form10q033109.htm
|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
(Mark
One)
|
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended March 31,
2009
|
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from __________to____________
|
|
|
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 incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
130 EAST MARKET STREET, YORK,
PENNSYLVANIA
|
17401
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
|
Registrant's
telephone number, including area code (717)
845-3601
|
|
|
|
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.
|
ý
YES
|
¨NO
|
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
¨
YES
|
¨NO
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(check one):
|
|
|
Large
accelerated filer ¨
|
|
Accelerated
filer ý
|
|
|
Non-accelerated
filer ¨
|
Small
Reporting Company ¨ |
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
¨
YES
|
ýNO
|
|
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
|
11,410,578
Shares outstanding
as
of May 8,
2009
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheets
|
(In
thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
As
of
|
|
|
As
of
|
|
|
|
|
Mar.
31, 2009
|
|
|
Dec.
31, 2008
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
UTILITY
PLANT, at original cost
|
|
$ |
254,340 |
|
|
$ |
246,613 |
|
Plant
acquisition adjustments
|
|
|
(2,770 |
) |
|
|
(1,364 |
) |
Accumulated
depreciation
|
|
|
(35,986 |
) |
|
|
(34,429 |
) |
|
Net
utility plant
|
|
|
215,584 |
|
|
|
210,820 |
|
|
|
|
|
|
|
|
|
|
|
OTHER
PHYSICAL PROPERTY:
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation of $165 in 2009
|
|
|
|
|
|
|
|
|
|
and
$162 in 2008
|
|
|
558 |
|
|
|
562 |
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Receivables,
less reserves of $228 in 2009 and $195 in 2008
|
|
|
3,307 |
|
|
|
3,243 |
|
Unbilled
revenues
|
|
|
2,328 |
|
|
|
2,687 |
|
Recoverable
income taxes
|
|
|
216 |
|
|
|
131 |
|
Materials
and supplies inventories, at cost
|
|
|
750 |
|
|
|
741 |
|
Prepaid
expenses
|
|
|
587 |
|
|
|
412 |
|
Deferred
income taxes
|
|
|
156 |
|
|
|
133 |
|
|
Total
current assets
|
|
|
7,344 |
|
|
|
7,347 |
|
|
|
|
|
|
|
|
|
|
|
OTHER
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Deferred
debt expense
|
|
|
1,981 |
|
|
|
2,013 |
|
Notes
receivable
|
|
|
524 |
|
|
|
536 |
|
Deferred
regulatory assets
|
|
|
15,713 |
|
|
|
15,972 |
|
Restricted
cash-compensating balance
|
|
|
500 |
|
|
|
- |
|
Other
|
|
|
|
3,208 |
|
|
|
3,192 |
|
|
Total
long-term assets
|
|
|
21,926 |
|
|
|
21,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
245,412 |
|
|
$ |
240,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
Balance
Sheets
|
(In
thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
As
of
|
|
|
As
of
|
|
|
|
Mar.
31, 2009
|
|
|
Dec.
31, 2008
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY AND LIABILITIES
|
|
|
|
|
|
|
COMMON
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
Common
stock, no par value, authorized 46,500,000 shares,
|
|
$ |
58,325 |
|
|
$ |
57,875 |
|
issued
and outstanding 11,407,184 shares in 2009
|
|
|
|
|
|
|
|
|
and
11,367,248 shares in 2008
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
11,955 |
|
|
|
11,891 |
|
Total
common stockholders' equity
|
|
|
70,280 |
|
|
|
69,766 |
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK, authorized 500,000 shares, no shares issued
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT, excluding current portion
|
|
|
91,803 |
|
|
|
83,612 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
- |
|
|
|
6,000 |
|
Current
portion of long-term debt
|
|
|
2,741 |
|
|
|
2,741 |
|
Accounts
payable
|
|
|
2,379 |
|
|
|
2,011 |
|
Dividends
payable
|
|
|
1,193 |
|
|
|
1,192 |
|
Accrued
taxes
|
|
|
89 |
|
|
|
75 |
|
Accrued
interest
|
|
|
1,299 |
|
|
|
1,080 |
|
Other
accrued expenses
|
|
|
1,499 |
|
|
|
1,097 |
|
Total
current liabilities
|
|
|
9,200 |
|
|
|
14,196 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
CREDITS:
|
|
|
|
|
|
|
|
|
Customers'
advances for construction
|
|
|
17,942 |
|
|
|
18,258 |
|
Deferred
income taxes
|
|
|
20,425 |
|
|
|
19,549 |
|
Deferred
employee benefits
|
|
|
9,783 |
|
|
|
9,758 |
|
Other
deferred credits
|
|
|
2,547 |
|
|
|
2,789 |
|
Total
deferred credits
|
|
|
50,697 |
|
|
|
50,354 |
|
|
|
|
|
|
|
|
|
|
Contributions
in aid of construction
|
|
|
23,432 |
|
|
|
22,514 |
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity and Liabilities
|
|
$ |
245,412 |
|
|
$ |
240,442 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
Statements
of Income
|
(In
thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Three
Months
|
|
|
Ended
March 31
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
WATER
OPERATING REVENUES:
|
|
|
|
|
|
|
Residential
|
|
$ |
5,533 |
|
|
$ |
4,736 |
|
Commercial
and industrial
|
|
|
2,522 |
|
|
|
2,149 |
|
Other
|
|
|
719 |
|
|
|
621 |
|
|
|
|
8,774 |
|
|
|
7,506 |
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Operation
and maintenance
|
|
|
1,797 |
|
|
|
1,625 |
|
Administrative
and general
|
|
|
1,851 |
|
|
|
1,762 |
|
Depreciation
and amortization
|
|
|
1,069 |
|
|
|
886 |
|
Taxes
other than income taxes
|
|
|
86 |
|
|
|
241 |
|
|
|
|
4,803 |
|
|
|
4,514 |
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,971 |
|
|
|
2,992 |
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Interest
on debt
|
|
|
(1,271 |
) |
|
|
(1,166 |
) |
Allowance
for funds used during construction
|
|
|
98 |
|
|
|
172 |
|
Other
income (expenses), net
|
|
|
(341 |
) |
|
|
(143 |
) |
|
|
|
(1,514 |
) |
|
|
(1,137 |
) |
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,457 |
|
|
|
1,855 |
|
|
|
|
|
|
|
|
|
|
Federal
and state income taxes
|
|
|
960 |
|
|
|
649 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,497 |
|
|
$ |
1,206 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared Per Share
|
|
$ |
0.126 |
|
|
$ |
0.121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Common Stockholders' Equity and Comprehensive Income
|
(In
thousands of dollars, except per share amounts)
|
For
the Periods Ended March 31, 2009 and 2008
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
$ |
57,875 |
|
|
$ |
11,891 |
|
|
$ |
- |
|
|
$ |
69,766 |
|
Net
income
|
|
|
- |
|
|
|
1,497 |
|
|
|
- |
|
|
|
1,497 |
|
Dividends
($.126 per share)
|
|
|
- |
|
|
|
(1,433 |
) |
|
|
- |
|
|
|
(1,433 |
) |
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
reinvestment, direct stock and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plans
|
|
|
450 |
|
|
|
- |
|
|
|
- |
|
|
|
450 |
|
Balance,
March 31, 2009
|
|
$ |
58,325 |
|
|
$ |
11,955 |
|
|
$ |
- |
|
|
$ |
70,280 |
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income
(Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
$ |
56,566 |
|
|
$ |
10,986 |
|
|
$ |
(280 |
) |
|
$ |
67,272 |
|
Net
income
|
|
|
- |
|
|
|
1,206 |
|
|
|
- |
|
|
|
1,206 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on interest rate swap, net
|
|
|
- |
|
|
|
- |
|
|
|
(231 |
) |
|
|
(231 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975 |
|
Dividends
($.121 per share)
|
|
|
- |
|
|
|
(1,363 |
) |
|
|
- |
|
|
|
(1,363 |
) |
Issuance
of common stock under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividend
reinvestment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plans
|
|
|
249 |
|
|
|
- |
|
|
|
- |
|
|
|
249 |
|
Balance,
March 31, 2008
|
|
$ |
56,815 |
|
|
$ |
10,829 |
|
|
$ |
(511 |
) |
|
$ |
67,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE
YORK WATER COMPANY
|
|
|
|
|
|
|
|
|
Statements
of Cash Flows
|
(In
thousands of dollars, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Three
Months
|
|
|
Three
Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
Mar.
31, 2009
|
|
|
Mar.
31, 2008
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,497 |
|
|
$ |
1,206 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,069 |
|
|
|
886 |
|
Increase
in deferred income taxes
|
|
|
779 |
|
|
|
317 |
|
Other
|
|
|
|
9 |
|
|
|
(46 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Decrease
in accounts receivable, unbilled revenues and recoverable income
taxes
|
|
|
161 |
|
|
|
432 |
|
|
Increase
in materials and supplies and prepaid expenses
|
|
|
(184 |
) |
|
|
(58 |
) |
|
Increase
in accounts payable, accrued expenses, regulatory
|
|
|
|
|
|
|
|
|
|
and
other liabilities, and deferred employee benefits and
credits
|
|
|
831 |
|
|
|
646 |
|
|
Increase
in accrued interest and taxes
|
|
|
233 |
|
|
|
51 |
|
|
(Increase)
decrease in regulatory and other assets
|
|
|
9 |
|
|
|
(114 |
) |
|
Net
cash provided by operating activities
|
|
|
4,404 |
|
|
|
3,320 |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Utility
plant additions, including debt portion of allowance for funds used
during
|
|
|
|
|
|
|
|
|
|
construction
of $55 in 2008 and $96 in 2008
|
|
|
(2,399 |
) |
|
|
(4,580 |
) |
Acquisitions
of water systems
|
|
|
(2,165 |
) |
|
|
- |
|
Increase
in compensating balance
|
|
|
(500 |
) |
|
|
- |
|
Decrease
in notes receivable
|
|
|
12 |
|
|
|
24 |
|
|
Net
cash used in investing activities
|
|
|
(5,052 |
) |
|
|
(4,556 |
) |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Customers'
advances for construction and contributions in aid of
construction
|
|
|
61 |
|
|
|
171 |
|
Repayments
of customer advances
|
|
|
(358 |
) |
|
|
(318 |
) |
Proceeds
of long-term debt issues
|
|
|
8,715 |
|
|
|
3,583 |
|
Repayments
of long-term debt
|
|
|
(5,524 |
) |
|
|
(3,839 |
) |
Borrowings
(repayments) under short-term line of credit agreements
|
|
|
(1,000 |
) |
|
|
2,000 |
|
Changes
in cash overdraft position
|
|
|
(264 |
) |
|
|
746 |
|
Issuance
of common stock
|
|
|
450 |
|
|
|
249 |
|
Dividends
paid
|
|
|
(1,432 |
) |
|
|
(1,356 |
) |
|
Net
cash provided by financing activities
|
|
|
648 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
- |
|
|
|
- |
|
Cash
and cash equivalents at beginning of period
|
|
|
- |
|
|
|
- |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$ |
966 |
|
|
$ |
1,061 |
|
|
Income
taxes
|
|
|
139 |
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable includes $1,254 in 2009 and $1,055 in 2008 for the construction of
utility plant.
|
|
|
|
|
|
|
Accounts
payable and other deferred credits includes $76 in 2009 and $155 in 2008
for the acquisition of water systems.
|
|
|
Contributions
in aid of construction includes $51 in 2008 of contributed
land.
|
|
|
|
|
|
|
|
|
|
Short-term
line of credit borrowings amounting to $5,000 were reclassified as
long-term borrowings in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
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)
The
interim 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 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 financial statements and notes thereto contained in
the Company's Annual Report to Shareholders for the year ended December 31,
2008.
Operating
results for the three month period ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.
2.
|
Basic Earnings Per Share
|
Basic
earnings per share for the three months ended March 31, 2009 and 2008 were based
on weighted average shares outstanding of 11,374,131 and 11,266,318,
respectively.
Since the
Company has no common stock equivalents outstanding, there is no required
calculation for diluted earnings per share.
Certain
2008 amounts have been reclassified to conform to the 2009
presentation. Such reclassifications had no effect on the income
statement, stockholders’ equity and comprehensive income statement or cash flow
category reporting.
During
the first quarter of 2009, the Company determined that it had understated the
amount of accrued vacation recorded in its financial statements. As a
result, the Company recorded additional salaries and wages expense of $257 under
Statement of Financial Accounting Standards (SFAS) No. 43, “Accounting for
Compensated Absences.” The additional accrual, amounting to $152
after taxes, represents an error correction from prior
periods. The correction was deemed to be immaterial to prior
period financials and immaterial to both the trend in net income and projected
annual net income for 2009.
In
connection with the West Manheim Township acquisition, the Company settled its
remaining capital commitment of $2,075, which represented the purchase price,
during settlement in January 2009.
As of
March 31, 2009, the Company had committed a total of approximately $914 for a
new standpipe in Thomasville, Jackson Township, Pennsylvania. As of
the end of the quarter, no payments had been made.
Components
of Net Periodic Pension Cost
|
|
|
|
|
Three
Months Ended
March
31
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
$ 207
|
|
$ 154
|
|
|
|
|
Interest
Cost
|
340
|
|
302
|
|
|
|
|
Expected
return on plan assets
|
(235)
|
|
(298)
|
|
|
|
|
Amortization
of loss
|
113
|
|
3
|
|
|
|
|
Amortization
of prior service cost
|
4
|
|
4
|
|
|
|
|
Rate-regulated
adjustment
|
(96)
|
|
35
|
|
|
|
|
Net
periodic pension expense
|
$ 333
|
|
$ 200
|
|
|
|
|
Employer
Contributions
The
Company previously disclosed in its financial statements for the year ended
December 31, 2008 that it expected to contribute $1,218 to its pension plans in
2009. The Company now plans to contribute $1,332 to its pension plans
in 2009. As of March 31, 2009, no contributions had been
made. The Company expects to begin contributions during the second
quarter of 2009.
7.
|
Interest Rate Swap Agreement
|
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risk managed by using derivative instruments
is interest rate risk. The Company utilizes an interest rate swap
agreement to manage interest rate risk associated with the Company’s $12,000
variable-rate debt issue. The Company had designated the interest
rate swap agreement as a cash flow hedge. Interest rate swaps are
contracts in which a series of interest rate cash flows are exchanged over a
prescribed period. The notional amount on which the interest payments
are based ($12,000) is not exchanged. The interest rate swap
agreement is classified as a financial derivative used for non-trading
activities. Under the interest rate swap, the Company pays the swap
counterparty a fixed rate of 3.16% on the notional amount. The
counterparty pays the Company a variable rate based on a percentage of LIBOR
(59%) on the notional amount. The Company’s net payment rate on the swap was
2.82% during the quarter ended March 31, 2009. The intent is for the
variable rate received from the swap counterparty to approximate the variable
rate the Company pays to bondholders on its variable rate debt issue, resulting
in a fixed rate being paid to the swap counterparty and reducing the Company’s
interest rate risk.
The
interest rate swap agreement contains provisions that require the Company to
maintain a credit rating of at least BBB- with Standard &
Poor’s. If the Company’s rating were to fall below this rating, it
would be in violation of these provisions, and the counterparty to the
derivative could request immediate payment if the derivative was in a liability
position. The Company’s interest rate swap was in a liability
position as of March 31, 2009. If a violation were triggered on March
31, 2009, the Company could be required to pay the counterparty approximately
$2,472.
SFAS No.
133, “Accounting for Derivatives and Hedging Activities,” as amended, requires
companies to recognize all derivative instruments as either assets or
liabilities at fair value in the statement of financial position. In
accordance with SFAS No. 133, the interest rate swap is recorded on the balance
sheet in other deferred credits at fair value (see Note 8). Prior to
October 1, 2008, the Company used hedge accounting to record its swap
transactions. The effective portion of the gain or loss on a
derivative designated and qualifying as a cash flow hedging instrument was
initially reported as a component of other comprehensive income and subsequently
reclassified into earnings as interest expense in the same period or periods
during which the hedged transaction affected earnings. The
ineffective portion of the gain or loss on the derivative instrument was
recognized in earnings.
Beginning
October 1, 2008, the Company began using regulatory accounting treatment rather
than hedge accounting to defer the unrealized gains and losses on its interest
rate swap. Instead of the effective portion being recorded as other
comprehensive income and the ineffective portion being recognized in earnings,
the entire unrealized swap value is now recorded as a regulatory
asset. Based on current ratemaking treatment, the Company expects the
unrealized gains and losses to be recognized in rates as a component of interest
expense as the swap settlements occur. Swap settlements are recorded
in the income statement with the hedged item as interest
expense. During the first quarter of 2009, $111 was reclassified from
regulatory assets to interest expense as a result of swap
settlements. The overall swap result for the quarter was a gain of
$132. The Company expects to reclassify $328 from regulatory
assets to interest expense as a result of swap settlements over the next 12
months.
The
interest rate swap will expire on October 1, 2029. Other than the
interest rate swap, the Company has no other derivative
instruments.
8.
|
Fair Value Measurements
|
SFAS No.
157, “Fair Value Measurements,” establishes a fair value hierarchy which
indicates the extent to which inputs used in measuring fair value are observable
in the market. Level 1 inputs include quoted prices for identical
instruments and are the most observable. Level 2 inputs include
quoted prices for similar assets and observable inputs such as interest rates,
commodity rates and yield curves. Level 3 inputs are not observable
in the market and include management’s own judgments about the assumptions
market participants would use in pricing the asset or liability.
The Company has recorded its interest
rate swap liability at fair value in accordance with SFAS No.
157. The liability is recorded under the caption “Other deferred
credits” on the balance sheet. The table below illustrates the fair
value of the interest rate swap as of the end of the reporting
period.
($
in 000s)
|
|
Fair Value Measurements
at Reporting Date Using
|
Description
|
March 31, 2009
|
Significant Other Observable Inputs
(Level 2)
|
Interest
Rate Swap
|
$1,822
|
$1,822
|
Fair
values are measured as the present value of all expected future cash flows based
on the LIBOR-based swap yield curve as of the date of the
valuation. These inputs to this calculation are deemed to be level 2
inputs. The balance sheet carrying value reflects the Company’s
credit quality as of March 31, 2009. The rate used in discounting all
prospective cash flows anticipated to be made under this swap reflected a
representation of the yield to maturity for 30-year debt on utilities rated A-
as of March 31, 2009. The use of the Company’s credit quality
resulted in a reduction in the swap liability of $650 as of March 31,
2009. The fair value of the swap reflecting the Company’s credit
quality as of December 31, 2008 is shown in the table below.
($
in 000s)
|
|
Fair Value Measurements
at Reporting Date Using
|
Description
|
December 31, 2008
|
Significant Other Observable Inputs
(Level 2)
|
Interest
Rate Swap
|
$2,037
|
$2,037
|
|
As
of
Mar. 31, 2009
|
|
As
of
Dec. 31, 2008
|
3.60%
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
|
5.00%
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
|
9.60%
Senior Notes, Series B, due 2019
|
5,000
|
|
5,000
|
1.00%
Pennvest Loan, due 2019
|
445
|
|
455
|
10.05%
Senior Notes, Series C, due 2020
|
6,500
|
|
6,500
|
8.43%
Senior Notes, Series D, due 2022
|
7,500
|
|
7,500
|
4.75%
Industrial Development Authority
|
|
|
|
|
Revenue
Bonds, Series 2006, due 2036
|
10,500
|
|
10,500
|
Variable
Rate Pennsylvania Economic Development Financing Authority
|
|
|
|
|
Exempt
Facilities Revenue Bonds, Series A of 2008, due 2029
|
12,000
|
|
12,000
|
6.00%
Pennsylvania Economic Development Financing Authority
|
|
|
|
|
Exempt
Facilities Revenue Bonds, Series B, due 2038
|
15,000
|
|
15,000
|
Committed
Lines of Credit, due 2010
|
17,299
|
|
9,098
|
|
Total
long-term debt
|
94,544
|
|
86,353
|
|
Less
current maturities
|
(2,741)
|
|
(2,741)
|
|
Long-term
portion
|
$91,803
|
|
$83,612
|
The 3.60%
Industrial Development Authority Revenue Refunding Bonds, Series 1994, have a
mandatory tender date of May 15, 2009. The Company plans to meet its
$2,700 obligation using funds available under its lines of credit.
In
January 2009, the Company’s $7,500 line of credit, which was payable on demand,
was renegotiated to an $11,000 committed line of credit. Borrowings
outstanding under the on-demand line of credit were previously shown as
short-term borrowings, and now that they are committed, they are shown as a
component of long-term debt. The interest rate on this newly
committed facility is LIBOR plus 1.50%, and the agreement requires a
compensating balance of $500.
On May
16, 2007, the Company announced that it had entered into an agreement to acquire
the water system of West Manheim Township in York County,
Pennsylvania. The Company began serving the customers of West Manheim
Township in December 2008 through an interconnection with its current
distribution system. Closing on this acquisition took place in
January 2009. This acquisition resulted in the addition of 1,800
customers at a purchase price of approximately $2,075, which is less than the
depreciated original cost of the assets. The Company recorded a
negative acquisition adjustment of approximately $1,440 and will amortize it
over the remaining life of the underlying assets as required by the Pennsylvania
Public Utility Commission (PPUC).
On
November 24, 2008, the Company completed the acquisition of the water facilities
of Asbury Pointe Water Company in York County, Pennsylvania. The
Company acquired and is using Asbury Pointe’s distribution system through an
interconnection with its current distribution system. This
acquisition resulted in the addition of approximately 250 customers and the
purchase price was approximately $242, which is less than the depreciated
original cost of the assets. The Company recorded a negative
acquisition adjustment of approximately $207 as of December 31,
2008. Additional construction expenditures during the first quarter
of 2009 of approximately $22 resulted in a reduction of the negative acquisition
adjustment to $185. The Company will amortize the negative
acquisition adjustment over the remaining life of the underlying assets as
required by the PPUC.
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 May 16, 2008, and sought an increase of
$7,086, which would have represented a 19.6% increase in
rates. Effective October 9, 2008, the PPUC authorized an increase in
rates designed to produce approximately $5,950 in additional annual
revenues. The Company does not expect to file a base rate increase
request in 2009.
12.
|
Compensating Balance
Requirement
|
The
Company is required to maintain a demand deposit account with an average monthly
balance of $500 in order to retain one of its committed lines of
credit. The use of the funds in the account in excess of the $500 is
not restricted in any way.
13.
|
Impact of Recent Accounting
Pronouncements
|
In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141(R), “Business Combinations.” The statement establishes principles
and requirements for how the acquirer (1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and (3) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This statement is effective for annual periods beginning
after December 15, 2008. The Company adopted this statement January
1, 2009 and determined that it did not have a material impact on results of
operations or financial position.
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 which delayed
the effective date, by one year, of SFAS No. 157 for nonfinancial assets and
nonfinancial liabilities with certain exceptions. This portion of
SFAS No. 157 is effective for fiscal years beginning after November 15, 2008 and
interim periods within those years. The Company reviewed its
nonfinancial assets and liabilities for applicability and determined that this
statement did not have a material impact on its results of operations or
financial position for the quarter ended March 31, 2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No.
133.” This standard requires companies to provide qualitative
disclosures about the objectives and strategies for using derivatives,
quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their
hedged positions. This standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged, but not required. The Company
adopted this standard January 1, 2009 and has provided the required additional
disclosures in Note 7 to the financial statements included herein.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about
plan assets required by this FSP shall be provided for fiscal years ending after
December 15, 2009. The Company is currently reviewing the effect this
new pronouncement will have on its financial statements.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions that are not Orderly (FSP FAS
157-4).” FASB Statement 157, “Fair Value Measurements,” defines fair value
as the price that would be received to sell the asset or transfer the liability
in an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. FSP FAS 157-4 provides additional guidance on determining when the
volume and level of activity for the asset or liability has significantly
decreased. The FSP also includes guidance on identifying circumstances when a
transaction may not be considered orderly. This FSP is effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An
entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and FAS
124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments.” The Company is currently reviewing the effect this new
pronouncement will have on its financial statements.
In April 2009, the FASB issued FSP
No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” (FSP FAS 115-2 and FAS
124-2). FSP
FAS 115-2 and FAS 124-2 clarify the interaction of the factors that
should be considered when determining whether a debt security is
other-than-temporarily impaired. This FSP is effective for interim
and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An
entity early adopting FSP FAS 115-2 and FAS 124-2 must also early adopt FSP FAS
157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are not Orderly.” The Company is currently reviewing the
effect this new pronouncement will have on its financial statements.
In April 2009, the FASB issued FSP
No. FAS 107-1 and Accounting Principles Board
(APB) 28-1, “Interim Disclosures about Fair Value of
Financial Instruments,” (FSP FAS 107-1 and APB
28-1). FSP FAS
107-1 and APB 28-1 amends FASB Statement No. 107,
“Disclosures about Fair
Value of Financial Instruments,” to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This FSP also amends APB
Opinion No. 28, “Interim Financial Reporting,” to require those disclosures
in summarized financial information at interim reporting
periods. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. An entity early adopting
FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are not Orderly” and FSP FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments.” The Company is currently reviewing the
effect this new pronouncement will have on its financial
statements.
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
This
report on Form 10-Q contains certain matters which are not historical facts, but
which are forward-looking statements. Words such as "may," "should,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions are intended to identify forward-looking statements. The
Company intends for these forward-looking statements to qualify for safe harbor
from liability established by the Private Securities Litigation Reform Act of
1995. These forward-looking statements include certain information
relating to the Company’s business strategy; statements including, but not
limited to:
|
·
|
expected
profitability and results of
operations;
|
|
·
|
goals,
priorities and plans for, and cost of, growth and
expansion;
|
|
·
|
availability
of water supply;
|
|
·
|
water
usage by customers; and
|
|
·
|
ability
to pay dividends on common stock and the rate of those
dividends.
|
The
forward-looking statements in this report reflect what the Company currently
anticipates will happen. What actually happens could differ
materially from what it currently anticipates will happen. The
Company does not intend to make any public announcement when forward-looking
statements in this report are no longer accurate, whether as a result of new
information, what actually happens in the future or for any other
reason. Important matters that may affect what will actually happen
include, but are not limited to:
|
·
|
changes
in weather, including drought
conditions;
|
|
·
|
levels
of rate relief granted;
|
|
·
|
the
level of commercial and industrial business activity within the Company's
service territory;
|
|
·
|
construction
of new housing within the Company's service territory and increases in
population;
|
|
·
|
changes
in government policies or
regulations;
|
|
·
|
the
ability to obtain permits for expansion
projects;
|
|
·
|
material
changes in demand from customers, including the impact of conservation
efforts which may impact the demand of customers for
water;
|
|
·
|
changes
in economic and business conditions, including interest rates, which are
less favorable than expected;
|
|
·
|
the
ability to obtain financing; and
|
|
·
|
other
matters set forth in Item 1A, “Risk Factors” of the Company’s Annual
Report on Form 10-K for 2008.
|
General
Information
The
business of the Company is to impound, purify to meet or exceed safe drinking
water standards and distribute water. The Company operates entirely
within its franchised territory, which covers 39 municipalities within York
County, Pennsylvania and seven 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, debt and equity financing
and rate setting. The Company must obtain PPUC approval before
changing any practices associated with the aforementioned
areas. 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 73.0 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 untreated water per
day. As of March 31, 2009, the Company's average daily availability
was 35.0 million gallons, and daily consumption was approximately 17.7 million
gallons. The Company's service territory had an estimated population
of 176,000 as of December 31, 2008. 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. The Company has minimum customer charges in place
that are intended to cover fixed costs of operations under all likely weather
conditions; however, reduced water consumption and a sluggish economy have
combined to reduce per capita consumption by industrial and residential
customers by approximately 2.7% during the first quarter of 2009 compared to the
first quarter of 2008.
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 the
Company’s ability to obtain rate increases from regulatory authorities in a
timely manner and in adequate amounts and to increase volumes of water sold
through increased consumption and increases in the number of customers
served.
Results
of Operations
Three
Months Ended March 31, 2009 Compared
With
Three Months Ended March 31, 2008
Net
income for the first quarter of 2009 was $1,497, an increase of $291, or 24.1%,
from net income of $1,206 for the same period of 2008. The primary
contributing factor to the increase was higher water revenues which were
partially offset by higher salary and wage expense, depreciation, pension cost
and interest expense.
Water
operating revenues for the three months ended March 31, 2009 increased $1,268,
or 16.9%, from $7,506 for the three months ended March 31, 2008 to $8,774 for
the corresponding 2009 period. The primary reasons for the increase
in revenues were a rate increase effective October 9, 2008 and growth in the
customer base. The average number of customers served in the first
quarter of 2009 increased as compared to the same period in 2008 by 2,619
customers, from 59,006 to 61,625 customers. Approximately 2,050 of
the additional customers were due to the Asbury Pointe and West Manheim
acquisitions. The total per capita volume of water sold in the first
quarter of 2009 decreased compared to the corresponding 2008 period by
approximately 2.7%. Reduced consumption is attributed to a sluggish
economy and reduced water consumption by our customers. While
industrial and residential consumption remained lower than the same quarter last
year, there was a slight increase in the usage of our commercial
customers. The Company expects revenues to continue at a higher rate
than last year as a result of the new customers acquired at the end of 2008, and
the full year’s impact of the rate increase granted in October
2008. Drought warnings or restrictions as well as regulatory actions
could impact results in future quarters.
Operating
expenses for the first quarter of 2009 increased $289, or 6.4%, from $4,514 for
the first quarter of 2008 to $4,803 for the corresponding 2009
period. The increase was primarily due to higher salary and wage
expense of $260 due mainly to the increased vacation accrual discussed in Note
4, higher depreciation of $183 due to increased plant investment, increased
pension expense of $133 and increased power costs, rate case expense, banking
fees and other costs aggregating approximately $42. The increase was
partially offset by reduced capital stock taxes of $162 due to the Educational
Improvement Tax Credit (EITC) and a lower capital stock tax
rate. Lower distribution system operation and maintenance expenses of
approximately $55, reduced health insurance costs of $48, lower software support
costs of $39 and increased capitalized overhead of $25 also added to
the reduction of expenses. Depreciation and pension expenses are
expected to continue at a higher rate throughout 2009.
Interest
expense on debt for the first quarter of 2009 increased $105, or 9.0%, from
$1,166 for the first quarter of 2008 to $1,271 for the corresponding 2009
period. The primary reason for the increase was an increase in the
amount of long-term debt outstanding due to new debt issued on October 15, 2008
in the aggregate principal amount of $15,000 at an interest rate of
6%. Interest on the Company’s committed lines of credit decreased by
$95 due to lower interest rates. The average interest rate on the
lines of credit was 1.26% for the quarter ended March 31, 2009 compared to 4.43%
for the quarter ended March 31, 2008. The average debt outstanding
was $16,899 for the first quarter of 2009 and $12,770 for the first quarter of
2008. Lower interest on the $12,000 variable rate bonds also
contributed approximately $25 to the decreased expenses.
Allowance
for funds used during construction decreased $74, from $172 in the first quarter
of 2008 to $98 in the 2009 period, due to a planned lower volume of eligible
construction. Eligible 2008 construction expenditures included an
investment in a large water treatment replacement and expansion
project.
Other
expenses, net for the first quarter of 2009 increased by $198 as compared to the
same period of 2008. The increase was primarily due to higher
charitable contributions of $141, which were eligible for the EITC mentioned
above. Increased supplemental retirement and other expenses
aggregating approximately $57 also added to the increase.
Federal
and state income taxes for the first quarter of 2009 increased by $311, or
47.9%, compared to the same period of 2008, primarily due to an increase in
taxable income. The Company’s effective tax rate was 39.1% in the
first quarter of 2009 and 35.0% in the first quarter of 2008. The
increase in the effective tax rate was due to bonus depreciation initially being
taxable for state tax purposes.
Rate
Matters
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 May 16, 2008, and sought an increase of
$7,086, which would have represented a 19.6% increase in
rates. Effective October 9, 2008, the PPUC authorized an increase in
rates designed to produce approximately $5,950 in additional annual
revenues. The Company does not expect to file a base rate increase
request in 2009.
Acquisitions
On May
16, 2007, the Company announced that it had entered into an agreement to acquire
the water system of West Manheim Township in York County,
Pennsylvania. The Company began serving the customers of West Manheim
Township in December 2008 through an interconnection with its current
distribution system. Closing on this acquisition took place in
January 2009. This acquisition resulted in the addition of 1,800
customers at a purchase price of approximately $2,075, which is less than the
depreciated original cost of the assets. The Company recorded a
negative acquisition adjustment of approximately $1,440 and will amortize it
over the remaining life of the underlying assets as required by the
PPUC.
On
November 24, 2008 the Company completed the acquisition of the water facilities
of Asbury Pointe Water Company in York County, Pennsylvania. The
Company acquired and is using Asbury Pointe’s distribution system through an
interconnection with its current distribution system. This
acquisition resulted in the addition of approximately 250 customers and the
purchase price was approximately $242, which is less than the depreciated
original cost of the assets. The Company recorded a negative
acquisition adjustment of approximately $207 as of December 31,
2008. Additional construction expenditures during the first quarter
of 2009 of approximately $22 resulted in a reduction of the negative acquisition
adjustment to $185. The Company will amortize the negative
acquisition adjustment over the remaining life of the underlying assets as
required by the PPUC.
Liquidity
and Capital Resources
For the
quarter ended March 31, 2009, the Company invested $2,399 in construction
expenditures for routine items as well as various replacements of aging
infrastructure. In addition to construction projects, the Company
invested approximately $2,165 for the acquisition of West Manheim and additional
expenditures relating to the Asbury Pointe water system. The Company
was able to fund operating activities and construction expenditures using
internally-generated funds, borrowings against the Company’s lines of credit,
proceeds from the issuance of common stock under its dividend reinvestment and
direct stock purchase and sale plan and employee stock purchase plan, or ESPP,
and customer advances.
The
Company anticipates construction expenditures for the remainder of 2009 of
approximately $10,305. In addition to routine transmission and
distribution projects, a portion of the anticipated expenditures will be for an
additional standpipe and various replacements of aging
infrastructure. The Company intends to use internally-generated funds
for at least half of the anticipated construction and fund the remainder through
line of credit borrowings, customer advances and contributions, proceeds from
stock issuances through internal plans, subscriptions or public offerings and
the Distribution System Improvement Charge (DSIC). The condition of
the stock market and the availability of credit will play a major role in how
funds will be raised for the remainder of the year.
Internally-generated
Funds
The
amount of internally-generated funds available for operations and construction
depends on our ability to obtain timely and adequate rate relief, our customers’
water usage, weather conditions, customer growth and controlled
expenses. In the first quarter of 2009, we generated $4,404
internally as compared to $3,320 in the first quarter of 2008. A
successful rate increase request, the addition of approximately 2,600 customers
and increased depreciation and deferred income taxes, which are non-cash
expenses, helped to increase cash flow from operating activities. In
addition to internally-generated funds, we used our bank lines of credit to help
fund operations and construction.
Credit
Lines
As of
March 31, 2009, the Company maintained unsecured lines of credit aggregating
$28,000 with two banks. One line of credit includes a $4,000 portion
which is payable upon demand and carries an interest rate of 4.00% or LIBOR plus
0.70%, whichever is greater, and a $13,000 committed portion with a revolving
2-year maturity (currently May 2010), which currently carries an interest rate
of LIBOR plus 0.70%. The Company had $11,799 in outstanding
borrowings under the committed portion and no on-demand borrowings under this
line of credit as of March 31, 2009. The second line of credit, in
the amount of $11,000, is a committed line of credit, which matures in May 2010
and carries an interest rate of LIBOR plus 1.50%. This line of credit
has a compensating balance requirement of $500. The Company had
$5,500 in outstanding borrowings under this line of credit as of March 31,
2009. Both lines of credit are unsecured. The weighted
average interest rate on line of credit borrowings as of March 31, 2009 was
1.44% compared to 3.81% as of March 31, 2008.
The
Company is in the process of negotiating an additional short-term line of credit
of approximately $5,000. The terms and conditions of this additional
line of credit have not yet been finalized.
Long-term
Debt
The
Company’s loan agreements contain various covenants and
restrictions. To the Company’s knowledge, the Company is currently in
compliance with all of these covenants and restrictions. See Note 4
to the Company's Annual Report to Shareholders for the year ended December 31,
2008 for additional information regarding these restrictions.
The 3.6%
Industrial Development Authority Revenue Refunding Bonds, Series 1994, have a
mandatory tender date of May 15, 2009. The Company currently plans to
meet its $2,700 obligation using funds available under its lines of
credit.
Common
Stock
Common
stockholders’ equity as a percent of the total capitalization, defined as total
common stockholders’ equity plus long-term debt (including current maturities),
was 42.7% as of March 31, 2009, compared with 44.7% as of
December 31, 2008. It is the Company’s intent to achieve
and maintain a ratio near fifty percent. Economic conditions in 2008
caused us to modify our plans due to a reduced stock price, the potential
inability to raise the needed funds and the prospect of further dilution to our
stock value. We are currently evaluating the possibility of an equity
offering in 2009. We filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission on April 28, 2009 under the “shelf”
provisions of the Securities Act of 1933. This will allow us to issue
shares of the Company’s stock over the next couple of years when market
conditions are favorable.
Credit
Rating
On March
26, 2009, Standard and Poor’s affirmed the Company’s credit rating at A-, with a
stable outlook. Our ability to maintain this rating depends, among
other things, on adequate and timely rate relief, which we have been successful
in obtaining, and our ability to fund capital expenditures in a balanced manner
using both debt and equity. For the remainder of 2009, our objectives
will be to maximize our funds provided by operations and increase the equity
component of total capitalization.
Critical
Accounting Estimates
The
methods, estimates and judgments we use in applying our accounting policies have
a significant impact on the results we report in our financial
statements. Our accounting policies require us to make subjective
judgments because of the need to make estimates of matters that are inherently
uncertain. Our most critical accounting estimates include: regulatory
assets and liabilities, revenue recognition and accounting for our pension
plans. There has been no significant change in our accounting
estimates or the method of estimation during the quarter ended March 31,
2009.
Off-Balance
Sheet Transactions
The
Company does not use off-balance sheet transactions, arrangements or obligations
that may have a material current or future effect on financial condition,
results of operations, liquidity, capital expenditures, capital resources or
significant components of revenues or expenses. The Company does not
use securitization of receivables or unconsolidated entities. The Company does
not engage in trading or risk management activities, with the exception of the
interest rate swap agreement discussed in Note 7 to the financial statements,
does not use derivative financial instruments for speculative trading purposes,
has no lease obligations, no guarantees and does not have material transactions
involving related parties.
Impact
of Recent Accounting Pronouncements
See note
13 to the Financial Statements.
Item
3.
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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. As of April 2009, the Company has lines of credit with
maximum availability of $28,000 with two banks. One such line of credit includes
a $4,000 portion, which is payable upon demand and carries an interest rate of
4.00% , or LIBOR plus 0.70%, whichever is greater, and a $13,000 committed
portion with a revolving 2-year maturity (currently May 2010), which currently
carries an interest rate of LIBOR plus 0.70%. The Company had $11,799 in
outstanding borrowings under the committed portion and no on-demand borrowings
under this line of credit as of March 31, 2009. Both portions of this
line of credit are unsecured. The second line of credit, in the
amount of $11,000, is a committed line of credit, which matures in May 2010 and
carries an interest rate of LIBOR plus 1.50%. This line of credit has
a compensating balance requirement of $500 (see Note 12 to the financial
statements included herein). The Company had $5,500 in outstanding
borrowings under this line of credit as of March 31, 2009. The
weighted average interest rate on line of credit borrowings as of March 31, 2009
was 1.44%. Other than lines of credit, the Company has long-term
fixed rate debt obligations as shown in Note 9 to the Financial Statements
included herein and a variable rate Pennsylvania Economic Development Financing
Authority (PEDFA) loan agreement described below.
In May
2008, the PEDFA, issued $12,000 aggregate principal amount of PEDFA Exempt
Facilities Revenue Bonds, Series A (the “Series A Bonds”). The
proceeds of this bond issue were used to refund the $12,000 PEDFA Exempt
Facilities Revenue Bonds, Series B of 2004 which were refunded due to bond
insurer downgrading issues. 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 under this loan agreement
averaged 0.69% during the quarter ended March 31, 2009. In connection
with the loan agreement, the Company retained its interest rate swap agreement
whereby the Company exchanged its floating rate obligation for a fixed rate
obligation. The purpose of the interest rate swap is to manage the
Company’s exposure to fluctuations in the interest rate. If the
interest rate swap agreement works as intended, the rate received on the
swap should approximate the variable rate we pay on the PEDFA Series A Bond
Issue, thereby minimizing our risk. See Note 7 to the financial
statements included herein for additional information regarding the interest
rate swap.
In
addition to the interest rate swap agreement, the Company entered into a
Reimbursement, Credit and Security Agreement with PNC Bank, National Association
(“the bank”), dated as of May 1, 2008, in order to enhance the marketability of
the variable rate bonds and to keep the interest rate on the bonds
low. This agreement provides for a three-year direct pay letter of
credit issued by the bank to the trustee for the Series A Bonds. The
letter of credit is reviewed annually for a possible one-year
extension. The Company’s responsibility under this agreement is to
reimburse the bank on a timely basis for interest payments made to the
bondholders and for any tendered bonds that could not be
remarketed. The Company has fourteen months from the time bonds are
tendered to reimburse the bank. If the direct pay letter of credit is
not renewed, the Company would be required to pay the bank immediately for any
tendered bonds. In addition, the interest rate swap agreement would
terminate causing a potential payment by the Company to the
counterparty. Both the letter of credit and the swap agreement can
potentially be transferred upon this type of event.
Item
4.
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Controls
and Procedures
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(a)
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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 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
|
No change
in the Company’s internal control over financial reporting occurred during the
Company’s most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Part
II – OTHER INFORMATION
Item
6.
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Exhibits
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The
following Part I exhibits are attached to this report:
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3.1
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Statement
with Respect to Shares of a Domestic Corporation establishing the
designation of Series B Junior Participating Preferred Shares as a
series of the Series Preferred Stock of the Company (incorporated by
reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed with the SEC on January 26, 2009)
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31.1
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31.2
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32.1
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32.2
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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.
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THE
YORK WATER COMPANY
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By:
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/s/Jeffrey R.
Hines |
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Jeffrey
R. Hines |
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Principal
Executive Officer
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By:
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/s/Kathleen
M. Miller |
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Kathleen
M. Miller
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Principal
Financial and Accounting Officer
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