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| YORW > SEC Filings for YORW > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
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;
· strategic initiatives;
· 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 September 30, 2009, the Company's average daily availability was 35.0 million gallons, and daily consumption was approximately 18.5 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, laundry detergent, barbells and motorcycles.
The Company's business is somewhat dependent on weather conditions, particularly the amount of rainfall. Revenues are particularly vulnerable to weather conditions in the summer months. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping golf courses and sports fields irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions from governmental authorities. Despite the Company's adequate water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact our revenues. The Company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions. In 2009, reduced water consumption, rainfall patterns and a sluggish economy have combined to reduce per capita consumption by industrial and residential customers by approximately 5.7% during the first nine months of 2009 compared to the first nine months of 2008. If this downward trend continues, the Company's revenues would be diminished in the short term, making timely and adequate rate filings even more important.
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. The Company continuously looks for acquisition and expansion opportunities both within and outside its current service territory. The Company also looks for additional opportunities to enter into bulk water contracts with municipalities and other entities to supply water.
Results of Operations
Three Months Ended September 30, 2009 Compared With Three Months Ended September 30, 2008
Net income for the third quarter of 2009 was $2,091, an increase of $351, or 20.2%, from net income of $1,740 for the same period of 2008. The primary contributing factor to the increase was higher water revenues, which were partially offset by increased depreciation, pension cost and retirement expense.
Water operating revenues for the three months ended September 30, 2009 increased $1,184, or 13.8%, from $8,566 for the three months ended September 30, 2008 to $9,750 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 third quarter of 2009 increased as compared to the same period in 2008 by 2,563 customers, from 59,421 to 61,984 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 third quarter of 2009 decreased compared to the corresponding 2008 period by approximately 9.2%. Reduced consumption is attributed to, among other things, a sluggish economy and rainfall patterns.
Operating expenses for the third quarter of 2009 increased $373, or 8.2%, from $4,541 for the third quarter of 2008 to $4,914 for the corresponding 2009 period. The increase was primarily due to higher depreciation of $199 due to increased plant investment, increased pension expense of $146, higher distribution system maintenance expense of $55, increased realty taxes of $47, higher chemical costs of $46 and increased rate case expense, power costs and customer service expenses aggregating approximately $62. The increase was partially offset by lower capital stock taxes, reduced health insurance costs, lower transportation expense, higher capitalized overhead, lower salary and wage expense, reduced legal fees, lower software support costs and reduced shareholder expenses aggregating approximately $182.
Interest expense on debt for the third quarter of 2009 decreased $171, or 12.0%, from $1,425 for the third quarter of 2008 to $1,254 for the corresponding 2009 period. Lower interest on the $12,000 variable rate bonds contributed approximately $286 to the decreased expenses due to lower variable interest rates and the swap loss recorded in the third quarter of 2008. Interest on the Company's lines of credit decreased by $86 due to lower interest rates. The average interest rate on the lines of credit was 1.40% for the quarter ended September 30, 2009 compared to 3.17% for the quarter ended September 30, 2008. The average debt outstanding under the lines of credit was $21,758 for the third quarter of 2009 and $20,112 for the third quarter of 2008. Other long-term interest decreased $24. Interest on the Company's long-term debt increased by $225 due to 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%.
Allowance for funds used during construction decreased $122, from $157 in the third quarter of 2008 to $35 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 that was placed in service in December, 2008 and a main extension for the West Manheim acquisition.
Other income (expenses), net for the third quarter of 2009 reflects increased expenses of $143 as compared to the same period of 2008. The increase was primarily due to increased retirement expenses of $132. Higher charitable contributions and other expenses aggregating approximately $11 added to the increased expenses.
Federal and state income taxes for the third quarter of 2009 increased by $366, or 37.8%, compared to the same period of 2008, primarily due to an increase in taxable income. The Company's effective tax rate was 39.0% in the third quarter of 2009 and 35.8% in the third quarter of 2008. The increase in the effective tax rate was due to bonus depreciation initially being taxable for state tax purposes and additional taxes payable on our deferred compensation plans.
Nine Months Ended September 30, 2009 Compared With Nine Months Ended September 30, 2008
Net income for the first nine months of 2009 was $5,501, an increase of $1,035, or 23.2%, from net income of $4,466 for the same period of 2008. The primary contributing factor to the increase was higher water revenues which were partially offset by increased depreciation, higher pension cost, reduced interest capitalized, increased retirement expense and higher salary and wage expense.
Water operating revenues for the nine months ended September 30, 2009 increased $3,800, or 15.9%, from $23,934 for the nine months ended September 30, 2008 to $27,734 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 nine months of 2009 increased as compared to the same period in 2008 by 2,584 customers, from 59,222 to 61,806 customers. Approximately 2,050 of the additional customers were due to the Asbury Pointe and West Manheim acquisitions. Throughout the first half of 2009, the Company experienced a 5.7% decline in per capita consumption, of which the largest decline occurred in the industrial category followed by the residential and commercial categories. The reduction is attributed to, among other things, a sluggish economy and rainfall patterns. The Company expects revenues for the remainder of the year to be consistent with last year as the impact of the new customers acquired at the end of 2008 is expected to be offset by the decline in per capita consumption.
Operating expenses for the first nine months of 2009 increased $1,115, or 8.2%, from $13,584 for the first nine months of 2008 to $14,699 for the corresponding 2009 period. The increase was primarily due to higher depreciation of $580 due to increased plant investment, increased pension expense of $437, higher salary and wage expense of $198 due mainly to the increased vacation accrual discussed in Note 4 and higher distribution system maintenance expense, increased chemical costs, rate case expense, power costs, realty taxes, banking fees and other expenses aggregating approximately $227. The increase was partially offset by reduced health insurance costs, higher capitalized overhead, lower software support costs and lower transportation expense aggregating approximately $327. Depreciation and pension expenses are expected to continue at a higher rate throughout 2009.
Interest expense on debt for the first nine months of 2009 increased $49, or 1.3%, from $3,738 for the first nine months of 2008 to $3,787 for the corresponding 2009 period. Interest on the Company's long-term debt increased by $673 due to 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%. The increased expenses were partially offset by lower interest on the $12,000 variable rate bonds of approximately $349 due to lower variable interest rates and the swap loss recorded in the third quarter of 2008. Interest on the Company's lines of credit decreased by $240 due to lower interest rates. The average interest rate on the lines of credit was 1.51% for the first nine months ended September 30, 2009 compared to 3.65% for the nine months ended September 30, 2008. The average debt outstanding under the lines of credit was $19,735 for the first nine months of 2009 and $16,213 for the corresponding period of 2008. Other long-term interest decreased $35.
Allowance for funds used during construction decreased $311, from $481 for the first nine months of 2008 to $170 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 that was placed in service in December, 2008.
Other income (expenses), net for the first nine months of 2009 reflects increased expenses of $267 as compared to the same period of 2008. The increase was primarily due to increased retirement expenses of $220 and other expenses aggregating approximately $47.
Federal and state income taxes for the first nine months of 2009 increased by $1,023, or 41.9%, compared to the same period of 2008, primarily due to an increase in taxable income. The Company's effective tax rate was 38.7% in the first nine months of 2009 and 35.4% in the corresponding 2008 period. The increase in the effective tax rate was due to taxable gains on the surrender of life insurance policies, bonus depreciation initially being taxable for state tax purposes and additional taxes payable on our deferred compensation plans.
Rate Matters
See Note 10 to the Financial Statements.
Acquisitions
See Note 9 to the Financial Statements.
Capital Expenditures
For the nine months ended September 30, 2009, the Company invested $9,574 in construction expenditures for routine items as well as an additional standpipe and booster station and 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, an underwritten common stock offering, 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 $3,275. In addition to routine transmission and distribution projects and the Beaver Creek acquisition and main extension, a portion of the anticipated expenditures will be for various replacements of aging infrastructure. The Company uses internally-generated funds for at least half of the anticipated construction and funds the remainder through line of credit borrowings, proceeds from stock issuances through internal plans, the Distribution System Improvement Charge (DSIC) and minimal customer advances and contributions. The availability of credit will play a major role in how funds will be raised.
Liquidity and Capital Resources
Cash
Although the Company is able to generate funds internally through customer bill
payments, we have not historically maintained cash on the balance sheet. The
Company manages its cash through a cash management account that is directly
connected to a line of credit. Excess cash generated automatically pays down
outstanding borrowings under the line of credit arrangement. If there are no
outstanding borrowings, the cash is automatically invested in an
interest-bearing account overnight. Likewise, if additional funds are needed,
besides what is generated internally, for payroll, to pay suppliers, or to pay
debt service, funds are automatically borrowed under the line of credit. The
cash management facility has historically provided the necessary liquidity and
funding for our operations and we expect that to continue to be the case for the
foreseeable future. The cash balance was $56 at September 30, 2009 due to the
timing of the transfer of the excess cash against the outstanding borrowings
under the cash management arrangement.
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 nine months of 2009, we generated $12,679 internally as
compared to $9,030 in the first nine months 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
Historically, the Company has borrowed $15.0 to $20.0 million under its lines of
credit before refinancing with long-term debt or equity capital. As of September
30, 2009, the Company maintained unsecured lines of credit aggregating $33,000
with three 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 2011), which currently carries an interest rate of LIBOR plus
0.70%. The Company had $3,824 in outstanding borrowings under the committed
portion and no on-demand borrowings under this line of credit as of September
30, 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 $4,000 in outstanding borrowings under this line of credit
as of September 30, 2009. The third line of credit, in the amount of $5,000, is
a committed line of credit, which matures in April 2010 and carries an interest
rate of LIBOR plus 2.00%. The Company had $1,000 in outstanding borrowings under
this line of credit as of September 30, 2009. The weighted average interest rate
on line of credit borrowings as of September 30, 2009 was 1.47% compared to
3.18% as of September 30, 2008.
The credit and liquidity crisis which began in 2008 has caused substantial volatility and uncertainty in the capital markets and in the banking industry resulting in increased borrowing costs and reduced credit availability. While actual interest rates are currently low, one of our banks has recently increased the interest rate on our line of credit from LIBOR plus 70 basis points to LIBOR plus 150 basis points. We expect the interest rate on another line of credit to increase in 2009. Although we have taken steps to manage the risk of reduced credit availability such as maintaining primarily committed lines of credit that cannot be called on demand and obtaining a 2-year revolving maturity, there is no guarantee that we will be able to obtain sufficient lines of credit with favorable terms in the future. In addition, if the Company is unable to refinance its line of credit borrowings with long-term debt or equity when necessary, we may have to eliminate or postpone capital expenditures.
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 3.60% Industrial Development Authority Revenue Refunding Bonds, Series 1994, had a mandatory tender date of May 15, 2009. The Company retired the $2,700 bonds using funds available under its lines of credit. The 3.75% Industrial Development Authority Revenue Refunding Bonds, Series 1995, have a mandatory tender date of June 1, 2010. The Company currently plans to meet its $4,300 obligation using funds available under its lines of credit or potential debt and equity issuances.
The Company's debt (long-term debt plus current portion of long-term debt) as a percentage of the total capitalization, defined as total common stockholders' equity plus long-term debt (including current portion of long-term debt), was 48.1% as of September 30, 2009, compared with 55.3% as of December 31, 2008. While our debt load has trended upward over the years, we have historically matched increasing debt with increasing equity so that our debt to total capitalization ratio was nearly fifty percent. This capital structure has historically been acceptable to the Pennsylvania Public Utility Commission (PPUC) in that prudent debt costs and a fair return have been granted by the PPUC in rate filings. The economic downturn during the latter part of 2008 delayed the matching increase in equity, resulting in a higher debt ratio and increased borrowings under our lines of credit. The improved market conditions in 2009 allowed the Company to complete an underwritten common stock offering and reduce the percentage of debt in its capital structure.
Common Stock
In September 2009, the Company closed an underwritten public offering of 950,000
shares of its common stock. In October 2009, the Company closed on an
over-allotment of 120,000 shares. Boenning & Scattergood, Inc. and J.J.B.
Hilliard, W.L. Lyons, LLC were the underwriters in the offering. The Company
received net proceeds in the offering, after deducting offering expenses and
underwriters' discounts and commissions, of approximately $14.1 million. The net
proceeds were used to repay a portion of the Company's borrowings under its line
of credit agreements incurred to fund capital expenditures and acquisitions, and
for general corporate purposes.
Common stockholders' equity as a percent of the total capitalization was 51.9% as of September 30, 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 to issue common stock due to a reduced stock price, the potential inability to raise the needed funds and the prospect of further dilution to our stock value. The improved market conditions in 2009 allowed the Company to complete an underwritten common stock offering and increase the percentage of common stockholders' equity in its capital structure. We have the ability to issue additional shares of the Company's common stock over the next couple of years when market conditions are favorable under a Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 28, 2009 under the "shelf" provisions of the Securities Act of 1933.
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 September 30, 2009.
Off-Balance Sheet Arrangements
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 6 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 12 to the Financial Statements.
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