The York Water Company: Q1 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 company is regulated by the Pennsylvania Public Utility Commission. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Results for the quarter are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenues | $10,571 | $10,069 | 5.0% increase |
| Operating income | $4,758 | $4,773 | 0.3% decrease |
| Net income | $2,111 | $2,139 | 1.3% decrease |
| Basic earnings per share | $0.16 | $0.17 | Decrease |
| Operating margin | 45.0% | 47.4% | Down approximately 2.4 percentage points |
| Net margin | 20.0% | 21.2% | Down approximately 1.2 percentage points |
| Cash flow from operations | $2,187 | $4,060 | 46.1% decrease |
Operating expenses increased 9.8% to $5,813, exceeding revenue growth. Major increases included salary and wage expense, depreciation, distribution-system maintenance, pension expense and technology upgrade costs. Power expense declined because of participation in additional electric curtailment programs.
Cash and cash equivalents were $5,739 at March 31, 2014, compared with $7,565 at December 31, 2013. Total assets were $281,414, and stockholders’ equity was $103,972. Total debt, including current maturities, was $84,917, representing 45.0% of total capitalization, compared with 45.1% at year-end 2013. The company had $29,000 of unsecured credit lines and no outstanding line-of-credit borrowings at quarter-end.
Capital expenditures were $2,007 during the quarter, and $271 was spent acquiring a wastewater system. The company paid $1,857 in dividends and repurchased 27,980 shares for $572. The quarterly dividend declared per share increased to $0.1431 from $0.1383.
Material changes versus the prior comparable period
- Revenue increased $502, primarily from a rate increase effective February 28, 2014, higher per-capita consumption and East Prospect wastewater revenue.
- Average water customers increased by 406 to 63,984, while average wastewater customers increased by 133 to 365 following the East Prospect acquisition.
- Per-capita consumption increased 0.8% year over year.
- Operating expenses increased $517, driven by labor, depreciation, winter main breaks, pension costs and technology expenses.
- Operating income and net income declined despite higher revenue because of expense growth.
- Operating cash flow declined $1,873, primarily because of lower deferred-income-tax benefits, higher income-tax payments and higher interest payments attributable to payment timing.
- The company completed the acquisition of East Prospect Borough Authority’s wastewater facilities in February 2014, adding approximately 400 wastewater customers. Management stated that the acquisition was immaterial to total results.
- The company repurchased 27,980 shares in Q1 2014 versus 10,639 shares in Q1 2013. As of March 31, 2014, 1,077,606 shares remained authorized for repurchase.
Guidance, outlook, risks and unusual items
The PPUC authorized approximately $4,972 of additional annual water revenue and $28 of additional annual wastewater revenue effective February 28, 2014. The distribution system improvement charge reset to zero when the new base rates became effective; it contributed $283 of Q1 2014 revenue versus $328 in Q1 2013.
Management expects revenue to benefit from higher rates, stronger summer demand and customer growth from acquisitions. It expects depreciation and other system-maintenance costs to rise as infrastructure investment continues. Planned construction expenditures for the remainder of 2014 were approximately $10,500, excluding potential acquisitions. Management expects to fund these needs primarily with cash and internally generated funds, supplemented by credit facilities, stock-plan proceeds and customer contributions.
On April 25, 2014, the company refinanced $14,880 of 6.00% PEDFA Series 2008B bonds with 4.50% Series 2014 bonds maturing in 2038. Management expects the refinancing to reduce future interest expense and the overall effective debt rate.
The company contributed the full expected $2,182 to its pension plans during Q1 2014 and does not expect additional contributions during the remainder of 2014. Its interest-rate swap hedges $12,000 of variable-rate debt, expires October 1, 2029 and had a fair-value liability of $1,934 at March 31, 2014. A credit-rating or other default event could have required approximately $1,948 of immediate payment. Standard & Poor’s affirmed the company’s A- rating with a stable outlook on April 11, 2014.
Pending acquisitions include wastewater assets expected to add approximately 30 customers and two water-system acquisitions expected to add approximately 270 customers. Completion depends on regulatory approvals. Key risks include weather and drought restrictions, customer water usage, rate-relief decisions, regulatory changes, capital requirements, interest rates, credit availability, refinancing and the ability to maintain the company’s credit rating.
Important facts for investors to verify
- Confirm the effect and timing of the February 2014 PPUC rate increase, including the reset of the distribution system improvement charge.
- Assess whether revenue growth can offset continued increases in labor, depreciation, pension and infrastructure-maintenance expenses.
- Monitor operating cash flow, planned 2014 capital expenditures and the company’s expected use of credit facilities.
- Verify completion, regulatory approval and financial impact of the announced water and wastewater acquisitions.
- Review the April 2014 debt refinancing and its effect on interest expense, maturities and liquidity.
- Monitor the $1,934 interest-rate swap liability, related credit-rating requirements and the potential $1,948 termination payment.
- Evaluate the sustainability of dividends and share repurchases relative to internally generated cash and debt capacity.