General Information
The Company is the oldest investor-owned water utility in the United States and is duly organized under the laws of the Commonwealth of Pennsylvania. The Company has operated continuously since 1816. The business of the Company is to impound, purify and distribute water. The Company operates within its franchised territory, which covers 34 municipalities within York County, Pennsylvania and four municipalities within Adams 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 approximately 2.2 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 12.0 million gallons of water per day. As of December 31, 2006, the Company's present average daily availability was 35.0 million gallons, and daily consumption was approximately 18.8 million gallons. The Company's service territory had an estimated population of 166,000 as of December 31, 2006. 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 does not require large amounts of working capital and is not dependent on any single customer or a very few customers. In 2006, operating revenue was derived from the following sources and in the following percentages: residential, 63%; commercial and industrial, 30%; and other, 7%, which is primarily from the provision for fire service. Increases in revenues are generally dependent on the Company’s ability to obtain rate increases from regulatory authorities in a timely manner and in adequate amounts and to increase volumes of water sold through increased consumption and increases in the number of customers served.
During the five year period ended December 31, 2006, the Company has maintained an increasing growth in number of customers and distribution facilities as demonstrated by the following chart:
| | 2006 | 2005 | 2004 | 2003 | 2002 |
| Average daily consumption (gallons per day) | 18,769,000 | 18,657,000 | 18,116,000 | 17,498,000 | 17,901,000 |
| Miles of mains at year-end | 840 | 804 | 780 | 739 | 731 |
| Additional distribution/transmission mains installed (ft.) | 178,384 | 126,962 | 211,836 | 44,986 | 72,121 |
| Number of customers at year-end | 57,578 | 55,731 | 53,134 | 51,916 | 51,023 |
| Population served at year-end | 166,000 | 161,000 | 158,000 | 156,000 | 153,000 |
Results of Operations
2006 Compared with 2005
Net income for 2006 was $6,091, an increase of $258, or 4.4%, compared to net income of $5,833 for 2005. Increased water revenues were the primary contributing factor. An increased allowance for funds used during construction, decreased supplemental retirement expenses and a lower effective tax rate also added to the increase. Higher operating expenses and higher short-term interest expenses partially offset the increase.
Water operating revenues for the year increased $1,853, or 6.9%, from $26,805 for 2005 to $28,658 for 2006. A 9.2% rate increase effective September 15, 2006 accounted for approximately $719, or 38.8%, of the increase in water operating revenues for 2006. The average number of customers served in 2006 increased as compared to 2005 by 2,287, from 54,410 to 56,697 customers due to growth in the Company’s service territory and the Spring Grove and Mountain View acquisitions in July and November 2005, respectively. Despite this increase in customers, the total per capita volume of water sold in 2006 decreased compared to 2005 due to reduced consumption in the service territory. The Company expects revenues to continue to increase as a result of increases to the customer base within its current service area. The Company also seeks opportunities to make strategic acquisitions from time to time. In 2007, the Company will continue to benefit from the September 2006 rate increase. Drought warnings or restrictions as well as regulatory actions could impact results, however.
Operating expenses for the year increased $1,737, or 12.4%, from $14,017 for 2005 to $15,754 for 2006. Higher salaries due to wage increases and additional employees of approximately $458, increased software training, conversion and support expenses of approximately $184, higher internal control expenses of approximately $171, higher depreciation expense of $155 due to increased plant investment, increased distribution system maintenance of approximately $132 and higher transportation expenses due to additional vehicles and increased gas prices of approximately $116 were the principal reasons for the increase. Higher pension expense, payroll taxes, electric costs, bad debt expense, shareholder expenses and chemical costs aggregating approximately $512 also contributed to the increase. The increase was partially offset by lower rate case expense, reduced hydrant expenses due to inventorying additional parts and higher capitalization of indirect costs aggregating $173. Internal controls expenses are expected to level off in 2007, while depreciation expenses are expected to rise due to the level of plant investment in 2006 and pension expense is expected to rise due to an increased contribution to the plans in 2007. Other operating expenses should continue to increase at a moderate level as costs to serve additional customers and to extend our distribution system continue to rise.
Interest expense on long-term debt increased $80, or 2.3%, from $3,470 for 2005 to $3,550 for 2006, due primarily to an increase in amounts outstanding. The Company issued tax-exempt debt through the York County Industrial Development Authority, or YCIDA, in the amount of $10.5 million in October 2006. The proceeds of the bond issue were used to pay down a portion of the Company’s short-term borrowings. The increase was partially offset by the remarketing of the Company’s 6.0% Industrial Development Authority Revenue Refunding Bonds, Series 1995, and the interest rate being redetermined to 3.75% on June 1, 2005.
Interest expense on short-term debt increased $481, from $134 for 2005 to $615 for 2006 due to an increase in short-term borrowings used to fund operations and construction expenditures. The average short-term debt outstanding in 2006 and 2005 was $10.5 million and $2.7 million, respectively.
Allowance for funds used during construction increased $257 from $181 for 2005 to $438 for 2006 due to an increase in construction expenditures that were eligible for interest, including expenditures for the main extension to Abbottstown and the enterprise software system.
Other income (expenses), net increased by $259 in 2006 as compared to 2005 primarily due to reduced supplemental retirement expenses of approximately $225 due to an increase in the discount rate. Lower contributions and increased interest income on water district notes receivable aggregating approximately $81 also added to the increase. Higher non-operating property maintenance expenses of approximately $28 partially offset the increase.
Federal and state income taxes decreased by $187, or 5.5%. The effective tax rate declined from 36.7% in 2005 to 34.4% in 2006 due to the qualified domestic production deduction.
2005 Compared with 2004
Net income for 2005 was $5,833, an increase of $532, or 10.0%, compared to net income of $5,301 for 2004. Increased water revenues were the primary contributing factor. Higher operating expenses, reduced allowance for funds used during construction and the absence of a gain on the sale of land partially offset the increase.
Water operating revenues for the year increased $4,301, or 19.1%, from $22,504 for 2004 to $26,805 for 2005. Increases in 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 $3,172, or 73.8%, of the increase in water operating revenues for 2005. The average number of customers served in 2005 increased as compared to 2004 by 1,893, from 52,517 to 54,410 customers. This increase in customers, along with increased usage by our existing customers resulted in increased consumption in 2005. The total per capita volume of water sold increased 1.8% compared to 2004.
Operating expenses for the year increased $1,422, or 11.3%, from $12,595 for 2004 to $14,017 for 2005. Higher depreciation expense of approximately $422 due to increased plant investment (in particular, the investment associated with the Susquehanna River Pipeline completed in 2004), higher wage expenses of approximately $221, increased pension expense of approximately $178, higher health and general insurance premiums of approximately $113, increased customer and shareholder expenses of approximately $107, higher water treatment costs of approximately $95, system implementation expenses of approximately $66 and increased reservoir and pumping station maintenance expenses, banking fees, fees for our corporate bond rating, bad debt and rate case expenses aggregating approximately $127 were the principal reasons for the increase. Increased capitalized expenses, the absence of permitting expenses and lower capital stock taxes partially offset the increase by approximately $124.
Interest expense on long-term debt increased $447, or 14.8%, from $3,023 for 2004 to $3,470 for 2005 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 $7.3 million in April 2004 and $12.0 million in December 2004. The tax-exempt debt was issued primarily to pay down short-term debt incurred to fund the Susquehanna River Pipeline Project. The increase was partially offset by savings of approximately $56 on the remarketed 1995 Series Industrial Development Authority Bonds.
Interest expense on short-term debt decreased $40, or 23.1%, from $174 for 2004 to $134 for 2005 due to a decrease in short-term borrowings. The average short-term debt outstanding in 2005 and 2004 was $2.7 million and $7.0 million, respectively. Most of the 2004 short-term debt outstanding was incurred to fund the Susquehanna River Pipeline Project which was completed in 2004.
Allowance for funds used during construction decreased $884 from $1,065 for 2004 to $181 for 2005. A decreased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $852 accounted for the majority of the decrease.
A gain of $743 was recorded in the first quarter of 2004 for the sale of land. No significant land sales or other unusual events occurred in 2005.
Other expense, net decreased by $19 in 2005 as compared to 2004 primarily due to the absence of a termination settlement of approximately $144 offset by increased supplemental retirement expenses of approximately $123.
Federal and state income taxes increased by $332, or 10.9%, due to an increase in pre-tax income. The effective tax rates for 2005 and 2004 were 36.7% and 36.5%, respectively.
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 27, 2006, and sought an increase of $4.5 million, which would represent a 16.0% increase in rates. Effective September 15, 2006, the PPUC authorized an increase in rates designed to produce approximately $2.6 million in additional annual revenues, which represents an increase of 9.2% in the Company’s rates. The Company does not expect to file a rate increase request in 2007.
Acquisitions
On February 2, 2006, the Company announced an agreement to acquire the water system of Abbottstown Borough which served approximately 400 customers in Adams County, Pennsylvania. The acquisition was approved by the PPUC on July 20, 2006. The Company then constructed a water main, a standpipe and a booster station in order to serve the customers of the Borough by using York Water’s fully filtered and treated water supply. The constructed water main was interconnected with the Borough’s existing distribution facilities in December 2006.
On January 5, 2007, the Company closed the acquisition of the water system of Abbottstown Borough. The purchase price of approximately $0.9 million is less than the depreciated original cost of these assets. The Company will record a negative acquisition adjustment of approximately $131 and will amortize this credit over the remaining life of the acquired assets. The purchase was funded through internally generated funds and short-term borrowings. The Company began serving the customers of Abbottstown Borough in January 2007.
Liquidity and Capital Resources
As of December 31, 2006, current assets exceeded current liabilities by $775. During the fourth quarter of 2006, all short-term borrowings were refinanced with the proceeds of a long-term debt issuance and a common stock offering (described below). In addition, the Company renegotiated its standby bond purchase agreement (liquidity facility) associated with the Pennsylvania Economic Development Financing Authority (PEDFA) Exempt Facilities Revenue Bonds, Series B of 2004 to extend for a period of two years rather than one year. The bondholders of this debt issue are permitted to tender their bonds at any time. The Company has an annual remarketing agreement in place if this should happen which provides for the remarketing agent to re-sell the bonds. The standby bond purchase agreement becomes effective if the remarketing agent is unable to re-sell the bonds. The agreement provides for a financial institution to purchase the bonds. During the time the financial institution owns the bonds, they may be sold by the institution or the remarketing agent. If the bonds are not sold within 6 months, the Company must begin to buy back the bonds in monthly installments over a five-year period. Since the Company may be required to buy a portion of the bonds back after 6 months, part of the $12.0 million debt issue, $1.2 million, is classified as short-term. The remaining $10.8 million is classified as long-term because it would not be payable within one year, and the standby bond purchase agreement is now effective longer than one year.
The Company maintains lines of credit aggregating $20.5 million. Loans granted under these lines of credit bear interest at LIBOR plus 0.700% to 0.875%. Both lines of credit are unsecured and payable upon demand. The Company is not required to maintain compensating balances on its lines of credit. As of December 31, 2006 there were no outstanding borrowings under these agreements.
On October 27, 2006 the YCIDA issued $10.5 million Exempt Facilities Revenue Bonds Series 2006 for the benefit of the Company. The YCIDA then loaned the proceeds of the offering to the Company pursuant to a loan agreement. The loan agreement provides for a $10.5 million loan bearing interest at 4.75%. The bonds and the related loan will mature on October 1, 2036. The loan agreement contains various covenants and restrictions. The Company is in compliance with these restrictions. The proceeds of the loan were used to pay down a portion of the Company’s short-term borrowings.
In December, 2006 the Company closed an underwritten public offering of 645,000 shares and an over-allotment of 94,750 shares of its common stock. Janney Montgomery Scott LLC was the sole underwriter in the offering. The Company received net proceeds in the offering, after deducting offering expenses and underwriter’s discounts and commissions, of approximately $12.5 million. The net proceeds were used to repay the Company’s remaining short-term borrowings and to fund operations and capital expenditures. The issuance of these shares late in the year will likely cause dilution of basic earnings per share in 2007.
During 2006, net cash provided by operating activities and financing activities equaled net cash used in investing activities. The Company anticipates that during 2007 this will continue to be the case. Internally-generated funds, 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.
During 2006, the Company incurred $21,682 of construction expenditures. Approximately $4,260, or 20%, of the expenditures were for the automated meter reading system and the enterprise software system. An additional $4,507, or 21%, was for the main, standpipe and booster station for Abbottstown and the western portion of our service territory, and the remaining expenditures were for routine distribution system expenditures including the addition of various standpipes. 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, the proceeds of the YCIDA loan described above and proceeds from the December 2006 common stock offering described above. The Company anticipates construction expenditures for 2007 and 2008 of approximately $13.9 million and $16.3 million, respectively. In addition to routine transmission and distribution projects, a portion of the anticipated 2007 and 2008 expenditures will be for an addition to the Company’s distribution facility, additional standpipes, upgrades to water treatment facilities and various replacements of aging infrastructure. The Company plans to finance these future expenditures using internally-generated funds, short-term borrowings, customer advances, proceeds from the issuance of common stock under the DRIP and ESPP, and the distribution surcharge allowed by the PPUC. The distribution surcharge allows the Company to add a charge to customers’ bills for qualified replacement costs of certain infrastructure without submitting a rate filing.
Dividends
During 2006, the Company's dividend payout ratios relative to net income and cash provided by operating activities were 79.1% and 65.7% respectively. During the fourth quarter of 2006, the Board of Directors increased the dividend by 5.4% from 11.2 cents per share to 11.8 cents per share per quarter. This was the tenth consecutive annual dividend increase and the 191st consecutive year of paying dividends. While the Company expects to maintain this dividend amount in 2007, future dividends will be dependent upon the Company’s earnings, financial condition, capital demands and other factors and will be determined by the Company’s Board of Directors.
Common Stockholders’ Equity
Common stockholders’ equity as a percent of the total capitalization (including current maturities of long-term debt) was 51.2% as of December 31, 2006 compared with 49.3% as of December 31, 2005. It is the Company’s intent to maintain a debt to equity ratio near fifty percent.
Inflation
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.
Contractual Obligations
The following summarizes the Company’s contractual obligations by period as of December 31, 2006:
| | Payments due by period |
| |
| | Total | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter |
| Long-term debt obligations (a) | $62,335 | $1,240 | $2,440 | $5,141 | $6,741 | $2,441 | $44,332 |
| | | | | | | | |
| Interest on long-term debt (b) | 51,069 | 3,481 | 3,480 | 3,419 | 3,288 | 3,221 | 34,180 |
| | | | | | | | |
| Purchase obligations (c) | 254 | 254 | - | - | - | - | - |
| | | | | | | | |
| Defined benefit obligations (d) | 800 | 800 | - | - | - | - | - |
| | | | | | | | |
| Deferred employee benefits (e) | 3,986 | 161 | 209 | 209 | 179 | 212 | 3,016 |
| | | | | | | | |
| Total | $118,444 | $5,936 | $6,129 | $8,769 | $10,208 | $5,874 | $81,528 |
| (a) | Represents debt maturities including current maturities. Included in the table are payments of $1.2 million in 2007, $2.4 million annually in 2008-2011, and $1.2 million in 2012 on the $12.0 million variable rate bonds which could be tendered at any time. The Company believes it would be able to remarket any tendered bonds and would not have to buy them back before maturity in 2029. |
| (b) | Excludes interest on variable rate debt and interest rate swap payments as these payments cannot be reasonably estimated. These payments are expected to be in the $380 to $500 range annually through 2029. |
| (c) | Represents obligations under contracts relating to the new meter reading system and the new enterprise software system. |
| (d) | Represents contributions expected to be made to qualified defined benefit plans. The amount of required contributions in 2008 and thereafter is not currently determinable. |
| (e) | Represents the obligations under the Company’s Supplemental Retirement and Deferred Compensation Plans for executives. |
In addition to these obligations, the Company makes refunds on Customers’ Advances for Construction over a specific period of time based on operating revenues related to developer-installed water mains or as new customers are connected to and take service from such mains. The refund amounts are not included in the above table because the timing cannot be accurately estimated. Portions of these refund amounts are payable annually through 2017 and amounts not paid by the contract expiration dates become non-refundable and are transferred to Contributions in Aid of Construction.
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, revenue recognition and accounting for our pension plans.
Regulatory Assets and Liabilities
SFAS No. 71 defines generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator. In accordance with SFAS No. 71, the Company defers costs and credits on its balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits were incurred. These deferred amounts are then recognized in the income statement in the period in which they are reflected in customer rates. If the Company later finds that these assets and liabilities cannot be included in rate-making, they are adjusted appropriately. See Note 1 for additional details regarding regulatory assets and liabilities.
Revenue Recognition
Revenues include amounts billed to metered customers on a cycle basis and unbilled amounts based on both actual and estimated usage from the latest meter reading to the end of the accounting period. Estimates are based on average daily usage for those particular customers. The unbilled revenue amount is recorded as a current asset on the balance sheet. Actual results could differ from these estimates and would result in operating revenues being adjusted in the period in which the actual usage is known. Based on historical experience, the Company believes its estimate of unbilled revenues is reasonable.
Pension Accounting
Accounting for defined benefit pension plans requires estimates of future compensation increases, mortality, the discount rate, and expected return on plan assets as well as other variables. The Company selected its December 31, 2006 discount rate based on the Citigroup Pension Liability Index. This index uses the Citigroup spot rates for durations out to 30 years and matches them to expected disbursements from the plan over the long term. The Company believes this index most appropriately matches its pension obligations. The Company’s December 31, 2005 discount rate was based on the Moody’s AA bond rate. Both indices produced similar results for 2006. The present values of the Company’s future pension obligations were determined using a discount rate of 5.90% at December 31, 2006 and 5.50% at December 31, 2005.
Choosing a lower discount rate normally increases the amount of pension expense and the corresponding liability. In the case of the Company, a 25 basis point reduction in the discount rate would increase its liability by $651, but would not have an impact on its pension expense. The PPUC, in a previous rate settlement, agreed to grant recovery of the Company’s contribution to the pension plans in customer rates. As a result, under SFAS No. 71, expense in excess of the Company’s pension plan contribution is deferred as a regulatory asset and will be expensed as contributions are made to the plans and the contributions are recovered in customer rates. Therefore, changes in the discount rate affect regulatory assets rather than pension expense.
The Company’s estimate of the expected return on plan assets was primarily based on the historic returns and projected future returns of the asset classes represented in its plans. Approximately 60% of pension assets are equity securities and 40% are debt securities. The Company used 7% as its estimate of expected return on assets in both 2005 and 2006. If the Company were to reduce the expected return by 25 basis points to 6.75%, its liability would increase by $35, but its expense would again remain unchanged because the expense is equal to the Company’s contribution to the plans. The additional expense would instead be recorded as an increase to regulatory assets.
Other critical accounting estimates are discussed in the Significant Accounting Policies Note to the Financial Statements.
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 discussed in Note 4 to the financial statements, 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 February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 155, “Accounting for Certain Hybrid Financial Instruments - An Amendment of FASB Statements No. 133 and 140.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets for derivatives, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding derivatives. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted this statement in January 2007. Based on current financial instruments, there will be no effect on the Company’s financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company adopted this statement in January 2007 and it had no impact on the Company’s financial position or results of operations.
In July 2006, the FASB issued FASB Staff Position (FSP) No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” to provide guidance to a lessor in a transaction classified as a leveraged lease in accordance with SFAS No. 13, “Accounting for Leases.” FSP No. FAS 13-2 amends SFAS No. 13 to require a lessor to recalculate a leveraged lease to reflect a change or projected change in the timing of the realization of tax benefits generated by that lease. This FSP applies to fiscal years beginning after December 15, 2006. The Company adopted this position in January 2007 and it had no impact on financial position or results of operations.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN No. 48 prescribes (a) a consistent recognition threshold and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company evaluated and adopted this interpretation in January 2007 concluding that no uncertain tax positions meeting the recognition and measurement test of FIN No. 48 were required.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price), as opposed to the price that would be paid to acquire the asset or received to assume the liability at the measurement date (an entry price). SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged. The Company is currently evaluating this standard for its effects on future financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 requires (1) recognition of the funded status of a benefit plan in the balance sheet, (2) recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost, (3) measurement of defined benefit plan assets and obligations as of the balance sheet date, and (4) disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition in the current period. The requirements to recognize the funded status of a plan and to comply with disclosure provisions are effective as of the end of the fiscal year that ends after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the balance sheet date is effective for fiscal years ending after December 15, 2008. The Company adopted this standard as of December 31, 2006 and has accordingly reported the unfunded status of its defined benefit pension plans as well as the required disclosures. The effects can be seen in Note 6 of this report. The requirement to measure plan assets and benefit obligations as of the balance sheet date, effective after December 15, 2008 will have no impact, as the Company’s plans are already measured at the balance sheet date.
Management’s Report on Internal Control Over Financial Reporting
Management of The York Water Company (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective.
The Company’s independent auditors, Beard Miller Company LLP, have audited management’s assessment of the Company’s internal control over financial reporting. Their opinion on management’s assessment and their opinions on the effectiveness of the Company’s internal control over financial reporting and on the Company’s financial statements appear on the following pages of this annual report.
| | | | |
| /s/Jeffrey S. Osman | | | /s/Kathleen M. Miller |
Jeffrey S. Osman President, Chief Executive Officer | | | Kathleen M. Miller Chief Financial Officer |
March 12, 2007
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
The York Water Company
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that The York Water Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The York Water Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that The York Water Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, The York Water Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, common stockholders’ equity and comprehensive income, and cash flows of The York Water Company, and our report dated March 12, 2007 expressed an unqualified opinion.
| /s/ Beard Miller Company LLP | | | |
Beard Miller Company LLP York, Pennsylvania March 12, 2007 | | | |
