The York Water Company (NASDAQ:YORW)
Q4 2007 Earnings Call
March 12, 2008 11:00 am ET
Jeffrey Hines - President and Chief Operating Officer
Kathleen Miller - Chief Financial Officer
Heike Doerr - Janney Montgomery Scott LLC
Good day everyone, and welcome to the York Water Fourth Quarter 2007 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Jeff Hines. Please go ahead sir.
Thanks Melissa. Yes, this is Jeff Hines, I am the President and Chief Operating Officer of the York Water Company, and with me today is Kathleen Miller, our Chief Financial Officer. I would like to welcome everybody to the York Water Company’s Earnings Conference Call and the results of operations and financial position as of December 31, 2007. Before beginning our discussion, I would like to remind you of our safe harbor statement. Certain remarks today are forward-looking statements. These statements are based upon assumptions which are outside the company’s control. We caution that a number of factors could cause the actual results to differ from those expressed. Please refer to the company’s 10-Q, 10-K, and other SEC filings for more information on the factors which could contribute to actual results being different from those expressed today. Today, I will be discussing the company’s 2007 fourth quarter and calendar year results. I will also be discussing our capital expenditures, financing requirements, and other regulatory matters.
Let’s talk about the fourth quarter first. During the fourth quarter of 2007, operating revenues increased $443,000 or 6.0% over the fourth quarter of 2006. Net income for the fourth quarter increased $43,000 or 2.6% compared to the fourth quarter of 2006. The primary contributing factors to the increase in net income were higher operating revenues due to an increase in our customer base, partially offset by increased operating expenses. During the same period, earnings per share remained unchanged at 15 cents per share from the fourth quarter of 2006. Earnings per share were diluted due to an increase in the weighted average shares outstanding brought about by our follow-on stock offering in December 2006. During the fourth quarter of 2007, we continued to expand our franchise by growing the number of customers served within our existing service territory to 58,890 which represents a 2.3% increase over 2006. We also received approval from the Public Utility Commission to expand our service area with the West Manheim acquisition.
I would like to point out that part of our organic growth in our existing territory and our Adams County territory is a product of York and Adams County continuing as a veteran community for the Baltimore and DC corridor. Our service territory is approximately 40 miles north of Baltimore, and we have observed that many of our new customers work in the Baltimore and DC area. We actually are quite pleased with this kind of growth. Our margins for residential customers are good, and the revenue stream is stable. We believe several factors will continue to drive Virginian to Marylanders to moving in the company’s service territory; the factors being more growth, friendly zoning, and significantly better real estate values. We have also observed the scarcity of water supplies in Northern Maryland has limiting growth in that region and facilitated growth in Southern Pennsylvania.
Now let’s turn to the discussion of the calendar year. 2007 was an excellent year for the York Water Company during a period of uncertainty in the housing market. We continued the significant momentum that has been built over the last several years. Operating revenues grew by 9.7% to $31.4 million. Earnings increased 5.3% to $6.4 million, and earnings per share was off 1 penny compared to 2006 mostly due to dilution associated with the December 2006 stock offering. In 2007, dividends declared were increased to 47.5 cents per share, a 4.6% increase over 2006 and the 11th consecutive annual dividend increase. This was also the 192nd consecutive year that dividends have been distributed.
Although we continued to report record operating revenues, operating income, net income, and dividend declared in 2007, our operating results could have been better. Two reasons for this; first, our water consumption increased 1.6% over 2006, our number of customers served increased 2.3%, and our population served increased 3%; however, we experienced a 1.4% reduction in our per capita consumption in 2007. We partially attribute this to conservation due to a state declaration of a drought watch for most of Pennsylvania from August 2007 to January 2008. This is especially frustrating when York Water has daily consumption of 19 million gallons per day and a supply capacity of 42 million gallons per day available. However, now that the drought declaration has been lifted by the governor, we expect an increase in our per capita consumption over 2007.
Our customer growth of 2.3% last year was below our 5-year average of 3.3%. We attribute this to the sudden slowdown in residential construction in third and fourth quarters. We expect 2008 to make up for it with growth of around 5%; that’s about 2% organic growth and 3% due to the West Manheim acquisition. A second factor impacting our earnings in 2007 was an increase in our operation and maintenance expenses including administrative and general expense of $1,545,000 or 9.8%. These increases were due to an increase in salaries and wages, increased depreciation expenses, increased pension costs, and increased electrical and chemical costs. Depreciation expenses will continue to increase as we increase our planned investment. On the positive side, this non-cash expense will lessen the demand to borrow cash.
One metric we use to determine how efficiently we get money to the bottom line is the efficiency ratio. This is the ratio of operating expenses over operating revenues. In this ratio, a more efficiently run operation means lower operating expenses. Thus a lower efficiency ratio means more money can get to the bottom line. The expenses in this calculation include operation and maintenance, administrative and general expenses, and does not include depreciation expenses or income or other taxes. In 2007, our ratio improved to 41.6% from 42.4% during 2006. We believe that during 2008, this ratio will continue to improve.
Now let’s talk about our capital requirements. During 2007, we invested $19.7 million in utility plant primarily on replacement and expansion of existing facilities to improve water service to existing customers and to serve new customers. For 2008, we anticipate investing nearly $27 million in capital expenditures, again to expand and improve production facilities, to expand our service area to serve new customers, and to replace infrastructure to improve service to existing customers. We are also continuing expansion of our facilities to increase treated water capacity as I mentioned from 30 million gallons per day to 42 million gallons per day.
We expect to finance our capital expenditures in 2008 primarily through internally generated funds, customers’ advances, short-term borrowings, a debt offering and an equity offering in 2008. We project that we’ll require approximately $18 million in additional long-term debt, and we may add that to $12 million that we anticipate refinancing this year for a total debt requirement of $30 million. We have already received rate cap from the state for this so that we expect this debt to be tax exempt. We also anticipate a major rate case filing which will follow our past pattern of timely rate filings every 2 years. It is unknown what the value of this filing will be at this time. Based on past experience, these rates if approved and settled, could take effect by the fourth quarter of 2008. We also anticipate a fourth quarter equity offering in the neighborhood of $13 million. The last piece to improving our capitalization structure is a plan to expand our dividend reinvestment plan into a direct stock purchase plan. We recently filed securities certificate with the Public Utility Commission for this proposal and anticipate to implement this plan by the end of the year. Our debt-equity ratio on December 31, 2007, was 51.2% debt and 48.8% equity. As we accomplish these financing activities described above, we expect our equity ratio to be greater than 50% by the end of 2008.
I would now like a moment to discuss several projects that we are very excited about continuing in 2008. In 2007, we closed on our first property in Adams County and interconnected their system with ours. In addition to this acquisition, we anticipate closing on the West Manheim Municipal Authority in 2008. These two water systems will initially provide a total of about 2500 customers between them. These are both accretive acquisition, so that after completion, we expect only a nominal increase in expenses. We had also previously received Public Utility Commission approval for this expanded service area which now includes 7 municipalities in Adams County and 2 additional municipalities in Western York County. We anticipate continued growth in these areas as the housing market is still attractive to commuters from the DC and Baltimore corridor.
Also, in Adams County, we have entered into an agreement with Gettysburg Municipal Authority for the sale of water to the authority to be resold by them to their customers. Because this project requires an out-of-basin transfer from Susquehanna River to the Potomac River, we are continuing the lengthy process of obtaining the regulatory approvals for this transaction. We anticipate receiving regulatory approval in 2008 and initiating construction of the necessary piping and facility this year.
In addition to the steady growth in our Southern and Western areas, we are also seeing a re-emergence in our urban center, the city of York. Although the city is only one of the 44 municipalities we serve, it is the home to nearly 25% of our customers. The city has turned around a decade-long decline, and over the past 3 years, there has been steady growth in the city in population and also increased housing values for our nearly 14,000 city customers. Any growth within the city is especially beneficial and it increases our revenues without any increase in fixed costs.
So to summarize, we are enthused about all we want to accomplish throughout 2008, especially the expansion of our service territory and increased capacity of our facilities. We also believe that our Adams County expansion along with solid growth in York County will provide the company with significant customer growth in the future.
That concludes my prepared comments. Now, I would like to turn over to questions and answers if any.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press *1 on your touchtone phone at this time. If you are using a speaker phone, please make sure your mute function is turned on to allow your signal to reach our equipment. Once again, that is *1 for questions, and we’ll pause for just a moment to allow everyone to adjust their signal.
Once again, that is *1. We’ll take our first question from Heike Doerr with Janney Montgomery.
Heike Doerr - Janney Montgomery
Good morning! How are you?
Good, Heike. How are you?
Heike Doerr - Janney Montgomery
Good. A couple of quick questions. First, I think this is going to be a question for Kathy. Depreciation we saw it higher this past year than we have in recent years. I know there were some accounting shifts going on. When we look going forward into ‘08 and ‘09, do you expect a double-digit increase in depreciation? How should be we thinking about this?
‘08 and ‘09 should be a little lower probably than it was in ’07, because in ‘07, we started depreciating our new computer systems which had a relatively short life, so that caused a lot of the increase in 2007, and we’ll continue to depreciate that over the next couple of years, and besides that, we also changed our depreciation methods a little bit in that we now take some depreciation in the current year on current year additions. We used to wait until the next year to start depreciating our additions, so that added several thousand dollars this year. So that kind of thing is going to continue, but the big blip was mostly the software.
Heike Doerr - Janney Montgomery
Okay, that’s helpful. Thank you. On the rate increase, perhaps I am reading too much into this, I believe the rate stay-out ends in April and we had loosely been talking that shortly after the rate stay-out and then you would be going in for a filing. I see in the K that it just says that this is an ‘08 event. Has the timing of that changed at all?
No, it will be either the end of April or could be the end of May.
Heike Doerr - Janney Montgomery
Okay. Last question; Susquehanna River Basin Commission, I know we have all been sitting on her hands waiting for them to get approval. Is there any item in particular that’s holding them up and does that concern you for future growth in Adams County if the Susquehanna River Basin is going to have sign off on these things going forward?
Possibly. It is a difficult process. Quite a number of utilities have already received these out-of-basin transfers, so it’s kind of a standard procedure, but it is being tied up with some other state-wide and area-wide issues with the Chesapeake Bay Initiative; and they are just doing their due diligence and ensuring that they have got all the information they need to make their decision.
Heike Doerr - Janney Montgomery
I believe they are meeting tomorrow. Are you on their docket?
We are not on the docket for tomorrow. The next time the commission meets is in June.
Heike Doerr - Janney Montgomery
I’ll grumble along with you. Okay, thanks for your help.
Thanks a lot Heike.
Once again, that is *1 for questions, *1 for any questions at this time, (pause) and it appears we have no further questions.
Great, alright! Well, thank you for your time Melissa and everybody that’s listening in.
That does conclude today’s conference. We do appreciate your participation. You may disconnect at this time.
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