See “Management’s Discussion and Analysis – Rate
Matters” for a discussion of the Company’s rate case management.
Information about Our Executive Officers
The Company presently has 110 employees, all of which are full time employees including the officers detailed in the information set forth under the
caption “Executive Officers of the Company” of the 2022 Proxy Statement incorporated herein by reference.
Available Information
The Company makes available free of charge, on or through its website (www.yorkwater.com), its annual report on Form 10-K, its quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes
it to, the SEC. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, and other information about SEC registrants, including the Company.
Shareholders may request, without charge, copies of the Company’s financial reports. Such requests, as well as other investor relations inquiries,
should be addressed to:
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Molly E. Norton
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The York Water Company
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(717) 718-2942
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Investor Relations &
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130 East Market Street
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(800) 750-5561
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Communications Administrator
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York, PA 17401
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Not applicable.
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Item 1B.
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Unresolved Staff Comments.
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None.
Source of Water Supply
The Company owns two impounding dams 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.
In addition to the two impounding dams, the Company owns a 15-mile pipeline from the Susquehanna River to Lake Redman that provides access to a supply of
an additional 12.0 million gallons per day, or MGD.
The Company also owns four satellite water systems in Adams County, Pennsylvania. The systems consist of nine groundwater wells capable of providing a
combined safe yield of approximately 597,000 gallons per day.
As of December 31, 2021, the Company's present average daily availability was 39.6 million gallons, and daily consumption was approximately 20.1 million
gallons.
Pumping Stations
The Company's main pumping station is located in Spring Garden Township 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 several miles south of Wrightsville, PA. 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 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 water filtration plant is located in Spring Garden Township 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. Based on an average daily consumption in 2021 of approximately 20.1 million gallons, the Company believes the
pumping and filtering facilities are adequate to meet present and anticipated demands.
The Company’s sediment recycling facility is located adjacent to its 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.
The Company has five wastewater treatment facilities located in three counties within south-central Pennsylvania. The wastewater treatment plants are
small, packaged, extended aeration activated sludge facilities with a combined permitted flow capacity of 322,000 gallons. With a projected maximum daily demand of 123,000 gallons, the plants’ flow paths offer both capacity and operational
redundancy for maintenance, high flow events, and potential growth.
Distribution and Collection
The distribution system of the Company has approximately 999 miles of water main lines which range in diameter from 2 inches to 36 inches. The
distribution system includes 33 booster stations and 35 standpipes and reservoirs capable of storing approximately 58.9 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 eight wastewater collection systems of the Company have a combined approximate 346,000 feet of gravity collection mains and 38,000 feet of pressure
force mains along with 13 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.
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Item 3.
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Legal Proceedings.
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There are no material legal proceedings involving the Company.
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Item 4.
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Mine Safety Disclosures.
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Not applicable.
PART II
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Item 5.
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Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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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, 2021 numbered approximately 1,933.
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 2021.
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Item 6.
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Selected Financial Data.
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Not applicable.
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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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(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 five 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 rainfall, economic, and market conditions can have an adverse effect on revenues. The Company experienced increased revenues in
2021 compared to 2020 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 2021, 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.
The Company has entered into agreements with municipalities to provide sewer 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
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) was reported and was later characterized by the World Health Organization as
a pandemic. On March 6, 2020, Governor Tom Wolf signed an emergency disaster declaration for the Commonwealth of Pennsylvania which was extended for an additional ninety days five times, most recently on May 19, 2021. This emergency declaration
was ended on June 16, 2021, by joint resolution of the Pennsylvania legislature. However, developments in this area continue at the local, state, and national levels and the Company continues to stay abreast of these developments. The Company has
taken steps, consistent with directions from local, state, and federal 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. The Company continues to monitor guidance from state and
local authorities and, although most restrictions have been lifted, has made some modifications to its operations in order to comply with Pennsylvania’s guidelines. This includes implementing enhanced safety procedures in its lobby and other
measures such as holding virtual meetings and maintaining social distancing practices, when appropriate. These 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 has not impacted 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.
As a water and wastewater utility, it is the Company’s mission to provide uninterrupted water and wastewater service. Due to the effect of COVID-19 on
the general public, in compliance with an order from the PPUC, the Company paused shut-off procedures for delinquent customers on March 13, 2020. In addition, the Company stopped billing late payment charges. These customers were billed at normal
tariff rates for the water they used, and wastewater service provided. As allowed by the PPUC, the Company resumed normal shut-off procedures and began billing late payment charges for most customers in January 2021. Most remaining PPUC required
customer protections specific to the COVID-19 pandemic fully expired on April 1, 2021 with the exception of the requirement to offer extended term payment agreements to certain “protected customers” as defined by PPUC order, which expired on
September 30, 2021. Certain customers are eligible to receive utility assistance made available through federal relief funds through organizations not related to the Company.
The Company has begun to see demand by customer class revert back to close to pre-pandemic levels. However, the Company may continue to experience
changes in demand as the response to this pandemic continues. The duration and magnitude of these changes is currently unknown and difficult to predict.
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 2021 was strong under the above measures. Operating revenues increased in 2021 compared to 2020 primarily due to an
increase in the number of customers and revenues from the DSIC. The increase in operating expenses was higher than the increase in operating revenues, but other net expenses decreased primarily due to increased allowance for funds used during
construction which offset a prior year non-recurring gain on life insurance, and 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
2021 over 2020 of 2.3% and a return on year end common equity of 11.1%, comparable with the 2020 result of 11.6% and the five-year historical average of 10.8%.
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 27.6%. In 2021, the ratio was higher than the average at 30.8% 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.
2021 Compared with 2020
Net income for 2021 was $16,984, an increase of $386, or 2.3%, from net income of $16,598 for 2020. The primary contributing factors to the increase
were higher operating revenues and lower income taxes, which were partially offset by higher expenses and a prior year gain on life insurance, not repeated this year.
Operating revenues for 2021 increased $1,267, or 2.4%, from $53,852 for 2020 to $55,119 for 2021. The increase was primarily due to growth in the
customer base and revenues from the DSIC of $627. The average number of water customers served in 2021 increased as compared to 2020 by 703 customers, from 68,919 to 69,622 customers. The average number of wastewater customers served in 2021
increased as compared to 2020 by 246 customers, from 3,079 to 3,325 customers, due to acquisitions during 2020. Total per capita consumption for 2021 was approximately 1.2% higher than the same period of last year, but residential demand
decreased. Additional billing and revenue collection services also added to revenues. In 2022, the Company expects revenues to show a modest increase due to the revenues from the DSIC. An increase in the number of water and wastewater customers
from acquisitions and growth within the Company’s service territory are also expected to add to revenues. The duration and severity of the COVID-19 pandemic including any resulting economic slowdown or changes in consumption patterns could impact
results. Other regulatory actions and weather patterns could also impact results.
Operating expenses for 2021 increased $2,302, or 7.8%, from $29,421 for 2020 to $31,723 for 2021. The increase was primarily due to higher expenses of
approximately $682 for depreciation, $543 for insurance, $526 for wastewater treatment, $402 for wages, and $241 for water treatment and distribution system maintenance. Other expenses increased by a net of $265. The increased expenses were
partially offset by $236 for a lower provision for uncollectible accounts and reduced expenses of $121 for purchased power. In 2022, the Company expects depreciation expense to continue to rise due to additional investment in utility plant, and
other expenses to increase at a moderate rate as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.
Interest on debt for 2021 increased $219 or 4.7%, from $4,707 for 2020 to $4,926 for 2021. The increase was primarily due to an increase in long-term
debt outstanding. The average debt outstanding under the lines of credit was $11,487 for 2021 and $7,467 for 2020. The weighted average interest rate on the lines of credit was 1.30% for 2021 and 1.59% for 2020. Interest expense for 2022 is
expected to be slightly higher due to continued borrowings under the line of credit and expected increases in short term interest rates. A potential equity offering to pay down the line of credit borrowings may offset the expected increase.
Allowance for funds used during construction increased $691, from $530 in 2020 to $1,221 in 2021 due to a higher volume of eligible construction.
Allowance for funds used during construction in 2022 is expected to increase based on a projected increase in the amount of eligible construction.
A non-recurring gain on life insurance of $515 was recorded in 2020 as a result of a death benefit from a life insurance policy. No similar gains are
anticipated at this time.
Other income (expenses), net for 2021 reflects decreased expenses of $418 as compared to 2020. Lower retirement expenses of approximately $382 and
higher earnings on life insurance policies of approximately $72 were the primary reasons for the decrease. Other expenses increased by a net of $36. In 2022, 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 2021 decreased $898, or 44.5%, compared to 2020 primarily due to higher deductions from the IRS TPR. The Company’s effective tax rate
was 6.2% for 2021 and 10.8% for 2020. The Company's effective tax rate for 2022 will largely be determined by the level of eligible asset improvements expensed for tax purposes under TPR.
Rate Matters
See Note 10 to the Company’s financial statements included herein for a discussion of its rate matters.
Effective January 1, 2022, the Company's tariff included a distribution system improvement charge on revenues of 3.19%.
The Company expects to file a rate increase request in 2022.
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 July 30, 2021, the Company signed an agreement to purchase the water assets of Scott Water Company in Greene Township, Franklin County, Pennsylvania.
Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the third quarter of 2022 at which time the Company will add approximately 25 water customers.
On April 22, 2021, the Company signed an agreement to purchase the water assets and wastewater collection and treatment assets jointly owned by
Letterkenny Industrial Development Authority and Franklin County General Authority in Letterkenny and Greene Townships, Franklin County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory
authorities. Closing is expected in the second quarter of 2022 at which time the Company will add approximately 90 water and wastewater customers.
On May 27, 2020, the Company signed an agreement to purchase the water assets and wastewater collection and treatment assets of Country View Manor
Community, LLC in Washington Township, York County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second quarter of 2022 at which time the
Company will add approximately 50 water and wastewater customers.
On October 8, 2013, the Company signed an agreement to purchase the wastewater collection and treatment assets of SYC WWTP, L.P. in Shrewsbury and
Springfield Townships, York County, Pennsylvania. On July 1, 2020, the Company signed an agreement to purchase the Albright Trailer Park water assets and wastewater collection assets of R.T. Barclay, Inc. in Springfield Township, York County,
Pennsylvania. Completion of the acquisitions is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second quarter of 2022, at which time the Company will add approximately 90 combined
wastewater customers and approximately 60 water customers through an interconnection with its current water distribution system. The wastewater customers of the
Albright Trailer Park are currently served by SYC WWTP, L.P. and the water customers are currently served by the Company, each through a single customer connection to the park.
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 2022 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 2021, the Company invested $34,409 in construction expenditures for routine items, an upgrade to the enterprise software system, and an elevated
water tank, as well as various replacements and improvements to infrastructure. In addition, the Company invested $11,991 in the acquisition of one wastewater system. The Company replaced approximately 61,000 feet of main in 2021. The Company
was able to fund construction expenditures using internally-generated funds, line of credit borrowings, 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 2022 and 2023 of approximately $44,000 and $50,000, respectively, exclusive of any
acquisitions not yet approved. In addition to routine transmission and distribution projects, a portion of the anticipated 2022 and 2023 expenditures will be for additional main extensions, dam improvements, an elevated water tank, water treatment
plant construction, and various replacements of infrastructure. The Company intends to use primarily internally-generated funds for its anticipated 2022 and 2023 construction and fund the remainder through line of credit borrowings, 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 2022 and 2023. The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2022 and 2023, to fund anticipated construction and acquisition expenditures.
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, 2021, the Company borrowed $29,320 under its line of credit and incurred
a cash overdraft on its cash management account of $1,746, 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.
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 2021, a strengthening in the timeliness of payments resulted in a decrease 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 2021, 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 an increase in its allowance for doubtful accounts was warranted. 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 2021, the Company generated $22,959 internally as compared to $20,235 in 2020. The increase from 2020 was primarily due to
higher net income and lower income taxes paid.
Credit Lines
Historically, the Company has borrowed under its lines of credit before refinancing with long-term debt or equity capital. As of December 31, 2021, 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 2023. The Company had $29,320 in outstanding
borrowings under its line of credit as of December 31, 2021. The interest rate on line of credit borrowings as of December 31, 2021 was 1.30%. 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 2022.
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 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 49.4% as of December 31, 2021, compared with 46.9% as of December 31, 2020. Based on the debt percentage approaching fifty percent, the Company is considering issuing additional equity in 2022. A debt to total capitalization ratio between
forty-six 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, 2021.
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. The Company’s line of credit agreement explicitly states
that another index may be used if LIBOR is discontinued or otherwise unavailable. The Company believes that it is implicit in its other agreements that a successor rate to LIBOR may be used. The Company is not yet aware what successor rate will
be used and therefore cannot estimate the impact to the Company’s financial position, results of operations and cash flows, but it could include an increase in the cost of the variable rate indebtedness.
Income Taxes, Deferred Income Taxes and Uncertain Tax Positions
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. 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.
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. As a result of the ongoing deduction, the net income tax benefits of $2,361 and
$1,720 for the years ended December 31, 2021 and 2020, respectively, reduced income tax expense and flowed through to net income. 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. 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 was permitted to make this deduction for prior years. As a result of the catch-up deduction, income tax benefits of $3,887 were deferred as a regulatory liability. After
receiving approval from the PPUC in its most recent rate order, the Company began to recognize the catch-up deduction, recorded as a regulatory liability, over 15 years beginning March 1, 2019. As a result, the Company recognized $259 in income
taxes during each of the years ended December 31, 2021 and 2020, respectively.
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.
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, 2021. See Note 14 to the Company’s financial
statements included herein for additional details regarding income taxes.
Common Stock
Common stockholders’ equity as a percent of the total capitalization was 50.6% as of December 31, 2021, compared with 53.1% as of December 31, 2020. The
ratio decreased in 2021 due to higher debt primarily from a wastewater system acquisition and increased capital expenditures. It is the Company’s intent to target a ratio between fifty and fifty-four percent. Based on the percentage approaching
fifty percent, the Company is considering issuing additional equity in 2022.
The Company has an effective “shelf” Registration Statement on Form S-3 on file with the Securities and Exchange Commission, pursuant to which the
Company may offer an aggregate remaining amount of up to $50,000 of its common stock or debt securities subject to market conditions at the time of any such offering.
Credit Rating
On October 8, 2021, 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 2022, 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.
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 entered into a consent order agreement with the Pennsylvania
Department of Environmental Protection in December 2016 after the Company determined it exceeded the action level for lead as established by the Lead and Copper Rule, or LCR, issued by the U.S. Environmental Protection Agency. The Company did not have an exceedance in any subsequent compliance test. Under the agreement, the Company successfully completed its commitment to exceed the LCR
replacement schedule by replacing all the known company-owned lead service lines within four years from the agreement. Any additional company-owned lead service lines that are discovered will be replaced and included in utility plant but are not
expected to have a material impact on the financial position of the Company.
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 $1,351 and $1,204 through December 31, 2021 and 2020, respectively, and is included as a regulatory asset. Based on its
experience, the Company estimates that lead customer-owned service lines replacements will cost $1,400. This estimate is subject to adjustment as more facts become available.
Dividends
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 2020, the Company's dividend payout ratios relative to net income and net cash provided by operating activities were 57.2% and 46.4%, respectively. During the fourth quarter of 2021, the Board of Directors increased the
dividend by 4.00% from $0.1874 per share to $0.1949 per share per quarter.
The Company’s Board of Directors declared a dividend in the amount of $0.1949 per share at its January 2022 meeting. The dividend is payable on April
14, 2022 to shareholders of record as of February 28, 2022. While the Company expects to maintain this dividend amount in 2022, 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.
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:
regulatory assets and liabilities, revenue recognition, accounting for its pension plans, and income taxes.
Regulatory Assets and Liabilities
Generally accepted accounting principles define accounting standards for companies whose rates are established by or are subject to approval by an
independent third-party regulator. In accordance with the accounting standards, the Company defers costs and credits on its balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in
the rate-making process in a period different from when the costs and credits were incurred. These deferred amounts are then recognized in the statement of income in the period in which they are reflected in customer rates. If the Company later
finds that these assets and liabilities cannot be included in rate-making, they are adjusted appropriately. See Note 1 for additional details regarding regulatory assets and liabilities.
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 2020 and 2021.
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, 2021 and 2020 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 2.65% at December 31, 2021 and 2.30% at December 31, 2020.
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.
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 2020 and 2021. 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.
Income Taxes
The Company estimates the amount of income tax payable or refundable for the current year and the deferred income tax liabilities and assets that results
from estimating temporary differences resulting from the treatment of certain items, such as depreciation, for tax and financial statement reporting. Generally, these differences result in the recognition of a deferred tax asset or liability on
the balance sheet and require the Company to make judgments regarding the probability of the ultimate tax impact of the various transactions entered into. Based on these judgments, it may require tax reserves or valuation allowances on deferred
tax assets to reflect the expected realization of future tax benefits. The Company believes its determination of what qualifies as a repair expense tax deduction versus a capital cost as it relates to the IRS TPR ongoing and catch-up deductions is
consistent with the regulations. The Company also believes it has appropriately applied the provisions of the 2017 Tax Act and the 2021 Infrastructure Act including properly applying the accounting standards related to these acts. Actual income
taxes could vary from these estimates and changes in these estimates could increase income tax expense in the period that these changes in estimates occur.
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.
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk.
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Not applicable.
