The York Water Company 10Q 09-30-06
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
Quarter ended September
30, 2006
|
Commission
file number 0-690
|
THE
YORK WATER COMPANY
(Exact
name of registrant as specified in its charter)
PENNSYLVANIA
|
23-1242500
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
130
EAST MARKET STREET
YORK,
PENNSYLVANIA
|
17401
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(717)
845-3601
|
(Registrant's
telephone number, including area
code)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer x
|
Non-accelerated
Filer ¨
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common
stock, No par value
|
10,445,826
Shares outstanding
as
of November 9, 2006
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
(In
thousands of dollars, except per share
amounts)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
As
of
|
|
As
of
|
|
|
|
Sept
30, 2006
|
|
Dec.
31, 2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
UTILITY
PLANT, at original cost
|
|
$
|
199,374
|
|
$
|
182,868
|
|
Plant
acquisition adjustments
|
|
|
(1,088
|
)
|
|
(1,112
|
)
|
Accumulated
depreciation
|
|
|
(28,713
|
)
|
|
(26,982
|
)
|
Net
utility plant
|
|
|
169,573
|
|
|
154,774
|
|
|
|
|
|
|
|
|
|
OTHER
PHYSICAL PROPERTY:
|
|
|
|
|
|
|
|
Less
accumulated depreciation of $136 in 2006
|
|
|
|
|
|
|
|
and
$129 in 2005
|
|
|
571
|
|
|
527
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Receivables,
less reserves of $163 in 2006 and $135 in 2005
|
|
|
2,469
|
|
|
2,202
|
|
Unbilled
revenues
|
|
|
2,572
|
|
|
1,580
|
|
Recoverable
income taxes
|
|
|
-
|
|
|
59
|
|
Materials
and supplies, at cost
|
|
|
820
|
|
|
843
|
|
Prepaid
expenses
|
|
|
591
|
|
|
348
|
|
Deferred
income taxes
|
|
|
113
|
|
|
92
|
|
Total
current assets
|
|
|
6,565
|
|
|
5,124
|
|
|
|
|
|
|
|
|
|
OTHER
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
Deferred
debt expense
|
|
|
713
|
|
|
761
|
|
Notes
receivable
|
|
|
2,030
|
|
|
2,196
|
|
Deferred
regulatory assets
|
|
|
6,683
|
|
|
5,747
|
|
Other
|
|
|
3,315
|
|
|
3,167
|
|
Total
long-term assets
|
|
|
12,741
|
|
|
11,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
189,450
|
|
$
|
172,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
(In
thousands of dollars, except per share
amounts)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
As
of
|
|
As
of
|
|
|
|
Sept
30, 2006
|
|
Dec.
31, 2005
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY AND LIABILITIES
|
|
|
|
|
|
COMMON
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
Common
stock, no par value, authorized 46,500,000 shares,
|
|
$
|
42,809
|
|
$
|
42,015
|
|
issued
and outstanding 10,445,826 shares in 2006
|
|
|
|
|
|
|
|
and
10,399,995 shares in 2005
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
9,597
|
|
|
8,633
|
|
Accumulated
other comprehensive loss
|
|
|
(103
|
)
|
|
(233
|
)
|
Total
common stockholders' equity
|
|
|
52,303
|
|
|
50,415
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK, authorized 500,000 shares, no shares issued
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, excluding current portion
|
|
|
39,805
|
|
|
39,835
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
16,967
|
|
|
7,292
|
|
Current
portion of long-term debt
|
|
|
12,040
|
|
|
12,039
|
|
Accounts
payable
|
|
|
4,061
|
|
|
2,641
|
|
Dividends
payable
|
|
|
929
|
|
|
927
|
|
Accrued
taxes
|
|
|
505
|
|
|
89
|
|
Accrued
interest
|
|
|
490
|
|
|
786
|
|
Deferred
regulatory liabilities
|
|
|
113
|
|
|
92
|
|
Other
accrued expenses
|
|
|
837
|
|
|
784
|
|
Total
current liabilities
|
|
|
35,942
|
|
|
24,650
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS:
|
|
|
|
|
|
|
|
Customers'
advances for construction
|
|
|
25,923
|
|
|
23,704
|
|
Contributions
in aid of construction
|
|
|
15,278
|
|
|
14,995
|
|
Deferred
income taxes
|
|
|
13,541
|
|
|
12,339
|
|
Deferred
investment tax credits
|
|
|
1,053
|
|
|
1,082
|
|
Deferred
regulatory liabilities
|
|
|
757
|
|
|
779
|
|
Deferred
employee benefits
|
|
|
4,486
|
|
|
3,885
|
|
Other
deferred credits
|
|
|
362
|
|
|
612
|
|
Total
deferred credits
|
|
|
61,400
|
|
|
57,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity and Liabilities
|
|
$
|
189,450
|
|
$
|
172,296
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Income
|
(In
thousands of dollars, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
Three
Months
|
|
Nine
Months
|
|
|
|
Ended
September 30
|
|
Ended
September 30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
WATER
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
4,851
|
|
$
|
4,488
|
|
$
|
13,390
|
|
$
|
12,570
|
|
Commercial
and industrial
|
|
|
2,263
|
|
|
2,205
|
|
|
6,277
|
|
|
6,038
|
|
Other
|
|
|
551
|
|
|
514
|
|
|
1,628
|
|
|
1,527
|
|
|
|
|
7,665
|
|
|
7,207
|
|
|
21,295
|
|
|
20,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
1,617
|
|
|
1,388
|
|
|
4,459
|
|
|
3,935
|
|
Administrative
and general
|
|
|
1,483
|
|
|
1,382
|
|
|
4,351
|
|
|
4,088
|
|
Depreciation
and amortization
|
|
|
621
|
|
|
589
|
|
|
1,890
|
|
|
1,766
|
|
Taxes
other than income taxes
|
|
|
268
|
|
|
213
|
|
|
815
|
|
|
688
|
|
|
|
|
3,989
|
|
|
3,572
|
|
|
11,515
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,676
|
|
|
3,635
|
|
|
9,780
|
|
|
9,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on long-term debt
|
|
|
(857
|
)
|
|
(853
|
)
|
|
(2,569
|
)
|
|
(2,612
|
)
|
Interest
on short-term debt
|
|
|
(221
|
)
|
|
(45
|
)
|
|
(490
|
)
|
|
(54
|
)
|
Allowance
for funds used during construction
|
|
|
90
|
|
|
48
|
|
|
181
|
|
|
110
|
|
Other
income (expenses), net
|
|
|
15
|
|
|
3
|
|
|
(15
|
)
|
|
(41
|
)
|
|
|
|
(973
|
)
|
|
(847
|
)
|
|
(2,893
|
)
|
|
(2,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,703
|
|
|
2,788
|
|
|
6,887
|
|
|
7,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
and state income taxes
|
|
|
964
|
|
|
1,053
|
|
|
2,423
|
|
|
2,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,739
|
|
$
|
1,735
|
|
$
|
4,464
|
|
$
|
4,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$
|
0.17
|
|
$
|
0.17
|
|
$
|
0.43
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Share
|
|
$
|
0.112
|
|
$
|
0.104
|
|
$
|
0.336
|
|
$
|
0.312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Common Stockholders' Equity and Comprehensive
Income
|
(In
thousands of dollars, except per share
amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Common
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
Stock
|
|
Earnings
|
|
Income
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$
|
42,015
|
|
$
|
8,633
|
|
$
|
(233
|
)
|
$
|
50,415
|
|
Net
income
|
|
|
-
|
|
|
4,464
|
|
|
-
|
|
|
4,464
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on interest rate swap, net
|
|
|
-
|
|
|
-
|
|
|
130
|
|
|
130
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
4,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
($.336 per share)
|
|
|
|
|
|
(3,500
|
)
|
|
-
|
|
|
(3,500
|
)
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
reinvestment plan
|
|
|
718
|
|
|
-
|
|
|
-
|
|
|
718
|
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plan
|
|
|
76
|
|
|
-
|
|
|
-
|
|
|
76
|
|
Balance,
September 30, 2006
|
|
$
|
42,809
|
|
$
|
9,597
|
|
$
|
(103
|
)
|
$
|
52,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Common
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
Stock
|
|
Earnings
|
|
Income
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
41,014
|
|
$
|
7,192
|
|
$
|
(169
|
)
|
$
|
48,037
|
|
Net
income
|
|
|
-
|
|
|
4,443
|
|
|
-
|
|
|
4,443
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on interest rate swap, net
|
|
|
-
|
|
|
-
|
|
|
(101
|
)
|
|
(101
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
4,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
($.312 per share)
|
|
|
-
|
|
|
(3,229
|
)
|
|
-
|
|
|
(3,229
|
)
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
reinvestment plan
|
|
|
668
|
|
|
-
|
|
|
-
|
|
|
668
|
|
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plan
|
|
|
69
|
|
|
-
|
|
|
-
|
|
|
69
|
|
Balance,
September 30, 2005
|
|
$
|
41,751
|
|
$
|
8,406
|
|
$
|
(270
|
)
|
$
|
49,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
(In
thousands of dollars, except per share
amounts)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
Nine
Months
|
|
Nine
Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Sept.
30, 2006
|
|
Sept.
30, 2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
4,464
|
|
$
|
4,443
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,890
|
|
|
1,766
|
|
Amortization
of deferred income
|
|
|
(95
|
)
|
|
(95
|
)
|
Equity
portion of AFUDC
|
|
|
(80
|
)
|
|
(48
|
)
|
Unrealized
gain on swap transaction
|
|
|
(6
|
)
|
|
(4
|
)
|
Provision
for losses on accounts receivable
|
|
|
119
|
|
|
98
|
|
Increase
in deferred income taxes
|
|
|
760
|
|
|
321
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable, unbilled revenues and recoverable income
taxes
|
|
|
(1,319
|
)
|
|
(576
|
)
|
(Increase)
decrease in materials and supplies
|
|
|
23
|
|
|
(210
|
)
|
Increase
in prepaid expenses and prepaid pension costs
|
|
|
(823
|
)
|
|
(95
|
)
|
Increase
in accounts payable, accrued expenses, regulatory
|
|
|
|
|
|
|
|
and
other liabilities, and deferred employee benefits and
credits
|
|
|
874
|
|
|
1,300
|
|
Increase
(decrease) in accrued interest and taxes
|
|
|
120
|
|
|
(445
|
)
|
(Increase)
decrease in regulatory and other assets
|
|
|
(472
|
)
|
|
11
|
|
Net
cash provided by operating activities
|
|
|
5,455
|
|
|
6,466
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Utility
plant additions, including allowance for funds used during
construction
|
|
|
|
|
|
|
|
of
$101 in 2006 and $61 in 2005
|
|
|
(15,153
|
)
|
|
(10,622
|
)
|
Acquisitions
of water systems, net
|
|
|
-
|
|
|
(1,963
|
)
|
Decrease
in notes receivable
|
|
|
166
|
|
|
1
|
|
Net
cash used in investing activities
|
|
|
(14,987
|
)
|
|
(12,584
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Customers'
advances for construction and contributions in aid of
construction
|
|
|
3,861
|
|
|
4,394
|
|
Repayments
of customer advances
|
|
|
(1,264
|
)
|
|
(891
|
)
|
Debt
issuance costs
|
|
|
(7
|
)
|
|
(35
|
)
|
Repayments
of long-term debt
|
|
|
(29
|
)
|
|
(29
|
)
|
Borrowings
under line-of-credit agreements
|
|
|
19,442
|
|
|
9,985
|
|
Repayments
under line-of-credit agreements
|
|
|
(9,767
|
)
|
|
(4,988
|
)
|
Issuance
of common stock under dividend reinvestment plan
|
|
|
718
|
|
|
667
|
|
Issuance
of common stock under employee stock purchase plan
|
|
|
76
|
|
|
69
|
|
Dividends
paid
|
|
|
(3,498
|
)
|
|
(3,218
|
)
|
Net
cash provided by financing activities
|
|
|
9,532
|
|
|
5,954
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
-
|
|
|
(164
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
-
|
|
|
164
|
|
Cash
and cash equivalents at end of period
|
|
$
|
-
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
3,191
|
|
$
|
2,869
|
|
Income
taxes
|
|
|
1,169
|
|
|
2,272
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non cash investing and financing activities:
|
|
|
|
|
|
|
|
Accounts
payable includes $1,498 in 2006 and $1,683 in 2005 for the construction
of
utility plant.
|
|
|
|
|
|
|
|
Accounts
payable and other deferred credits includes $256 in 2006 for the
acquisition of water systems.
|
|
|
|
|
|
|
|
The
change in notes receivable includes ($5) in 2005 offset by like
amounts of
customer advances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
Notes
to Interim Financial Statements
(In
thousands of dollars, except per share amounts)
1.
|
Basis
of Presentation
|
|
The
interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all adjustments, consisting of only
normal
recurring accruals, necessary for a fair presentation of results
for such
periods. Because the consolidated financial statements cover an interim
period, they do not include all disclosures and notes normally provided
in
annual financial statements, and therefore, should be read in conjunction
with the consolidated financial statements and notes thereto contained
in
the Company's Annual Report to Shareholders for the year ended December
31, 2005.
Operating
results for the three and nine month periods ended September 30,
2006 are
not necessarily indicative of the results that may be expected for
the
year ending December 31, 2006.
|
2.
|
Basic
Earnings Per Share
|
|
Basic
earnings per share for the three months ended September 30, 2006
and 2005
were based on weighted average shares outstanding of 10,432,225 and
10,368,507, respectively.
Basic
earnings per share for the nine months ended September 30, 2006 and
2005
were based on weighted average shares outstanding of 10,416,984 and
10,351,253, respectively.
Since
the Company has no common stock equivalents outstanding, there is
no
required calculation for diluted earnings per share.
|
3.
|
Reclassification
|
|
Certain
2005 amounts have been reclassified to conform to the 2006 presentation.
Such reclassifications had no effect on net income.
|
4.
|
Capital
Commitments
|
|
As
of September 30, 2006 the Company had committed a total of $4.5 million
for a new meter reading system to be completed in early 2007. As
of the
end of the quarter, $0.5 million remained to be incurred.
The
Company announced the acquisition of the Abbottstown Borough Water
System
during the first quarter of 2006 at a purchase price of approximately
$0.9
million. Settlement on this acquisition is expected to take place
in
December 2006.
|
|
Components
of Net Periodic Pension Cost
|
|
|
|
|
|
Three
Months Ended
September
30
|
|
Nine
Months Ended
September
30
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
$
171
|
|
$
147
|
|
$
513
|
|
$
440
|
|
Interest
Cost
|
265
|
|
254
|
|
794
|
|
763
|
|
Expected
return on plan assets
|
(248)
|
|
(240)
|
|
(745)
|
|
(720)
|
|
Amortization
of loss
|
56
|
|
37
|
|
169
|
|
111
|
|
Amortization
of prior service cost
|
67
|
|
70
|
|
201
|
|
209
|
|
Rate-regulated
adjustment
|
(184)
|
|
(155)
|
|
(580)
|
|
(465)
|
|
Net
periodic pension expense
|
$
127
|
|
$
113
|
|
$
352
|
|
$
338
|
|
Employer
Contributions
|
|
The
Company previously disclosed in its financial statements for the
year
ended December 31, 2005 that it expected to contribute $450 to its
pension
plans in 2006. As of September 30, 2006, the Company plans to contribute
$552, but has made no contributions as of the end of the third quarter.
The Company expects to make the $552 contribution in the fourth quarter
of
2006.
|
6.
|
Interest
Rate Swap Agreement
|
|
The
Company utilizes an interest rate swap agreement to convert its
variable-rate debt to a fixed rate (cash flow hedge). The effective
portion of the gain or loss on a derivative designated and qualifying
as a
cash flow hedging instrument is initially reported as a component
of other
comprehensive income and subsequently reclassified into earnings
in the
same period or periods during which the hedged transaction affects
earnings. The cumulative ineffective portion of the gain or loss
on the
derivative instrument, if any, is recognized currently in earnings.
As of
September 30, 2006, there was no cumulative ineffectiveness on the
Company’s interest rate swap.
|
7.
|
Other
Comprehensive Income
|
|
|
Three
Months Ended
September
30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Net
Income
|
$
1,739
|
|
$
1,735
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on interest rate swap,
|
|
|
|
|
|
|
|
net
of ($184) income tax in 2006,
|
|
|
|
|
|
|
|
and
$151 income tax in 2005
|
(270)
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
|
|
|
|
|
|
amounts
recognized in income,
|
|
|
|
|
|
|
|
net
of $13 income tax in 2005
|
-
|
|
18
|
|
|
|
(270)
|
|
240
|
|
|
Comprehensive
income
|
$
1,469
|
|
$
1,975
|
|
|
|
Nine
Months Ended
September
30
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Net
Income
|
$
4,464
|
|
$
4,443
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on interest rate swap,
|
|
|
|
|
|
|
|
net
of $81 income tax in 2006,
|
|
|
|
|
|
|
|
and
($118) income tax in 2005
|
119
|
|
(172)
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
|
|
|
|
|
|
amounts
recognized in income,
|
|
|
|
|
|
|
|
net
of $8 income tax in 2006,
|
|
|
|
|
|
|
|
and
$49 income tax in 2005
|
11
|
|
71
|
|
|
|
130
|
|
(101)
|
|
|
Comprehensive
income
|
$
4,594
|
|
$
4,342
|
|
8.
|
Stock
Split
|
|
On
August 28, 2006, the Company’s Board of Directors declared a three-for-two
split of its common stock in the nature of a stock dividend. The
split was
effected on September 11, 2006 to shareholders of record as of September
1, 2006. One additional share of common stock was issued for every
two
shares issued and outstanding as of September 1, 2006. Accordingly,
the
financial statements as well as share and per share amounts in this
report
have been restated to reflect the stock
split.
|
|
|
As
of
Sept.
30, 2006
|
|
As
of
Dec.
31, 2005
|
|
|
3.6%
Industrial Development Authority Revenue
|
|
|
|
|
|
|
Refunding
Bonds, Series 1994, due 2009
|
$2,700
|
|
$2,700
|
|
|
3.75%
Industrial Development Authority Revenue
|
|
|
|
|
|
|
Refunding
Bonds, Series 1995, due 2010
|
4,300
|
|
4,300
|
|
|
4.05%
Pennsylvania Economic Development Financing Authority
|
|
|
|
|
|
|
Exempt
Facilities Revenue Bonds, Series A, due 2016
|
2,350
|
|
2,350
|
|
|
5.0%
Pennsylvania Economic Development Financing Authority
|
|
|
|
|
|
|
Exempt
Facilities Revenue Bonds, Series A, due 2016
|
4,950
|
|
4,950
|
|
|
10.17%
Senior Notes, Series A, due 2019
|
6,000
|
|
6,000
|
|
|
9.6%
Senior Notes, Series B, due 2019
|
5,000
|
|
5,000
|
|
|
1.0%
Pennvest Loan, due 2019
|
545
|
|
574
|
|
|
10.05%
Senior Notes, Series C, due 2020
|
6,500
|
|
6,500
|
|
|
8.43%
Senior Notes, Series D, due 2022
|
7,500
|
|
7,500
|
|
|
Variable
Rate Pennsylvania Economic Development Financing
|
|
|
|
|
|
|
Authority
Exempt Facilities Revenue Bonds, Series B, due 2029
|
12,000
|
|
12,000
|
|
|
|
Total
long-term debt
|
51,845
|
|
51,874
|
|
|
|
Less
current maturities
|
(12,040)
|
|
(12,039)
|
|
|
|
Long-term
portion
|
$39,805
|
|
$39,835
|
|
On
October 27, 2006 the York County Industrial Development Authority (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 currently in compliance with these restrictions.
Item
2.
|
Management's
Discussion and Analysis of
Financial
Condition and Results of Operations
(In
thousands of dollars, except per share amounts)
|
Forward-looking
Statements
|
Certain
statements contained herein and elsewhere in this Form 10-Q which are not
historical facts are forward-looking statements under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements, which generally
are
preceded by, followed by, or include the words "believes," "expects,"
"anticipates," "plans," or similar expressions, address among other
things:
· |
various
federal and state regulations concerning water quality and environmental
standards;
|
· |
the
adequacy of approved rates to allow for a fair rate of return on
the
investment in utility plant;
|
· |
the
timeliness of rate relief;
|
· |
quantity
of rainfall and temperature;
|
· |
consummation
of capital markets transactions to finance capital expenditure projects;
and
|
· |
environmental
and water quality regulations.
|
The
statements are based on a number of assumptions concerning future events, many
of which are outside the Company's control. The Company cautions that a number
of important factors could cause the actual results to differ materially from
those expressed in any forward-looking statements made on behalf of the Company.
The Company undertakes no obligation to update or revise forward-looking
statements, whether as a result of new information, future events or
otherwise.
General
Information
The
business of the Company is to impound, purify and distribute water. The Company
operates entirely within its franchised territory, which covers 34
municipalities within York County, Pennsylvania 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 both the South Branch and
East
Branch of the Codorus Creek, which together have an average daily flow of 89.0
million gallons per day. This combined watershed area is 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 September 30, 2006, the Company's average daily availability was
approximately 35.0 million gallons, and consumption was approximately 19.1
million gallons daily. The Company's service territory has an estimated
population of 165,000. Industry within the Company's service territory is
diversified, manufacturing such items as fixtures and furniture, electrical
machinery, food products, paper, ordnance units, textile products, air
conditioning systems, barbells and motorcycles.
The
Company's business is somewhat dependent on weather conditions, particularly
the
amount of rainfall; however, minimum customer charges are in place, and the
Company expects to cover its fixed costs of operations under all likely weather
conditions.
The
Company’s business does not require large amounts of working capital and is not
dependent on any single customer or a very few customers for a material portion
of its business. Increases in revenues are generally dependent on our ability
to
obtain rate increases from regulatory authorities in a timely manner and in
an
adequate amount, and increasing volumes of water sold through increased
consumption and increases in the number of customers served.
Three
Months Ended September 30, 2006 Compared
With
Three Months Ended September 30, 2005
Net
income for the third quarter of 2006 was $1,739, an increase of $4, from net
income of $1,735 for the same period of 2005. Higher water operating revenues
were the primary contributing factor and were partially offset by increased
operating and short-term interest expenses.
Water
operating revenues for the three months ended September 30, 2006 increased
$458,
or 6.4%, from $7,207 for the three months ended September 30, 2005 to $7,665
for
the corresponding 2006 period. Increases in our revenues are generally dependent
on our ability to obtain rate increases from regulatory authorities and
increasing our volumes of water sold through increased consumption and increases
in the number of customers served. The average number of customers served in
the
third quarter of 2006 increased as compared to the same period in 2005 by 2,304
customers, from 54,828 to 57,132 customers due to growth in our service
territory and our acquisition of Spring Grove Water Company on July 6, 2005.
Despite this increase in customers, the total per capita volume of water sold
in
the third quarter of 2006 decreased compared to the corresponding 2005 period
due to reduced consumption in our service territory.
Operating
expenses for the third quarter of 2006 increased $417, or 11.7%, from $3,572
for
the third quarter of 2005 to $3,989 for the corresponding 2006 period. Higher
salaries due to higher wages and additional employees of approximately $114,
increased distribution system maintenance of approximately $80, higher realty
and payroll tax expenses aggregating approximately $59, increased internal
controls expenses of approximately $56, increased chemical expenses of
approximately $35 and higher depreciation expense of approximately $32 due
to
increased plant investment were the principal reasons for the increase. Higher
shareholder, health insurance and pension expenses aggregating approximately
$53
and increased power costs due to higher rates and additional facilities of
approximately $26 also contributed to the increase. The increase was partially
offset by reduced rate case, 401k and postage expenses aggregating approximately
$44.
Interest
expense on short-term debt for the third quarter of 2006 was $176 higher than
the same period in 2005 due to an increase in short-term borrowings. The average
short-term debt outstanding was $13,471 for the third quarter of 2006 and $3,963
for the third quarter of 2005.
Allowance
for funds used during construction increased $42, from $48 in the third quarter
of 2005 to $90 in the 2006 period, due to an increase in construction
expenditures that were eligible for interest.
Other
income, net increased by $12 in 2006 as compared to 2005 primarily due to a
decrease in supplemental retirement expenses.
Federal
and state income taxes decreased by $89, or 8.5%, due to lower taxable income
and the qualified domestic production deduction. The Company’s effective tax
rate was 35.7% in the third quarter of 2006 and 37.8% in the third quarter
of
2005.
Nine
Months Ended September 30, 2006 Compared
With
Nine
Months Ended September 30, 2005
Net
income for the first nine months of 2006 was $4,464, an increase of $21, or
0.5%, from net income of $4,443 for the same period of 2005. Higher water
operating revenues partially offset by increased operating expenses and higher
short-term interest expenses were the primary contributing factors.
Water
operating revenues for the nine months ended September 30, 2006 increased
$1,160, or 5.8%, from $20,135 for the nine months ended September 30, 2005
to
$21,295 for the corresponding 2006 period. Increases in our revenues are
generally dependent on our ability to obtain rate increases from regulatory
authorities and increasing our volumes of water sold through increased
consumption and increases in the number of customers served. The average number
of customers served in the first nine months of 2006 increased as compared
to
the same period in 2005 by 2,419 customers, from 54,012 to 56,431 customers
due
to growth in our service territory and the Spring Grove acquisition. Despite
this increase in customers, the total per capita volume of water sold in the
first three quarters of 2006 decreased compared to the corresponding 2005 period
due to reduced consumption in our service territory.
Operating
expenses for the nine months of 2006 increased $1,038, or 9.9%, from $10,477
for
the nine months of 2005 to $11,515 for the corresponding 2006 period. Higher
salaries due to wage increases and additional employees of approximately $328,
higher depreciation expense of $124 due to increased plant investment, increased
distribution system maintenance of approximately $121, higher transportation
expenses due to additional vehicles and increased gas prices of approximately
$77 and increased internal control expenses of approximately $74 were the
principal reasons for the increase. Higher chemical costs, software training
and
conversion expenses, electric costs, shareholder expenses, realty taxes, capital
stock taxes and payroll taxes aggregating approximately $317 also contributed
to
the increase. The increase was partially offset by lower rate case expense
and
reduced hydrant expenses primarily due to capitalization and higher indirect
costs capitalized aggregating $151.
Interest
expense on long-term debt for the first nine months of 2006 was $43 lower than
the same period in 2005 primarily due to 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 for the first nine months of 2006 was $436 higher
than the same period in 2005 due to an increase in short-term borrowings. The
average short-term debt outstanding was $10,760 for the first nine months of
2006 and $1,587 for the first nine months of 2005.
Allowance
for funds used during construction increased $71, from $110 as of September
2005
to $181 as of September 2006, due to an increase in construction expenditures
that were eligible for interest.
Other
expenses, net decreased by $26 in 2006 as compared to 2005 primarily due to
decreased contributions and lower supplemental retirement expenses aggregating
$71. The decrease was partially offset by higher non-operating property
maintenance expenses of approximately $24.
Federal
and state income taxes decreased by $195, or 7.4%, due to reduced taxable income
and the qualified domestic production deduction. The Company’s effective tax
rate was 35.2% in the first nine months of 2006 and 37.1% in the first nine
months of 2005.
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 $2,600,000 in additional annual revenues, which represents an
increase of 9.2% in the Company’s rates.
Acquisitions
On
February 2, 2006, the Company announced an agreement to acquire the water system
of Abbottstown Borough which serves approximately 400 customers in Adams County,
Pennsylvania. Following the acquisition, the Company will serve the customers
of
the Borough by using York Water’s fully filtered and treated water supply. This
treated supply will be provided through a main which is being constructed by
the
Company to interconnect with the Borough’s existing distribution facilities. The
interconnection is expected to be completed in December, 2006. The estimated
acquisition cost of $0.9 million will be funded through internally generated
funds and short-term borrowings.
To
date,
the Company has obtained the required Pennsylvania Department of Transportation
permit and stream crossing and construction permits from the Pennsylvania
Department of Environmental Protection. The PPUC approved the acquisition on
July 20, 2006. Construction of the water main and standpipe is nearly complete
while construction of the booster station continues.
Liquidity
and Capital Resources
As
of
September 30, 2006, current liabilities exceeded current assets by $29,377.
The
excess was primarily due to the classification of the $12.0 million aggregate
principal amount of PEDFA Exempt Facilities Revenue Bonds, Series B of 2004
as
current because the bondholders can tender their bonds at any time. The Company
believes the bonds would be successfully remarketed if tendered. In addition,
the Company had $16,967 in short-term borrowings under its lines of credit
as of
September 30, 2006. The short-term borrowings were incurred to fund operations,
acquisitions and construction expenditures. The Company maintains lines of
credit aggregating $22,500. Loans granted under these lines of credit bear
interest at LIBOR plus 0.70 to
0.875%. The weighted average interest rate on short-term borrowings at September
30, 2006 was 6.09%. The lines of credit are unsecured and payable upon demand.
The Company is not required to maintain compensating balances on its lines
of
credit.
On
October 27, 2006 the York County Industrial Development Authority (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 currently in compliance with these restrictions.
On
October 10, 2006, the Company filed a registration statement with the Securities
and Exchange Commission relating to its proposed offering of 600,000 shares
of
common stock. The registration statement relating to these securities has not
yet become effective, and the Company may not sell or accept offers to buy
prior
to the time the registration statement becomes effective. Furthermore, even
if
the registration statement is declared effective, the Company can give no
assurances that prevailing market conditions will permit the sale of any or
all
of the 600,000 shares on terms acceptable to the Company.
During
the first nine months of 2006, net cash provided by operations and financing
activities equaled net cash used in investing activities. The Company
anticipates that this will continue to be the case during the remainder of
2006.
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, customer
advances, the proceeds of the YCIDA loan described above and, depending on
market conditions, proceeds from the planned common stock offering described
above will be used to satisfy the need for additional cash.
During
the first nine months of 2006, the Company incurred $16,731 of construction
expenditures. Approximately $3,681, or 22%, of the expenditures were for the
automated meter reading system and the enterprise software system. An additional
$3,309, or 20%, was for the main extension to Abbottstown and the construction
of various standpipes. The remaining expenditures were for routine distribution
system 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 DRIP and ESPP. The Company anticipates
construction expenditures for the remainder of 2006 of approximately $1,251,
primarily for projects relating to the Company’s transmission and distribution
systems, the aforementioned continuing projects and certain construction
expenses related to the Abbottstown acquisition. 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, the proceeds of the YCIDA loan described above and, depending
on market conditions, proceeds from the planned common stock offering described
above.
The
Company, like all other businesses, is affected by inflation, most notably
by
the continually increasing costs incurred to maintain and expand its service
capacity. The cumulative effect of inflation results in significantly higher
facility replacement costs which must be recovered from future cash flows.
The
ability of the Company to recover this increased investment in facilities is
dependent upon future revenue increases, which are subject to approval by the
PPUC. The Company can provide no assurances that its rate increases will be
approved by the PPUC; and, if approved, the Company cannot guarantee that these
rate increases will be granted in a timely or sufficient manner to cover the
investments and expenses for which the rate increase was sought.
Critical
Accounting Estimates
The
methods, estimates and judgments we use in applying our accounting policies
have
a significant impact on the results we report in our financial statements.
Our
accounting policies require us to make subjective judgments because of the
need
to make estimates of matters that are inherently uncertain. Our most critical
accounting estimates include: regulatory assets and liabilities, the
determination of the remaining life of our assets, revenue recognition and
the
discount rate used in our pension plan calculations. There has been no
significant change in our accounting estimates or the method of estimation
during the quarter ended September 30, 2006.
Off-Balance
Sheet Transactions
The
Company does not use off-balance sheet transactions, arrangements or obligations
that may have a material current or future effect on financial condition,
results of operations, liquidity, capital expenditures, capital resources,
or
significant components of revenues or expenses. The Company does not use
securitization of receivables or unconsolidated entities. The Company does
not
engage in trading or risk management activities, with the exception of the
interest rate swap agreement previously mentioned, does not use derivative
financial instruments for speculative trading purposes, has no lease obligations
and does not have material transactions involving related parties.
Impact
of Recent Accounting Pronouncements
In
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 is currently evaluating this standard for
consideration in future financings.
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 is currently evaluating this standard for its effects on future
financial position and results of operations.
In
June
2006, the EITF reached consensus on Issue 05-1, “Accounting for the Conversion
of an Instrument that Became Convertible upon the Issuer’s Exercise of a Call
Option.” This consensus requires an assessment of the substance of a conversion
right at issuance as to whether it is considered reasonably possible that the
conversion right will become exercisable absent the issuer’s call. If so, the
conversion upon call is accounted for as a conversion with no gain or loss,
if
not, then the conversion is accounted for as an extinguishment with a gain
or
loss. This consensus is not expected to have an impact on the Company’s
financial position or results of operations.
In
July,
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
will
apply to fiscal years beginning after December 15, 2006 and is not expected
to
have an impact on the Company’s financial position or results of
operations.
In
July,
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. The Company is currently reviewing its
tax positions to determine if they meet the recognition and measurement test
of
FIN No. 48. This interpretation is effective for fiscal years beginning after
December 15, 2006.
In
September, 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, 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 will adopt this standard as of December
31,
2006. The Company is currently evaluating this standard for its effects on
future financial position and results of operations.
In
October, the FASB issued FSP No. FAS 123(R) - 5 and FSP No. FAS 123(R) - 6
amending guidance and providing technical corrections to SFAS No. 123(R). The
additional FSP’s had no impact on the Company’s financial statements as SFAS No.
123(R) did not apply to the Company.
In
October, the FASB issued FSP No. FAS 126-1, “Applicability of Certain Disclosure
and Interim Reporting Requirements for Obligors for Conduit Debt Securities,” to
amend previous authoritative accounting literature to clarify that conduit
obligors for conduit debt securities traded in a public market meet the
definition of a public entity or enterprise. FSP No. FAS 126-1 applies to
financial statements for fiscal periods beginning after December 15, 2006,
and
may also be applied retrospectively to all prior periods. This FSP is expected
to have no impact on the Company’s financial position or results of
operations.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
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 an
interest rate swap agreement, described below, does not use derivative financial
instruments for speculative trading purposes, has no lease obligations, and
does
not have material transactions involving related parties.
The
Company's operations are exposed to market risks primarily as a result of
changes in interest rates. This exposure to these market risks relates to the
Company's debt obligations under its lines of credit. The Company has lines
of
credit for up to $22.5 million with two banks, under which there were borrowings
of approximately $17.0 million outstanding as of September 30, 2006. Loans
granted under these lines bear interest based upon LIBOR plus 0.70 to 0.875
percent. The weighted average interest rate on short-term borrowings outstanding
at September 30, 2006 was 6.09%. A 25-basis point increase in LIBOR would cause
additional short-term interest expense of approximately $42 on an annual basis.
Other than lines of credit, the Company has long-term fixed rate debt
obligations and a variable-rate long-term debt obligation, the Pennsylvania
Economic Development Financing Authority, or the PEDFA, Series B issue.
In
December 2004, the PEDFA issued $12.0 million aggregate principal amount of
PEDFA Exempt Facilities Revenue Bonds, Series B. The PEDFA then loaned the
proceeds to the Company pursuant to a variable interest rate loan agreement
with
a maturity date of October 1, 2029. The interest rate on the loan as of
September 30, 2006 was 3.85%. In connection with the loan agreement, the Company
entered into an interest rate swap transaction that results in the Company’s
floating rate obligation becoming substantially a fixed rate obligation. The
purpose of the interest rate swap is to manage the Company’s exposure to
fluctuations in the interest rate. For a more detailed discussion, see the
“Liquidity and Capital Resources” section of “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our 2005 Annual
Report to Shareholders.
The
$12.0
million PEDFA Series B bonds can be tendered at any time. When the bonds are
tendered they are subject to an annual remarketing agreement. As additional
security, the Company also has a Standby Bond Purchase Agreement (also known
as
a liquidity facility) whereby bonds which can not be remarketed are purchased
by
a financial institution. The Standby Bond Purchase Agreement is also renewed
annually. As a result, the $12.0 million obligation was classified as current
maturities of long-term debt. The Company believes the bonds would be
successfully remarketed if tendered.
Item
4.
|
Controls
and Procedures
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
The
Company's management, with the participation of the Company's President and
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this quarterly report. Based upon this evaluation, the Company's
President and Chief Executive Officer along with the Chief Financial Officer
concluded that the Company's disclosure controls and procedures as of the end
of
the period covered by this report are functioning effectively to provide
reasonable assurance that the information required to be disclosed by the
Company in reports filed under the Securities Exchange Act of 1934 is (i)
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and (ii) accumulated and communicated to the
Company’s management, including the President and Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
(b)
|
Change
in Internal Control over Financial
Reporting
|
As
previously disclosed, we had identified a material weakness in our billing
function. This material weakness was eliminated during the third quarter of
2005
by instituting interim measures, such as additional verification and
reconciliation as well as enhanced physical security. During the third quarter
of 2006, we implemented several modules of the Oracle enterprise software system
to further improve our internal controls in this function. In particular, the
billing module allows us to segregate many of the duties that were previously
performed by a single department. In addition, we believe a fully-integrated
software billing system provides for greater efficiencies, more insight into
operations, and increased reliance on systematic controls rather than manual
controls.
Part
II - OTHER INFORMATION
Item
6.
|
Exhibits
|
The
following Part 1 exhibits are attached to this report:
|
3.1
|
Amended
and Restated Articles of Incorporation of The York Water Company
(incorporated herein by reference to Exhibit 3.1 of the Company’s current
report on Form 8-K as filed with the Securities and Exchange Commission
on
August 30, 2006).
|
3.2
|
By-Laws
of The York Water Company (incorporated herein by reference to Exhibit
3.2
of the Company’s current report on Form 8-K as filed with the Securities
and Exchange Commission on August 30, 2006).
|
31.1
|
Certification
of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a)
under the
Securities Exchange Act of 1934.
|
31.2
|
Certification
of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a)
under the
Securities Exchange Act of 1934.
|
32.1
|
Certification
of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
Certification
of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
Date:
November 9, 2006
|
By: |
/s/ Jeffrey
S. Osman |
|
Jeffrey S. Osman |
|
Principal
Executive Officer
|
|
|
|
|
|
|
|
|
Date:
November 9, 2006
|
By: |
/s/ Kathleen
M. Miller |
|
Kathleen M. Miller |
|
Principal
Financial and Accounting
Officer
|