10-Q 1 march10q.txt 1ST QUARTER 2002 10Q 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 March 31, 2002 Commission File No. 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) 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. YES X NO 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 3,161,657 Shares outstanding as of May 6, 2002 THE YORK WATER COMPANY PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited) As Of As of Mar. 31, 2002 Dec. 31, 2001 UTILITY PLANT, at original cost $122,336,838 $121,109,335 Less-Reserve for depreciation 19,798,728 19,356,553 102,538,110 101,752,782 OTHER PHYSICAL PROPERTY: Less-Reserve for depreciation of $90,999 in 2002 and $89,392 in 2001 511,769 511,007 CURRENT ASSETS: Cash and cash equivalents - 97,447 Receivables, less reserves of $130,000 in 2002 and 2001 2,786,635 2,995,000 Materials and supplies, at cost 470,220 449,777 Prepaid expenses 263,585 229,248 Deferred income taxes 88,655 88,655 3,609,095 3,860,127 OTHER LONG-TERM ASSETS: Prepaid pension cost 2,202,995 2,202,995 Deferred debt expense 344,326 354,346 Deferred rate case expense 122,436 144,042 Notes receivable 1,283,524 1,121,916 Deferred regulatory assets 2,419,599 1,886,658 Other 1,898,637 1,517,619 8,271,517 7,227,576 $114,930,491 $113,351,492 THE YORK WATER COMPANY Balance Sheets (Unaudited) As Of As Of Mar. 31, 2002 Dec. 31, 2001 CAPITALIZATION Common stock, no par value, authorized 31,000,000 shares, out- standing 3,161,657 shares in 2002 and 3,154,332 shares in 2001 $ 31,671,287 $ 31,473,194 Earnings retained in the business 4,473,601 4,418,280 36,144,888 35,891,474 LONG-TERM DEBT 1.0% Pennvest Loan, due 2019 680,815 690,343 6.0% Industrial Development Authority Revenue Refunding Bonds, Series 1995, due 2010 4,300,000 4,300,000 10.05% Senior Notes, Series C, due 2020 6,500,000 6,500,000 10.17% Senior Notes, Series A, due 2019 6,000,000 6,000,000 9.6% Senior Notes, Series B, due 2019 5,000,000 5,000,000 8.43% Senior Notes, Series D, due 2022 7,500,000 7,500,000 4.40% Industrial Development Authority Revenue Refunding Bonds, Series 1994, due 2009 2,700,000 2,700,000 32,680,815 32,690,343 CURRENT LIABILITIES Short-term borrowings 2,185,318 2,000,000 Current portion of long-term debt 37,971 37,877 Accounts payable 673,149 478,423 Dividends payable 627,557 623,498 Accrued taxes 408,128 527,674 Advance water revenues 28,200 25,037 Accrued interest 494,564 678,163 Other accrued expenses 451,246 470,545 4,906,133 4,841,217 DEFERRED CREDITS Customers' advances for construction 18,116,439 17,777,685 Contributions in aid of construction 10,865,001 10,784,143 Deferred income taxes 9,325,421 8,519,594 Deferred regulatory liabilities 964,912 970,330 Deferred employee benefits 1,926,882 1,876,706 41,198,655 39,928,458 $114,930,491 $113,351,492 THE YORK WATER COMPANY Statements of Income (Unaudited) (Unaudited) Three Months Three Months Ended Ended Mar. 31, 2002 Mar. 31, 2001 WATER OPERATING REVENUES Residential $2,767,610 $2,700,543 Commercial and industrial 1,292,277 1,235,713 Other 619,747 559,194 4,679,634 4,495,450 OPERATING EXPENSES Operation and maintenance 1,029,814 988,892 Administrative and general 976,701 913,443 Depreciation and amortization 415,873 441,689 Taxes other than income taxes 182,303 200,300 2,604,691 2,544,324 Operating income 2,074,943 1,951,126 INTEREST EXPENSE AND OTHER INCOME Interest on long-term debt 689,938 690,042 Interest on interim bank loans 15,279 51,176 Allowance for funds used during construction (23,851) (8,607) Other expense, net 73,330 5,270 754,696 737,881 Income before income taxes 1,320,247 1,213,245 Federal and state income taxes 444,800 411,045 Net income $ 875,447 $ 802,200 Basic Earnings Per Share $0.28 $0.26 Cash Dividends Per Share $0.26 $0.25 THE YORK WATER COMPANY Statements of Shareholders' Investment Earnings Retained Common in the Stock Business Balance, December 31, 2001 $31,473,194 $4,418,280 Net Income 875,447 Cash Dividends (820,126) Issuance of common stock under dividend reinvestment plan 182,432 Issuance of common stock under employee stock purchase plan 15,661 Balance, March 31, 2002 $31,671,287 $4,473,601 THE YORK WATER COMPANY Statements of Cash Flows (Unaudited) (Unaudited) Three Months Three Months Ended Ended Mar. 31, 2002 Mar. 31, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 875,447 $ 802,200 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 415,873 441,689 Provision for losses on accounts receivable 32,500 32,500 Increase in deferred income taxes (including regulatory assets and liabilities) 267,468 188,897 Changes in assets and liabilities: Decrease in accounts receivable 175,865 283,116 Increase in materials and supplies (20,443) (30,376) Increase in prepaid expenses and prepaid pension costs (34,337) (15,241) Increase (decrease) in accounts payable, accrued expenses, other liabilities and deferred employee benefits 232,825 (408,979) (Decrease) increase in accrued interest and taxes (303,145) 48,689 (Increase) decrease in other assets (287,118) 429,433 Net cash provided by operating activities 1,354,935 1,771,928 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (1,264,237) (1,841,352) Customers' advances for construction and contributions in aid of construction 419,612 325,408 Increase in notes receivable (161,608) (99,939) Net cash used in investing activities (1,006,233) (1,615,883) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (9,434) (9,330) Net borrowings under line-of-credit agreements 185,318 430,320 Issuance of common stock under dividend reinvestment plan 182,432 164,178 Issuance of common stock under employee stock purchase plan 15,661 19,470 Dividends paid (820,126) (760,683) Net cash used in financing activities (446,149) (156,045) Net decrease in cash and cash equivalents (97,447) - Cash and cash equivalents at beginning of period 97,447 - Cash and cash equivalents at end of period $ - $ - Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $ 863,178 $ 916,565 Income taxes 324,660 53,897 THE YORK WATER COMPANY Notes to Interim Financial Statements 1. Interim Financial Information The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation of results for such periods. These financial statements 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, 2001. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 2. Basic Earnings Per Share Basic earnings per share for the three months ended March 31, 2002 and 2001 were based on weighted average shares outstanding of 3,155,624 and 3,044,387, respectively. THE YORK WATER COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001 Net income for the first three months of 2002 was $875,447, an increase of $73,247, or 9.1%, compared to the same period of 2001. Water operating revenues for the three months ended March 31, 2002 increased $184,184, or 4.1%, compared to the three months ended March 31, 2001. The increase resulted primarily from the 4.2% rate increase approved by the PPUC, effective September 1, 2001. In addition, there were 871 more customers in the first quarter of 2002 compared to the first quarter of 2001. Operating expenses for the first three months of 2002 increased $60,367, or 2.4%, compared to the first quarter of 2001. Higher pension expenses due to lower returns, higher health and general insurance premiums, and higher power costs due to a new supplier were the main reasons for the increase. Reduced Nasdaq fees, lower depreciation expense due to longer asset lives, and an Educational Improvement Tax Credit partially offset the increases. Interest on interim bank loans decreased $35,897, or 70.1%, during the first three months of 2002 compared to the same period in 2001 due to lower interest rates and a reduction in short-term debt outstanding. The average daily short-term debt outstanding in 2002 and 2001 was $2,011,787 and $3,108,346, respectively. Allowance for funds used during construction for 2002 increased $15,244 when compared to 2001. Capitalized interest on the costs associated with the pipeline to the river project accounts for the increase. Other income and expense, net increased by $68,060 due to increased contributions, partially offset by the Educational Improvement Tax Credit (in operating expenses), and increased supplemental retirement expenses. Federal and state income taxes increased $33,755, or 8.2% due to an increase in taxable income. The effective tax rate was 33.7% in 2002 and 33.9% in 2001. Rate Developments Within the last several years the Company has filed written applications for rate increases with the PPUC and has been granted rate relief as a result of such requests. The most recent request was filed on March 20, 2001 seeking a $2,039,790 or 11.1% rate increase. Effective September 1, 2001, the PPUC authorized an increase in rates designed to produce approximately $800,000 in additional annual operating revenues, an increase of 4.2%. The Company plans to file its next rate increase request in January 2003. Liquidity and Capital Resources The Company is not aware of demands, events or uncertainties that will result in a decrease of liquidity or in a material change in the mix and relative cost of capital resources. The Company does not use off-balance sheet arrangements such as securitization of receivables or unconsolidated entities. The Company has no lease obligations, does not engage in trading or risk management activities, and does not have material transactions involving related parties. During the first quarter of 2002, the per capita volume of water sold did not change significantly compared to first quarter 2001. The Company does not anticipate any change in the level of water usage, with the exception of the drought emergency discussed below, which would have a material impact on future results of operations. During the first quarter of 2002, the Company had $1,264,237 of construction expenditures. The Company financed such expenditures through internally generated funds, customers' advances, short-term borrowings, and proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends) and employee stock purchase plan. The Company anticipates construction expenditures of approximately $6,518,500 for the year 2002, and will finance these expenditures in the same manner as the first quarter of 2002. During the first three months of 2002, net cash used in investing and financing activities exceeded net cash provided by operating activities. The Company anticipates that during the remainder of 2002 net cash used in investing and financing activities will equal net cash provided by operating activities. Borrowings against the Company's lines of credit, proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends) and employee stock purchase plan, and customers' advances are expected to be used to satisfy the need for additional cash. As of March 31, 2002, current liabilities exceeded current assets by $1,297,038. Short-term borrowings from lines of credit as of March 31, 2002 were $2,185,318. The Company maintains lines of credit aggregating $19,000,000. Loans granted under these lines of credit bear interest based on the prime or Libor rates plus 1 to 1.5%. The Company is not required to maintain compensating balances on its lines of credit. On April 11, 2002, the PPUC approved the Company's previously announced two-for-one common stock split. On May 20, 2002, shareholders of record as of May 10, 2002 will receive one additional share for each share held as of the record date. The permitting process for the Company's pipeline to the Susquehanna River continued during the first quarter of 2002. A problem developed with one of the permits due to the classification of the Company's Lakes as Cold Water Fishes. The Company believes, and there is evidence to suggest, that the Lakes were misclassified. As a result, on April 16, 2002, the Company filed a petition with the Environmental Quality Board to designate the Lakes and the East Branch of the Codorus Creek as Warm Water Fishes. The results of the petition should be known within a couple of months. Forward Looking Information Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address activities or events which the Company expects will or may occur in the future. 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 is subject to various federal and state regulations concerning water quality and environmental standards. In addition, the water industry is generally dependent on the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant. The Company's profitability also depends on the timeliness of rate relief and numerous factors over which it has little or no control, such as quantity of rainfall, temperature, industrial demand, financing costs, energy rates, and environmental and water quality regulations. In the coming quarters, the Company expects revenues to remain above prior year as long as the drought situation doesn't worsen. As far as expenses, interest rates are expected to stay low in the near future, health and general insurance costs will continue to exceed prior year, and payroll expenses will increase. Other expenses are projected to be fairly consistent with first quarter and prior year. No major refunds or expenses are expected in the coming quarters of 2002. The Company plans to file for a rate increase in January 2003. Drought On February 12, 2002, the Governor issued a drought emergency which continued to be effective through the remainder of the first quarter. The emergency placed mandatory water use restrictions on the Company's service territory. Thus far there has not been a significant impact on operating revenues, but if the drought continues into historically higher water use periods, it could have a material impact on revenue and income in the coming quarters. Item 6. Exhibits and Reports on Form 8-K The Company filed a Form 8-K on February 21, 2002 announcing that its Board of Directors had unanimously approved a two-for-one split of the Company's common stock. THE YORK WATER COMPANY 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 William T. Morris Principal Executive Officer Date: May 13, 2002 Jeffrey S. Osman Principal Financial and Accounting Officer Date: May 13, 2002