The York Water Company: FY2014 Form 10-K Summary
Business context and reporting period
The York Water Company is a regulated water and wastewater utility serving 39 municipalities in York County and nine municipalities in Adams County, Pennsylvania. The filing covers the fiscal year ended December 31, 2014, with fourth-quarter information included in the unaudited quarterly data. The Pennsylvania Public Utility Commission regulates rates, financing, service territory, billing and related matters.
At year-end, the Company served 65,102 customers and an estimated population of 192,000. Average daily water availability was 35.2 million gallons versus consumption of approximately 18.3 million gallons. The Company operated approximately 951 miles of water mains.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenues | $45.900 million | $42.383 million | 8.3% increase |
| Operating expenses | $23.823 million | $21.622 million | 10.2% increase |
| Operating income | $22.077 million | $20.761 million | 6.3% increase |
| Net income | $11.484 million | $9.654 million | 19.0% increase |
| Basic EPS | $0.89 | $0.75 | 18.7% increase |
| Cash flow from operations | $18.766 million | $18.438 million | 1.8% increase |
| Capital expenditures | $14.139 million | $9.852 million | 43.5% increase |
| Long-term debt, including current portion | $84.885 million | $84.928 million | Broadly unchanged |
Operating margin was approximately 48.1%, compared with 49.0% in 2013, while net margin improved to approximately 25.0% from 22.8%. Return on year-end common equity was 11.0%, the Company's highest level in more than five years. Total assets were $304.339 million and common stockholders' equity was $104.563 million at December 31, 2014.
Cash and cash equivalents declined to $1.488 million from $7.565 million, primarily reflecting higher capital expenditures and share repurchases. The Company had $29.0 million of unsecured credit lines available and no outstanding borrowings under those lines at year-end.
Dividends declared were $0.5788 per share for the year, and the quarterly dividend increased 4.5% in the fourth quarter to $0.1495 per share. The dividend payout ratio was 64.8% of net income and 39.4% of operating cash flow.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Operating revenues | $11.499 million | $10.665 million |
| Operating income | $5.427 million | $5.320 million |
| Net income | $3.551 million | $2.638 million |
| Basic EPS | $0.28 | $0.21 |
Fourth-quarter 2014 net income included a $1.342 million tax benefit from the ongoing deduction permitted under the IRS tangible property regulations. The fourth quarter also included the full-year effect of this tax-method change, making reported quarterly earnings less representative of recurring profitability.
Material changes versus the prior comparable period
- An 11.7% water-rate increase became effective February 28, 2014 and was the principal driver of revenue growth. Customer additions from acquisitions also contributed, while total per-capita water consumption declined 0.4%.
- Operating expenses increased $2.201 million. Major increases included approximately $589 thousand of pension expense, $489 thousand of salary and wage expense, $188 thousand of depreciation, and $165 thousand of health-insurance expense.
- Interest expense declined because the Company refinanced $14.880 million of 6.00% debt with 4.50% Series 2014 bonds due 2038.
- A $316 thousand gain on the sale of land was recorded in 2014; no comparable gain occurred in 2013.
- Other expense increased by approximately $1.022 million, primarily due to higher retirement expenses, additional charitable contributions and lower earnings on life-insurance policies.
- The effective income-tax rate decreased to 29.8% from 37.6%, primarily because of the IRS tangible property regulations. The $4.314 million catch-up tax benefit was recorded as a regulatory liability, while the $1.342 million ongoing benefit reduced 2014 income-tax expense.
- The Company completed acquisitions adding approximately 400 wastewater customers at East Prospect, approximately 70 water customers at Forest Lakes and approximately 200 water customers at Lincoln Estates. Additional acquisitions expected to add approximately 330 customers were planned for 2015, subject to approvals.
- Utility plant increased to $316.525 million from $301.570 million, and deferred regulatory assets increased substantially to $32.614 million from $16.123 million.
- The Company repurchased and retired 282,570 shares in 2014 for approximately $5.692 million. There were 823,016 shares remaining under the authorized repurchase program at year-end.
Guidance, outlook, risks and unusual items
Management expected 2015 revenues to increase modestly, supported by the full-year benefit of the 2014 rate increase and additional water and wastewater customers. Management projected an effective tax rate of approximately 30% to 33% in 2015 and expected depreciation and other operating costs to rise as infrastructure investment and acquisitions continue.
Planned construction and acquisition expenditures were approximately $14.1 million in 2015 and $15.8 million in 2016, excluding acquisitions not yet approved. The Company expected to fund these needs primarily through internally generated cash, with additional funding from credit lines, stock plans, customer advances and potentially debt or equity offerings.
- Rate recovery is dependent on timely and adequate PPUC approval. Failure to recover investments, pension costs, regulatory assets or environmental expenditures could adversely affect results.
- Weather, drought restrictions, conservation and declining water consumption can reduce demand and revenue. The business is seasonally stronger in warmer months.
- The Company is concentrated in central and southern Pennsylvania and is exposed to local economic, demographic and industrial conditions.
- The $12.0 million variable-rate PEDFA debt may be tendered by holders and is supported by a letter of credit expiring June 30, 2017. The debt is hedged with an interest-rate swap, but the Company remains exposed to remarketing, credit and spread risk.
- Pension obligations were underfunded by $10.309 million at year-end, compared with $4.952 million in 2013. The Company planned to contribute $2.300 million to the plans in 2015.
- The Company expects to armor its Lake Williams and Lake Redman dams beginning in 2017 or 2018. Estimated cost is approximately $5 million per dam.
- Water-quality, wastewater, dam-safety, cybersecurity, labor, financing and acquisition risks could increase costs or disrupt operations. No material legal proceedings were reported.
The filing text contains an apparent inconsistency: one MD&A passage refers to 2013 operating revenues of $42.283 million, while the selected financial data, income statements and quarterly data report $42.383 million. The latter value is used above.
Most important facts for an investor to verify
- Whether the 2014 earnings improvement remains after excluding the $1.342 million IRS tangible-property tax benefit and the $316 thousand land-sale gain.
- The timing and sufficiency of future PPUC rate relief, including recovery of regulatory assets and the $4.314 million tax-related regulatory liability.
- Funding plans for approximately $29.9 million of projected 2015–2016 construction and acquisition expenditures.
- Renewal of the $5.0 million credit line maturing in June 2015 and continued availability of the $29.0 million credit facilities.
- Remarketing and letter-of-credit renewal risk for the $12.0 million variable-rate bonds, as well as the $2.592 million fair value liability of the interest-rate swap.
- Pension funding requirements, the impact of lower discount rates and the recovery of pension-related costs through customer rates.
- Actual customer additions and financial contribution from announced acquisitions and planned dam, treatment-facility and infrastructure projects.