The York Water Company — Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
The York Water Company provides regulated water service across portions of York and Adams Counties, Pennsylvania, and operates wastewater collection and treatment systems. The unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company served approximately 64,132 average water customers during the quarter and operated under Pennsylvania Public Utility Commission regulation.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Operating revenues | $11.768 million | $10.737 million | $22.339 million | $20.806 million |
| Operating income | $5.800 million | $5.301 million | $10.558 million | $10.074 million |
| Net income | $2.757 million | $2.342 million | $4.868 million | $4.481 million |
| Basic EPS | $0.22 | $0.18 | $0.38 | $0.35 |
| Operating margin | 49.3% | 49.4% | 47.3% | 48.4% |
| Net margin | 23.4% | 21.8% | 21.8% | 21.5% |
| Operating cash flow | — | — | $7.410 million | $7.484 million |
Six-month capital expenditures were $5.107 million, and acquisitions of water and wastewater systems used $313,000. Cash and cash equivalents were $2.083 million at June 30, 2014, down from $7.565 million at December 31, 2013. Total debt, including current maturities, was $84.907 million, or 45.5% of total capitalization, compared with 45.1% at year-end 2013.
The company had $29.0 million of unsecured committed credit lines and no outstanding borrowings under those facilities at June 30, 2014. Credit lines were renewed or extended to May 2016 and June 2015. Standard & Poor’s affirmed the company’s A- rating with a stable outlook and adequate liquidity.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 9.6%, and six-month revenue increased 7.4%, primarily from an 11.7% water-rate increase effective February 28, 2014, wastewater customer additions, and certain nonrecurring revenues in the quarter.
- Second-quarter net income increased 17.7% to $2.757 million; six-month net income increased 8.6% to $4.868 million.
- Operating expenses increased 9.8% in both the quarter and six-month period. Major drivers included higher pension, wage, maintenance, insurance, technology, wastewater-treatment, and rate-case costs.
- Per-capita water consumption declined 1.8% in the second quarter and 0.6% for the first six months, despite customer growth.
- The company refinanced $14.880 million of 6.00% 2008 PEDFA bonds with 4.50% Series 2014 bonds due 2038, reducing interest expense. Six-month interest expense declined 1.7%.
- The company acquired East Prospect Borough Authority wastewater facilities, adding approximately 400 wastewater customers, and Forest Lakes Water Association water assets, adding approximately 70 water customers. Management stated that the acquisitions were immaterial to total results.
- The company repurchased and retired 207,440 shares during the second quarter and 235,420 shares during the first six months for $4.755 million. A total of 870,166 shares remained available under the repurchase authorization.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects revenues to benefit from the February rate increase and additional water and wastewater customers. It expects approximately $5.0 million of additional 2014 construction expenditures, excluding potential acquisitions.
- The company expects no distribution system improvement charge revenue before the second half of 2015.
- Pending acquisitions expected to close in the fourth quarter of 2014 could add approximately 30 commercial and industrial wastewater customers, 200 water customers, and 90 water customers, subject to regulatory approvals.
- Management expects depreciation and other distribution-system costs to rise as infrastructure investment and acquisitions continue. It expects average quarterly internally generated funds to increase during the remainder of 2014 due to higher revenues and lower interest and tax payments.
- The company expects no additional pension contributions during the remainder of 2014 after contributing $2.182 million through June 30.
- An IRS tangible-property and repair deduction may reduce the effective tax rate and increase net income. Management expected to record an estimate during the second half of 2014; the filing does not provide a clear amount.
- The company’s $12.0 million variable-rate debt is economically converted to fixed through an interest-rate swap. The swap had a $2.159 million fair-value liability at June 30, 2014. A credit-rating or other default event could have required approximately $2.196 million of immediate payment; the swap expires October 1, 2029.
- Principal risks include weather and drought restrictions, changes in water consumption, regulatory and rate-case outcomes, customer growth, interest rates, access to financing, credit ratings, capital requirements, acquisitions, and changes in tax or accounting rules.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth after the one-time second-quarter revenues and the February 2014 rate increase.
- Monitor whether expense growth, particularly pension, labor, maintenance, and infrastructure costs, continues to outpace revenue growth.
- Confirm the timing and regulatory approval of pending acquisitions and assess their effect on customer growth and capital needs.
- Review liquidity after share repurchases, pension funding, dividends, and planned capital expenditures.
- Assess refinancing, interest-rate-swap, letter-of-credit, and credit-rating exposure, including the potential swap settlement upon a default.
- Track the expected IRS tax adjustment and its effect on deferred taxes, effective tax rate, and earnings.
- Confirm continued compliance with debt covenants and the company’s ability to maintain its targeted capital structure and dividend policy.