Fin 601 – Dr. GarnerGroup #6

Joel BurgerErik Hudzik

Marc JosephBernard KlemmerLaKysha Owens

Jake Ramage

York Water (YORW)York Water (YORW)• Business is the

impounding, purifying, and distribution of water

• Located in York County Pennsylvania

• Founded in 1816• Serves ~156,000 people

• 60 % Residential• 27% Commercial• 13% Other

York Water Historical Revenue York Water Historical Revenue & Net Income& Net Income

0

5

10

15

20

25

1997 1998 1999 2000 2001 2002 2003Fiscal Year

$ (

in m

illio

ns)

Revenue

Net Income

YORW vs. NASDAQYORW vs. NASDAQ

% c

hang

e

Time (in quarters)

YORW vs. CompetitorsYORW vs. Competitors

% c

hang

e

Time (in quarters)

CompetitionCompetition● As a public utility, they have no true

competitors in their territory● Can be compared to other similar firms

CompetitionCompetition

Recent DevelopmentsRecent Developments● Began project in 2003 to increase their

territory to Conewago and Springfield Townships

● Estimated to cost $22 million● Financed by:

– Tax exempt bonds – Common Stock issuances– Line of Credit

● Has led to large increase in long term debt

Recent DevelopmentsRecent Developments● Just finalized deal to buy Spring Grove Borough's

water-distribution system for $1.3 million● Increase customer base by ~1000● Plan to have Spring Grove connected to their

infrastructure by July

Profitability RatiosProfitability Ratios

ValuationValuation

Valuation York Water

American Water1

Aqua America

United Water1

Industry2 Market3

Price/Sales Ratio 6.05 -- 5.32 -- 0.61 1.43

Price/Earnings Ratio 24.83 -- 29.65 -- -- 22.54

Price/Book Ratio 2.76 -- 3.46 -- 3.01 2.68

Price/Cash Flow Ratio 19.12 -- 17.50 -- 13.35 12.24

Estimating Value of FirmEstimating Value of Firm

● Analyze Historical Data– Determine rates of growth for forecast

● Forecast Future Cash Flows● Determine WACC for Firm● Compute Net Present Value

– Different Scenarios● Determine Fair Stock Price● Multiple pricing Methods● Recommendation

Historical DataHistorical Data

•Assume growth of Revenues to be 4.56% for short term

•Assume Total Operating Costs to be 55.94% of Revenues

•Assume Depreciation to be 15.89% of Operating Costs

•Assume corporate tax rate of 35%

Historical Data From Annual Reports For York Water CompanyYear 1999 2000 2001 2002 2003

Total Revenues (M) 17.50 18.50 19.40 19.60 20.90Growth in Sales 5.71% 4.86% 1.03% 6.63%

Average Growth in Sales 4.56%Total Operating Costs (M) 10.30 10.00 10.50 11.20 11.60

OC/TR 58.86% 54.05% 54.12% 57.14% 55.50%Average OC/TR 55.94%Depreciation (M) 1.70 1.70 1.60 1.70 1.80

Dep/OC 16.50% 17.00% 15.24% 15.18% 15.52%Average Dep/OC 15.89%

Estimating Capital Expenditures Estimating Capital Expenditures and Net Working Capitaland Net Working Capital

● $27 M expenditure expanding with Susquehanna River pipeline project.– Use the average capitol expenditure rate of $6.7

M per year to estimate for valuation (prior to 2003)

● Estimate NWC at 13% of Revenues– Large amount of short term debt, therefore

● NWC = (AR + Inv.) – (AP)

Forecasted Free Cash Flows(in millions)Year 2004 2005 2006 2007 2008 2009 2010 2011

Total Revenues 22.00 23.03 24.12 25.25 26.44 27.68 28.98 29.43Total Operating Costs 12.40 12.90 13.51 14.14 14.81 15.50 16.23 16.48

Operating Income 9.60 10.13 10.61 11.11 11.63 12.18 12.75 12.95Depreciation 2.00 2.05 2.15 2.25 2.36 2.47 2.59 2.63

Net Before Taxes 7.60 8.08 8.46 8.86 9.27 9.71 10.16 10.32Tax at 35% 2.66 2.83 2.96 3.10 3.25 3.40 3.56 3.61Net Income 4.94 5.25 5.50 5.76 6.03 6.31 6.61 6.71Depreciation 2.00 2.05 2.15 2.25 2.36 2.47 2.59 2.63

Operating Cash Flows 6.94 7.31 7.65 8.01 8.39 8.78 9.19 9.33Captiol Expenditures 27.22 6.72 6.72 6.72 6.72 6.72 6.72 6.72Net Working Capitol 1.04 -0.06 0.14 0.15 0.15 0.16 0.17 0.06

Free Cash Flows -21.32 0.65 0.79 1.14 1.51 1.90 2.31 2.56

Free Cash Flow ForecastFree Cash Flow Forecast

Based on all assumed rates for years 2005 through 2010-2004 estimated from 3Q results-2011 estimated at sustained growth rate

Weighted Average Cost of CapitalWeighted Average Cost of Capital

Book Value of Debt $39,787,205

Depends on LIBOR, 1% to 1.25% over…At 4.71%, cost of debt is 7.78%

Book Value of Equity$39,056,529

Cost of DebtNotes (%) Value portion of total Weighted average

Series A 10.17% $6,000,000.000 0.151 1.53%Series B 9.60% $5,000,000.000 0.126 1.21%Series C 10.05% $6,500,000.000 0.163 1.64%Series D 8.43% $7,500,000.000 0.189 1.59%IDA 1994 4.40% $2,700,000.000 0.068 0.30%

Pennvest Note 1.00% $652,086.000 0.016 0.02%IDA 1995 6.00% $4,300,000.000 0.108 0.65%

Credit Line (varies) 3.67% $7,135,119.000 0.179 0.66%Totals $39,787,205.000 7.59%

Cost of EquityFrom Yahoo, Beta = -0.007 ReShort Term (13 week T-Bill at 2.42%) 2.4240%Intermediate Term (T-Bond 5 yr. at 3.83%) 3.8241%Long Term (T-Bond 10 yr. At 4.24%) 4.2445%

Weighted Average Cost of CapitolShort Term, Lower Limit 3.69% Short Term, Upper Limit 3.75%

Intermediate Term, Lower Limit 4.38% Intermediate Term, Upper Limit 4.45%LongTerm, Lower Limit 4.59% Long Term, Upper Limit 4.65%

Net Present Value of York Water Company Net Present Value of York Water

Year 2005 2006 2007 2008 2009 2010 2011Free Cash Flows (M) 0.65 0.79 1.14 1.51 1.90 2.31 2.56Terminal Value of Future Cash FlowsAt WACC = 3.69% and Growth Rate = 1.55% 119.51At WACC = 3.69% and Growth Rate = 2.25% 181.79At WACC = 3.69% and Growth Rate = 3.00% 389.16At WACC = 4.65% and Growth Rate = 1.55% 82.55At WACC= 4.65% and Growth Rate of 2.25% 109.17At WACC = 4.65% and Growth Rate = 3.00%% 163.03

Cash Flows (M) to Discount at 3.69%, 1.55% 0.65 0.79 1.14 1.51 1.90 121.82NPV $103,297,046

Cash Flows (M) to Discount at 3.69%, 2.25% 0.65 0.79 1.14 1.51 1.90 184.10NPV $153,404,063

Cash Flows (M) to Discount at 3.69%, 3.00% 0.65 0.79 1.14 1.51 1.90 391.47NPV $320,255,891

Cash Flows (M) to Discount at 4.65%, 1.55% 0.65 0.79 1.14 1.51 1.90 84.86NPV $69,717,642

Cash Flows (M) to Discount at 4.65%, 2.25% 0.65 0.79 1.14 1.51 1.90 111.47NPV $89,981,254

Cash Flows (M) to Discount at 4.65%, 3.00% 0.65 0.79 1.14 1.51 1.90 165.34NPV $130,988,469

Determining Fair Price for YORW Determining Fair Price for YORW StockStock

Multiple pricing methods:-(P/E Ratio of industry) X (EPS of York) $20.98/$141.4M-Market Price $19.90/$136.8M

Fair Price per Share of York WaterNet Present Value Of Firm $130,988,469LiabilitiesShort Term Debt $7,135,119Current Long Term Debt $2,738,641Market Value of Equity $121,114,709Number of Share Outstanding 6,874,000 Fair Price per share $17.62

Recommendation: Recommendation: HOLDHOLD

● Valuation was conservative● Below both market indicators● “Safe” investment● Impacts of capital expenditures● Diversification of Portfolio

Questions?Questions?