York Water - 10-Q quarterly report FY

 

 

 

 

Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements address among other things: various federal and state regulations concerning water quality and environmental standards; the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant; the timeliness of rate relief; quantity of rainfall and temperature; industrial demand; financing costs; energy rates; consummation of capital markets transactions to finance capital expenditure projects; and environmental and water quality regulations, as well as information contained elsewhere in this report preceded by, followed by, or including the words "believes," "expects," "anticipates," "plans," or similar expressions.

The statements are based on a number of assumptions concerning future events, many of which are outside the Company's control. The Company cautions that a number of important factors could cause the actual results to differ materially from those expressed in any forward-looking statements made on behalf of the Company. The Company undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

The business of the Company is to impound, purify and distribute water. The Company operates entirely within its franchised territory, which covers 33 municipalities within York County, Pennsylvania. The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, in the areas of billing, payment procedures, dispute processing, terminations, service territory, and rate setting. The Company must obtain PPUC approval before changing any of the aforementioned procedures. Water service is supplied through the Company's own distribution system. The Company obtains its water supply from the south branch and east branch of the Codorus Creek, which drains an area of approximately 117 square miles. The Company has two reservoirs, Lake Williams and Lake Redman, which together hold up to 2.23 billion gallons of water. The Company has a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional supply of 12 million gallons of water per day. The Company's present average daily availability is approximately 35 million gallons.

The Company's service territory has an estimated population of 158,000. 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.

Three Months Ended March 31, 2005 Compared

With Three Months Ended March 31, 2004

Net income for the first quarter of 2005 was $1,230,169, a decrease of $347,012, or 22.0%, from net income of $1,577,181 for the same period of 2004. An after-tax gain on the sale of land of approximately $467,000, a higher allowance for funds used during construction, and lower interest expenses in 2004 were the primary contributing factors, but were partially offset by increased water revenues in 2005.

 

Water operating revenues for the three months ended March 31, 2005 increased $870,962, or 16.2%, from $5,363,365 for the three months ended March 31, 2004 to $6,234,327 for the corresponding 2005 period. Increases in our revenues are generally dependent on our ability to obtain rate increases from regulatory authorities and increasing our volumes of water sold through increased consumption and increases in the number of customers served. A 15.9% rate increase effective November 9, 2004 accounted for approximately $855,000 in increased water operating revenues in the first quarter of 2005. The average number of customers served in the first quarter of 2005 increased as compared to the same period in 2004 by 1,309, from 52,054 to 53,363 customers. Despite this increase in customers, the total per capita volume of water sold in the first quarter of 2005 decreased compared to the corresponding 2004 period due to reduced consumption in our service territory.

Operating expenses for the first quarter of 2005 increased $392,508, or 13.0%, from $3,010,082 for the first quarter of 2004 to $3,402,590 for the corresponding 2005 period. Higher depreciation expense of approximately $115,000 due to increased plant investment (particularly the plant associated with the Susquehanna River Pipeline), higher wages and directors’ fees of approximately $91,000 and higher pension expense of approximately $52,000 were the principal reasons for the increase. Higher health insurance premiums, increased contractual accounting expenses related to internal controls, higher rate case expense and miscellaneous administrative expenses related to credit rating and banking fees of approximately $106,000 contributed to the increase. Reduced transmission and distribution expenses for maintenance of meters and hydrants of approximately $35,000 partially offset the increase.

Interest expense on long-term debt for the first quarter of 2005 was $185,893, or 27.0%, higher than the same period in 2004 due to an increase in amounts outstanding. The Company issued tax-exempt debt through the Pennsylvania Economic Development Financing Authority, or the PEDFA, in the amount of $7,300,000 in April 2004 and $12,000,000 in December 2004. The tax-exempt debt was issued primarily to pay down short-term debt incurred to fund the Susquehanna River Pipeline Project.

Interest expense on short-term debt for the first quarter of 2005 was $40,720, or 97.6%, lower than the same period in 2004 due to a decrease in short-term borrowings. The average short-term debt outstanding was $106,404 for the first quarter of 2005 and $7,769,032 for the first three months of 2004. Most of the 2004 short-term debt outstanding was incurred to fund the Susquehanna River Pipeline Project.

Allowance for funds used during construction decreased $163,725 from $203,391 in the first quarter of 2004 to $39,666 in the 2005 period. A decreased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $149,000 accounted for the majority of the decrease.

A gain of $743,195 was recorded in the first quarter of 2004 for the sale of land. No significant land sales or other similar events occurred during the first quarter of 2005.

Federal and state income taxes decreased by $224,438, or 24.0%, due to a decrease in pre-tax income. The effective tax rate was 36.6% in the first quarter of 2005 and 37.2% in the first quarter of 2004.

 

 

From time to time the Company files applications for rate increases with the PPUC and is granted rate relief as a result of such requests. The most recent rate request was filed by the Company on April 28, 2004 and sought an increase of $4,869,970, which would have represented a 22.1% increase in rates. On September 30, 2004, the PPUC authorized an increase in rates designed to produce approximately $3,500,000 in additional annual operating revenues, which represents an increase of 15.9%. The rate increase became effective on November 9, 2004 when the Susquehanna River Pipeline became operational. The Company plans to file its next rate increase request in April 2006.

During the first quarter of 2005, net cash used in investing activities exceeded net cash provided by operating and financing activities by $164,235. The Company anticipates that during the remainder of 2005, net cash used in investing activities will equal net cash provided by operating and financing activities. Borrowings against the Company’s lines of credit, proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends), or DRIP, and employee stock purchase plan, or ESPP, and customer advances will be used to satisfy the need for additional cash.

During the first three months of 2005, the Company incurred $2,749,125 of construction expenditures. Approximately $914,000, or 33%, of the expenditures were for the Susquehanna River Pipeline Project. The Company financed such expenditures through internally generated funds, customers’ advances, short-term borrowings, proceeds from the issuance of common stock under its DRIP and ESPP and proceeds remaining from the December 2004 tax-exempt bond issuance. The Company anticipates construction expenditures for the remainder of 2005 of approximately $11,500,000. In addition to transmission and distribution projects and previously announced acquisitions, a portion of the 2005 expenditures is for the upgrade of our automated meter reading technology. The Company plans to finance these future expenditures using internally-generated funds, short-term borrowings, customer advances and proceeds from the issuance of common stock under the DRIP and ESPP. Closing on the previously announced acquisitions is expected to take place between July and December 2005. The estimated acquisition costs of $2.3 million will be funded as noted above.

The Company's $4.3 million 6.0% Industrial Development Authority Revenue Refunding Bonds, Series 1995, have a mandatory tender date of June 1, 2005. The bonds will be remarketed and the interest rate redetermined to 3.75% on June 1, 2005. Under the terms of the bonds, existing bond holders had the opportunity to retain their bonds at the 3.75% interest rate. All bonds not retained by current bond holders have been remarketed. The newly issued bonds will mature on June 1, 2010.

 

 

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.

The Company has completed construction on the pump house building and garage. Additional testing of the pumps is taking place as well as formalizing written procedures for operation. A public open house is scheduled for May 14, 2005.

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, does not use derivative financial instruments for speculative trading purposes, has no lease obligations, and does not have material transactions involving related parties with the exception of the interest rate swap agreement previously mentioned.

In April 2005, the Securities and Exchange Commission delayed the required implementation date of Statement of Financial Accounting Standard (SFAS) No.123 (Revised 2004) “Share-Based Payment” from the first interim or annual period beginning after June 15, 2005 to the first interim period of the fiscal year beginning after December 15, 2005. SFAS 123R is not expected to have an effect on our financial statements.

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143. The adoption of this interpretation is not expected to impact our financial statements.

In April 2005, the FASB issued Staff Position No. FAS19-1 “Accounting for Suspended Well Costs.” The adoption of FASB Staff Position FAS19-1 will have no impact on our financial statements.

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 currently has available $26,500,000 under lines of credit with four banks, under which there were no borrowings as of March 31, 2005. Loans granted under these lines bear interest based upon LIBOR plus .875 to 1.25 percent. Other than lines of credit, the Company has long-term fixed-rate debt obligations with the exception of the PEDFA Series B issue and the 1995 Industrial Development Authority Revenue Refunding Bonds.

 

 

The Company’s $12,000,000 PEDFA Series B bonds carry a variable interest rate and can be tendered at any time. When the bonds are tendered they are subject to a remarketing agreement. As a result, the $12,000,000 was classified as current maturities of long-term debt. The Company believes the bonds would be successfully remarketed if tendered. The Company entered into an interest rate swap agreement to manage risk associated with the variable interest rate. The swap essentially fixes the interest rate on the PEDFA Series B issue at 3.16%.

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, in light of the previously identified material weaknesses in the Company’s internal control over financial reporting, the Company's disclosure controls and procedures as of the end of the period covered by this report are not 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.

During the Company’s most recent fiscal quarter, the Company implemented measures to improve controls related to the material weaknesses identified in its 2004 annual report. Additional reviews and oversight of the treasury function and further limitation of access to the check processing system have eliminated the lack of segregation of duties issues in these areas. In addition, implementation of the billing portion of the new enterprise software system is now expected to be completed in 2005. The new system will provide substantial segregation of duties within the billing function.

Company management is pursuing additional training opportunities and resources as well as consulting with accounting professionals as needed to provide the necessary expertise in applying generally accepted accounting principles to non-routine transactions and recording them properly.

 

 

 

 

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.