Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements |
Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements address among other things: various federal and state regulations concerning water quality and environmental standards; the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant; the timeliness of rate relief; quantity of rainfall and temperature; industrial demand; financing costs; energy rates; consummation of capital markets transactions to finance capital expenditure projects; and environmental and water quality regulations, as well as information contained elsewhere in this report preceded by, followed by, or including the words "believes," "expects," "anticipates," "plans," or similar expressions.
The statements are based on a number of assumptions concerning future events, many of which are outside the Company's control. The Company cautions that a number of important factors could cause the actual results to differ materially from those expressed in any forward-looking statements made on behalf of the Company. The Company undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
General Information
The business of the Company is to impound, purify and distribute water. The Company operates entirely within its franchised territory, which covers 34 municipalities within York County, Pennsylvania. The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, in the areas of billing, payment procedures, dispute processing, terminations, service territory, and rate setting. The Company must obtain PPUC approval before changing any of the aforementioned procedures. Water service is supplied through the Company's own distribution system. The Company obtains its water supply from the south branch and east branch of the Codorus Creek, which drains an area of approximately 117 square miles. The Company has two reservoirs, Lake Williams and Lake Redman, which together hold up to 2.23 billion gallons of water. The Company has a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional supply of 12 million gallons of water per day. The Company's present average daily availability is approximately 35 million gallons.
The Company's service territory had an estimated population of 158,000 as of December 31, 2004. Industry within the Company's service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, barbells and motorcycles.
The Company's business is somewhat dependent on weather conditions, particularly the amount of rainfall; however, minimum customer charges are in place, and the Company expects to cover its fixed costs of operations under all likely weather conditions.
The Company’s business does not require large amounts of working capital and is not dependent on any single customer or a very few customers for a material portion of its business.
On July 6, 2005, the Company closed its acquisition of the stock of Spring Grove Water Company and the assets comprising the Spring Grove Borough water systems. The aggregate purchase price paid by the Company at the closing was approximately $2.0 million, which was paid from borrowings under its lines of credit. The Company will be required to pay the former owner of Spring Grove Water Company an additional amount of consideration based on the amount of water such former owner purchases from the Company over the 60-month period following the closing, which amount may not exceed $328,000. As of September 30, 2005, the Company had made payments amounting to $5,866. These acquisitions added approximately 1,000 new customers in York County, Pennsylvania. The Company is serving the new customers from its fully filtered and treated water supply through a main which has been constructed by the Company to interconnect with the purchased distribution facilities.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations |
Three Months Ended September 30, 2005 Compared
With Three Months Ended September 30, 2004
Net income for the third quarter of 2005 was $1,735,105, an increase of $496,235, or 40.1%, from net income of $1,238,870 for the same period of 2004. Higher water operating revenues were the primary contributing factor, but were partially offset by increased operating expenses.
Water operating revenues for the three months ended September 30, 2005 increased $1,638,112, or 29.4%, from $5,569,128 for the three months ended September 30, 2004 to $7,207,240 for the corresponding 2005 period. Increases in our revenues are generally dependent on our ability to obtain rate increases from regulatory authorities and increasing our volumes of water sold through increased consumption and increases in the number of customers served. A 15.9% rate increase effective November 9, 2004 accounted for approximately $989,000 of the increase in water operating revenues in the third quarter of 2005. The average number of customers served in the third quarter of 2005 increased as compared to the same period in 2004 by 2,130, from 52,698 to 54,828 customers due to growth in our service territory and the Spring Grove acquisition. Increased per capita consumption caused the remainder of the increase in revenues.
Operating expenses for the third quarter of 2005 increased $412,462, or 13.1%, from $3,159,826 for the third quarter of 2004 to $3,572,288 for the corresponding 2005 period. Higher depreciation expense of approximately $115,000 due to increased plant investment (in particular, the investment associated with the Susquehanna River Pipeline), higher wages of approximately $69,000, training and conversion expenses for the new computer system of approximately $48,000 and higher chemical prices and usage of approximately $46,000 were the principal reasons for the increase. Higher pension expense, increased health insurance premiums, new service line, meter reading and increased filter plant and pumping station maintenance expenses aggregating approximately $119,000 also contributed to the increase. Reduced permitting expenses and transmission and distribution expenses for maintenance of tanks of approximately $29,000 partially offset the increase.
Interest expense on long-term debt for the third quarter of 2005 was $82,943, or 10.8%, higher than the same period in 2004 due to an increase in amounts outstanding. The Company issued tax-exempt debt through the Pennsylvania Economic Development Financing Authority, or the PEDFA, in the amount of $12,000,000 in December 2004. The tax-exempt debt was issued primarily to pay down short-term debt incurred to fund the Susquehanna River Pipeline Project.
Interest expense on short-term debt for the third quarter of 2005 was $44,933, which was consistent with $43,253 for the third quarter of 2004.
Allowance for funds used during construction decreased $348,529 from $396,584 in the third quarter of 2004 to $48,055 in the 2005 period. A decreased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $330,000 accounted for the majority of the decrease.
Other income, net increased $41,885 in the third quarter of 2005 compared to the same period of 2004. The increase was due primarily to increased interest income on water district notes of approximately $30,000. Decreased contributions and supplemental retirement expenses also contributed to the increase in income.
Federal and state income taxes increased by $338,148, or 47.3%, due to an increase in pre-tax income. The effective tax rate was 37.8% in the third quarter of 2005 and 36.6% in the third quarter of 2004.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations (continued) |
Nine Months Ended September 30, 2005 Compared
With Nine Months Ended September 30, 2004
Net income for the first nine months of 2005 was $4,443,303, an increase of $577,462 or 14.9%, compared to net income of $3,865,841 for the same period of 2004. Higher water operating revenues in 2005 were the primary contributing factor but were partially offset by higher operating expenses in 2005 and a gain on the sale of land, a higher allowance for funds used during construction and lower interest expenses in 2004.
Water operating revenues for the nine-month period ended September 30, 2005 increased $3,705,393, or 22.6%, from $16,430,455 for the nine months ended September 30, 2004 to $20,135,848 for the corresponding 2005 period. A 15.9% rate increase effective November 9, 2004 accounted for approximately $2,762,000 of the increase in water operating revenues. The average number of customers served in the first nine months of 2005 increased as compared to the same period in 2004 by 1,651, from 52,361 to 54,012 customers. Increased per capita consumption caused the remainder of the increase in revenues.
Operating expenses for the first nine months of 2005 increased $1,175,273, or 12.6%, from $9,302,118 for the first nine months of 2004 to $10,477,391 for the corresponding 2005 period. Higher depreciation expense of approximately $344,000 due to increased plant investment (in particular, the investment associated with the Susquehanna River Pipeline), higher wages of approximately $204,000 and higher pension expense of approximately $130,000 were the principal reasons for the increase. Higher health insurance premiums, higher customer and shareholder expenses, higher chemical prices and usage, increased contractual accounting and computer expenses, higher rate case expense, miscellaneous administrative expenses related to credit rating and banking fees and increased pumping station maintenance expenses aggregating approximately $428,000 contributed to the increase. Reduced distribution system maintenance expenses and lower capital stock taxes partially offset the increase by approximately $53,000.
Interest expense on long-term debt for the first nine months of 2005 was $385,858, or 17.3%, higher than the same period in 2004 due to an increase in amounts outstanding. The Company issued tax-exempt debt through the Pennsylvania Economic Development Financing Authority, or the PEDFA, in the amount of $7,300,000 in April 2004 and $12,000,000 in December 2004. The tax-exempt debt was issued primarily to pay down short-term debt incurred to fund the Susquehanna River Pipeline Project.
Interest expense on short-term debt for the first nine months of 2005 was $63,470, or 54.1%, lower than the same period in 2004 due to a decrease in short-term borrowings. The average short-term debt outstanding was $1,587,431 for the first nine months of 2005 and $6,864,817 for the first nine months of 2004. Most of the 2004 short-term debt outstanding was incurred to fund the Susquehanna River Pipeline Project and was repaid with proceeds from the Company’s two tax-exempt debt issuances and the stock issuance during 2004.
Allowance for funds used during construction decreased $729,606 from $839,654 in the first nine months of 2004 to $110,048 in the 2005 period. A decreased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $670,000 accounted for the majority of the decrease.
A gain of $743,195 was recorded in the first quarter of 2004 for the sale of land. No significant land sales or other similar events occurred during the first nine months of 2005.
Other expense, net decreased by $236,475 in the first nine months of 2005 as compared to the same period of 2004 primarily due to a termination settlement of approximately $144,000 in 2004. Decreased contributions and supplemental retirement expenses and increased interest income on water district notes aggregating approximately $103,000 contributed to the decrease.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations (continued) |
Federal and state income taxes increased by $393,944, or 17.7%, due to an increase in pre-tax income. The effective tax rate was 37.1% in the first nine months of 2005 and 36.5% in the first nine months of 2004.
Rate Developments
From time to time the Company files applications for rate increases with the PPUC and is granted rate relief as a result of such requests. The most recent rate request was filed by the Company on April 28, 2004 seeking an increase of $4,869,970, which would have represented a 22.1% increase in rates. On September 30, 2004, the PPUC authorized an increase in rates designed to produce approximately $3,500,000 in additional annual operating revenues, which represents an increase of 15.9%. The rate increase became effective on November 9, 2004 when the Susquehanna River Pipeline became operational. The Company currently plans to file its next rate increase request in April 2006.
Acquisitions
On July 6, 2005, the Company acquired 100% of the capital stock of Spring Grove Water Company for a purchase price of approximately $973,000. Of the total price, $645,000 was paid from borrowings under the Company’s lines of credit. Up to $328,000 may be paid to the former owner in installments based on the amount of water such former owner purchases from the Company over the 60-month period following the closing. As of September 30, 2005, the Company had made one installment payment totaling approximately $6,000. The acquired company provides water service to 21 customers just outside the Borough of Spring Grove and the P.H. Glatfelter Company. The acquisition included assets with a book value of $296,000 and assumed liabilities of $25,000. The Company recorded an acquisition adjustment of $702,000 and intends to ask the PPUC to amortize these costs over the remaining life of the acquired assets. The Company began to include the operating results of the acquired system in its consolidated operating results on the acquisition date. The results have been immaterial to total company results.
Also on July 6, 2005, the Company acquired the water utility assets of Spring Grove Borough for a purchase price of $1,312,000, which is less than the depreciated original cost of these assets. The Company used borrowings under its lines of credit to fund this purchase. This acquisition added approximately 850 customers.
Settlement on the previously announced acquisition of the Mountain View Water Company is expected to take place in either the fourth quarter of 2005 or the first quarter of 2006. The Company will extend its distribution system and provide facility upgrades as necessary in lieu of an actual payment for the system.
Liquidity and Capital Resources
As of September 30, 2005, current liabilities exceeded current assets by $17,193,865. The excess was due to the classification of the $12,000,000 aggregate principal amount of PEDFA Exempt Facilities Revenue Bonds, Series B of 2004 as current because the bondholders can tender their bonds at any time. The Company believes the bonds would be successfully remarketed if tendered. In addition, the Company had $4,997,231 in short-term borrowings under its lines of credit as of September 30, 2005. The short-term borrowings were incurred to fund acquisitions and construction expenditures. The Company maintains lines of credit aggregating $30,500,000. Loans granted under these lines of credit bear interest at LIBOR plus .70 to 1.25%. All lines of credit are unsecured and payable upon demand. The Company is not required to maintain compensating balances on its lines of credit.
During the first nine months of 2005, net cash used in investing activities exceeded net cash provided by operating and financing activities by $164,235. The Company anticipates that this will continue to be the case during the remainder of 2005. Borrowings against the Company’s lines of credit, proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends), or DRIP, and employee stock purchase plan, or ESPP, and customer advances will be used to satisfy the need for additional cash.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Liquidity and Capital Resources (continued) |
During the first nine months of 2005, the Company incurred $10,715,426 of construction expenditures. Approximately $3.6 million, or 34%, of the expenditures were for the Susquehanna River Pipeline Project, the automated meter reading system, and the enterprise software system. The remaining expenditures were for routine distribution system expenditures. The Company financed such expenditures through internally generated funds, customers’ advances, short-term borrowings, proceeds from the issuance of common stock under its DRIP and ESPP and proceeds remaining from its December 2004 tax-exempt bond issuance. The Company anticipates construction expenditures for the remainder of 2005 of approximately $2,410,000, primarily for projects relating to the Company’s transmission and distribution systems, the aforementioned continuing projects and certain construction expenses related to the Mountain View acquisition. The Company plans to finance these future expenditures using internally-generated funds, short-term borrowings, customer advances and proceeds from the issuance of common stock under the DRIP and ESPP.
The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs incurred to maintain and expand its service capacity. The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows. The ability of the Company to recover this increased investment in facilities is dependent upon future revenue increases, which are subject to approval by the PPUC. The Company can provide no assurances that its rate increases will be approved by the PPUC; and, if approved, the Company cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which the rate increase was sought.
Critical Accounting Estimates
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements. Our accounting policies require us to make subjective judgments because of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include: regulatory assets and liabilities, the determination of the remaining life of our assets, revenue recognition and the discount rate used in our pension plan calculations. There has been no significant change in our accounting estimates or the method of estimation during the three quarters ended September 30, 2005.
Off-Balance Sheet Transactions
The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. The Company does not use securitization of receivables or unconsolidated entities. The Company does not engage in trading or risk management activities with the exception of the interest rate swap agreement previously mentioned, does not use derivative financial instruments for speculative trading purposes, has no lease obligations and does not have material transactions involving related parties.
Impact of Recent Accounting Pronouncements
In June 2005, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements.” The consensus provides for the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of the lease to be the lesser of the subsequently acquired leasehold improvements’ useful life, or a period that reflects renewals that are reasonably assured upon the acquisition or purchase. This EITF is effective for leasehold improvements purchased or acquired in reporting periods beginning after June 29, 2005. Application of this consensus did not have an impact on our financial statements.
THE YORK WATER COMPANY
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Impact of Recent Accounting Pronouncements (continued) |
In August 2005, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS123(R)-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R), to defer the requirement of FASB Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” that a freestanding financial instrument originally subject to the SFAS becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee of the entity. This position is effective upon initial adoption of SFAS No. 123(R). This position is not expected to have an impact on our financial statements
In October 2005, the FASB issued Staff Position No. FAS123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R),” to provide to constituents guidance on determining the grant date for an award as defined in FASB SFAS No. 123(R), “Share-Based Payment.” This position is effective upon initial adoption of SFAS No. 123(R). This position is not expected to have an impact on our financial statements.
Also in October 2005, The FASB issued Staff Position FAS13-1, “Accounting for Rental Costs Incurred during a Construction Period.” Under this position, rental costs associated with operating leases that are incurred during a construction period shall be recognized as rental expense and cannot be capitalized. This position is effective for the first interim or annual reporting period beginning after December 15, 2005. Adoption of this position will not have a material impact on our financial statements or results of operations.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
The Company's operations are exposed to market risks primarily as a result of changes in interest rates under its lines of credit. The Company currently has available $30,500,000 under lines of credit with four banks, under which there were borrowings of $4,997,231 at a weighted average interest rate of 4.553% as of September 30, 2005. Loans granted under these lines bear interest based upon LIBOR plus .70 to 1.25 percent. Other than lines of credit, the Company has long-term fixed-rate debt obligations and a variable-rate long-term debt obligation, the PEDFA Series B issue.
The Company’s $12,000,000 PEDFA Series B bonds carry a variable interest rate and can be tendered at any time. The bonds are subject to a remarketing agreement in the event they are tendered. As a result of the fact that the bonds can be tendered by the holders thereof at any time, the $12,000,000 is classified as current maturities of long-term debt. The Company believes the bonds would be successfully remarketed if tendered. The Company entered into an interest rate swap agreement to manage risk associated with the variable interest rate. The swap essentially fixes the interest rate on the PEDFA Series B issue at 3.16%.
Item 4. | Controls and Procedures |
| (a) | Evaluation of Disclosure Controls and Procedures |
The Company's management, with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon this evaluation, the Company's President and Chief Executive Officer along with the Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Company’s management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
THE YORK WATER COMPANY
Item 4. | Controls and Procedures (continued) |
| (b) | Change in Internal Control over Financial Reporting |
During the Company’s most recent fiscal quarter, additional testing of the treasury function and check processing system controls was performed. Management believes that these controls are effective and the material weakness relating to these areas has been eliminated.
Implementation of the billing portion of the new enterprise software system is not expected to be completed until the first quarter of 2006. As a result of this delay, interim measures, such as additional verification and reconciliation as well as enhanced physical security, have been implemented in an effort to make our billing function controls effective. Additional testing was performed during the most recent fiscal quarter. Management believes that the interim measures and controls have successfully eliminated the material weakness within the billing function.
Company management participated in training programs related to non-routine transactions and consulted available resources on a regular basis during the three most recent fiscal quarters. Management believes that available resources are adequate to provide the necessary expertise in applying generally accepted accounting principles to non-routine transactions and recording them properly. As a result, management believes adequate controls are now in place.
Part II - Other Information
| |
| The following Part 1 exhibits are attached to this report: |
| |
| 31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
| 31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934. |
| 32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
THE YORK WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | |
| | THE YORK WATER COMPANY |
|
|
|
| Date: November 9, 2005 | By: | /s/ Jeffrey S. Osman |
| | Jeffrey S. Osman |
| | Principal Executive Officer |
| | | |
| Date: November 9, 2005 | By: | /s/ Kathleen M. Miller |
| | Kathleen M. Miller |
| | Principal Financial and Accounting Officer |
