The York Water Company (YORW) 10-Q 2020 Q3 Quarterly report

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 September 30, 2020

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)

PENNSYLVANIA	23-1242500
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
130 EAST MARKET STREET, YORK, PENNSYLVANIA	17401
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code (717) 845-3601

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

⌧ YES ◻ 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ◻	Accelerated filer ◻		Non-accelerated filer ⌧
Small Reporting company ⌧		Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

◻ YES ⌧ NO

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE	YORW	The NASDAQ Global Select Market
(Title of Class)	(Trading Symbol)	(Name of Each Exchange on Which Registered)

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock, No par value	13,049,958 Shares outstanding as of November 6, 2020

TABLE OF CONTENTS

PART I	Financial Information
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II	Other Information
Item 6.	Exhibits	28
Signatures		29

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THE YORK WATER COMPANY

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

Balance Sheets (Unaudited)

(In thousands of dollars, except per share amounts)

	Sep. 30, 2020			Dec. 31, 2019
ASSETS
UTILITY PLANT, at original cost	$	423,676		$	401,383
Plant acquisition adjustments		(2,973	)		(3,318	)
Accumulated depreciation		(90,217	)		(84,841	)
Net utility plant		330,486			313,224
OTHER PHYSICAL PROPERTY, net of accumulated depreciation of $452 in 2020 and $435 in 2019		748			769
CURRENT ASSETS:
Cash and cash equivalents		10,901			2
Accounts receivable, net of reserves of $477 in 2020 and $305 in 2019		5,193			4,421
Unbilled revenues		2,801			2,276
Recoverable income taxes		50			547
Materials and supplies inventories, at cost		1,158			1,007
Prepaid expenses		1,679			1,131
Total current assets		21,782			9,384
OTHER LONG-TERM ASSETS:
Prepaid pension cost		3,878			1,819
Note receivable		255			255
Deferred regulatory assets		37,314			34,189
Other assets		3,954			3,889
Total other long-term assets		45,401			40,152
Total Assets	$	398,417		$	363,529

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Balance Sheets (Unaudited)

(In thousands of dollars, except per share amounts)

	Sep. 30, 2020		Dec. 31, 2019
STOCKHOLDERS' EQUITY AND LIABILITIES
COMMON STOCKHOLDERS' EQUITY:
Common stock, no par value, authorized 46,500,000 shares, issued and outstanding 13,049,237 shares in 2020 and 13,014,898 shares in 2019	$	85,375	$	83,976
Retained earnings		56,053		50,209
Total common stockholders' equity		141,428		134,185
PREFERRED STOCK, authorized 500,000 shares, no shares issued		–		–
LONG-TERM DEBT, excluding current portion		116,829		94,535
COMMITMENTS		–		–
CURRENT LIABILITIES:
Current portion of long-term debt		–		6,500
Accounts payable		6,770		3,452
Dividends payable		2,102		2,096
Accrued compensation and benefits		1,175		1,247
Accrued interest		1,068		914
Deferred regulatory liabilities		453		609
Other accrued expenses		352		338
Total current liabilities		11,920		15,156
DEFERRED CREDITS:
Customers' advances for construction		10,291		7,844
Deferred income taxes		42,195		40,426
Deferred employee benefits		4,545		4,317
Deferred regulatory liabilities		27,149		24,790
Other deferred credits		2,919		2,247
Total deferred credits		87,099		79,624
Contributions in aid of construction		41,141		40,029
Total Stockholders' Equity and Liabilities	$	398,417	$	363,529

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Statements of Income (Unaudited)

(In thousands of dollars, except per share amounts)

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
OPERATING REVENUES	$	14,257		$	13,680		$	40,454		$	38,559
OPERATING EXPENSES:
Operation and maintenance		2,659			2,586			7,940			7,639
Administrative and general		2,257			2,172			6,573			6,181
Depreciation and amortization		2,046			1,926			6,113			5,750
Taxes other than income taxes		274			281			898			914
		7,236			6,965			21,524			20,484
Operating income		7,021			6,715			18,930			18,075
OTHER INCOME (EXPENSES):
Interest on debt		(1,152	)		(1,314	)		(3,503	)		(3,937	)
Allowance for funds used during construction		115			117			330			273
Other pension costs		(341	)		(362	)		(1,022	)		(1,088	)
Gain on life insurance		–			–			515			–
Other income (expenses), net		(41	)		(81	)		(287	)		(353	)
		(1,419	)		(1,640	)		(3,967	)		(5,105	)
Income before income taxes		5,602			5,075			14,963			12,970
Income taxes		898			592			2,075			1,957
Net Income	$	4,704		$	4,483		$	12,888		$	11,013
Basic Earnings Per Share	$	0.36		$	0.35		$	0.99		$	0.85
Diluted Earnings Per Share	$	0.36		$	0.35		$	0.99		$	0.85

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Statements of Common Stockholders' Equity (Unaudited)

(In thousands of dollars, except per share amounts)

For the Periods Ended September 30, 2020 and 2019

	Common Stock Shares		Common Stock Amount		Retained Earnings			Total
Balance, June 30, 2020		13,033,999	$	84,872	$	53,700		$	138,572
Net income		–		–		4,704			4,704
Cash dividends declared, $0.1802 per share		–		–		(2,351	)		(2,351	)
Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans		10,326		429		–			429
Stock-based compensation		4,912		74		–			74
Balance, September 30, 2020		13,049,237	$	85,375	$	56,053		$	141,428
Balance, December 31, 2019		13,014,898	$	83,976	$	50,209		$	134,185
Net income		–		–		12,888			12,888
Cash dividends declared, $0.5406 per share		–		–		(7,044	)		(7,044	)
Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans		29,427		1,273		–			1,273
Stock-based compensation		4,912		126		–			126
Balance, September 30, 2020		13,049,237	$	85,375	$	56,053		$	141,428

	Common Stock Shares		Common Stock Amount		Retained Earnings			Total
Balance, June 30, 2019		12,974,287	$	82,183	$	46,931		$	129,114
Net income		–		–		4,483			4,483
Cash dividends declared, $0.1733 per share		–		–		(2,250	)		(2,250	)
Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans		10,539		421		–			421
Stock-based compensation		–		40		–			40
Balance, September 30, 2019		12,984,826	$	82,644	$	49,164		$	131,808
Balance, December 31, 2018		12,943,536	$	81,305	$	44,890		$	126,195
Net income		–		–		11,013			11,013
Cash dividends declared, $0.5199 per share		–		–		(6,739	)		(6,739	)
Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans		34,327		1,220		–			1,220
Stock-based compensation		6,963		119		–			119
Balance, September 30, 2019		12,984,826	$	82,644	$	49,164		$	131,808

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Statements of Cash Flows (Unaudited)

(In thousands of dollars, except per share amounts)

	Nine Months Ended September 30
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,888		$	11,013
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on life insurance		(515	)		–
Depreciation and amortization		6,113			5,750
Stock-based compensation		126			119
Increase in deferred income taxes		93			313
Other		342			195
Changes in assets and liabilities:
(Increase) decrease in accounts receivable and unbilled revenues		(1,657	)		95
(Increase) decrease in recoverable income taxes		497			(508	)
Increase in materials and supplies, prepaid expenses, prepaid pension cost, regulatory and other assets		(6,184	)		(5,166	)
Increase in accounts payable, accrued compensation and benefits, accrued expenses, deferred employee benefits, regulatory liabilities, and other deferred credits		4,449			1,805
Increase (decrease) in accrued interest and taxes		154			(63	)
Net cash provided by operating activities		16,306			13,553
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility plant additions, including debt portion of allowance for funds used during construction of $184 in 2020 and $153 in 2019		(15,973	)		(13,284	)
Acquisitions of wastewater systems		(1,158	)		(2,088	)
Cash received from surrender of life insurance policies		672			–
Net cash used in investing activities		(16,459	)		(15,372	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Customers' advances for construction and contributions in aid of construction		2,760			1,336
Repayments of customer advances		(225	)		(243	)
Proceeds of long-term debt issues		53,671			46,113
Debt issuance costs		(162	)		(180	)
Repayments of long-term debt		(37,843	)		(38,690	)
Repayments under short-term line of credit agreements		–			(1,000	)
Changes in cash overdraft position		(1,384	)		(7	)
Issuance of common stock		1,273			1,220
Dividends paid		(7,038	)		(6,730	)
Net cash provided by financing activities		11,052			1,819
Net change in cash and cash equivalents		10,899			–
Cash and cash equivalents at beginning of period		2			2
Cash and cash equivalents at end of period	$	10,901		$	2
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	3,029		$	3,588
Income taxes		1,753			2,184
Supplemental disclosure of non-cash investing and financing activities:
Accounts payable includes $3,647 in 2020 and $2,050 in 2019 for the construction of utility plant.
Contributions in aid of construction includes $1,024 recorded as part of the Felton Borough acquisition.

The accompanying notes are an integral part of these statements.

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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, 2019.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.  Additionally, based on the duration and severity of the novel coronavirus ("COVID-19") pandemic, the Company is uncertain of the ultimate impact it could have on the business.

2.  Reclassifications

Certain 2019 amounts have been reclassified to conform to the 2020 presentation. This reclassification had no impact on the statements of income, the statement of common stockholders’ equity, or the statement of cash flows.

3.  Acquisitions

On April 9, 2020, the Company completed the acquisition of the wastewater collection and treatment assets of Felton Borough in York County, Pennsylvania.  The Company began operating the existing collection and treatment facilities on April 16, 2020.  The acquisition resulted in the addition of approximately 130 wastewater customers with purchase price and acquisition costs of approximately $914, which is more than the depreciated original cost of the assets net of contributions in aid of construction.  The Company recorded an acquisition adjustment of $295 and will seek approval from the Pennsylvania Public Utility Commission, or PPUC, to amortize the acquisition adjustment over the remaining life of the acquired assets.  This acquisition is immaterial to Company results.

On September 14, 2020, the Company completed the acquisition of the wastewater collection and treatment assets and began operating the existing collection and treatment facilities of the Letterkenny Township Municipal Authority in Franklin County, Pennsylvania.  The acquisition resulted in the addition of approximately 180 wastewater customers with purchase price and acquisition costs of approximately $244.  This acquisition is immaterial to Company results.

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4.  Accounts Receivable and Contract Assets

Accounts receivable and contract assets are summarized in the following table:

	As of Sep. 30, 2020			As of Dec. 31, 2019			Change
Accounts receivable – customers	$	5,392		$	4,574		$	818
Other receivables		278			152			126
		5,670			4,726			944
Less: allowance for doubtful accounts		(477	)		(305	)		(172	)
Accounts receivable, net	$	5,193		$	4,421		$	772
Unbilled revenue	$	2,801		$	2,276		$	525

Differences in timing of revenue recognition, billings, and cash collections result in receivables and contract assets.  Generally, billing occurs subsequent to revenue recognition, resulting in a contract asset reported as unbilled revenue on the balance sheet.  The Company does not receive advances or deposits from customers before revenue is recognized so no contract liabilities are reported.  Accounts receivable are recorded when the right to consideration becomes unconditional and are presented separately on the balance sheet.  The changes in accounts receivable – customers and in unbilled revenue were primarily due to normal timing difference between performance and the customer’s payments.

5.  Common Stock and Earnings Per Share

Net income of $4,704 and $4,483 for the three months ended September 30, 2020 and 2019, respectively, and $12,888 and $11,013 for the nine months ended September 30, 2020 and 2019, respectively, is used to calculate both basic and diluted earnings per share.  Basic earnings per share is based on the weighted average number of common shares outstanding.  Diluted earnings per share is based on the weighted average number of common shares outstanding plus potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted earnings per share and is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.

The following table summarizes the shares used in computing basic and diluted earnings per share:

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Weighted average common shares, basic		13,032,389		12,968,540		13,021,398		12,955,602
Effect of dilutive securities:
Employee stock-based compensation		1,164		2,131		565		1,506
Weighted average common shares, diluted		13,033,553		12,970,671		13,021,963		12,957,108

On March 11, 2013, the Board of Directors, or the Board, 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.  The stock repurchase program has no specific end date and 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.  No shares were repurchased during the three or nine months ended September 30, 2020 and 2019.  As of September 30, 2020, 618,004 shares remain authorized for repurchase.

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6.  Debt

	As of Sep. 30, 2020			As of Dec. 31, 2019
10.05% Senior Notes, Series C, due 2020	$	–		$	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
3.00% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series A of 2019, due 2036		10,500			10,500
3.10% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series B of 2019, due 2038		14,870			14,870
3.23% Senior Notes, 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
4.54% Senior Notes, due 2049		20,000			20,000
3.24% Senior Notes, due 2050		30,000			–
Committed Line of Credit, due 2022		–			7,672
Total long-term debt		119,870			104,042
Less discount on issuance of long-term debt		(184	)		(192	)
Less unamortized debt issuance costs		(2,857	)		(2,815	)
Less current maturities		–			(6,500	)
Long-term portion	$	116,829		$	94,535

In the third quarter of 2020, the Company entered into an agreement for a $50,000 unsecured, committed line of credit maturing in September 2022 at an interest rate of LIBOR plus 1.05% with an unused commitment fee and an interest rate floor.  Simultaneously, the Company paid off and terminated all prior existing line of credit agreements.

On September 30, 2020, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $30,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 3.24% per annum payable semiannually and mature on September 30, 2050.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $29,838.  The net proceeds were used to refinance the $6,500 aggregate principal amount of the Company’s 10.05% Senior Notes, Series C, due September 30, 2020, to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects, to fund acquisitions and for general corporate purposes.

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 3.08% and 1.88% during the three months ended September 30, 2020 and 2019, respectively, and 2.76% and 1.75% for the nine months ended September 30, 2020 and 2019, respectively.

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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.  These unrealized gains and losses are 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 $93 and $57 for the three months ended September 30, 2020 and 2019, respectively, and $249 and $158 for the nine months ended September 30, 2020 and 2019, respectively. The overall swap result was a loss of $10 and $290 for the three months ended September 30, 2020 and 2019, respectively, and $911 and $776 for the nine months ended September 30, 2020 and 2019, respectively. The Company expects to reclassify $369 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 April 9, 2020, 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 September 30, 2020.  If a violation due to credit rating, or some other default provision, were triggered on September 30, 2020, the Company would have been required to pay the counterparty approximately $3,045.

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 of Financial Instruments 

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	September 30, 2020	Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2)
Interest Rate Swap	$2,919	$2,919

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 September 30, 2020.  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 September 30, 2020.  The use of the Company's credit rating resulted in a reduction in the fair value of the swap liability of $126 as of September 30, 2020.  The fair value of the swap reflecting the Company's credit quality as of December 31, 2019 is shown in the table below.

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Description	December 31, 2019	Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2)
Interest Rate Swap	$2,248	$2,248

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 $119,870 at September 30, 2020, and $104,042 at December 31, 2019, had an estimated fair value of approximately $138,000 and $115,000, 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 the letter of credit on the 2008 Pennsylvania Economic Development Financing Authority Series A issue.

Customers' advances for construction and note receivable had carrying values at September 30, 2020 of $10,291 and $255, respectively.  At December 31, 2019, customers' advances for construction and note receivable had carrying values of $7,844 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.

9.  Commitments

The Company received approval from the PPUC to provide water and wastewater service to the Amblebrook development in Adams County, Pennsylvania.  The developer initiated construction of the water and wastewater systems prior to the Company receiving all necessary approvals.  The Company has committed a total of approximately $6,000 to reimburse the developer for the actual cost of the work completed and real property assets which is expected to be paid in the fourth quarter of 2020.  Additional costs for these systems will be integrated into the Company’s annual capital budgets.

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection in December 2016 after the Company determined it exceeded the action level for lead as established by the Lead and Copper Rule, or LCR, issued by the U.S. Environmental Protection Agency.  The Company did not have an exceedance in any subsequent compliance test.  Under the agreement, the Company committed to exceed the LCR replacement schedule by replacing all of the remaining known company-owned lead service lines within four years from the agreement.  The cost for these service line replacements was approximately $2,734 and $2,713 through September 30, 2020 and December 31, 2019, respectively, and is included in utility plant.  As of September 30, 2020, all known company-owned lead service lines have been replaced.  Any additional company-owned lead service lines that are discovered will be replaced but are not expected to have a material impact on the financial position of the Company.

The Company was granted approval by the PPUC to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned service lines over nine years from the agreement.  The tariff modification allows the Company to replace customer-owned service lines at its own initial cost.  The Company will record the costs as a regulatory asset to be recovered in future base rates to customers, over a four-year period.  The cost for the customer-owned lead service line replacements was approximately $1,174 and $1,000 through September 30, 2020 and December 31, 2019, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,400.  This estimate is subject to adjustment as more facts become available.

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10.  Revenue

The following table shows the Company’s revenues disaggregated by service and customer type.

	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Water utility service
Residential	$	8,902	$	8,460	$	25,643	$	24,060
Commercial and industrial		3,774		3,864		10,331		10,630
Fire protection		795		780		2,379		2,290
Wastewater utility service
Residential		446		334		1,281		878
Commercial and industrial		78		72		229		203
Billing and revenue collection services		118		19		147		56
Collection services		–		16		14		48
Other revenue		4		4		14		11
Total Revenue from Contracts with Customers		14,117		13,549		40,038		38,176
Rents from regulated property		140		131		416		383
Total Operating Revenue	$	14,257	$	13,680	$	40,454	$	38,559

Utility Service

The Company provides utility service as a distinct and single performance obligation to each of its water and wastewater customers.  The transaction price is detailed in the tariff pursuant to an order by the PPUC and made publicly available.  There is no variable consideration and no free service, special rates, or subnormal charges to any customer.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied over time through the continuous provision of utility service through a stand-ready obligation to perform and the transfer of water or the collection of wastewater through a series of distinct transactions that are identical in nature and have the same pattern of transfer to the customer.  The Company uses an output method to recognize the utility service revenue over time.  The stand-ready obligation is recognized through the passage of time in the form of a fixed charge and the transfer of water or the collection of wastewater is recognized at a per unit rate based on the actual or estimated flow through the meter.  Each customer is invoiced every month and the invoice is due within twenty days.  The utility service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.  A contract asset for unbilled revenue is recognized for the passage of time and the actual or estimated usage from the latest meter reading to the end of the accounting period.  The methodology is standardized and consistently applied to reduce bias and the need for judgment.

Billing and Revenue Collection Service

The Company provides billing and revenue collection service as distinct performance obligations to four municipalities within the service territory of the Company.  The municipalities provide wastewater service to their residents and the Company acts as the billing and revenue collection agent for the municipalities.  The transaction price is a fixed amount per bill prepared as established in the contract.  There is no variable consideration.  Due to the fact that both the billing performance obligation and the revenue collection performance obligation are materially complete by the end of the reporting period, the Company does not allocate the transaction price between the two performance obligations.  The performance obligations are satisfied at a point in time when the bills are sent as the municipalities receive all the benefits and bears all of the risk of non-collection at that time.  Each municipality is invoiced when the bills are complete and the invoice is due within thirty days.  The billing and revenue collection service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.

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Collection Service

The Company provides collection service as a distinct and single performance obligation to several municipalities within the service territory of the Company.  The municipalities provide wastewater service to their residents.  If those residents are delinquent in paying for their wastewater service, the municipalities request that the Company post for and shut off the supply of water to the premises of those residents.  When the resident is no longer delinquent, the Company will restore water service to the premises.  The transaction price for each posting, each shut off, and each restoration is a fixed amount as established in the contract.  There is no variable consideration.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied at a point in time when the posting, shut off, or restoration is completed as the municipalities receive all the benefits in the form of payment or no longer providing wastewater service.  Each municipality is invoiced periodically for the posting, shut offs, and restorations that have been completed since the last billing and the invoice is due within thirty days.  The collection service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.  A contract asset for unbilled revenue is recognized for postings, shut offs, and restorations that have been completed from the last billing to the end of the accounting period.

Service Line Protection Plan

The Company provides service line protection as a distinct and single performance obligation to current water customers that choose to participate.  The transaction price is detailed in the plan’s terms and conditions and made publicly available.  There is no variable consideration.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied over time through the continuous provision of service line protection through a stand-ready obligation to perform.  The Company uses an output method to recognize the service line protection revenue over time.  The stand-ready obligation is recognized through the passage of time.  A customer has a choice to prepay for an entire year or to pay in advance each month.  The service line protection plan has no returns or extended warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no material performance obligations remain unsatisfied as of the end of the reporting period.

11.  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 30, 2018, and sought an annual increase in water rates of $6,399 and an annual increase in wastewater rates of $289.  Effective March 1, 2019, the PPUC authorized an increase in water rates designed to produce approximately $3,361 in additional annual revenues and an increase in wastewater rates designed to produce approximately $289 in additional annual revenues.

As part of a rate order approved by the PPUC, the Company has agreed to return $2,117 to customers as a reconcilable negative surcharge on their bills generated from March 2019 through February 2020 for the benefit of the lower tax rate effective January 1, 2018 resulting from the enactment of the Tax Cuts and Jobs Act of 2017, or 2017 Tax Act.  The Company increased its regulatory liability by reducing revenue by $0 and $14 during the three months ended September 30, 2020 and 2019, respectively, and $1 and $319 during the nine months ended September 30, 2020 and 2019, respectively, including the gross-up of revenue necessary to return, in rates, the effect of this temporary tax difference.  The Company reclassified no excess accumulated deferred income taxes on accelerated depreciation recorded at December 31, 2017 during the three months ended September 30, 2020 and 2019 and $0 and $27 during the nine months ended September 30, 2020 and 2019, respectively.  As of September 30, 2020, the Company has returned $2,117 in negative surcharges to customers.

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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 DSIC reset to zero when the new base rates took effect March 1, 2019. The DSIC provided no revenues for the three months ended September 30, 2020 and 2019, and $0 and $249 for the nine months ended September 30, 2020 and 2019, respectively.

12.  Pensions

Components of Net Periodic Pension Cost

	Three Months Ended September 30						Nine Months Ended September 30
	2020			2019			2020			2019
Service cost	$	234		$	213		$	703		$	637
Interest cost		365			412			1,093			1,234
Expected return on plan assets		(800	)		(684	)		(2,399	)		(2,050	)
Amortization of actuarial loss		92			106			277			316
Amortization of prior service cost		(3	)		(4	)		(9	)		(10	)
Rate-regulated adjustment		687			532			2,060			1,598
Net periodic pension expense	$	575		$	575		$	1,725		$	1,725

Pension service cost is recorded in operating expenses.  All other components of net periodic pension cost are recorded as other pension costs in other income (expenses).

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2019 that it expected to contribute $2,300 to its pension plans in 2020.  For the nine months ended September 30, 2020, contributions of $1,725 have been made.  The Company expects to contribute the remaining $575 during the final quarter of 2020.

13.  Stock-Based Compensation

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.

On November 20, 2018, the Board accelerated the vesting period for restricted stock granted in 2016, 2017, and 2018 to one retiring officer from three years to that officer’s 2019 retirement date, which had been fully recognized as of March 31, 2019.

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On August 19, 2019, the Board accelerated the vesting period for restricted stock granted in 2017, 2018, and 2019 to one retiring officer from three years to that officer’s 2020 retirement date which had been fully recognized as of March 31, 2020.

On September 18, 2020, the Board awarded stock to non-employee directors effective September 18, 2020.  This stock award vested immediately.  On September 18, 2020, the Compensation Committee awarded restricted stock to officers and key employees effective September 18, 2020.  This restricted stock award vests ratably over three years beginning September 18, 2020. 

The restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period.  As a result, the awards are included in common shares outstanding on the balance sheet.  Restricted stock awards result in compensation expense valued at the fair market value of the stock on the date of the grant and are amortized ratably over the restriction period.

The following tables summarize the stock grant amounts and activity for the nine months ended September 30, 2020.

	Number of Shares	Grant Date Weighted Average Fair Value
Nonvested at beginning of the period	7,342	$33.57
Granted	4,912	$44.07
Vested	(5,491)	$36.00
Forfeited	(82)	$33.61
Nonvested at end of the period	6,681	$39.30

For the three months ended September 30, 2020 and 2019, the statement of income includes $74 and $40 of stock-based compensation, respectively, and related recognized tax benefits of $21 and $12, respectively. For the nine months ended September 30, 2020 and 2019, the statement of income includes $126 and $119 of stock-based compensation, respectively, and related recognized tax benefits of $36 and $35, respectively. The total fair value of the shares vested in the nine months ended September 30, 2020 was $198. Total stock-based compensation related to nonvested awards not yet recognized is $263 which will be recognized over the remaining three year vesting period.

14.  Income Taxes

The Company filed for a change in accounting method under the Internal Revenue Service tangible property regulations, or 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’s effective tax rate was 16.0% and 11.7% for the three months ended September 30, 2020 and 2019, respectively, and 13.9% and 15.1% for the nine months ended September 30, 2020 and 2019, respectively. The higher effective tax rate for the three months ended September 30, 2020 is primarily due to lower deductions from the TPR.  The lower effective tax rate for the nine months ended September 30, 2020 is primarily due to higher deductions from the TPR and a non-taxable gain on life insurance.  The effective tax rate will vary depending on the level of eligible asset improvements expensed for tax purposes under TPR each period.

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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 changes 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;

• natural disasters, including pandemics such as the current outbreak of the novel strain of coronavirus known as “COVID-19” and the effectiveness of the Company’s pandemic plans;

• 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 reduce the demand of customers for water;

• changes in economic and business conditions, including interest rates;

• loss of customers;

• changes in, or unanticipated, capital requirements;

• the impact of acquisitions;

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• changes in accounting pronouncements;

• changes in the Company’s credit rating or the market price of its common stock; and

• the ability to obtain financing.

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 systems and four wastewater collection and treatment systems.  The Company operates within its franchised water and wastewater territory, which covers portions of 50 municipalities within three counties in south-central Pennsylvania.  The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, for both water and wastewater 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 supplements its reservoirs with 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 September 30, 2020, the Company's average daily availability was 35.4 million gallons, and average daily consumption was approximately 20.0 million gallons.  The Company's service territory had an estimated population of 201,000 as of December 31, 2019.  Industry within the Company's service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergent, barbells and motorcycles.

The Company's 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.

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Impact of COVID-19

In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) was reported.  On March 6, 2020, Governor Tom Wolf signed an emergency disaster declaration for the Commonwealth of Pennsylvania which was extended for an additional ninety days on June 3, 2020 and again on September 1, 2020.  On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.  Developments in this area continue daily at the local, state, and national levels.  The Company is taking steps, consistent with directions from local, state, and federal authorities, to mitigate known risks with the health and safety of its employees and customers as its first priority.

The Company is an essential, life-sustaining business and has continued normal operations.  The Company continues to monitor guidance from state and local authorities and has made some modifications to its operations in order to comply with Pennsylvania’s guidelines.  This includes implementing enhanced safety procedures in its lobby and when entering customers’ homes and businesses as well as implementing social distancing practices such as halting unnecessary gatherings and travel.  The Company has evaluated and re-prioritized some of its capital projects, but the restrictions are not expected to materially impede the Company’s ability to complete its planned capital expenditures or acquisitions.  The Company has not experienced any supply chain disruptions and continues to maintain relationships with its vendors to identify issues as early as possible.  The Company believes it has sufficient liquidity and access to the capital markets if needed.

As a water and wastewater utility, it is the Company’s mission to provide uninterrupted water and wastewater service.  Due to the effect of COVID-19 on the general public, in compliance with an order from the PPUC, the Company paused shut-off procedures for delinquent customers on March 13, 2020.  In addition, the Company is not currently billing late payment charges.  These customers will continue to be billed at normal tariff rates for the water they use, and wastewater service provided.  Based on the October 8, 2020 order from the PPUC, the Company expects to resume normal shut-off procedures and begin billing late payment charges for most customers on or around November 9, 2020.  However, the Company will not terminate service and will waive late payment charges for certain “protected customers” as defined by the order.

The Company may continue to experience an increase in residential demand while commercial and industrial demand may decline based on many government, commercial, and industrial concerns which have curtailed production, or limited capacity, due to government orders or in response to changing economic conditions, and simultaneously, many employees are now teleworking or have been laid off or furloughed.  The duration and magnitude of these changes is currently unknown and difficult to predict.

To date, there has been no material impact on the Company’s workforce, operations, financial performance, liquidity, or supply chain as a result of COVID-19.  However, the ultimate duration and severity of the pandemic or its effects on the economy, the capital and credit markets, or the Company’s workforce, customers and suppliers, as well as governmental and regulatory responses, are uncertain.

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Results of Operations

Three Months Ended September 30, 2020 Compared

With Three Months Ended September 30, 2019

Net income for the third quarter of 2020 was $4,704, an increase of $221, or 4.9%, from net income of $4,483 for the same period of 2019.  The primary contributing factors to the increase were higher operating revenues and lower interest on debt which were partially offset by higher operating expenses and income taxes.

Operating revenues for the third quarter of 2020 increased $577, or 4.2%, from $13,680 for the three months ended September 30, 2019 to $14,257 for the corresponding 2020 period.  The primary reason for the increase was changes in consumption patterns.  Total per capita consumption for the third quarter of 2020 was approximately 0.6% higher than the same period of last year.  The Company experienced an increase in residential demand as many employees are now teleworking or have been laid off or furloughed while commercial and industrial demand declined based on many government, commercial, and industrial concerns which have curtailed production, or limited capacity, due to government orders or in response to changing economic conditions.  Growth in the customer base also added to revenues.  The average number of water customers served in 2020 increased as compared to 2019 by 589 customers, from 68,407 to 68,996 customers.  The average number of wastewater customers served in 2020 increased as compared to 2019 by 555 customers, from 2,522 to 3,077 customers, due to the recent acquisitions.

Operating expenses for the third quarter of 2020 increased $271, or 3.9%, from $6,965 for the third quarter of 2019 to $7,236 for the corresponding 2020 period.  The increase was primarily due to higher expenses of approximately $120 for depreciation, $93 for a higher provision for uncollectible accounts, and $85 for wastewater treatment.  Other expenses increased by a net of $180.  The increased expenses were partially offset by lower expenses of approximately $111 for wages, $58 for health insurance, and $38 for distribution system maintenance.

Interest on debt for the third quarter of 2020 decreased $162, or 12.3%, from $1,314 for the third quarter of 2019 to $1,152 for the corresponding 2020 period.  The decrease was primarily due to lower interest on long-term debt due to the refinancing of various debt issues.  The average debt outstanding under the lines of credit was $10,595 for the third quarter of 2020 and $4,873 for the third quarter of 2019.  The weighted average interest rate on the lines of credit was 1.41% for the quarter ended September 30, 2020 and 3.45% for the quarter ended September 30, 2019.

Allowance for funds used during construction decreased $2, from $117 in the third quarter of 2019 to $115 in the corresponding 2020 period due to a lower volume of eligible construction.

Other income (expenses), net for the third quarter of 2020 decreased $40, or 49.4%, compared to the same period of 2019.  Higher earnings on life insurance policies of approximately $19 were partially offset by higher retirement expenses of $6.  Other expenses decreased by a net of approximately $27.

Income taxes for the third quarter of 2020 increased $306, or 51.7%, compared to the same period of 2019 primarily due to lower deductions from the Internal Revenue Service, or IRS, tangible property regulations, or TPR.  The Company’s effective tax rate was 16.0% for the third quarter of 2020 and 11.7% for the third quarter of 2019.

Nine Months Ended September 30, 2020 Compared

With Nine Months Ended September 30, 2019

Net income for the first nine months of 2020 was $12,888, an increase of $1,875, or 17.0%, from net income of $11,013 for the same period of 2019.  The primary contributing factors to the increase were higher operating revenues and a gain on life insurance which were partially offset by higher expenses and income taxes.

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Operating revenues for the first nine months of 2020 increased $1,895, or 4.9%, from $38,559 for the nine months ended September 30, 2019 to $40,454 for the corresponding 2020 period.  The primary reasons for the increase were changes in consumption patterns and a rate increase effective March 1, 2019.  Total per capita consumption for the first nine months of 2020 was approximately 1.4% lower than the same period of last year.  However, the Company experienced an increase in residential demand as many employees are now teleworking or have been laid off or furloughed while commercial and industrial demand declined based on many government, commercial, and industrial concerns which have curtailed production, or limited capacity, due to government orders or in response to changing economic conditions.  The Company reduced revenue by $1 in the first nine months of 2020 and $319 in the same period of 2019, by recording a regulatory liability for the benefit of the lower tax rate effective January 1, 2018 resulting from the enactment of the 2017 Tax Act, which it agreed to give back to customers as part of the new rate order, including the gross-up of revenue necessary to return the effect of the temporary tax difference.  Growth in the customer base also added to revenues.  The average number of water customers served in 2020 increased as compared to 2019 by 565 customers, from 68,225 to 68,790 customers.  The average number of wastewater customers served in 2020 increased as compared to 2019 by 645 customers, from 2,373 to 3,018 customers, due to the recent acquisitions.  The increased revenues were partially offset by a $249 decrease from a lower distribution system improvement charge, or DSIC, allowed by the PPUC.  The DSIC reset to zero on March 1, 2019 when the rate order took effect.  For the remainder of the year, the Company expects revenues to show a modest increase due to an increase in the number of water and wastewater customers from acquisitions and growth within the Company’s service territory.  The duration and severity of the COVID-19 pandemic including any resulting economic slowdown could impact results.  Other regulatory actions and weather patterns could also impact results.

Operating expenses for the first nine months of 2020 increased $1,040, or 5.1%, from $20,484 for the first nine months of 2019 to $21,524 for the corresponding 2020 period.  The increase was primarily due to higher expenses of approximately $363 for depreciation, $242 for wastewater treatment, and $156 for a higher provision for uncollectible accounts.  Also adding to the increase were expenses of $80 for water treatment chemicals and $70 for purchased power.  Other expenses increased by a net of $323.  The increased expenses were partially offset by reduced expenses of $129 for water treatment plant and distribution system maintenance, and $65 for wages.  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 treat water and to maintain and extend the distribution system continue to rise.  The Company may continue to experience additional expenses for uncollectible accounts as a result of the COVID-19 pandemic.

Interest on debt for the first nine months of 2020 decreased $434, or 11.0%, from $3,937 for the first nine months of 2019 to $3,503 for the corresponding 2020 period.  The decrease was primarily due to lower interest on long-term debt due to the refinancing of various debt issues.  The average debt outstanding under the lines of credit was $9,405 for the first nine months of 2020 and $3,914 for the first nine months of 2019.  The weighted average interest rate on the lines of credit was 1.99% for the nine months ended September 30, 2020 and 3.62% for the nine months ended September 30, 2019.  Interest expense for the remainder of the year is expected to increase slightly due to the long-term debt issue (see Note 6 to the financial statements included herein) partially offset by the repayment of the 10.05% Senior Notes and line of credit.

Allowance for funds used during construction increased $57, from $273 in the first nine months of 2019 to $330 in the corresponding 2020 period due to a higher 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.

A non-recurring gain on life insurance of $515 was recorded in the first nine months of 2020 as a result of a death benefit from a life insurance policy.  No similar gains are anticipated at this time.

Other income (expenses), net for the first nine months of 2020 reflects decreased expenses of $66 as compared to the same period of 2019.  Higher earnings on life insurance policies of approximately $32 and lower charitable contributions of $7 were the primary reasons for the decrease.  Other expenses decreased by a net of $57.  Higher retirement expenses of approximately $30 partially offset the decrease.  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.

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Income taxes for the first nine months of 2020 increased $118, or 6.0%, compared to the same period of 2019 primarily due to higher taxable income partially offset by higher deductions from the IRS TPR.  The Company’s effective tax rate was 13.9% for the first nine months of 2020 and 15.1% for the first nine months of 2019.  The lower effective tax rate is primarily due to higher deductions from the TPR and a non-taxable gain on life insurance.  The Company's effective tax rate for the remainder of 2020 will largely be determined by the level of eligible asset improvements expensed for tax purposes under TPR each period.

Rate Matters

See Note 11 to the financial statements included herein for a discussion of rate matters.

The Company does not expect to collect a distribution system improvement charge or file a rate increase request in 2020.

Acquisitions and Growth

On October 8, 2013, the Company signed an agreement to purchase the wastewater collection and treatment assets of SYC WWTP, L.P. in Shrewsbury and Springfield Townships,York County, Pennsylvania.  On July 1, 2020, the Company signed an agreement to purchase the Albright Trailer Park water assets and wastewater collection assets of R.T. Barclay, Inc. in Springfield Township, York County, Pennsylvania.  Completion of the acquisitions is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2021, at which time the Company will add approximately 90 combined wastewater customers and approximately 60 water customers through an interconnection with its current water distribution system.  The wastewater customers of the Albright Trailer Park are currently served by SYC WWTP, L.P. and the water customers are currently served by the Company, each through a single customer connection to the park.

On March 4, 2019, the Company signed an agreement to purchase the wastewater collection assets of West Manheim Township in York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2021 at which time the Company will add approximately 1,800 wastewater customers.  These wastewater customers are currently water customers of the Company.

On May 27, 2020, the Company signed an agreement to purchase the water assets and wastewater collection and treatment assets of Country View Manor Community, LLC in Washington Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2021 at which time the Company will add approximately 50 water and 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.

On May 10, 2017, the Company signed an emergency interconnect agreement with Dallastown-Yoe Water Authority.  The effectiveness of this agreement is contingent upon receiving approval from all required regulatory authorities.  Approval is expected to be granted in 2021 at which time the Company will begin construction of a water main extension to a single point of interconnection and either supply a minimum agreed upon amount of water to the authority, receive a payment in lieu of water, or provide water during an emergency, at current tariff rates.

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Capital Expenditures

For the nine months ended September 30, 2020, the Company invested $15,973 in construction expenditures for routine items and the replacement of a standpipe as well as various replacements and improvements to infrastructure.  In addition, the Company invested $1,158 in the acquisitions of wastewater systems.  The Company was able to fund construction expenditures using internally-generated funds, line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions from developers, municipalities, customers or builders.

The Company anticipates construction expenditures for the remainder of 2020 of approximately $12,200 exclusive of any potential acquisitions not yet approved.  In addition to routine transmission and distribution projects and the reimbursement for the Amblebrook development (see Note 9 to the financial statement included herein), a portion of the anticipated expenditures will be for additional main extensions, improvements to a raw water pumping station, expansion of a wastewater treatment plant, and various replacements and improvements to infrastructure.  The Company intends to use primarily internally-generated funds for its anticipated construction and fund the remainder through cash, line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions.  Customer advances and contributions are expected to account for between 5% and 10% of funding requirements during the remainder of 2020.  The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, to meet its anticipated capital needs in the remainder of 2020 and 2021.

Liquidity and Capital Resources

Cash

The Company manages its cash through a cash management account that is directly connected to its line of credit.  Excess cash generated automatically pays down outstanding borrowings under the line of credit arrangement.  If there are no outstanding borrowings, the cash is 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.  As of September 30, 2020, the Company had no borrowings outstanding on its line of credit and had a cash balance of $10,901 from its most recent long-term debt issue.  The cash and the cash management facility connected to the line of credit are expected to provide the necessary liquidity and funding for the Company's operations, capital expenditures, acquisitions and potential buybacks of stock for the foreseeable future.

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.  For the three months ended September 30, 2020, higher revenue as compared to the end of 2019 and a weakening in the timeliness of payments resulted in an increase in accounts receivable – customers.  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.  During 2020, management’s assessment included consideration of the COVID-19 pandemic along with past trends during times of economic instability and regulations from the PPUC regarding customer turn-offs and collections, and determined an increase in its allowance for doubtful accounts was warranted.  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.  During the first nine months of 2020, the Company generated $16,306 internally from operations as compared to the $13,553 it generated during the first nine months of 2019, primarily due to an increase in net income and a reduction in the amount of interest and income taxes paid.

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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.

In the third quarter of 2020, the Company entered into an agreement for a $50,000 unsecured, committed line of credit maturing in September 2022 at an interest rate of LIBOR plus 1.05% with an unused commitment fee and an interest rate floor.  Simultaneously, the Company paid off and terminated all prior existing line of credit agreements.  As of September 30, 2020, the Company had no borrowings under its line of credit agreement.

The COVID-19 pandemic has caused volatility and uncertainty in the capital markets and in the banking industry resulting in increased borrowing costs.  The Company has taken steps to manage the risk of reduced credit availability.  It has established a committed line of credit with an increase in the total amount available and a 2-year revolving maturity that cannot be called on demand.  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 2020 and 2021.

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 6 to the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for additional information regarding these restrictions.

On September 30, 2020, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $30,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 3.24% per annum payable semiannually and mature on September 30, 2050.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $29,838.  The net proceeds were used to refinance the $6,500 aggregate principal amount of the Company’s 10.05% Senior Notes, Series C, due September 30, 2020, to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects, to fund acquisitions and for general corporate purposes.

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 45.9% as of September 30, 2020 and 43.7% as of December 31, 2019.  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 ability to generate more 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 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’s effective tax rate will largely be determined by the level of eligible asset improvements expensed for tax purposes that would have been capitalized for tax purposes prior to the implementation of TPR.

The Company has a substantial deferred income tax asset primarily due to the excess accumulated deferred income taxes on accelerated depreciation from the 2017 Tax Act and the differences between the book and tax balances of the 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.

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The Company has seen an increase in its deferred income tax liability amounts primarily as a result of the accelerated 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 depreciation or TPR.

The Company has determined there are no uncertain tax positions that require recognition as of September 30, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.  The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments.  The CARES Act did not have a material impact on the Company’s financial statements for the three or nine months ended September 30, 2020.  The Company will continue to monitor any effects that may result from the CARES Act or future COVID-19 related legislation.

Common Stock

Common stockholders’ equity as a percent of the total capitalization was 54.1% as of September 30, 2020 and 56.3% as of December 31, 2019.  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 April 9, 2020, 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.

Physical and Cyber Security

The Company maintains security measures at its facilities, and collaborates with federal, state and local authorities and industry trade associations regarding information on possible threats and security measures for water and wastewater utility operations.  The costs incurred are expected to be recoverable in water and wastewater rates and are not expected to have a material impact on its business, financial condition, or results of operations.

The Company relies on information technology systems in connection with the operation of the business, especially with respect to customer service, billing, accounting, and in some cases, the monitoring and operation of treatment, storage and pumping facilities.  In addition, the Company relies on these systems to track utility assets and to manage maintenance and construction projects, materials and supplies, and human resource functions.  The information technology systems may be vulnerable to damage or interruption from cyber security attacks or other cyber-related events, including, but not limited to, power loss, computer systems failures, internet, telecommunications or data network failures, physical and electronic loss of data, computer viruses, intentional security breaches, hacking, denial of service actions, misappropriation of data, and similar events.  In some cases, administration of certain functions may be outsourced to third-party service providers that could also be targets of cyber security attacks.  A loss of these systems, or major problems with the operation of these systems, could harm the business, financial condition, and results of operations of the Company through the loss or compromise of customer, financial, employee, or operational data, disruption of billing, collections or normal field service activities, disruption of electronic monitoring and control of operational systems, and delays in financial reporting and other normal management functions.

Possible impacts associated with a cyber security attack or other events may include remediation costs related to lost, stolen, or compromised data, repairs to data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation, and reputational damage.

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The Company has implemented processes, procedures and controls to prevent or limit the effect of these possible events, and maintains insurance to help defray costs associated with cyber security attacks.  The Company has not experienced a material impact on business or operations from these attacks.  Although the Company does not believe its systems are at a materially greater risk of cyber security attacks than other similar organizations and despite the implementation of robust security measures, the Company cannot provide assurance that the insurance will fully cover the costs of a cyber security event, and its robust security measures do not guarantee that reputation and financial results will not be adversely affected by such an incident.

Environmental Matters

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection in December 2016 after the Company determined it exceeded the action level for lead as established by the Lead and Copper Rule, or LCR, issued by the U.S. Environmental Protection Agency.  The Company did not have an exceedance in any subsequent compliance test.  Under the agreement, the Company committed to exceed the LCR replacement schedule by replacing all of the remaining known company-owned lead service lines within four years from the agreement.  The cost for these service line replacements was approximately $2,734 and $2,713 through September 30, 2020 and December 31, 2019, respectively, and is included in utility plant.  As of September 30, 2020, all known company-owned lead service lines have been replaced.  Any additional company-owned lead service lines that are discovered will be replaced but are not expected to have a material impact on the financial position of the Company.

The Company was granted approval by the PPUC to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned service lines over nine years from the agreement.  The tariff modification allows the Company to replace customer-owned service lines at its own initial cost.  The Company will record the costs as a regulatory asset to be recovered in future base rates to customers, over a four-year period.  The cost for the customer-owned lead service line replacements was approximately $1,174 and $1,000 through September 30, 2020 and December 31, 2019, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,400.  This estimate is subject to adjustment as more facts become available.

Labor Relations

The prior union contract expired on April 30, 2020.  Management and the union leadership have negotiated and agreed to a new contract, which was ratified in October 2020 and expires April 30, 2023.

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 September 30, 2020.

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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. For risk management purposes, the Company uses a derivative financial instrument, an interest rate swap agreement discussed in Note 7 to the financial statements included herein.  The Company does not engage in trading or other risk management activities, does not use other derivative financial instruments for any purpose, has no guarantees and does not have material transactions involving related parties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

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

Item 6.		Exhibits.
Exhibit No.	Description
3	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.
3.1	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.
10.1	Note Agreement relative to the $30,000,000 3.24% Senior Notes, dated September 30, 2020.  Incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 2, 2020
31.1	Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE YORK WATER COMPANY
	/s/ Joseph T. Hand
Date: November 6, 2020	Joseph T. Hand Principal Executive Officer
	/s/ Matthew E. Poff
Date: November 6, 2020	Matthew E. Poff Principal Financial and Accounting Officer

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