The York Water Company: Q3 2014 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2014. The York Water Company provides regulated water service in Pennsylvania and operates wastewater collection and treatment systems. Its principal regulator is the Pennsylvania Public Utility Commission. The interim financial statements are unaudited and should be read with the 2013 Form 10-K.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenues | $12.062 million | $10.912 million | $34.401 million | $31.718 million |
| Operating income | $6.092 million | $5.367 million | $16.650 million | $15.441 million |
| Net income | $3.065 million | $2.535 million | $7.933 million | $7.016 million |
| Basic EPS | $0.23 | $0.19 | $0.61 | $0.54 |
| Operating margin | 50.5% | 49.2% | 48.4% | 48.7% |
| Net margin | 25.4% | 23.2% | 23.1% | 22.1% |
Third-quarter net income increased 20.9%, while nine-month net income increased 13.1%. Operating revenue increased 10.5% in the quarter and 8.5% year to date, primarily reflecting an 11.7% water-rate increase effective February 28, 2014. Average water customers increased by 413 in the quarter and 401 year to date. Wastewater customers increased primarily because of the East Prospect acquisition.
Operating expenses increased 7.7% in the quarter and 9.1% year to date. Key increases included pension, salary and wage, depreciation, insurance, wastewater treatment, distribution-system maintenance, rate-case, and technology-upgrade costs. Interest expense declined 4.3% in the quarter and 2.6% year to date following debt refinancing.
Net cash provided by operating activities was $13.954 million for the first nine months of 2014, compared with $13.667 million in 2013. Investing activities used $9.219 million, including $9.304 million of utility-plant additions and $293 thousand for acquisitions. Financing activities used $9.068 million, including $5.551 million of dividends and $5.180 million of share repurchases. Cash and cash equivalents declined to $3.232 million from $7.565 million at December 31, 2013.
Total debt, including current maturities, was $84.896 million at September 30, 2014, compared with $84.928 million at year-end 2013. Debt represented 45.2% of total capitalization, versus 45.1% at year-end. The Company had no borrowings under its $29 million of unsecured credit lines. Stockholders’ equity was $102.881 million, and total assets were $284.770 million.
Material changes versus the prior comparable period
- The February 2014 rate increase was the principal driver of revenue growth; consumption was 0.3% higher in the quarter but 0.3% lower for the first nine months.
- The Company refinanced $14.880 million of 6.00% debt with 4.50% Series 2014 bonds due 2038, reducing interest expense and the effective debt rate.
- A $316 thousand gain on the sale of land related to a Pennsylvania Department of Transportation realignment project benefited 2014 results. No additional land sales were anticipated.
- The Company acquired East Prospect Borough Authority wastewater facilities, adding approximately 400 customers, and Forest Lakes Water Association water assets, adding approximately 70 customers. Management stated that the acquisitions were immaterial to total results.
- The Company repurchased and retired 256,943 shares during the first nine months, compared with 94,414 shares in the prior-year period. Approximately 848,643 shares remained available under the repurchase authorization at September 30, 2014.
- The distribution system improvement charge produced no revenue in the third quarter and $283 thousand year to date, compared with $380 thousand and $1.047 million, respectively, in 2013. Management did not expect to collect the charge before the second half of 2015.
Guidance, outlook, risks and unusual items
Management expected the remainder of 2014 revenue to remain generally consistent with the first nine months, as rate increases and customer additions offset lower consumption. The Company expected approximately $3.0 million of additional 2014 construction expenditures, excluding potential acquisitions, funded primarily with cash, internally generated funds, stock-plan proceeds, customer contributions, and credit facilities as needed.
Management believed current cash and credit availability would support anticipated 2014 and 2015 needs. The Company maintained $29 million of unsecured lines of credit, with maturities extending to May 2016 for $24 million and June 2015 for $5 million. Management stated that it was in compliance with debt covenants and expected no additional pension contributions during the remainder of 2014 after contributing $2.182 million through September 30.
Potential future acquisitions were expected to add approximately 30, 200, 90, 80, and 160 customers, respectively, subject to regulatory approvals and scheduled for late 2014 or 2015. Management expected these transactions to be immaterial to total results.
The Company expected to record an adjustment in the fourth quarter related to IRS tangible-property regulations and a retroactive repair deduction. Management expected the change to reduce the effective tax rate and increase net income, although the filing does not provide a clear quantified amount.
Key risks include weather and drought restrictions, customer conservation, water demand, commercial and industrial activity, rate-case outcomes, regulatory approvals, capital requirements, financing availability, interest rates, credit-rating changes, pension-market performance, customer losses, and the ability to recover regulatory assets. An interest-rate swap hedges $12 million of variable-rate debt, expires October 1, 2029, and had a $2.209 million liability at September 30, 2014. A credit-rating or other default event could have required approximately $2.238 million of immediate payment.
Important facts for investors to verify
- Confirm the sustainability of revenue growth after the February 2014 rate increase and the absence of the DSIC until potentially the second half of 2015.
- Review the impact and timing of the IRS tangible-property and repair-deduction adjustment expected in the fourth quarter.
- Monitor cash depletion, planned capital expenditures, share repurchases, acquisitions, and reliance on credit facilities.
- Verify the benefits and future debt-service implications of the 4.50% refinancing.
- Assess exposure associated with the interest-rate swap, including its $2.209 million fair-value liability and credit-rating covenant.
- Evaluate pension expense, regulatory-asset recovery, rate relief, weather conditions, water consumption, and drought-related restrictions.
- Confirm completion and regulatory approval of pending acquisitions and their actual customer and financial contributions.