YORK WATER CO
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2016 |
| 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
001-34245
THE YORK WATER COMPANY
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA
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23-1242500
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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130 EAST MARKET STREET, YORK, PENNSYLVANIA
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17401
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(Address of principal executive offices)
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(Zip Code)
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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
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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Small Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
NO
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Common stock, No par value
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12,869,555 Shares outstanding
as of August 2, 2016
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PART I
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Financial Information
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PART II
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Other Information
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Page 2
THE YORK WATER COMPANY
PART I - FINANCIAL INFORMATION
THE YORK WATER COMPANY
Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)
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Jun. 30, 2016
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Dec. 31, 2015
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||||||
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||||||||
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ASSETS
|
||||||||
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UTILITY PLANT, at original cost
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$
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334,244
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$
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329,415
|
||||
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Plant acquisition adjustments
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(3,621
|
)
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(3,724
|
)
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||||
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Accumulated depreciation
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(66,941
|
)
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(64,271
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)
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||||
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Net utility plant
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263,682
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261,420
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||||||
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||||||||
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OTHER PHYSICAL PROPERTY, net of accumulated depreciation of $341 in 2016 and $329 in 2015
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757
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769
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||||||
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||||||||
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CURRENT ASSETS:
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||||||||
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Cash and cash equivalents
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5,009
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2,879
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||||||
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Accounts receivable, net of reserves of $334 in 2016 and $315 in 2015
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3,814
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3,535
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||||||
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Unbilled revenues
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2,444
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2,614
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||||||
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Recoverable income taxes
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10
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1,049
|
||||||
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Materials and supplies inventories, at cost
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765
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771
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||||||
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Prepaid expenses
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971
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729
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||||||
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Total current assets
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13,013
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11,577
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||||||
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||||||||
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OTHER LONG-TERM ASSETS:
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||||||||
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Notes receivable
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255
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255
|
||||||
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Deferred regulatory assets
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33,368
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32,996
|
||||||
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Other assets
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2,964
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3,516
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||||||
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Total other long-term assets
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36,587
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36,767
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||||||
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||||||||
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Total Assets
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$
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314,039
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$
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310,533
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||||
The accompanying notes are an integral part of these statements.
Page 3
THE YORK WATER COMPANY
Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)
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Jun. 30, 2016
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Dec. 31, 2015
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||||||
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||||||||
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STOCKHOLDERS' EQUITY AND LIABILITIES
|
||||||||
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COMMON STOCKHOLDERS' EQUITY:
|
||||||||
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Common stock, no par value, authorized 46,500,000 shares, issued and outstanding 12,867,736 shares in 2016 and 12,812,377 shares in 2015
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$
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78,885
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$
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77,317
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||||
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Retained earnings
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33,092
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31,753
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||||||
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Total common stockholders' equity
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111,977
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109,070
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||||||
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||||||||
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PREFERRED STOCK, authorized 500,000 shares, no shares issued
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-
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-
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||||||
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||||||||
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LONG-TERM DEBT, excluding current portion
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84,569
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84,518
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||||||
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||||||||
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COMMITMENTS
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-
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-
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||||||
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||||||||
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CURRENT LIABILITIES:
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||||||||
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Current portion of long-term debt
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44
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44
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||||||
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Accounts payable
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1,609
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1,772
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||||||
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Dividends payable
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1,735
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1,708
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||||||
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Accrued compensation and benefits
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1,181
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1,174
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||||||
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Accrued interest
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980
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976
|
||||||
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Other accrued expenses
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465
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523
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||||||
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Total current liabilities
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6,014
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6,197
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||||||
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||||||||
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DEFERRED CREDITS:
|
||||||||
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Customers' advances for construction
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8,063
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7,500
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||||||
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Deferred income taxes
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51,357
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50,280
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||||||
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Deferred employee benefits
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9,327
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11,079
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||||||
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Other deferred credits
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7,628
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6,959
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||||||
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Total deferred credits
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76,375
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75,818
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||||||
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||||||||
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Contributions in aid of construction
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35,104
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34,930
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||||||
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||||||||
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Total Stockholders' Equity and Liabilities
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$
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314,039
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$
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310,533
|
||||
The accompanying notes are an integral part of these statements.
Page 4
THE YORK WATER COMPANY
Statements of Income (Unaudited)
(In thousands of dollars, except per share amounts)
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Three Months
Ended June 30
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Six Months
Ended June 30
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||||||||||||||
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2016
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2015
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2016
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2015
|
||||||||||||
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||||||||||||||||
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OPERATING REVENUES:
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||||||||||||||||
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Residential
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$
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7,491
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$
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7,501
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$
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14,722
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$
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14,692
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||||||||
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Commercial and industrial
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3,435
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3,526
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6,580
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6,679
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||||||||||||
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Other
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894
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868
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1,796
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1,733
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||||||||||||
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11,820
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11,895
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23,098
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23,104
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||||||||||||
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||||||||||||||||
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OPERATING EXPENSES:
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||||||||||||||||
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Operation and maintenance
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2,028
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2,125
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3,921
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4,088
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||||||||||||
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Administrative and general
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2,274
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2,303
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4,488
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4,544
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||||||||||||
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Depreciation and amortization
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1,555
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1,505
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3,182
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3,054
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||||||||||||
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Taxes other than income taxes
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268
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280
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598
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602
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||||||||||||
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6,125
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6,213
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12,189
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12,288
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||||||||||||
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||||||||||||||||
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Operating income
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5,695
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5,682
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10,909
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10,816
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||||||||||||
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||||||||||||||||
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OTHER INCOME (EXPENSES):
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||||||||||||||||
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Interest on debt
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(1,316
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)
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(1,286
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)
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(2,621
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)
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(2,570
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)
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||||||||
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Allowance for funds used during construction
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47
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53
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100
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108
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||||||||||||
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Other income (expenses), net
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(99
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)
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(174
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)
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(262
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)
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(315
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)
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||||||||
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(1,368
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)
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(1,407
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)
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(2,783
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)
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(2,777
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)
|
||||||||
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||||||||||||||||
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Income before income taxes
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4,327
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4,275
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8,126
|
8,039
|
||||||||||||
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||||||||||||||||
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Income taxes
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1,480
|
1,350
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2,793
|
2,586
|
||||||||||||
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||||||||||||||||
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Net Income
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$
|
2,847
|
$
|
2,925
|
$
|
5,333
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$
|
5,453
|
||||||||
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||||||||||||||||
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Basic Earnings Per Share
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$
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0.23
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$
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0.22
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$
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0.42
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$
|
0.42
|
||||||||
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||||||||||||||||
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Cash Dividends Declared Per Share
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$
|
0.1555
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$
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0.1495
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$
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0.3110
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$
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0.2990
|
||||||||
The accompanying notes are an integral part of these statements.
Page 5
THE YORK WATER COMPANY
Statements of Common Stockholders' Equity (Unaudited)
(In thousands of dollars, except per share amounts)
For the Periods Ended June 30, 2016 and 2015
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Common
Stock
Shares
|
Common
Stock
Amount
|
Retained
Earnings
|
Total
|
||||||||||||
|
|
||||||||||||||||
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Balance, December 31, 2015
|
12,812,377
|
$
|
77,317
|
$
|
31,753
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$
|
109,070
|
|||||||||
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Net income
|
-
|
-
|
5,333
|
5,333
|
||||||||||||
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Dividends
|
-
|
-
|
(3,994
|
)
|
(3,994
|
)
|
||||||||||
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Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans
|
55,359
|
1,568
|
-
|
1,568
|
||||||||||||
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Balance, June 30, 2016
|
12,867,736
|
$
|
78,885
|
$
|
33,092
|
$
|
111,977
|
|||||||||
|
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Common
Stock
Shares
|
Common
Stock
Amount
|
Retained
Earnings
|
Total
|
||||||||||||
|
|
||||||||||||||||
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Balance, December 31, 2014
|
12,830,521
|
$
|
77,556
|
$
|
27,007
|
$
|
104,563
|
|||||||||
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Net income
|
-
|
-
|
5,453
|
5,453
|
||||||||||||
|
Dividends
|
-
|
-
|
(3,843
|
)
|
(3,843
|
)
|
||||||||||
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Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans
|
51,573
|
1,157
|
-
|
1,157
|
||||||||||||
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Balance, June 30, 2015
|
12,882,094
|
$
|
78,713
|
$
|
28,617
|
$
|
107,330
|
|||||||||
The accompanying notes are an integral part of these statements.
Page 6
THE YORK WATER COMPANY
Statements of Cash Flows (Unaudited)
(In thousands of dollars, except per share amounts)
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Six Months
Ended June 30
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|||||||
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2016
|
2015
|
||||||
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CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
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Net income
|
$
|
5,333
|
$
|
5,453
|
||||
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Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
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Depreciation and amortization
|
3,182
|
3,054
|
||||||
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Increase in deferred income taxes
|
607
|
754
|
||||||
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Other
|
170
|
167
|
||||||
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Changes in assets and liabilities:
|
||||||||
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Increase in accounts receivable and unbilled revenues
|
(252
|
)
|
(450
|
)
|
||||
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Decrease in recoverable income taxes
|
1,039
|
485
|
||||||
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Increase in materials and supplies, prepaid expenses, regulatory and other assets
|
(1,091
|
)
|
(1,635
|
)
|
||||
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Increase (decrease) in accounts payable, accrued compensation and benefits,
accrued expenses, deferred employee benefits, and other deferred credits |
(736
|
)
|
155
|
|||||
|
Increase in accrued interest and taxes
|
4
|
-
|
||||||
|
Net cash provided by operating activities
|
8,256
|
7,983
|
||||||
|
|
||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
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Utility plant additions, including debt portion of allowance for funds used during construction of $56 in 2016 and $60 in 2015
|
(5,009
|
)
|
(5,886
|
)
|
||||
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Acquisitions of water systems
|
(29
|
)
|
(89
|
)
|
||||
|
Decrease in notes receivable
|
-
|
11
|
||||||
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Cash received from surrender of life insurance policies
|
596
|
-
|
||||||
|
Net cash used in investing activities
|
(4,442
|
)
|
(5,964
|
)
|
||||
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|
||||||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
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Customers' advances for construction and contributions in aid of construction
|
892
|
431
|
||||||
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Repayments of customer advances
|
(155
|
)
|
(209
|
)
|
||||
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Proceeds of long-term debt issues
|
-
|
3,970
|
||||||
|
Repayments of long-term debt
|
(22
|
)
|
(3,992
|
)
|
||||
|
Issuance of common stock
|
1,568
|
1,157
|
||||||
|
Dividends paid
|
(3,967
|
)
|
(3,835
|
)
|
||||
|
Net cash used in financing activities
|
(1,684
|
)
|
(2,478
|
)
|
||||
|
|
||||||||
|
Net change in cash and cash equivalents
|
2,130
|
(459
|
)
|
|||||
|
Cash and cash equivalents at beginning of period
|
2,879
|
1,488
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
5,009
|
$
|
1,029
|
||||
|
|
||||||||
|
Supplemental disclosures of cash flow information:
|
||||||||
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Cash paid during the period for:
|
||||||||
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Interest, net of amounts capitalized
|
$
|
2,491
|
$
|
2,447
|
||||
|
Income taxes
|
660
|
915
|
||||||
|
|
||||||||
|
Supplemental schedule of non-cash investing and financing activities:
|
||||||||
|
Accounts payable includes $645 in 2016 and $1,354 in 2015 for the construction of utility plant.
|
||||||||
The accompanying notes are an integral part of these statements.
Page 7
THE YORK WATER COMPANY
Notes to Interim Financial Statements
(In thousands of dollars, except per share amounts)
| 1. | Basis of Presentation |
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 on Form 10-K for the year ended December 31, 2015.
Operating results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
| 2. | Common Stock and Basic Earnings Per Share |
Basic earnings per share for the three months ended June 30, 2016 and 2015 were based on weighted average shares outstanding of 12,849,884 and 12,861,823, respectively.
Basic earnings per share for the six months ended June 30, 2016 and 2015 were based on weighted average shares outstanding of 12,835,495 and 12,849,166, respectively.
Since the Company has no common stock equivalents outstanding, there are no diluted earnings per share.
On March 11, 2013, the Board of Directors authorized a share repurchase program granting the Company authority to repurchase up to 1,200,000 shares of the Company's common stock from time to time. Under the stock repurchase program, the Company may repurchase shares in the open market or through privately negotiated transactions. The Company may suspend or discontinue the repurchase program at any time. There were no shares repurchased by the Company during the three and six month periods ended June 30, 2016 and 2015. As of June 30, 2016, 702,004 shares remain available for repurchase.
| 3. | Reclassifications |
Certain 2015 amounts have been reclassified to conform to the 2016 presentation. Such reclassifications had no effect on net income, the statement of common stockholders' equity, or the statement of cash flow category reporting.
| 4. | Capital Commitments |
The Company has committed a total of approximately $9,799 for an additional raw water pumping station and force main, all of which remains to be incurred as of June 30, 2016. The Company may make additional commitments for this project during the remainder of 2016.
Page 8
| 5. | Pensions |
Components of Net Periodic Pension Cost
|
|
Three Months
Ended June 30
|
Six Months
Ended June 30
|
||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
|
||||||||||||||||
|
Service cost
|
$
|
255
|
$
|
292
|
$
|
509
|
$
|
583
|
||||||||
|
Interest cost
|
400
|
379
|
800
|
758
|
||||||||||||
|
Expected return on plan assets
|
(559
|
)
|
(558
|
)
|
(1,117
|
)
|
(1,115
|
)
|
||||||||
|
Amortization of actuarial loss
|
140
|
176
|
280
|
352
|
||||||||||||
|
Amortization of prior service cost
|
(3
|
)
|
(3
|
)
|
(6
|
)
|
(6
|
)
|
||||||||
|
Rate-regulated adjustment
|
342
|
289
|
684
|
578
|
||||||||||||
|
Net periodic pension expense
|
$
|
575
|
$
|
575
|
$
|
1,150
|
$
|
1,150
|
||||||||
Employer Contributions
As of June 30, 2016, contributions of $2,300 had been made to the Company's pension plans, and the Company does not expect to contribute any additional amount during the remainder of 2016.
| 6. | Debt |
For the six months ended June 30, 2016, the Company did not enter into any new long-term debt arrangements or modify its outstanding long-term debt, summarized in the table below.
|
|
As of
Jun. 30, 2016
|
As of
Dec. 31, 2015
|
||||||
|
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 Note, due 2019
|
140
|
162
|
||||||
|
10.05% Senior Notes, Series C, due 2020
|
6,500
|
6,500
|
||||||
|
8.43% Senior Notes, Series D, due 2022
|
7,500
|
7,500
|
||||||
|
Variable Rate Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2008A, due 2029
|
12,000
|
12,000
|
||||||
|
4.75% York County Industrial Development Authority Revenue Bonds, Series 2006, due 2036
|
10,500
|
10,500
|
||||||
|
4.50% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2014, due 2038
|
14,880
|
14,880
|
||||||
|
5.00% Monthly Senior Notes, Series 2010A, due 2040
|
15,000
|
15,000
|
||||||
|
4.00% - 4.50% York County Industrial Development Authority Exempt Facilities Revenue Bonds, Series 2015, due 2029 - 2045
|
10,000
|
10,000
|
||||||
|
Total long-term debt
|
87,520
|
87,542
|
||||||
|
Less discount on issuance of long-term debt
|
(231
|
)
|
(237
|
)
|
||||
|
Less unamortized debt issuance costs
|
(2,676
|
)
|
(2,743
|
)
|
||||
|
Less current maturities
|
(44
|
)
|
(44
|
)
|
||||
|
Long-term portion
|
$
|
84,569
|
$
|
84,518
|
||||
Page 9
The York County Industrial Development Authority Series 2006 bonds are subject to optional redemption provisions that allow the Company to redeem all or a portion of the bonds on or after October 1, 2016. The Company may refinance these bonds at some time to take advantage of lower interest rates.
Subsequent to June 30, 2016, the Company entered into an agreement with a fourth bank for a $10,000 unsecured committed line of credit at an interest rate of LIBOR plus 1.20% maturing in July 2017.
| 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 effectively convert the Company's $12,000 variable-rate debt issue to a fixed rate. 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 provides that the Company pays the counterparty a fixed interest rate of 3.16% on the notional amount of $12,000. In exchange, the counterparty pays the Company a variable interest rate based on 59% of the U.S. Dollar one-month LIBOR rate on the notional amount. 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 Company's net payment rate on the swap was 2.88% and 3.04% during the three months ended June 30, 2016 and 2015, respectively, and 2.84% and 3.01% during the six months ended June 30, 2016 and 2015, respectively.
The interest rate swap agreement is classified as a financial derivative used for non-trading activities. The accounting standards regarding accounting for derivatives and hedging activities require companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. In accordance with the standards, the interest rate swap is recorded on the balance sheet in other deferred credits at fair value (see Note 8).
The Company uses 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 or loss and the ineffective portion being recognized in earnings using the cash flow hedge accounting rules provided by the derivative accounting standards, the entire unrealized swap value is 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. Swap settlements resulted in the reclassification from regulatory assets to interest expense of $86 and $91 during the three months ended June 30, 2016 and 2015, respectively, and $173 and $182 during the six months ended June 30, 2016 and 2015, respectively. The overall swap result was a loss (gain) of $334 and $(427) for the three months ended June 30, 2016 and 2015, respectively, and $843 and $(84) for the six months ended June 30, 2016 and 2015, respectively. The Company expects to reclassify $345 from regulatory assets to interest expense as a result of swap settlements over the next 12 months.
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. On March 30, 2016, Standard & Poor's affirmed the Company's credit rating at A-, with a stable outlook and adequate liquidity. The Company's interest rate swap was in a liability position as of June 30, 2016. If a violation due to credit rating, or some other default provision, were triggered on June 30, 2016, the Company would have been required to pay the counterparty approximately $3,378.
Page 10
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 |
The accounting standards regarding fair value measurements establish 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 the standards. 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.
|
Description
|
June 30, 2016
|
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
|
|
Interest Rate Swap
|
$3,179
|
$3,179
|
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 June 30, 2016. The rate used in discounting all prospective cash flows anticipated to be made under this swap reflects a representation of the yield to maturity for 30-year debt on utilities rated A- as of June 30, 2016. The use of the Company's credit rating resulted in a reduction in the fair value of the swap liability of $199 as of June 30, 2016. The fair value of the swap reflecting the Company's credit quality as of December 31, 2015 is shown in the table below.
|
Description
|
December 31, 2015
|
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
|
|
Interest Rate Swap
|
$2,511
|
$2,511
|
The carrying amount of current assets and liabilities that are considered financial instruments approximates fair value as of the dates presented. The Company's total long-term debt, with a carrying value of $87,520 at June 30, 2016, and $87,542 at December 31, 2015, had an estimated fair value of approximately $109,000 and $102,000, respectively. The estimated fair value of debt was calculated using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile. These inputs to this calculation are deemed to be Level 2 inputs. The Company recognized its credit rating in determining the yield curve, and did not factor in third party credit enhancements including bond insurance on the 2006 York County Industrial Development Authority issue and the letter of credit on the 2008 Pennsylvania Economic Development Financing Authority, or PEDFA, Series A issue.
Customers' advances for construction and notes receivable have carrying values at June 30, 2016 of $8,063 and $255, respectively. At December 31, 2015, customers' advances for construction and notes receivable had carrying values of $7,500 and $255, respectively. The relative fair values of these amounts cannot be accurately estimated since the timing of future payment streams is dependent upon several factors, including new customer connections, customer consumption levels and future rate increases.
Page 11
| 9. | Income Taxes |
The Company filed for a change in accounting method under the Internal Revenue Service tangible property regulations effective in 2014. Under the change in accounting method, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return. This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable. It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions. As a result, the Company's effective tax rate was 34.2% and 31.6% for the three months ended June 30, 2016 and 2015, respectively, and 34.4% and 32.2% for the six months ended June 30, 2016 and 2015, respectively. The effective tax rate will vary depending on the level of eligible asset improvements that are placed in service each period, which was lower during the first six months of 2016 as compared to the first six months of 2015.
| 10. | Acquisitions |
On October 19, 2015, the Company completed the acquisition of the water assets of the Newberry Farms Mobile Home Park in York County, Pennsylvania. The Company began operating the existing system through an interconnection with its current distribution system on October 22, 2015. The acquisition resulted in the addition of approximately 160 new water customers with purchase price and acquisition costs of approximately $129, of which $13 was paid in the first quarter of 2016. The purchase price and acquisition costs approximated the depreciated original cost of the assets. In 2016, the Company recorded an immaterial negative acquisition adjustment and will seek approval from the Pennsylvania Public Utility Commission, or PPUC, to expense the negative acquisition adjustment.
On November 2, 2015, the Company completed the acquisition of the water assets of Margaretta Mobile Home Park in York County, Pennsylvania. The Company began operating the existing system through an interconnection with its current distribution system on November 3, 2015. The acquisition resulted in the addition of approximately 65 new water customers with purchase price and acquisition costs of approximately $102 after a net transfer of $31 to related construction projects in the first quarter of 2016. The purchase price and acquisition costs were more than the depreciated original cost of the assets. In 2016, the Company recorded an acquisition adjustment of approximately $56 and will seek approval from the PPUC to amortize the acquisition adjustment over the remaining life of the acquired assets.
On March 10, 2016, the Company completed the acquisition of the water assets of Crestview Mobile Home Park in York County, Pennsylvania. The Company began operating the existing system through an interconnection with its current distribution system on March 15, 2016. The acquisition resulted in the addition of approximately 120 new water customers with purchase price and acquisition costs of approximately $47. The purchase price and acquisition costs were more than the depreciated original cost of the assets. The Company recorded an acquisition adjustment of approximately $19 and will seek approval from the PPUC to amortize the acquisition adjustment over the remaining life of the acquired assets. These customers were previously served by the Company through a single customer connection to the park.
The result of these acquisitions has been immaterial to total Company results.
Page 12
| 11. | Long-Term Incentive Plan |
On May 2, 2016, the Company's stockholders approved The York Water Company
Long-Term Incentive Plan, or LTIP. The LTIP was adopted to provide the incentive of long-term stock-based awards to officers, directors and key employees. The LTIP provides for the granting of nonqualified stock options, incentive stock options, stock appreciation rights, performance restricted stock grants and units, restricted stock grants and units, and unrestricted stock grants. A maximum of 100,000 shares of common stock may be issued under the LTIP over the ten-year life of the plan. The maximum number of shares of common stock subject to awards that may be granted to any participant in any one calendar year is 2,000. Shares of common stock issued under the LTIP may be treasury shares or authorized but unissued shares. The LTIP will be administered by the Compensation Committee of the Board, or the full Board, provided that the full Board will administer the LTIP as it relates to awards to non-employee directors of the Company. The Company filed a registration statement with the Securities and Exchange Commission on May 11, 2016 covering the offering of stock under the LTIP. The LTIP was effective on July 1, 2016. No long-term stock-based awards have yet been granted under the LTIP.
| 12. | 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 29, 2013 and sought an increase in rates designed to produce additional annual water revenues of $7,116 and additional annual wastewater revenues of $28. Effective February 28, 2014, the PPUC authorized an increase in water rates designed to produce approximately $4,972 in additional annual revenues, and an increase in wastewater rates for the Asbury Pointe subdivision to produce approximately $28 in additional annual revenues.
The PPUC permits water utilities to collect a distribution system improvement charge, or DSIC. The DSIC allows the Company to add a charge to customers' bills for qualified replacement costs of certain infrastructure without submitting a rate filing. This surcharge mechanism typically adjusts periodically based on additional qualified capital expenditures completed or anticipated in a future period. The DSIC is capped at 5% of base rates, and is reset to zero when new base rates that reflect the costs of those additions become effective or when a utility's earnings exceed a regulatory benchmark. The surcharge reset to zero when the new base rates took effect on February 28, 2014. To date in 2016, the Company's earnings have exceeded the regulatory benchmark, preventing the collection of a DSIC. There were no DSIC revenues for the three and six months ended June 30, 2016 and 2015.
| 13. | Impact of Recent Accounting Pronouncements |
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09,
Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
. This ASU
involves multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption available. The Company will assess the impact of the adoption of the standard on its financial position, results of operations, and cash flows upon its issuance of share-based payments.
Page 13
In April 2015, the FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs.
This ASU clarifies the required presentation of debt issuance costs. The standard requires that debt issuance costs be presented on the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the standard. This ASU is effective for fiscal years beginning after December 15, 2015, and the Company adopted this ASU in the first quarter of 2016. The Company applied the ASU retrospectively and reclassified the deferred debt expense asset of $2,743 to offset long-term debt on the December 31, 2015 balance sheet. The adoption did not have a material impact on the results of operations or cash flows of the Company.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, deferring the effective date of this amendment for public companies by one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016, the original effective date. The standard permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is in the process of assessing the impact of the adoption of the standard on its financial position, results of operations and cash flows.
Page 14
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
Certain statements contained in this report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements include certain information relating to the Company's business strategy; statements including, but not limited to:
|
●
|
the amount and timing of rate increases and other regulatory matters including the recovery of costs recorded as regulatory assets;
|
|
●
|
expected profitability and results of operations;
|
|
●
|
trends;
|
|
●
|
goals, priorities and plans for, and cost of, growth and expansion;
|
|
●
|
strategic initiatives;
|
|
●
|
availability of water supply;
|
|
●
|
water usage by customers; and
|
|
●
|
the 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 a 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 or extended periods of heavy rainfall;
|
|
●
|
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, including the tax code;
|
|
●
|
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;
|
|
●
|
loss of customers;
|
|
●
|
changes in, or unanticipated, capital requirements;
|
|
●
|
the impact of acquisitions;
|
|
●
|
changes in accounting pronouncements;
|
|
●
|
changes in the Company's credit rating or the market price of its common stock;
|
|
●
|
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 the year ended December 31, 2015.
|
Page 15
General Information
The primary business of the Company is to impound, purify to meet or exceed safe drinking water standards and distribute water. The Company also owns and operates two wastewater collection and treatment systems. The Company operates within its franchised water territory, which covers 39 municipalities within York County, Pennsylvania and nine municipalities within Adams County, Pennsylvania. The Company's wastewater operations include portions of three municipalities in 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, 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 the bulk of 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. 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. The Company also owns seven wells which are capable of providing a safe yield of approximately 366,000 gallons per day to supply water to its customers in Carroll Valley Borough and Cumberland Township, Adams County. As of June 30, 2016, the Company's average daily availability was 35.4 million gallons, and average daily consumption was approximately 18.3 million gallons. The Company's service territory had an estimated population of 194,000 as of December 31, 2015. 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, injectable drug delivery systems, air conditioning systems, laundry detergent, barbells and motorcycles.
The Company's water business is somewhat dependent on weather conditions, particularly the amount and timing 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 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.
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 the PPUC 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 water and wastewater acquisition and expansion opportunities both within and outside its current service territory as well as additional opportunities to enter into bulk water contracts with municipalities and other entities to supply water.
The Company has agreements with several municipalities to provide sewer billing and collection services. The Company also has a service line protection program on a targeted basis in order to further diversify its business. Under this optional program, customers pay a fixed monthly fee, and the Company will repair or replace damaged customer service lines, as needed, subject to an annual maximum dollar amount. Opportunities to expand both initiatives are being pursued.
Page 16
Results of Operations
Three Months Ended June 30, 2016 Compared
With Three Months Ended June 30, 2015
Net income for the second quarter of 2016 was $2,847, a decrease of $78, or 2.7%, from net income of $2,925 for the same period of 2015. The primary contributing factors to the decrease were higher income taxes, lower operating revenues and higher depreciation expense, which were partially offset by lower operation and maintenance expenses.
Operating revenues for the three months ended June 30, 2016 decreased $75, or 0.6%, from $11,895 for the three months ended June 30, 2015 to $11,820 for the corresponding 2016 period. The primary reason for the decrease was lower consumption due in part to the prior year non-recurring interconnection with a neighboring municipality to provide water during an emergency event. Total per capita consumption for the second quarter of 2016 was 3.5% lower than the same period of last year. The decrease was partially offset by an increase in customers, and higher sewer collection service revenue. The average number of customers served in the 2016 period increased as compared to the 2015 period by 988 customers, from 65,591 to 66,579 customers.
Operating expenses for the second quarter of 2016 decreased $88, or 1.4%, from $6,213 for the second quarter of 2015 to $6,125 for the corresponding 2016 period. The decrease was due to lower water treatment chemical expense of approximately $44 due to prior year adverse weather conditions, $39 for higher capitalized overhead and $31 for reduced power expense. Also adding to the decrease were prior year non-recurring expenses of $32 for information technology strategic planning and $18 for a survey of piping at the water treatment plant. Other expenses decreased by a net of $11. The decrease was partially offset by increased expenses of approximately $50 for depreciation and $37 primarily for annual shareholder reports.
Interest on debt for the second quarter of 2016 increased $30, or 2.3%, from $1,286 for the second quarter of 2015 to $1,316 for the corresponding 2016 period. The increase was due to an increase in long-term debt outstanding resulting from the bond issuance in July 2015.
Allowance for funds used during construction decreased $6, from $53 in the second quarter of 2015 to $47 in the 2016 period, due to a lower volume of eligible construction.
Other income (expenses), net for the second quarter of 2016 reflects decreased expenses of $75 as compared to the same period of 2015. Higher earnings on life insurance policies of $45 and lower charitable contributions of $42 were the primary reasons for the decrease. Other expenses of approximately $12 increased as compared to the same period of 2015.
Income taxes for the second quarter of 2016 increased $130, or 9.6%, compared to the same period of 2015 due to higher taxable income and a lower volume of asset improvements eligible for the tax benefit of the Internal Revenue Service, or IRS, tangible property regulations, or TPR. The Company's effective tax rate was 34.2% for the second quarter of 2016 and 31.6% the second quarter of 2015.
Six Months Ended June 30, 2016 Compared
With Six Months Ended June 30, 2015
Net income for the first six months of 2016 was $5,333, a decrease of $120, or 2.2%, from net income of $5,453 for the same period of 2015. The primary contributing factors to the decrease were higher income taxes and depreciation expense, which were partially offset by lower operation and maintenance expenses.
Page 17
Operating revenues for the six months ended June 30, 2016 were $23,098 as compared to $23,104 for the corresponding 2015 period. Lower consumption due in part to the prior year non-recurring interconnection with a neighboring municipality was partially offset by an increase in customers, and higher sewer billing and collection service revenue. Total per capita consumption for the first six months of 2016 was 2.9% lower than the same period of last year. The average number of customers served in the 2016 period increased as compared to the 2015 period by 1,003 customers, from 65,412 to 66,415 customers. For the remainder of the year, the Company expects revenues to increase slightly due to higher summer demand and an expected increase in the number of water and wastewater customers from acquisitions and growth within the Company's service territory. Other regulatory actions and weather patterns could impact results.
Operating expenses for the first six months of 2016 decreased $99, or 0.8%, from $12,288 for the first six months of 2015 to $12,189 for the corresponding 2016 period. The decrease was primarily due to lower expenses of approximately $75 for health insurance, $71 for higher capitalized overhead, and $60 for reduced water treatment chemical usage. Other expenses decreased by a net of $21. The decrease was partially offset by increased expense of approximately $128 for depreciation. For the remainder of the year, the Company expects depreciation expense to continue to rise due to additional investment in utility plant, and other expenses to increase at a moderate rate as costs to maintain and extend the distribution system continue to rise and as additional water and wastewater systems are acquired.
Interest on debt for the first six months of 2016 increased $51, or 2.0%, from $2,570 for the first six months of 2015 to $2,621 for the corresponding 2016 period. The increase was due to an increase in long-term debt outstanding resulting from the bond issuance in July 2015. Interest expense for the remainder of the year is expected to remain consistent, but could be higher with possible line of credit borrowings.
Allowance for funds used during construction decreased $8, from $108 in the first six months of 2015 to $100 in the 2016 period, due to a lower volume of eligible construction. Allowance for funds used during construction for the remainder of the year is expected to increase based on a projected increase in the amount of eligible construction.
Other income (expenses), net for the first six months of 2016 reflects decreased expenses of $53 as compared to the same period of 2015. Lower charitable contributions of $59 and higher earnings on life insurance policies of $31 were the primary reasons for the decrease. The decreased expenses were partially offset by higher outside services of approximately $23. Other expenses increased by approximately $14 as compared to the same period of 2015. For the remainder of the year, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.
Income taxes for the first six months of 2016 increased $207, or 8.0%, compared to the same period of 2015 due to higher taxable income and a lower volume of asset improvements eligible for the tax benefit of the IRS TPR. The Company's effective tax rate was 34.4% for the first six months of 2016 and 32.2% the first six months of 2015. The Company expects the effective tax rate to fall to approximately 28% to 32% for 2016 due to the continued expensing of asset improvements that would have been capitalized for tax purposes prior to the implementation of the TPR. The Company's effective tax rate will vary depending on the level of eligible asset improvements that are placed in service each period.
Rate Matters
See Note 12 to the financial statements included herein for a discussion of rate matters.
The benefit from the implementation of the IRS TPR impacts the rate matters of the Company. E
arnings in excess of the regulatory benchmark prevent the collection of a distribution system improvement charge, which is likely to remain throughout 2016. It may also lengthen the amount of time until filing the next rate increase request. As a result, the Company does not expect to file a rate increase request in 2016.
When the Company does file for its next rate increase, the PPUC will take into account the lower income taxes which resulted from the implementation of the IRS TPR, effectively reducing the amount of revenue required in future years and lowering the Company's rate increase request.
Page 18
Acquisitions
See Note 10 to the financial statements included herein for a discussion of completed acquisitions included in financial results.
On October 8, 2013, the Company signed an agreement to purchase the wastewater assets of SYC WWTP, L.P. in Shrewsbury and Springfield Townships,
York County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Due to unforeseen delays, closing is not expected until 2017 at which time the Company will add approximately 30 commercial and industrial wastewater customers.
On July 20, 2015, the Company signed an agreement to purchase the water assets of the Westwood Mobile Home Park in York County, Pennsylvania. Completion of this acquisition is contingent upon receiving approval from all required regulatory authorities. The Company expects to begin serving approximately 200 new customers through an interconnection with its current distribution system in the fourth quarter of 2016. These customers are currently served by the Company through a single customer connection to the park.
On January 18, 2016, the Company signed an agreement to purchase the wastewater collection assets of West York Borough in York County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the fourth quarter of 2016 at which time the Company will add approximately 1,700 wastewater customers.
In total, these acquisitions are expected to be immaterial to Company results. The Company is also pursuing other bulk water contracts and acquisitions in and around its service territory to help offset any further declines in per capita water consumption and to grow its business.
Capital Expenditures
For the six months ended June 30, 2016, the Company invested $5,009 in construction expenditures for routine items, further upgrades to water treatment facilities and information technology, as well as various replacements of infrastructure. In addition, the Company invested $29 in the acquisition of water systems. The Company was able to fund construction expenditures using internally-generated funds and proceeds from its stock purchase plans.
The Company anticipates construction expenditures for the remainder of 2016 of approximately $12,000 exclusive of any potential acquisitions not yet approved. In addition to routine transmission and distribution projects, a portion of the anticipated expenditures will be for additional main extensions, an additional raw water pumping station and force main, and various replacements and improvements to infrastructure. The Company intends to use primarily cash on hand and internally-generated funds for its anticipated construction and fund the remainder through line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions. Customer advances and contributions are expected to account for less than 5% of funding requirements during the remainder of 2016. The Company believes it will have adequate credit facilities to meet its anticipated capital needs in 2016 and 2017.
Page 19
Liquidity and Capital Resources
Cash
The Company manages its cash through a cash management account that is directly connected to one of its lines 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 used as an earnings credit to reduce banking fees. Likewise, if additional funds are needed beyond what is generated internally for payroll, to pay suppliers, to fund capital expenditures, or to pay debt service, funds are automatically borrowed under the line of credit. The Company utilized a significant portion of its cash on hand for cash outflows, specifically a $2,300 contribution to its pension trusts and its quarterly dividend payments, but did not use its lines of credit during the first six months of 2016. The Company has rebuilt its cash through internally-generated funds, accumulating a cash balance of $5,009 as of June 30, 2016. The Company expects the cash balance to be fully utilized in 2016, after which the cash management facility and other lines of credit are expected to provide the necessary liquidity and funding for the Company's operations, capital expenditures, acquisitions and potential buybacks of stock.
Accounts Receivable
The accounts receivable balance tends to follow the change in revenues but is also affected by the timeliness of payments by customers and the level of the reserve for doubtful accounts. This quarter, higher revenue levels as compared to the end of 2015 resulted in an increase in accounts receivable. A reserve is maintained at a level considered adequate to provide for losses that can be reasonably anticipated based on inactive accounts with outstanding balances. Management periodically evaluates the adequacy of the reserve based on past experience, agings of the receivables, adverse situations that may affect a customer's ability to pay, current economic conditions, and other relevant factors. If the status of these factors deteriorates, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its internally-generated funds.
Internally-generated Funds
The amount of internally-generated funds available for operations and construction depends on the Company's ability to obtain timely and adequate rate relief, changes in regulations including taxes, customers' water usage, weather conditions, customer growth and controlled expenses. In the first six months of 2016, the Company generated $8,256 internally from operations as compared to the $7,983 it generated in the first six months of 2015 due primarily to lower income taxes paid.
Credit Lines
Historically, the Company has borrowed $15,000 to $20,000 under its lines of credit before refinancing with long-term debt or equity capital. As of June 30, 2016, the Company maintained unsecured lines of credit aggregating $31,500 with three banks at interest rates ranging from LIBOR plus 1.20% to LIBOR plus 1.25%. The Company had no outstanding borrowings under any of its lines of credit as of June 30, 2016. In the second quarter of 2016, the Company renewed two of its committed lines of credit aggregating $24,000 and extended the maturity date to May 2018. In addition, the Company renewed
its $5,000 committed line of credit increasing the available amount to $7,500, lowering the interest rate from LIBOR plus 1.50% to LIBOR plus 1.25%, and extending the maturity to June 2017. In July 2016, the Company entered into an agreement with a fourth bank for a $10,000 unsecured committed line of credit at an interest rate of LIBOR plus 1.20% maturing in July 2017, increasing the aggregate available amount to $41,500.
The Company has taken steps to manage the risk of reduced credit availability. It has maintained committed lines of credit that cannot be called on demand and obtained a 2-year revolving maturity on its larger facilities. One of the Company's banks recently increased the available amount and reduced the interest rate on its line of credit, and a new relationship was established with another bank for a committed line of credit at an interest rate matching the lowest rate currently offered. Despite these factors, there is no guarantee that the Company will be able to obtain sufficient lines of credit with favorable terms in the future. If the Company is unable to obtain sufficient lines of credit or to refinance its line of credit borrowings with long-term debt or equity when necessary, it may have to eliminate or postpone capital expenditures. Management believes the Company will have adequate capacity under its current lines of credit to meet anticipated financing needs throughout 2016 and 2017.
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Long-term Debt
The Company's loan agreements contain various covenants and restrictions. Management believes it is currently in compliance with all of these restrictions. See Note 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for additional information regarding these restrictions.
The York County Industrial Development Authority Series 2006 bonds are subject to optional redemption provisions that allow the Company to redeem all or a portion of the bonds on or after October 1, 2016. The Company may refinance these bonds at some time to take advantage of lower interest rates.
The Company's total long-term debt as a percentage of the total capitalization, defined as total common stockholders' equity plus total long-term debt, was 43.9% as of June 30, 2016, compared with 44.5% as of December 31, 2015. The Company expects to allow the debt percentage to trend upward until it approaches fifty percent before considering additional equity. A debt to total capitalization ratio between forty-six and fifty percent has historically been acceptable to the PPUC in rate filings. Due to its recent ability to generate and retain cash internally, the Company has been able to keep its ratio below fifty percent.
Income Taxes, Deferred Income Taxes and Uncertain Tax Positions
The Company has a substantial deferred income tax asset primarily due to the differences between the book and tax balances of the pension and deferred compensation plans. The Company does not believe a valuation allowance is required due to the expected generation of future taxable income during the periods in which those temporary differences become deductible.
The Company has seen an increase in its deferred income tax liability amounts as a result of the accelerated and bonus depreciation deduction available for federal tax purposes which creates differences between book and tax depreciation expense. The Company expects this trend to continue as it makes significant investments in capital expenditures subject to accelerated and bonus depreciation or TPR.
The Company filed for a change in accounting method under the IRS TPR effective in 2014. Under the change in accounting method, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return. This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable. It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions. The Company expects an effective tax rate of 28% to 32% each year based on current asset improvement estimates. The effective tax rate will vary depending on the level of eligible assets improvements that are placed in service each period.
The Company has determined there are no uncertain tax positions that require recognition as of June 30, 2016.
Common Stock
Common stockholders' equity as a percent of the total capitalization was 56.1% as of June 30, 2016, compared with 55.5% as of December 31, 2015. The volume of share repurchases and line of credit borrowings, among other things, could reduce this percentage in the future. It is the Company's general intent to target a ratio between fifty and fifty-four percent.
Credit Rating
On March 30, 2016, Standard & Poor's affirmed the Company's credit rating at A-, with a stable outlook and adequate liquidity. The Company's ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, which it has been successful in obtaining, its ability to fund capital expenditures in a balanced manner using both debt and equity and its ability to generate cash flow. The Company's objectives are to continue to maximize its funds provided by operations and maintain a strong capital structure in order to be able to attract capital.
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Critical Accounting Estimates
The methods, estimates and judgments the Company used in applying its accounting policies have a significant impact on the results reported in its financial statements. The Company's accounting policies require management to make subjective judgments because of the need to make estimates of matters that are inherently uncertain. The Company's most critical accounting estimates include regulatory assets and liabilities, revenue recognition and accounting for its pension plans. There has been no significant change in accounting estimates or the method of estimation during the quarter ended June 30, 2016.
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 uses a derivative financial instrument, an interest rate swap agreement discussed in Note 7 to the financial statements included herein, for risk management purposes. The Company does not engage in trading or other risk management activities, does not use other derivative financial instruments for any purpose, has no material lease obligations, no guarantees and does not have material transactions involving related parties.
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Quantitative and Qualitative Disclosures About Market Risk
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The Company's operations are exposed to market risks primarily as a result of changes in interest rates under its lines of credit. The Company has unsecured lines of credit with four banks having a combined maximum availability of $41,500. The first line of credit, in the amount of $13,000, is a committed line of credit with a revolving 2-year maturity (currently May 2018), and carries an interest rate of LIBOR plus 1.20%. The second line of credit, in the amount of $11,000, is a committed line of credit, which currently matures in May 2018 and carries an interest rate of LIBOR plus 1.25%. The third line of credit, in the amount of $7,500, is a committed line of credit, which matures in June 2017 and carries an interest rate of LIBOR plus 1.25%. The fourth line of credit, in the amount of $10,000, is a committed line of credit, which matures in June 2017 and carries an interest rate of LIBOR plus 1.20%. The Company had no outstanding borrowings under any of its lines of credit as of June 30, 2016. Other than lines of credit, the Company has long-term fixed rate debt obligations that are not subject to interest rate risk as shown in Note 6 to the financial statements included herein, and a variable rate PEDFA loan agreement, which is subject to minimal market risk, described below.
In May 2008, the PEDFA issued $12,000 aggregate principal amount of PEDFA Exempt Facilities Revenue Bonds, Series A (the "2008 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 0.45% during the three months ended June 30, 2016 and 0.26% during the six months ended June 30, 2016. 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 receive rate on the swap should approximate the variable rate the Company pays on the PEDFA Series A 2008 Bond Issue, thereby minimizing its risk. See Note 7 to the financial statements included herein for additional information regarding the interest rate swap.
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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 and to minimize the interest rate on the 2008 Bonds. This agreement provides for a direct pay letter of credit issued by the Bank to the trustee for the 2008 Bonds. The current expiration date of the letter of credit is June 30, 2018. It is reviewed annually for a potential extension of the expiration date. 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 and reclassify a portion of the bonds as current liabilities. 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.
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Item 4.
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Controls and Procedures
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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 effective such that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, 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. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
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.
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Part II – OTHER INFORMATION
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Exhibits
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Exhibit No.
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Description
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3
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Amended and Restated Articles of Incorporation. Incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2010.
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3.1
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Amended and Restated By-Laws. Incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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Page 24
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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/s/Jeffrey R. Hines
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Date: August 3, 2016
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Jeffrey R. Hines
Principal Executive Officer
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/s/Kathleen M. Miller
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Date: August 3, 2016
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Kathleen M. Miller
Principal Financial and Accounting Officer
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Page 25
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Exhibit No.
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Description
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3
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Amended and Restated Articles of Incorporation. Incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2010.
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3.1
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Amended and Restated By-Laws. Incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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Page 26
TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 6. Exhibits