The York Water Company
Highlights of Our 186th Year
Summary of Operations For the Year 2001 2000 1999 1998 1997
<s> <c> <c> <c> <c> <c>
Water operating revenue $19,402,542 $18,481,163 $17,511,251 $17,137,029 $16,996,706
Operating expenses 10,467,905 10,008,624 10,255,553 9,721,428 9,678,694
Operating income 8,934,637 8,472,539 7,255,698 7,415,601 7,318,012
Interest expense 2,855,565 2,797,705 2,643,579 2,673,614 2,707,310
Other income, net 159,536 166,003 252,058 158,329 150,588
Income taxes 2,232,541 2,083,050 1,710,104 1,764,927 1,641,229
Net income $ 4,006,067 $ 3,757,787 $3,154,073 $ 3,135,389 $ 3,120,061
Per Share of Common Stock
Book value $11.38 $10.66 $10.31 $10.20 $9.93
Net income 1.30 1.25 1.05 1.06 1.07
Dividends<F1> 1.01 .98 .945 .93 .91
Number of shares outstanding
at year-end 3,154,332 3,042,733 2,989,091 2,979,722 2,934,782
Utility Plant
Original cost $121,109,335 $114,748,545 $108,804,699 $102,088,220 $97,487,926
Construction expenditures 7,095,827 6,413,721 7,050,376 4,989,967 4,500,517
Other
Total assets $113,351,492 $107,626,319 $108,600,110<F2> $102,479,091<F2> $98,854,074<F2>
Long-term debt 32,690,343 32,728,220 32,765,943 32,000,000 32,000,000
Per share data does not reflect the impact of the proposed stock
split. See Note 12 to the financial statements.
<F1> Cash dividends per share reflect dividends declared on
shares outstanding at each dividend date.
For Management's Discussion and Analysis of Financial
Condition and Results of Operations, Please Refer to Page 3.
<F2> Total assets do not reflect the reclassification of deferred
tax assets and liabilities and the related regulatory
assets and liabilities that were made for 2001 and 2000.
The York Water Company
Description of Business
The business of the Company is to impound, purify and
distribute water. The Company operates entirely within its
franchised territory located in York County, Pennsylvania, and is
subject to regulation by the Pennsylvania Public Utility
Commission, or PPUC. Water service is supplied through the
Company's own distribution system to the City of York, the
Boroughs of North York, West York, Manchester, Mount Wolf, New
Salem, Hallam, Jacobus, Loganville, Yorkana, Seven Valleys, East
Prospect, Jefferson, Glen Rock, New Freedom, Railroad, and
portions of the Townships of Manchester, East Manchester, West
Manchester, North Codorus, Shrewsbury, North Hopewell, Hopewell,
Springettsbury, Spring Garden, Conewago, Springfield, York,
Hellam, Windsor, Lower Windsor, Dover and Jackson. The Company's
service territory has an estimated population of 149,000.
Industry of the area served is diversified, manufacturing such
items as fixtures and furniture, electrical machinery, food
products, paper, ordnance, textile products, air conditioning,
barbells, etc. The Company's present average daily consumption
is 19,734,260 gallons, and its present safe daily yield is
23,000,000 gallons.
In the area served by the Company, under the regulation of
the PPUC, there are no competitors. During the five years ended
in 2001, the Company has maintained an increasing growth in
number of customers and distribution facilities as shown by the
following chart:
2001 2000 1999 1998 1997
Average
daily
consumption
(gallons per
day) 19,734,260 19,541,520 20,928,000 19,488,000 19,405,000
Miles of
mains at
year-end 717 703 696 671 655
Additional
distribution
mains installed
(ft.) 77,923 67,072 130,262 85,431 77,274
Number of
customers 50,079 49,195 48,144 47,173 46,458
Population
served 149,000 146,000 144,000 142,000 140,700
Operating revenue in 2001 is derived from the following sources
and in the following percentages:
Residential 60%; Commercial and Industrial, 28%; Other, 12%.
Market for Common Stock and Dividends
Beginning January 16, 2001, the common stock of The York Water
Company is traded on the Nasdaq National Market. Prior to
January 16, 2001, the common stock of The York Water Company was
traded over-the-counter. Over-the-counter quotations reflect
inter-dealer prices without retail mark-ups, markdown or
commissions and may not necessarily represent actual
transactions.
Quarterly price ranges and cash dividends per share for the last
two years follow:
2001 2000
HIGH LOW DIVIDEND<F1> HIGH LOW DIVIDEND<F1>
1st Quarter $25.50 $17.88 $0.25 $17.13 $13.50 $0.24
2nd Quarter 25.25 22.00 0.25 14.75 13.75 0.24
3rd Quarter 25.31 22.75 0.25 16.38 14.25 0.25
4th Quarter 30.32 23.00 0.26 18.50 15.00 0.25
<F1> Cash dividends per share reflect dividends declared on
shares actually outstanding at each dividend date.
(Refer to Note 4 to the Financial Statements for a description
of the restriction on the declaration and payment of cash
dividends.)
Prices for the year 2001 are closing prices listed on Nasdaq,
prices for the year 2000 are bid prices quoted from local
newspapers.
Shareholders of record as of December 31, 2001 numbered 1,327.
Per share data does not reflect the impact of the proposed stock
split. See Note 12 to the financial statements.
Financial Reports and Investor Relations
Shareholders may request, without charge, copies of the Company's
financial reports including Annual Reports and Forms 10-K and
10-Q. Such requests, as well as other investor relations
inquiries, should be addressed to :
Jeffrey S. Osman - Vice President-Finance
The York Water Company or visit our web page at:
Box 15089, York, PA 17405-7089 www.yorkwater.com
The York Water Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Annual Report contains certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements made with
respect to the results of operations and businesses of the
Company. Words such as "may," "should," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements include certain information relating
to the Company's business strategy, including the markets in
which it operates, the services it provides, its plans for
construction, its expansion of its service territories, water
usage by its customers and its plans to invest in new
technologies. These forward-looking statements are based upon
management's current plans, expectations, estimates and
assumptions and are subject to a number of risks and
uncertainties that could significantly affect current plans,
anticipated actions and the Company's financial condition and
results of operations. Factors that may cause actual results to
differ materially from those discussed in such forward-looking
statements include, among others, the following possibilities:
(i) weather conditions, particularly the amount of rainfall; (ii)
the level of commercial and industrial business activity within
the Company's service territory; (iii) construction of new
housing within the Company's service territory; (iv) governmental
regulation affecting the Company's rates and service obligations;
and (v) general economic and business conditions, including
interest rates, which are less favorable than expected. The
Company does not intend to update these cautionary statements.
Results of Operations
2001 Compared with 2000
Net income for 2001 was $4,006,067, an increase of $248,280,
or 6.6%, compared to 2000.
Water operating revenues for 2001 increased $921,379, or
5.0%, compared to 2000. The increase resulted primarily from an
increase in customers and to a lesser extent from the 4.2% rate
increase approved by the PPUC, effective September 1, 2001.
Operating expenses for 2001 increased $459,281, or 4.6%,
compared to 2000. The increase was due to a number of factors
including: increased service line maintenance due to highway
relocation, Nasdaq listing fees, higher power costs, increased
general insurance premiums, increased pension and supplemental
retirement costs, and increased water treatment plant and
equipment maintenance expenses. Reduced public utility realty
taxes, lower depreciation expense due to the lengthening of asset
lives, and lower health insurance premiums partially offset the
increase in operating expenses.
Interest on long-term debt increased $20,083 in 2001
compared to 2000 due to the remarketing of the Series 1995 5%
Industrial Development Bonds at 6%. The higher interest rate was
in effect for all of 2001. Short-term interest also increased by
$69,720 in 2001 compared to 2000 despite lower interest rates,
due to an increase in short-term debt outstanding. The average
short-term debt outstanding in 2001 and 2000 was $3,298,887 and
$1,415,595, respectively.
Allowance for funds used during construction for 2001
increased $31,943, or 57.1%, when compared to 2000. Interest on
the pipeline to the river project accounts for the increase.
Federal and state income taxes rose by $149,491, or 7.2%,
due to an increase in taxable income. The effective tax rates
for 2001 and 2000 were 35.8% and 35.7%, respectively.
2000 Compared with 1999
Net income for 2000 was $3,757,787, an increase of $603,714,
or 19.1%, compared to 1999.
Water operating revenues for 2000 increased $969,912, or
5.5%, compared to 1999. The increase resulted from a 5.3% rate
increase approved by the PPUC, effective October 1, 1999.
Consumption for 2000 increased 1.1% for residential customers and
decreased 7.5% for commercial and industrial customers combined.
Operating expenses for 2000 decreased $246,929, or 2.4%,
compared to 1999. The decrease was primarily due to reduced
public utility realty taxes and deferred compensation costs. In
addition, pension expenses, year 2000 system costs, legal fees,
capital stock tax and hydrant maintenance costs decreased in 2000
compared to 1999. Increased main and service line maintenance
due to highway relocation, increased insurance premiums, rate
case amortization, and depreciation due to increased plant
investment partially offset the decrease in operating expenses.
Interest on long-term debt increased $24,397 in 2000
compared to 1999 due to the remarketing of the Series 1995 5%
Industrial Development Bonds at 6%. Short-term interest also
increased by $82,683 in 2000 compared to 1999 due to higher
interest rates and an increase in short-term debt outstanding.
The average short-term debt outstanding in 2000 and 1999
was $1,415,595 and $463,530, respectively.
Allowance for funds used during construction for 2000
decreased $47,046, or 45.7%, when compared to 1999. Interest was
capitalized due to large main extension projects in 1999, such as
Railroad, Windsor, and Conewago Township, while 2000 projects
were of smaller magnitude.
Federal and state income taxes rose by $372,946, or 21.8%,
due to an increase in taxable income. The effective tax rates
for 2000 and 1999 were 35.7% and 35.2%, respectively.
Rate Developments
Within the last several years the Company has filed
applications for rate increases with the PPUC and has been
granted rate relief as a result of such requests. The most
recent rate request was filed by the Company on March 20, 2001,
seeking an 11.1% increase in rates. Effective September 1, 2001,
the PPUC authorized an increase in rates designed to produce
approximately $800,000 in additional annual operating revenues,
an increase of 4.2%. The Company does not plan to file an
application for a rate increase in 2002.
Liquidity and Capital Resources
The Company is not aware of demands, events or uncertainties
that will result in a decrease of liquidity or in a material
change in the mix and relative cost of capital resources.
The Company does not use off-balance sheet arrangements such
as securitization of receivables or unconsolidated entities. The
Company has no lease obligations, does not engage in trading or
risk management activities, and does not have material
transactions involving related parties.
During 2001, the per capita volume of water sold declined in
the industrial class primarily due to the loss of a large
industrial customer who closed its operation in December 2000.
The per capita volume of water sold did not change significantly
in the other customer classifications. The Company does not
anticipate any further change in the level of water usage which
would have a material impact on its financial condition or
results of operations.
During 2001, the Company had $7,095,827 of construction
expenditures. The Company financed such expenditures through
internally generated funds, customers' advances, short-term
borrowings, and proceeds from the issuance of common stock under
its dividend reinvestment plan (stock issued in lieu of cash
dividends), employee stock purchase plan, and stock subscription.
The Company anticipates construction expenditures for 2002
and 2003 of approximately $6,518,500 and $5,131,000,
respectively. The Company plans to finance such expenditures
with internally generated funds, customers' advances, short-term
borrowings, proceeds from the issuance of common stock under its
dividend reinvestment plan (stock issued in lieu of cash
dividends) and employee stock purchase plan.
During 2001, net cash provided by operating activities
exceeded net cash used in investing and financing activities.
The Company anticipates that during 2002 net cash used in
investing and financing activities will equal net cash provided
by operating activities. 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) and employee stock purchase plan, and customers'
advances will be used to satisfy the need for additional cash.
As of December 31, 2001, current liabilities exceeded
current assets by $981,090. As of December 31, 2000, current
liabilities exceeded current assets by $2,159,841. Short-term
borrowings from lines of credit as of December 31, 2001 and 2000
were $2,000,000 and $2,648,946, respectively. The Company
maintains lines of credit aggregating $19,000,000. Loans granted
under these lines of credit bear interest based on the prime or
LIBOR rates plus 1 to 1.5 percent. 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 2001, the Company's dividend payout ratios relative
to net income and cash provided by operating activities were
78.0% and 45.2%, respectively. The Company believes that these
payout ratios are appropriate.
Shareholders' investment as a percent of total
capitalization was 52.3% as of December 31, 2001 compared with
49.8% as of December 31, 2000.
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.
Over the past several years, the Company and an outside
consultant have been evaluating the source of supply. Studies
indicate that a new source will be needed by 2006. Available
options have been analyzed, and the Company has decided on a
pipeline from the Susquehanna River to Lake Redman. This
alternative had the lowest cost, provided expandability, and was
the best for the environment. The Company plans to build an
intake and a pump station on its land at Long Level in Lower
Windsor Township, York County. The water would then be pumped 13
miles through a 30 inch diameter pipe and released into Lake
Redman. The cost of this project is estimated at $18 to $20
million. Funds will be raised through a combination of debt and
equity issues. While the permitting process began in 2001,
major expenditures are not expected until after 2002.
Drought
On November 6, 2001, the Governor issued a drought warning,
which called for voluntary reductions in water use. On February
12, 2002, the drought warning became a drought emergency which
imposes mandatory water use restrictions on our service
territory. The drought did not have a noticeable impact on 2001
because it occurred at a time in which our customers were already
using less water due to the season. The drought, if it
continues, could have a material impact in 2002.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase
method of accounting. The pooling method of accounting is
prohibited except for transactions initiated before July 1, 2001.
SFAS No. 142 prescribes accounting for all purchased
goodwill and intangible assets. The Statement requires that
acquired goodwill is no longer amortized over a prescribed
period, but is tested for impairment at least annually or
whenever an impairment indicator arises. Acquired intangible
assets, other than goodwill, are initially recognized at fair
value and amortized over their useful life. This Statement is
effective for fiscal years beginning after December 15, 2001, and
until adoption of SFAS No. 142, goodwill and intangibles
continue to be amortized under previously existing standards.
The Company has consummated business combinations prior to
June 30, 2001, which have been accounted for by the purchase
method. The Statement provides for transition provisions which
will require the Company to: (a) reassess the estimated useful
lives of intangible assets that were previously recognized
separately from goodwill; (b) cease amortization on intangible
assets determined to have an indefinite life and subsequently
test for impairment and (c) recognize any unamortized deferred
negative goodwill. At December 31, 2001, the utility plant
includes a credit acquisition adjustment of $1,447,968, which is
the unamortized difference between the purchase price of prior
acquisitions and the carrying values at the time of the
acquisitions. Management has initially determined that none of
this amount is deemed to be negative goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" which is effective for financial
statements issued for fiscal years beginning after June 15, 2001.
The Statement requires the entity to recognize a liability for an
asset retirement obligation where the entity has a legal
obligation associated with the retirement of a tangible
long-lived asset. This Statement is not expected to have a
material impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The
Statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and interim periods
within those fiscal periods. This Statement will require an
entity to recognize an impairment loss if the carrying value of a
long-lived asset or asset group is not recoverable and exceeds
fair value. This Statement is not expected to have a material
impact on the Company's financial position or results of
operations.
The York Water Company
Balance Sheets
December 31
Assets 2001 2000
UTILITY PLANT, at original cost $121,109,335 $114,748,545
Less-Reserve for depreciation 19,356,553 18,314,880
101,752,782 96,433,665
OTHER PHYSICAL PROPERTY:
Less-Reserve for depreciation of
$89,392 in 2001 and $80,985 in
2000 . . . . . 511,007 519,414
CURRENT ASSETS:
Cash and cash equivalents 97,447 -
Receivables, less reserves of
$130,000 in 2001 and 2000. . . . . . . 2,995,000 2,854,593
Materials and supplies, at cost 449,777 402,770
Prepaid expenses 229,248 258,236
Deferred income taxes (Note 3) 88,655 88,655
3,860,127 3,604,254
OTHER LONG-TERM ASSETS:
Prepaid pension cost (Note 6) 2,202,995 2,178,423
Deferred debt expense 354,346 394,422
Deferred rate case expense 144,042 46,950
Notes receivable (Note 7) 1,121,916 985,794
Deferred regulatory assets (Note 1) 1,886,658 1,600,420
Other. . . . . . . . . . . . . . . 1,517,619 1,862,977
7,227,576 7,068,986
$113,351,492 $107,626,319
Capitalization and Liabilities
CAPITALIZATION:
Common stock, no par value, authorized
31,000,000 shares, outstanding
3,154,332 shares in 2001 and
3,042,733 shares in 2000 (Note 5) $ 31,473,194 $ 28,899,504
Earnings retained in the business 4,418,280 4,226,051
Treasury stock, 38,000 shares in 2000 - (687,800)
35,891,474 32,437,755
Long-term debt (Note 4) 32,690,343 32,728,220
68,581,817 65,165,975
CURRENT LIABILITIES:
Short-term borrowings (Note 4) 2,000,000 2,648,946
Current portion of long-term debt 37,877 37,500
Accounts payable 478,423 1,168,824
Dividends payable 623,498 577,914
Accrued taxes 527,674 165,002
Advance water revenues 25,037 21,182
Accrued interest 678,163 678,164
Other accrued expenses 470,545 466,563
4,841,217 5,764,095
DEFERRED CREDITS:
Customers' advances for construction
(Note 7). . . . . . . . 17,777,685 16,746,170
Contributions in aid of construction 10,784,143 10,157,133
Deferred income taxes (Note 3) 8,519,594 7,179,769
Deferred regulatory liabilities
(Note 1) . . . . . . . . . . 970,330 988,781
Deferred employee benefits 1,876,706 1,624,396
39,928,458 36,696,249
$113,351,492 $107,626,319
The accompanying notes are an integral part of these statements.
The York Water Company
Statements of Income
Year Ended December 31
2001 2000 1999
WATER OPERATING REVENUES:
Residential $11,570,453 $10,979,596 $10,198,707
Commercial and industrial 5,472,782 5,301,362 5,368,833
Other 2,359,307 2,200,205 1,943,711
19,402,542 18,481,163 17,511,251
OPERATING EXPENSES:
Operation and maintenance 4,565,022 4,217,504 4,130,342
Administrative and general 3,921,598 3,386,889 3,283,359
Depreciation and amortization 1,571,441 1,673,715 1,618,357
Taxes other than income taxes 409,844 730,516 1,223,495
10,467,905 10,008,624 10,255,553
Operating income. . . . . 8,934,637 8,472,539 7,255,698
INTEREST EXPENSE AND OTHER INCOME:
Interest on long-term debt
(Note 4). . . . . . . . . 2,759,985 2,739,902 2,715,505
Interest on short-term debt
(Note 4) . . . . . . . . 183,429 113,709 31,026
Allowance for funds used
during construction . . . . (87,849) (55,906) (102,952)
Other income, net (159,536) (166,003) (252,058)
2,696,029 2,631,702 2,391,521
Income before income taxes 6,238,608 5,840,837 4,864,177
Federal and state income taxes
(Note 3) 2,232,541 2,083,050 1,710,104
Net income . . . . . $ 4,006,067 $ 3,757,787 $ 3,154,073
BASIC EARNINGS PER SHARE
(Note 5). . . . . . . . . . $1.30 $1.25 $1.05
Statements of Shareholders' Investment
Earnings
Retained
Common In The Treasury
Stock Business Stock
Balance, January 1, 1999 27,292,726 3,087,710 -
Net income - 3,154,073 -
Cash dividends ($.945
per share) . . . . . . . . . - (2,823,526) -
Issuance of common stock
under dividend reinvestment
plan 728,166 - -
Issuance of common stock
under employee stock
purchase plan. . . . . 78,305 - -
Repurchase of 38,000 shares
of common stock. . . . - - (687,800)
Balance, December 31, 1999 28,099,197 3,418,257 (687,800)
Net income - 3,757,787 -
Cash dividends ($.98 per
share). . . . . . . . . . - (2,949,993) -
Issuance of common stock
under dividend reinvestment
plan. . . . . . 722,609 - -
Issuance of common stock
under employee stock
purchase plan. . . . . 77,698 - -
Balance, December 31, 2000 28,899,504 4,226,051 (687,800)
Net income - 4,006,067 -
Cash dividends ($1.01 per
share) . . . . . . . . . - (3,126,038) -
Issuance of 76,930 shares
of common stock. . . . . 1,783,726 - -
Issuance of common stock
under dividend reinvestment
plan. . . . . . 715,023 - -
Issuance of common stock
under employee stock
purchase plan. . . . . 74,941 - -
Retirement of treasury stock - (687,800) 687,800
Balance, December 31, 2001 $31,473,194 $4,418,280 $ -0-
The accompanying notes are an integral part of these statements.
The York Water Company
Statements of Cash Flows
Year Ended December 31
2001 2000 1999
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $4,006,067 $3,757,787 $3,154,073
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,571,441 1,673,715 1,618,357
Provision for losses on
accounts receivable. . . . . 89,265 85,357 87,795
Increase in deferred income
taxes (including regulatory
assets and liabilities) 1,035,136 924,785 947,655
Changes in assets and
liabilities:
Increase in accounts
receivable. . . . . . . (229,672) (186,690) (359,256)
Decrease (increase) in
recoverable income taxes - 5,702 (5,702)
Increase in materials and
supplies . . . . . . . . (47,007) (12,330) (29,040)
Decrease (increase) in
prepaid expenses and
prepaid pension costs 4,416 (233,670) (201,587)
(Decrease) increase in accounts
payable, accrued expenses,
other liabilities and
deferred employee benefits (384,670) 677,666 729,785
Increase (decrease) in accrued
interest and taxes. . . . . 362,671 135,021 (314,860)
Decrease (increase) in other
assets. . . . . . . . 502,018 (432,002) (131,476)
Net Cash Provided by
Operating Activities 6,909,665 6,395,341 5,495,744
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of temporary
investments. . . . . . . . (2,940,152) (249,046) (3,281,000)
Maturities of temporary
investments. . . . . . . . 2,940,152 249,046 3,281,000
Construction expenditures (7,095,827) (6,413,721) (7,050,376)
Customers' advances for
construction and
contributions
in aid of construction 1,658,525 1,189,961 1,741,382
(Increase) decrease in
notes receivable. . . . . . . (136,122) (202,000) 29,281
Net Cash Used in Investing
Activities . . . . (5,573,424) (5,425,760) (5,279,713)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayments) proceeds of
long-term debt. . . . . . . (37,500) (37,723) 800,000
Net (repayments) borrowings
under line-of-credit
agreements. . . . . (648,946) 1,217,828 1,431,118
Repurchase of 38,000 shares
of common stock. . . . . - - (687,800)
Issuance of 76,930 shares
of common stock. . . . . . 1,783,726 - -
Issuance of common stock under
dividend reinvestment plan 715,023 722,609 728,166
Issuance of common stock under
employee stock purchase plan 74,941 77,698 78,305
Dividends paid (3,126,038) (2,949,993) (2,823,526)
Net Cash Used in Financing
Activities . . . . (1,238,794) (969,581) (473,737)
Net increase (decrease) in
cash and cash equivalents 97,447 - (257,706)
Cash and cash equivalents at
beginning of year - - 257,706
Cash and cash equivalents at
end of year . . . . . . $ 97,447 $ - $ -
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest, net of amounts
capitalized . . . . . . . $2,851,378 $2,783,830 $2,636,394
Income taxes . . . . . . 757,162 1,076,981 940,540
The accompanying notes are an integral part of these statements.
The York Water Company
Notes to Financial Statements
l. Accounting Policies
The business of The York Water Company is to impound, purify
and distribute water. The Company operates entirely within its
franchised territory located in York County, Pennsylvania, and is
subject to regulation by the PPUC.
The Company is subject to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation, and, therefore, certain
of the accounting principles followed may differ from enterprises
in general to reflect the economic effect of rate decisions by
regulatory authorities.
The following summarizes the significant accounting policies
employed by The York Water Company.
Property, Plant and Equipment and Depreciation
Property, plant and equipment consists of utility plant.
The cost of additions includes contracted cost, direct labor and
fringe benefits, materials, overheads and, for certain utility
plant, allowance for funds used during construction. Water
systems acquired are recorded at estimated original cost of
utility plant when first devoted to utility service and the
applicable depreciation is recorded to accumulated depreciation.
The difference between the estimated original cost less
applicable accumulated depreciation, and the purchase price is
recorded as an acquisition adjustment within utility plant. At
December 31, 2001 and 2000, utility plant includes a credit
acquisition adjustment of $1,447,968 and $1,481,554,
respectively, which is being amortized over the remaining life of
the respective assets. Amortization amounted to $33,586 in 2001
and $33,585 in 2000.
Upon normal retirement of depreciable property, the
estimated or actual cost of the asset is credited to the utility
plant account, and such amounts, together with the cost of
removal less salvage value, is charged to the reserve for
depreciation. Gains or losses from abnormal retirements are
reflected in income currently.
The Company charges to maintenance expense the cost of
repairs and replacements and renewals of minor items of property.
Maintenance of transportation equipment is charged to clearing
accounts and apportioned therefrom in a manner similar to
depreciation. The cost of replacements, renewals and betterments
of units of property is capitalized to the utility plant
accounts.
The straight-line remaining life method is used to compute
depreciation on utility plant cost, exclusive of land and land
rights. The effective rate of depreciation was 1.74% in 2001,
1.96% in 2000, and 2.02% in 1999 on average utility plant,
net of customers' advances and contributions. Larger
depreciation provisions are deducted for tax purposes.
Annual provisions for depreciation of transportation and
mechanical equipment included in utility plant are computed on a
straight-line basis over the estimated service lives. Such
provisions are charged to clearing accounts and apportioned
therefrom to operating expenses and other accounts in accordance
with the Uniform System of Accounts as prescribed by the PPUC.
During 2001, the estimated lives were lengthened for certain
assets that resulted in less depreciation expense of
approximately $170,000 in 2001.
Deferred Charges-
Deferred debt expense is amortized on a straight-line basis
over the term of the related debt.
Deferred rate case expense is amortized over two years as
specified by the PPUC for rate-making purposes.
Revenues-
Revenues include amounts billed to customers on a cycle
basis and unbilled amounts based on estimated usage from the
latest meter reading to the end of the accounting period.
Customers' Advances for Construction-
Advances are received from customers for construction of
utility plant and are refundable as operating revenues are earned
and any notes receivable have been paid after the completion of
construction (see also Note 7). After all refunds to which the
customer is entitled are made, any remaining balance is
transferred to contributions in aid of construction.
Contributions in Aid of Construction-
Contributions in aid of construction include direct
contributions and the portion of customers' advances for
construction which become nonrefundable. Transfers to other
accounts may not be made without approval of the PPUC.
Income Taxes and Deferred Regulatory Assets and Liabilities-
Certain income and expense items are accounted for in
different time periods for financial reporting than for income
tax reporting purposes.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. To the
extent such income taxes increase or decrease future rates, an
offsetting regulatory asset or liability has been recorded.
Investment tax credits have been deferred and are being
amortized to income over the average estimated service lives of
the related assets.
Notes Receivable-
Notes receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management, considering
current information and events regarding the borrowers' ability
to repay their obligations, considers a note to be impaired when
it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount
of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective
interest rate.
Pension Plans-
The Company has defined benefit pension plans covering
substantially all of its employees. The benefits are based on
years of service and the employee's compensation before
retirement.
Allowance for Funds Used During Construction-
Allowance for funds used during construction (AFUDC)
represents the cost of funds used for construction purposes
during the period of construction. These costs are reflected as
non-cash income during the construction period and as an addition
to the cost of plant constructed. The AFUDC rate was 10.04% for
2001, 2000, and 1999.
Statements of Cash Flows-
For the purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents
except for those instruments earmarked to fund construction
expenditures or repay long-term debt.
Use of Estimates in the Preparation of Financial Statements-
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification-
Throughout 2001, management evaluated the classification of
deferred income tax assets and liabilities and the related
regulatory assets and liabilities. Several components of these
accounts were reclassified which resulted in significant changes
when compared to prior financial reporting periods. These
reclassifications did not affect current or prior year income tax
expense or net income.
Certain 2000 amounts have been reclassified to conform to
2001 presentation.
2. Rate Increases
The Company has increased rates as approved by the PPUC in
August 2001 (4.2%). The new rates became effective September 1,
2001 and are designed to produce approximately $800,000 in
additional annual operating revenues. The next application to
increase rates will be filed sometime after 2002.
3. Income Taxes
The provisions for income taxes consist of:
2001 2000 1999
Federal current.. $ 710,573 $ 926,825 $ 674,116
State current.... 348,373 297,378 215,860
Federal deferred. 1,217,628 811,966 805,778
State deferred... (6,427) 83,563 51,373
Federal investment
tax credit, net
of current
utilization... (37,606) (36,682) (37,023)
Total income
taxes......... $2,232,541 $2,083,050 $1,710,104
A reconciliation of the statutory Federal tax provision
(34%) to the total provision follows:
2001 2000 1999
Statutory
Federal tax
provision..... $2,121,127 $1,985,885 $1,653,820
Tax-exempt
interest...... (54,145) (47,524) (73,715)
Effect of
depreciation
flowed through.. - (65,061) (46,021)
Effect of cost of
removal flowed
through......... - (27,990) (23,163)
Amortization of
investment tax
credit.......... (38,332) (38,118) (38,325)
State income
taxes, net of
Federal benefit. 225,684 251,441 176,374
Debt issuance
expenses........ 9,612 (31,956) 10,356
Other, net....... (31,405) 56,373 50,778
Total income
taxes........... $2,232,541 $2,083,050 $1,710,104
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31, 2001 and 2000 are summarized in
the following table:
2001 2000
Deferred tax assets:
Allowance for doubtful accounts $ 88,655 $ 88,655
Deferred compensation 263,009 173,291
Customers' advances
and contributions 512,339 567,910
Alternative minimum tax
credit carryforward 768,511 1,135,705
Other 35,104 29,592
Total gross deferred tax assets 1,667,618 1,995,153
Less valuation allowance - -
Total deferred tax assets 1,667,618 1,995,153
Deferred tax liabilities:
Accelerated depreciation 8,616,012 7,598,115
Investment tax credit 351,804 365,443
Pension income 894,271 884,296
Other, net 236,470 238,413
Total deferred tax liabilities 10,098,557 9,086,267
Net deferred tax liability $ 8,430,939 $ 7,091,114
Reflected on balance sheets as:
Current deferred tax asset $ (88,655) $ (88,655)
Noncurrent deferred tax liability 8,519,594 7,179,769
Net deferred tax liability $ 8,430,939 $ 7,091,114
No valuation allowance is required for deferred tax assets
as of December 31, 2001 and 2000. In assessing the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the
level of historical taxable income and the current
regulatory environment, management believes it is more likely
than not the Company will realize the benefits of
these deductible differences.
4. Borrowings
Long-term debt as of December 31, 2001 and 2000 is
summarized in the following table:
2001 2000
10.17% Senior Notes,
Series A, due 2019.. $ 6,000,000 $ 6,000,000
9.60% Senior Notes,
Series B, due 2019.. 5,000,000 5,000,000
10.05% Senior Notes,
Series C, due 2020.. 6,500,000 6,500,000
8.43% Senior Notes,
Series D, due 2022.. 7,500,000 7,500,000
4.40% Industrial Development
Authority Revenue Refunding
Bonds, Series 1994, due 2009 2,700,000 2,700,000
1% Pennvest Note, due 2019 690,343 728,220
6% Industrial Development
Authority Revenue Refunding
Bonds, Series 1995, due 2010 4,300,000 4,300,000
$32,690,343 $32,728,220
During 2000, the Company issued $4,300,000 of 6% Industrial
Development Authority Revenue Refunding Bonds, Series 1995.
Proceeds of these bonds were used to redeem the outstanding
amount of the 5% Industrial Development Authority Revenue
Refunding Bonds, Series 1995. These bonds have a mandatory
tender date of June 1, 2005. The Company is required to purchase
any unremarketed bonds.
The 4.40% Industrial Development Authority Revenue Refunding
Bonds, Series 1994, have a mandatory tender date of May 15, 2004.
The Company is required to repurchase any unremarketed bonds.
The terms of the debt agreements limit in some cases the
Company's ability to prepay its borrowings and include certain
restrictions with respect to declaration and payment of cash
dividends and acquisition of the Company's stock. Under the
terms of the most restrictive agreements, cumulative payments for
dividends and acquisition of stock since December 31, 1982 may
not exceed $1,500,000 plus net income since that date. As of
December 31, 2001, none of the earnings retained in the business
are restricted under these provisions.
The Company maintains lines of credit aggregating
$19,000,000. Loans granted under these lines as of December 31,
2001 bear interest based on the prime or LIBOR rate plus 1 to 1.5
percent. There were $2,000,000 of short-term borrowings as of
December 31, 2001 and $2,648,946 as of December 31, 2000. The
weighted average interest rate on short-term borrowings
outstanding as of December 31, 2001 was 3.14%. All of the lines
of credit are payable upon demand. The Company is not required
to maintain compensating balances on its lines of credit.
5. Common Stock and Earnings Per Share
Earnings per share are based upon the weighted average
number of shares outstanding of 3,076,625 in 2001; 3,010,675
in 2000; and 2,990,267 in 1999. The Company does not have
dilutive securities.
Under the employee stock purchase plan, all full-time
employees who have been employed at least six consecutive months
may purchase shares of the Company's common stock through payroll
deductions limited to 10% of gross compensation. The purchase
price is 95% of the fair market value (as defined). As of
December 31, 2001, 57,286 shares have been issued under the plan.
Under the optional dividend reinvestment plan, holders of
the Company's common stock may purchase additional shares. The
purchase price is 95% of the fair market value (as defined). As
of December 31, 2001, 504,748 shares of the 960,000 shares
authorized have been issued.
On October 22, 1999, the Company purchased 38,000 shares of
its common stock in a private transaction. These shares were
retired in 2001.
On July 23, 2001, the Company offered to holders of its
common stock non-transferable subscription rights to purchase up
to an aggregate of 120,000 shares of common stock. All
shareholders were granted one subscription right for every 25
shares of common stock held of record as of June 30, 2001. Each
subscription right entitled the holder to purchase one share at a
purchase price of $23.61 per share. On September 10, 2001,
subscription rights to purchase 76,930 shares were exercised.
The net proceeds, $1,783,726, were used to repay short-term
borrowings.
6. Employee Benefit Plans
The Company maintains two defined benefit pension plans
covering substantially all of its employees. The benefits
are based upon years of service times the sum of $17.50 plus 1.5%
of final average monthly earnings in excess of $400. The
Company's funding policy is to contribute annually the maximum
amount permitted by the Employee Retirement Income Security Act
of 1974, as amended.
The following table sets forth the plans' funded status and
amounts recognized in the Company's balance sheets as of December
31, 2001 and 2000. The measurement of assets and obligations of
the plans is as of December 31, 2001 and 2000.
2001 2000
Pension benefit obligations
beginning of year $11,993,805 $10,903,511
Service cost 384,287 332,258
Interest cost 795,934 752,667
(Decrease) increase due
to actuarial (gain) loss (697,159) 513,657
Benefit payments (522,781) (508,288)
Pension benefit
obligation end of year $11,954,086 $11,993,805
Fair value of plan assets
beginning of year $15,006,375 $15,487,253
Actual return on plan assets (1,156,567) 27,410
Benefits paid (522,781) (508,288)
Fair value of plan assets
end of year $13,327,027 $15,006,375
Funded status $ 1,372,941 $ 3,012,570
Unrecognized transition asset (36,333) (242,333)
Unrecognized net prior
service cost 236,404 267,740
Unrecognized net loss (gain) 629,983 (859,554)
Prepaid pension cost as of
December 31, 2001 and 2000 $ 2,202,995 $ 2,178,423
Net periodic pension income for 2001, 2000 and 1999 included the
following components:
2001 2000 1999
Service cost-benefits
earned during the
year $ 384,287 $ 332,258 $ 369,469
Interest cost on
projected benefit
obligation 795,934 752,667 659,340
Expected return
on plan assets (1,030,129) (1,064,600) (1,000,896)
Amortization of
transition asset (206,000) (206,000) (206,000)
Amortization of
prior service cost 31,336 31,017 26,717
Amortization of
accumulated gain - (45,882) -
Net periodic
pension income $ (24,572) $(200,540) $(151,370)
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7.25% in 2001, 6.75% in 2000 and 7.0% in 1999. The rate of
increase in future compensation levels was 5%. The expected
long-term rate of return on assets was 7%.
The Company has a savings plan pursuant to the provisions of
section 401(k) of the Internal Revenue Code. The plan provides
for elective employee contributions of up to 15% of compensation
and Company matching contributions of 50% of the participant's
contribution, up to a maximum annual Company contribution of
$1,000 for each employee. Contributions to the plan amounted to
$61,584 in 2001, $58,952 in 2000, and $51,519 in 1999.
7. Notes Receivable and Customers' Advances for Construction
The Company has entered into agreements with five
municipalities to extend water service into newly-formed water
districts. The Company loaned funds to the municipalities to
cover the costs related to the projects. The municipalities
concurrently advanced these funds back to the Company in the form
of customers' advances for construction. The municipalities are
required by enacted ordinance to charge application fees and
water revenue surcharges (fees) to customers connected to the
system which are remitted to the Company. The principal and the
related customer advance are reduced periodically as operating
revenues are earned by the Company from customers connected to
the system and refunds of advances are made. There is no due
date for the notes nor expiration date for the advances.
The Company has recorded interest income of $142,560 in
2001, $122,828 in 2000, and $198,590 in 1999.
Included in the accompanying balance sheets at December 31,
2001 and 2000 were the following amounts related to these
projects.
2001 2000
Notes receivable,
including interest $ 947,852 $ 804,307
Customers' advances
for construction 3,090,261 2,775,234
The Company has other notes receivable totaling $174,064 and
$181,487 at December 31, 2001 and 2000, respectively.
The Company has other customers' advances for construction
totaling $14,687,424 and $13,970,936 at December 31, 2001 and
2000, respectively.
8. Capital Commitments
The Company plans to finance ongoing capital expenditures
with internally generated funds, customers' advances, short-term
borrowings and proceeds from the issuance of common stock under
its dividend reinvestment plan (stock issued in lieu of cash
dividends) and employee stock purchase plan. As additional funds
are needed for the pipeline to the river, various debt and equity
financing will be used.
9. Commitments and Contingent Liabilities
The Company is involved in certain legal and administrative
proceedings before various courts and governmental agencies
concerning rates and other matters. The Company expects that the
ultimate disposition of these proceedings will not have a
material effect on the Company's financial position, results of
operations and cash flows.
10. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined based on available market information and appropriate
valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the
Company might realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value.
The carrying amount of current assets and liabilities that
are considered financial instruments approximates their fair
value as of the dates presented. The Company's long-term debt,
with a carrying value of $32,690,343 at December 31, 2001 and
$32,728,220 at December 31, 2000, had an estimated fair value of
approximately $39,000,000 in 2001 and in 2000. The weighted
average rates used to calculate the carrying value were based on
the 30-year Treasury Bond yield. The 2001 and 2000 rates were
6.58% and 6.55%, respectively.
The Company's customers' advances for construction and notes
receivable have carrying values at December 31, 2001 of
$17,777,685 and $1,121,916, respectively. The relative fair
values of these amounts cannot be accurately estimated since the
timing of future payment streams is dependent upon several
factors, including new customer connections, customer consumption
levels and future rate increases.
11. Shareholder Rights Plan
On January 25, 1999, the Company's Board of Directors
approved a Shareholder Rights Plan designed to protect the
Company's shareholders in the event of an unsolicited, unfair
offer to acquire the Company. Each outstanding common share is
entitled to one Right which is evidenced by the common share
certificate. In the event any person acquires 15% or more of the
outstanding common shares or commences a tender or exchange offer
which, if consummated, would result in a person owning 15% or
more of the outstanding common shares, the Rights will begin to
trade independently from the common shares, and would entitle the
holder to purchase a number of common shares having approximately
twice the value of the exercise price of the Rights. If the
Company is involved in a merger or other business combination at
any time after the Rights become exercisable, the Rights will
entitle the holder to acquire a number of shares of the acquiring
company having approximately twice the value of the exercise
price of the Rights. The Rights are redeemable by the Company at
a redemption price of $0.01 per Right at any time before the
Rights become exercisable. The Rights will expire on January 24,
2009, unless previously redeemed.
12. Subsequent Event
On February 21, 2002, the Board of Directors approved a
two-for-one stock split, subject to the approval by the
Pennsylvania Public Utility Commission, or PPUC. The record date
for the stock split will be determined after the PPUC acts on the
Company's application.
Assuming the Company receives approval of the two-for-one
stock split from the PPUC, per share data would be as follows:
Per share of common stock, assuming the two-for-one stock
split approval:
2001 2000 1999
Net Income $0.650 $0.625 $0.525
Dividends $0.505 $0.490 $0.473
Per share of common stock, historical:
2001 2000 1999
Net Income $1.30 $1.25 $1.05
Dividends $1.01 $0.98 $0.945
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of The York Water
Company:
We have audited the accompanying balance sheets of The York Water
Company as of December 31, 2001 and 2000, and the related
statements of income, shareholders' investment, and cash flows
for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based
on our audits. The financial statements of The York Water
Company as of December 31, 1999 were audited by other auditors
whose report dated February 25, 2000, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing
the accounting principles used and the significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2001 and 2000 financial statements referred
to above present fairly, in all material respects, the financial
position of The York Water Company as of December 31, 2001 and
2000, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles
generally accepted in the United States of America.
York, Pennsylvania Stambaugh Ness, PC
February 26, 2002