10-Q 1 june10q.txt 2ND 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 June 30, 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 6,336,218 Shares outstanding as of August 2, 2002 THE YORK WATER COMPANY PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited) As Of As of June 30, 2002 Dec. 31, 2001 UTILITY PLANT, at original cost $123,868,844 $121,109,335 Less-Reserve for depreciation 20,119,326 19,356,553 103,749,518 101,752,782 OTHER PHYSICAL PROPERTY: Less-Reserve for depreciation of $92,606 in 2002 and $89,392 in 2001 510,163 511,007 CURRENT ASSETS: Cash and cash equivalents - 97,447 Receivables, less reserves of $130,000 in 2002 and 2001 2,938,301 2,995,000 Recoverable income taxes 45,326 - Materials and supplies, at cost 472,025 449,777 Prepaid expenses 304,171 229,248 Deferred income taxes 88,655 88,655 3,848,478 3,860,127 OTHER LONG-TERM ASSETS: Prepaid pension cost 2,314,609 2,202,995 Deferred debt expense 334,307 354,346 Deferred rate case expense 101,630 144,042 Notes receivable 882,786 1,121,916 Deferred regulatory assets 2,443,770 1,886,658 Other 1,930,856 1,517,619 8,007,958 7,227,576 $116,116,117 $113,351,492 THE YORK WATER COMPANY Balance Sheets (Unaudited) As Of As Of June 30, 2002 Dec. 31, 2001 CAPITALIZATION Common stock, no par value, authorized 31,000,000 shares, outstanding 6,336,218 shares in 2002 and 6,308,664 shares in 2001 $ 31,894,035 $ 31,473,194 Earnings retained in the business 4,572,504 4,418,280 36,466,539 35,891,474 LONG-TERM DEBT 1.0% Pennvest Loan, due 2019 671,263 690,343 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 32,671,263 32,690,343 CURRENT LIABILITIES Short-term borrowings 2,490,392 2,000,000 Current portion of long-term debt 38,066 37,877 Accounts payable 1,204,652 478,423 Dividends payable 625,729 623,498 Accrued taxes 20,051 527,674 Advance water revenues 25,293 25,037 Accrued interest 678,164 678,163 Other accrued expenses 431,542 470,545 5,513,889 4,841,217 DEFERRED CREDITS Customers' advances for construction 17,937,744 17,777,685 Contributions in aid of construction 11,038,201 10,784,143 Deferred income taxes 9,714,606 8,519,594 Deferred regulatory liabilities 953,679 970,330 Deferred employee benefits 1,820,196 1,876,706 41,464,426 39,928,458 $116,116,117 $113,351,492 THE YORK WATER COMPANY Statements of Income (Unaudited) (Unaudited) Three Months Ended Six Months Ended June 30 June 30 2002 2001 2002 2001 WATER OPERATING REVENUES Residential $2,884,107 $2,852,024 $5,651,717 $5,552,567 Commercial and industrial 1,370,445 1,337,836 2,662,722 2,573,549 Other 621,753 573,522 1,241,500 1,132,716 4,876,305 4,763,382 9,555,939 9,258,832 OPERATING EXPENSES Operation and maintenance 1,160,122 1,128,927 2,189,936 2,117,819 Administrative and general 1,130,658 966,031 2,107,359 1,879,474 Depreciation 415,874 445,326 831,747 887,015 Taxes other than income taxes 187,456 188,853 369,759 389,153 2,894,110 2,729,137 5,498,801 5,273,461 Operating Income 1,982,195 2,034,245 4,057,138 3,985,371 INTEREST EXPENSE AND OTHER INCOME Interest on long-term debt 689,914 689,977 1,379,852 1,380,019 Interest on short-term debt 16,026 53,172 31,305 104,348 Allowance for funds used during construction (31,193) (17,826) (55,044) (26,433) Other income, net (157,325) (40,945) (83,995) (35,675) 517,422 684,378 1,272,118 1,422,259 Income before income taxes 1,464,773 1,349,867 2,785,020 2,563,112 Federal and state income taxes 543,839 493,178 988,639 904,223 Net Income $ 920,934 $ 856,689 $1,796,381 $1,658,889 Basic Earnings Per Share $0.15 $0.14 $0.28 $0.27 Cash Dividends Per Share $0.13 $0.13 $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 - 1,796,381 Cash Dividends - (1,642,157) Issuance of common stock under dividend reinvestment plan 388,240 - Issuance of common stock under employee stock purchase plan 32,601 - Balance, June 30, 2002 $31,894,035 $4,572,504 THE YORK WATER COMPANY Statements of Cash Flows (Unaudited) (Unaudited) Six Months Six Months Ended Ended June 30, 2002 June 30, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,796,381 $1,658,889 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 831,747 887,015 Provision for losses on accounts receivable 65,000 65,000 Increase in deferred income taxes (including regulatory assets and liabilities) 621,249 642,233 Changes in assets and liabilities: (Increase) decrease in accounts receivable (8,301) 143 Increase in recoverable income taxes (45,326) (148,449) Increase in materials and supplies (22,248) (39,019) Increase in prepaid expenses and prepaid pension costs (186,537) (45,687) Increase (decrease) in accounts payable, accrued expenses, other liabilities and deferred employee benefits 633,203 (532,129) Decrease in accrued interest and taxes (507,622) (144,789) (Increase) decrease in other assets (260,350) 449,867 Net cash provided by operating activities 2,917,196 2,793,074 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (2,918,075) (4,082,107) Customers' advances for construction and contributions in aid of construction 414,117 849,759 Decrease (increase) in notes receivable 239,130 (88,949) Net cash used in investing activities (2,264,828) (3,321,297) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long term debt (18,891) (18,724) Net borrowings under line-of-credit agreements 490,392 1,690,815 Issuance of common stock under dividend reinvestment plan 388,240 340,445 Issuance of common stock under employee stock purchase plan 32,601 39,456 Dividends paid (1,642,157) (1,523,769) Net cash (used in) provided by financing activities (749,815) 528,223 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 $1,354,325 $1,456,087 Income taxes 872,037 554,142 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 month and six month periods ended June 30, 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 six months ended June 30, 2002 and 2001 were based on weighted average shares outstanding of 6,317,385 and 6,096,868, respectively. 3. As previously mentioned, the Company had a two-for-one stock split this quarter. On May 20, 2002, shareholders of record as of May 10, 2002, received one additional share of common stock for each share held as of the record date. The transaction had no effect on total stockholders' equity. All shares outstanding and per share amounts in this report have been restated to reflect the effect of the stock split. 4. During the second quarter, the Company offset notes receivable in the amount of $388,078 against the related advances for construction based on its determination that the principal recoverable from note holders was less than the recorded amount, and the fact that advances are not fully refundable to the extent that payments are not received on the notes. THE YORK WATER COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended June 30, 2002 Compared with Three Months Ended June 30, 2001 Net income for the second quarter of 2002 was $920,934, an increase of $64,245, or 7.5%, compared to the same period of 2001. Water operating revenues for the three months ended June 30, 2002 increased $112,923, or 2.4%, compared to the three months ended June 30, 2001. The increase resulted primarily from the 4.2% rate increase approved by the PPUC, effective September 1, 2001. Drought conditions lessened the impact of the rate increase and an increase in customers during the second quarter 2002 compared to second quarter 2001. Operating expenses for the second quarter of 2002 increased $164,973, or 6.0%, compared to the second quarter of 2001. Higher pension expenses due to lower returns, higher health insurance premiums, shareholder relations expenses, and higher power costs due to a new supplier were the main reasons for the increase. Lower depreciation expense due to longer asset lives, and reduced distribution system maintenance costs partially offset the increase. Interest on short-term bank loans decreased $37,146, or 69.9%, during the second quarter 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 for the second quarter 2002 and 2001 was $2,355,536 and $3,665,216, respectively. Allowance for funds used during construction for the second quarter 2002 increased $13,367, or 75.0%, when compared to second quarter 2001. Capitalized interest on the costs associated with the pipeline to the river project accounts for the increase. Other income, net increased by $116,380 during the second quarter 2002 compared to second quarter 2001, due to a decrease in supplemental retirement expenses caused by an increase in the discount rate used in the present value calculations. Federal and state income taxes increased $50,661, or 10.3%, due to an increase in taxable income. The effective tax rate was 37.1% for second quarter 2002 compared with 36.5% for second quarter 2001. Six Months Ended June 30, 2002 Compared with Six Months Ended June 30, 2001 Net income for the first half of 2002 was $1,796,381, an increase of $137,492, or 8.3%, compared to the first half of 2001. Water operating revenues for the year-to-date period ended June 30, 2002 increased $297,107, or 3.2%, compared to the same period in 2001. The increase resulted primarily from the 4.2% rate increase approved by the PPUC, effective September 1, 2001. Drought conditions reduced the impact of the rate increase and the growth in customers in all classifications. Operating expenses for the first six months of 2002 increased $225,340, or 4.3%, compared to the first six months of 2001. Higher pension expense due to lower returns, higher health insurance premiums, and higher power costs due to a new supplier were the main reasons for the increase. Reduced depreciation and an Educational Improvement Tax Credit partially offset the increase. Interest on short-term bank loans decreased $73,043, or 70.0%, during the first half 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 $2,184,611 and $3,386,781, respectively. Allowance for funds used during construction for 2002 increased $28,611 when compared to 2001. Capitalized interest on the costs associated with the pipeline to the river project accounts for the increase. Other income, net increased by $48,320 in 2002 due to a decrease in supplemental retirement expenses caused by an increase in the discount rate used in the present value calculations. This increase was partially offset by increased contributions (some offset by the Educational Improvement Tax Credit mentioned in operating expenses). Federal and state income taxes increased $84,416, or 9.3%, due to an increase in taxable income. The effective tax rate was 35.5% and 35.3% as of June 30, 2002 and June 30, 2001, respectively. 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 half of 2002, the per capita volume of water sold decreased approximately 5.0% compared to the first half of 2001. The Company does not anticipate a further change in the level of water usage unless the drought worsens, which could have a material impact on future results of operations. During the first half of 2002, the Company had $2,918,075 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 half of 2002. During the first six 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 continue to exceed 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 June 30, 2002, current liabilities exceeded current assets by $1,665,411. Short-term borrowings from lines of credit as of June 30, 2002 were $2,490,392. 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 received 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 second quarter of 2002. A problem developed with one of the permits during the first quarter 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. While waiting for the results of this petition, the Company solicited bids from engineering firms and has selected a firm to assist with the design work for the project. As of this date, we have not received the results of our petition. 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, depreciation and realty taxes will exceed prior year but will remain consistent with the first half of 2002, and supplemental retirement expenses will be lower than prior year. Other expenses are projected to be fairly consistent with first half 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 second quarter. The emergency placed mandatory water use restrictions on the Company's service territory. Thus far the drought has reduced operating revenues some and if the emergency continues into historically higher water use periods, it could have a material impact on revenue and income in the coming quarters. THE YORK WATER COMPANY Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Shareholders of The York Water Company was convened May 6, 2002 at the office of the Company, 130 East Market Street, in the City of York, Pennsylvania, at 1:00 P.M. for the purpose of taking action upon the following proposals: (1) To elect three (3) Directors to three-year terms of office. The actions taken by the Shareholders concerning the election of Directors are as follows: John L. Finlayson Chloe R. Eichelberger Thomas C. Norris For election 2,447,267 2,448,439 2,491,996 Shares withheld 45,589 44,417 41,717 The following Directors' terms of office continued after the Annual Meeting. George W. Hodges Irvin S. Naylor George Hay Kain, III William T. Morris Michael W. Gang Jeffrey S. Osman (2) To appoint Stambaugh Ness, PC as independent accountants to audit the financial statements of the Company for the year 2002. The actions taken by the Shareholders concerning the appointment of Stambaugh Ness, PC independent accountants are as follows: For Approval 2,482,265 Against Approval 5,786 Abstaining From Voting 4,705 Item 6. Exhibits and Reports on Form 8-K The Company filed no Form 8-K's during the quarter covered by this report. 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 /s/William T. Morris William T. Morris Principal Executive Officer Date: August 12, 2002 /s/Jeffrey S. Osman Jeffrey S. Osman Principal Financial and Accounting Officer Date: August 12, 2002 - 13 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The York Water Company on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William T. Morris, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. THE YORK WATER COMPANY /s/William T. Morris William T. Morris Chief Executive Officer Date: August 12, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The York Water Company on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey S. Osman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. THE YORK WATER COMPANY /s/Jeffrey S. Osman Jeffrey S. Osman Chief Financial Officer Date: August 12, 2002