The York Water Company
Highlights of Our 182nd Year
Summary of
Operations For The Year 1997 1996 1995 1994 1993
Water operating rev$16,996,706 $15,721,462 $15,449,296 $14,755,707 $14,201,756
Operating expenses 9,678,694 9,223,227 9,119,832 8,881,499 8,591,315
Income taxes 1,641,229 1,258,704 1,419,907 1,055,448 1,285,799
Operating income 5,676,783 5,239,531 4,909,557 4,818,760 4,324,642
Interest expense 2,707,310 2,893,123 2,738,846 2,720,535 3,045,872
Gain on sale of land - 134,117 - 215,417 842,002
Other income, net 150,588 279,231 141,536 131,036 430,111
Net income 3,120,061 2,759,756 2,312,247 2,444,678 2,550,883
Per Share of Common Stock
Book value $9.93 $9.65 $8.54 $8.44 $8.28
Net income 1.07 1.05 .92 .98 1.03
Dividends <F1> .91 .90 .90 .90 .90
Number of shares outstanding
at year-end 2,934,782 2,900,524 2,549,496 2,518,736 2,487,268
Utility Plant
Original cost $97,487,926 $93,492,775 $88,710,279 $83,642,650 $77,241,368
Construction
expenditures 4,500,517 4,936,816 5,256,959 6,629,903 6,040,584
Other
Total assets $98,854,074 $96,736,434 $90,459,706 $86,967,330 $84,738,162
Long-term debt 32,000,000 32,000,000 32,000,000 32,000,000 32,000,000
<F1> Cash dividends per share reflect dividends declared on shares
outstanding at each dividend date.
All per share data has been restated to reflect the June 1997 four-
for-one stock split.
For Management's Discussion and Analysis of Financial Condition and
Results of Operations, Please Refer to Page 3.
Directors, Officers and Key Employees
Irvin S. Naylor<F1>
Chairman of the Board
Vice Chairman of Board
Cor-Box, Incorporated
William T. Morris, P.E.<F1>
President and
Chief Executive Officer
The York Water Company
Horace Keesey III<F1>
Vice Chairman of the Board
Consultant
George Hay Kain, III
Attorney at Law
Frank Motter<F1>
President
Motter Printing Press Co.
Chloe Eichelberger
President/Chief Executive
Officer
Chloe Eichelberger Textiles,
Inc.
Paul W. Ware<F1>
Chairman
Penn Fuel Gas, Inc.
John L. Finlayson<F2>
Vice President-Finance and
Administration
Susquehanna Pfaltzgraff Co.
Michael W. Gang<F2>
Partner
Morgan, Lewis & Bockius LLP
Directors Emeriti
William H. Kain
Robert E. Skold
Josephine S. Appell
<F1>Members of the
Executive Committee
<F2>Alternate Members of
the Executive Committee
Staff
William T. Morris, P.E.
President and
Chief Executive Officer
Jeffrey S. Osman
Vice President-Finance
Secretary-Treasurer
Duane R. Close
Vice President-Operations
Jeffrey R. Hines, P.E.
Vice President-Engineering
Bruce C. McIntosh
Human Resources Director
Lois L. Shultz
Customer Service Manager
Assistant Secretary/
Assistant Treasurer
To Our Shareholders:
A drought, southern expansion and increased net income have all
combined to make 1997 a very interesting and exciting year.
Operating revenue for 1997 of $16,996,706 increased 8.1% over
that recorded in 1996. Net income increased 13.1% to a record
high of $3,120,061. These increases are attributable in part to
a small increase in water usage and due to the full year effect
of the September 5, 1996 rate increase.
As is highlighted elsewhere in this report, due to the foresight
of past Company Boards and Management, your Company was able to
provide service without imposing any restrictions during the 1997
drought. Rainfall for 1977 was 6.99 inches below normal with the
lack of rainfall in April establishing a new record minimum
rainfall. Although less total rainfall was recorded in 1991 and
1988, each of those years had seven months when the rainfall was
80% or more below average. In 1997 there were eight months that
the rainfall was 80% or more below average. In accordance with
our drought contingency plan, we drew Lake Williams down to a
maximum point of 260.5 inches below the spillway and for the
first time, due to a drought, withdrew water from Lake Redman.
We drew Lake Redman down to a maximum point of 20 inches below
the spillway. The reservoirs and our plan functioned as designed
and our customers enjoyed continued full service.
In mid 1997 we finalized details and started construction on a
major expansion into southern York County. The new area includes
portions of Shrewsbury, Hopewell and North Hopewell Townships.
This expansion adds an additional 21,000 feet of water main, a
one million gallon steel standpipe, and a booster pump station.
The project when completed in mid 1998 will cost approximately
$1.5 million with approximately $600,000 of this cost being paid
by the project's developer participants. An additional 500
residential and 27 industrial/commercial customers will be added
initially.
Early in 1997 your Company applied for and received permission to
recover its investment in infrastructure rehabilitation and
replacement between rate base filings. The recovery amount is
known as the Distribution System Improvement Charge (DSIC). The
implementation of the DSIC will enable us to address the problems
presented by an aging distribution system in an orderly and
comprehensive manner and to continue to provide solutions to
regional water problems. It will also reduce the administrative
cost of these repairs to allow more funds to go directly into
construction.
Also in 1997 we began a USEPA required 18 month water analysis
program titled The Information Collection Rule (ICR). This rule
requires over 500 of the largest water suppliers in the United
States to collect and analyze numerous water samples from their
treatment systems each month and submit the results to USEPA on
computer disk. The data submitted will be used to assess water
quality and will aid in formulating future water quality
regulations. Our compliance with this will cost between $50,000
and $100,000.
The Company's other 1997 major activities included: the sale of
bulk water to Glen Rock Borough; a four-for-one stock split; the
elimination of the annual reinvestment limit on your Company's
dividend reinvestment plan (DRIP); a new one million gallon tank
in the New Salem Borough area to replace the old 300,000 gallon
tank; and the upgrade of the New Salem Booster Station.
The Company's 1998 planned activities include: expansion into
Conewago Township; the completion of the Southern York County
expansion; the sale of bulk water to Stewartstown Borough; and,
the engineering to provide increased capacity, by the
installation of some type of gates, to Lake Redman.
In closing, on behalf of the Board of Directors, I would like to
extend my appreciation to our dedicated, hardworking employees
who consistently go above and beyond the call of duty to bring
"that good York water" into the homes and businesses of our
customers with high levels of quality and service. It is their
efforts which give our Company a well earned reputation for
excellence throughout the communities we serve.
Respectfully submitted,
William T. Morris, P.E.
President and Chief Executive Officer
The York Water Company
Description of Business
The business of The York Water Company is to impound, purify
and distribute water. The Company operates entirely within its
franchised territory located in York County, Pennsylvania, and
is subject to regulation by the Pennsylvania Public Utility
Commission (PPUC). Water service is supplied through the
Company's own distribution system to the City of York, the
Boroughs of North York, West York, Manchester, Mount Wolf, New
Salem, Hallam, Jacobus, Loganville, Yorkana, Seven Valleys, East
Prospect, Jefferson, Glen Rock and portions of the Townships of
Manchester, East Manchester, West Manchester, North Codorus,
Springettsbury, Spring Garden, Springfield, York, Hellam,
Windsor, Lower Windsor, Codorus and Jackson. The Company's
service territory has an estimated population of 140,700.
Industry of the area served is diversified, manufacturing such
items as fixtures and furniture, electrical machinery, food
products, paper, ordnance, textile products, air conditioning,
barbells, etc. The Company's present average daily consumption
is 19,405,000 gallons, and its present safe daily yield is
29,900,000 gallons.
In the area served by the Company, under the supervision of
the PPUC, there are no competitors. During the five years ended
in 1996, the Company has maintained an increasing growth in
number of customers and distribution facilities as shown by the
following chart:
1997 1996 1995 1994 1993
Average daily
consumption (gallons
per day) 19,405,000 18,593,000 19,657,000 19,660,000 19,380,000
Miles of mains at
year-end 655 641 622 597 580
Distribution mains
installed (ft.) 77,274 78,619 84,515 91,087 58,414
Number of customers 46,458 45,800 44,879 43,830 42,844
Population served 140,700 143,000 140,000 136,000 134,000
Operating revenue in 1997 is derived from the following sources
and in the following percentages: Residential 59%; Commercial
and Industrial, 31%; Other, 10%.
Security Market and Dividends
Securities of The York Water Company are traded over-the-counter.
Quarterly price ranges and cash dividends per share for the last
two years follow (All per share data has been restated to reflect
the June 1997 four-for-one stock split):
1997 1996
HIGH LOW DIVIDEND<F1> HIGH LOW DIVIDEND<F1>
1st Quarter $17.38 $16.81 $.225 $17.25 $16.97 $.225
2nd Quarter 21.69 17.31 .225 17.94 17.25 .225
3rd Quarter 23.50 21.00 .230 17.50 17.19 .225
4th Quarter 23.00 19.25 .230 17.38 16.81 .225
<F1> Cash dividends per share reflect dividends declared on
shares actually outstanding at each dividend date.
(Refer to Note 4 to the Financial Statements for a description of
the restriction on the declaration and payment of cash
dividends.)
Prices are bid prices quoted from local newspapers.
Shareholders of record as of December 31, 1997 were 1,334.
THE COMPANY WILL PROVIDE TO SHAREHOLDERS OF RECORD, AND/OR
BENEFICIAL OWNERS, UPON WRITTEN REQUEST, WITHOUT CHARGE, A COPY
OF FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR 1997.
Requests Should Be Made To:
LOIS L. SHULTZ - ASSISTANT SECRETARY
THE YORK WATER COMPANY
BOX 15089, YORK, PA 17405
The York Water Company
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
1997 Compared with 1996
Water operating revenues for 1997 increased $1,275,244 or
8.1% over 1996. The increase resulted primarily from an increase
in rates of 6.0% approved by the Pennsylvania Public Utility
Commission (PPUC) effective September 5, 1996. Consumption for
1997 increased 4.5% for residential customers, and decreased .8%
for commercial and industrial customers combined compared to
1996.
Operating expenses, exclusive of depreciation and taxes, for
1997 increased $218,674 or 3.2%. Maintenance costs associated
with structures, equipment, and service lines, increased Company
match expenses for the 401k program, and higher power costs were
the main causes of the increase. Lower workers' compensation
premiums and decreased meter reading expenses partially offset
the increase.
Depreciation expense for 1997 increased $181,885 or 13.3%
from 1996 to 1997 due to increased plant investment.
Federal and state income taxes for 1997 increased $382,525 or
30.4% when compared to 1996 principally as a result of an
increase in taxable income.
Interest on short-term debt for 1997 decreased $250,733 when
compared to 1996, due to a decrease in short-term debt
outstanding during 1997. The average short-term debt outstanding
in 1997 and 1996 was $479,452 and $3,628,378, respectively.
Allowance for funds used during construction for 1997
decreased $64,920 or 57.9% when compared to 1996. The decrease
was due to a decrease in the Company's plant investment under
construction from an average of $3,900,000 in 1996 to $1,900,000
in 1997.
During 1996, the Company had a gain on sale of one parcel of
land of $134,117 ($79,674 after tax). No such transaction
occurred in 1997.
Other income, net for 1997 decreased $128,643 or 46.1% when
compared to 1996. Other income in 1996 contained additional
income on water district notes resulting from additional
customers, and interest on stock subscription funds, whereas 1997
other income contained less interest on water district notes and
no interest on stock subscription funds. In addition, donations
were higher in 1997 than in 1996.
1996 Compared with 1995
Water operating revenues for 1996 increased $272,166 or 1.8%
over 1995. The increase resulted primarily from an increase in
rates of 6.0% approved by the PPUC effective September 5, 1996.
While residential revenues were up 4.2%, commercial and
industrial revenues declined 6.9% from 1995 to 1996.
Operating expenses, exclusive of depreciation and taxes, for
1996 increased $196,945 or 3.0%. The expense increase was
generally due to increases in pension fees, maintenance of
structures and equipment, legal fees, and power expenses. Lower
cable meter reading fees partially offset the increase.
Depreciation expense for 1996 decreased $139,465 or 9.2%
since 1995 as a result of a reevaluation of plant assets
resulting in longer useful lives, and therefore, lower
depreciation rates.
Federal and state income taxes for 1996 decreased $161,203 or
11.4% when compared to 1995 principally as a result of an
increase in deferred income tax expense in 1995 resulting from a
reduction in deferred tax assets by recognizing a 2% decline in
the state income tax rates.
Interest on long-term debt for 1996 decreased $70,771 or
2.5%, related to the issuance of $4,300,000 5% Revenue Refunding
Bonds to replace a like amount of bonds with an interest rate of
6.25% during the fourth quarter of 1995.
Interest on short-term debt for 1996 increased $110,898 when
compared to 1995, due primarily to an increase in short-term debt
outstanding during 1996. The average short-term debt outstanding
in 1996 and 1995 was $3,628,378 and $2,312,964, respectively.
The increase in short-term debt was used to fund construction
expenditures.
Allowance for funds used during construction for 1996
decreased $114,150 or 50.4% when compared to 1995. The decrease
was due to a decrease in the Company's plant investment under
construction during 1996.
During 1996, the Company had a gain on sale of one parcel of
land of $134,117 ($79,674 after tax).
Other income, net for 1996 increased $137,695 or 97.3% when
compared to 1995. The increase was due to the recognition of
additional income on water district notes as a result of
additional customers in those districts.
Rate Developments
Within the last several years the Company has filed written
applications for rate increases with the PPUC and has been
granted rate relief as a result of such requests. The most
recent formal rate request was filed by the Company on May 9,
1996, seeking a 9.6% increase in annual revenues. Effective
September 5, 1996, the PPUC authorized an increase in rates
designed to produce approximately $960,000 in additional annual
operating revenues, an increase of 6.0%. The Company does not
expect to file another application for a rate increase until
after 1998.
Liquidity and Capital Resources
During 1997, the per capita volume of water sold did not
significantly change compared to 1996. The Company does not
anticipate any change in the level of water usage which would
have a material impact on future results of operations.
During 1997, the Company had $4,500,517 of construction
expenditures. The Company financed such expenditures through
internally generated funds, customers' advances, short-term
borrowings, and proceeds from the issuance of common stock under
its dividend reinvestment plan (stock issued in lieu of cash
dividends), and employee stock purchase plan.
During 1997, amendments to the existing Articles of
Incorporation were approved. The amendments (i) increased the
authorized capital stock of the Company from 1,200,000 shares of
common stock, par value $10.00 to 6,500,000 shares (6,000,000
shares of common stock, without par value, and 500,000 shares of
Series Preferred Stock, without par value); (ii) eliminated the
concept of par value of the capital stock; and (iii) deleted
certain provisions relating to dividends and shares in
distribution and common stock in order to allow for possible
future issuance of Series Preferred Stock.
Also, during 1997, the Board of Directors declared a four-
for-one stock split for shareholders of record on June 2, 1997,
in conjunction with the increase in authorized shares. The stock
was distributed on June 10, 1997. Shareholders of record
received three additional shares of common stock for each share
owned. The transaction had no effect on total shareholders'
equity, but caused a restatement of all per share amounts. The
Board of Directors also approved an increase in the number of
authorized shares for the Dividend Reinvestment Program by a
factor of four to reflect the stock split, and the Employee Stock
Purchase Plan by a factor of four plus an additional 50,000
shares.
The Company anticipates construction expenditures for 1998
and 1999 of approximately $5,940,000 and $15,163,000,
respectively. The Company plans to finance such expenditures
with internally generated funds, customers' advances, short-term
borrowings, proceeds from the issuance of common stock under its
dividend reinvestment plan (stock issued in lieu of cash
dividends) and employee stock purchase plan, and a possible stock
offering.
The Company anticipates that it will submit an application in
the future with the PPUC proposing increases in rates to provide
a fair rate of return on the capital expenditures associated with
its 1998 and 1999 construction projects.
During 1997, net cash used in investing and financing
activities exceeded cash provided by operating activities.
Borrowings against the Company's lines of credit, proceeds from
the issuance of common stock under its dividend reinvestment plan
(stock issued in lieu of cash dividends) and employee stock
purchase plan and customers' advances are used to satisfy the
need for additional cash. The Company anticipates that during
1998 net cash used in investing and financing activities will
again exceed net cash provided by operating activities.
As of December 31, 1997, current assets exceeded current
liabilities by $488,649. As of December 31, 1996, current assets
exceeded current liabilities by $468,190. Short-term borrowings
from lines of credit as of December 31, 1997 and 1996 were
$843,000 and $1,237,000, respectively. The Company maintains
lines of credit aggregating $20,000,000. Loans granted under
these lines of credit bear interest based on the prime or LIBOR
rates plus basis points, as defined. The Company is not required
to maintain compensating balances on its lines of credit.
During 1997, the Company's dividend payout ratios relative to
net income and cash provided by operating activities were 84.9%
and 52.0%, respectively. The Company believes that these payout
ratios are appropriate.
Shareholders' investment as a percent of total capitalization
was 47.7% as of December 31, 1997 compared with 46.7% as of
December 31, 1996.
The Company, like all other businesses, is affected by
inflation, most notably by the continually increasing costs
incurred to maintain and expand its service capacity. The
cumulative effect of inflation results in significantly higher
facility replacement costs which must be recovered from future
cash flows. The ability of the Company to recover this increased
investment in facilities is dependent upon future revenue
increases, which are subject to approval by the PPUC.
The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium
(year 2000) approaches. The "year 2000" problem is pervasive and
complex as virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate
erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources
to identify, correct or reprogram, and test the systems for the
year 2000 compliance. It is anticipated that critical re-
programming efforts will be complete and tested by December 31,
1998, while less serious problems will be fixed and tested by
October 1999. The Company expects to incur costs between $25,000
and $50,000 on this project.
Impact of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share." SFAS 128 establishes standards
for computing and presenting earnings per share. SFAS 128 is
effective for financial statements issued for periods ending
after December 15, 1997. Adoption of this new Statement in 1997
did not have a material impact on the Company's financial
position, results of operations, or liquidity as of and for the
year ended December 31, 1997.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" (SFAS 129). SFAS 129 establishes standards
for disclosing information about an entity's capital structure.
SFAS 129 is effective for financial statements issued for periods
ending after December 15, 1997. Adoption of this new Statement
in 1997 did not have a material impact on the Company's financial
position, results of operations, or liquidity as of and for the
year ended December 31, 1997.
In June 1997, the FASB issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income,"
and No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements establish standards for
reporting and display of comprehensive income and its components
and for reporting information about business segments and
products in financial statements, and are effective for years
beginning after December 15, 1997. Adoption of these statements
is not expected to have a material effect on the Company's
financial statements.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132) which
amends the disclosure requirements of Statements No. 87,
"Employers' Accounting for Pensions" (SFAS 87), No. 88,
"Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pensions Plans and for Termination Benefits"
(SFAS 88), and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106). This Statement
standardizes the disclosure requirements of SFAS 87 SFAS 106 to
the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement
benefits and does not change any of the measurement or
recognition provisions provided for in SFAS 87, 88, or 106. The
statement is effective for fiscal years beginning after December
15, 1997. Adoption of this statement is not expected to have a
material effect on the Company's financial statements.
In January 1997, the Securities and Exchange Commission
amended regulations and forms, including regulations S-X and S-K,
to clarify and expand existing disclosure requirements about
accounting policies for certain derivative instruments, and to
add new disclosure requirements about the risk of loss from
changes in market rates or prices which are inherent in
derivatives. Adoption by the Company of the disclosure
requirements relating to risk of loss, which requirements are
effective for fiscal years ending after June 15, 1998, are not
expected to have a material effect on the Company's financial
statements.
Balance Sheets
December 31
Assets 1997 1996
UTILITY PLANT, at original cost. . . .$97,487,926 $93,492,775
Less-Reserve for depreciation. . . . . 14,332,890 13,158,637
83,155,036 80,334,138
OTHER PHYSICAL PROPERTY:
Less-Reserve for depreciation of
$65,193 in 1997 and $60,326 in 1996. . 498,859 421,145
CURRENT ASSETS:
Cash and Cash Equivalents. . . . . . . - 694,491
Receivables, less reserves of
$110,000 in 1997 and $90,000 in 1996. 2,540,075 2,523,510
Recoverable income taxes . . . . . . . 547,182 159,203
Materials and supplies, at cost . . . 337,837 302,821
Prepaid expenses . . . . . . . . . . . 190,314 221,402
Deferred income taxes (Note 3) . . . . 75,017 61,377
3,690,425 3,962,804
OTHER LONG-TERM ASSETS:
Prepaid pension cost (Note 6). . . . . 1,732,394 1,680,286
Deferred debt expense. . . . . . . . . 440,163 474,049
Deferred rate case expense . . . . . . 57,055 142,385
Notes receivable (Note 7). . . . . . . 913,934 990,448
Deferred regulatory assets (Note 1). . 7,287,799 7,827,988
Other. . . . . . . . . . . . . . . . . 1,078,409 903,191
11,509,754 12,018,347
$98,854,074 $96,736,434
Capitalization and Liabilities
CAPITALIZATION:
Common stock, no par value,
authorized 6,000,000 shares in 1997
and 4,800,000 shares in 1996, out-
standing 2,934,782 shares in 1997 and
2,900,524 shares in 1996 (Note 5) . .$26,453,873 $25,775,639
Earnings retained in the business. . . 2,696,913 2,227,118
29,150,786 28,002,757
Long-term debt (Note 4). . . . . . . . 32,000,000 32,000,000
61,150,786 60,002,757
CURRENT LIABILITIES:
Short-term borrowings (Note 4) . . . . 843,000 1,237,000
Accounts payable.. . . . . . . . . . . 551,402 376,469
Dividends payable. . . . . . . . . . . 488,483 531,977
Accrued taxes. . . . . . . . . . . . . 115,073 117,668
Advance water revenues . . . . . . . . 182,118 164,256
Accrued interest . . . . . . . . . . . 675,761 675,761
Other accrued expenses . . . . . . . . 345,939 391,483
3,201,776 3,494,614
DEFERRED CREDITS:
Customers' advances for construction
(Note 7). . . . . . . . . . . . . . . 16,219,638 15,471,245
Contributions in aid of construction . 5,861,487 5,606,358
Deferred income taxes (Note 3) . . . . 9,807,788 9,744,675
Deferred regulatory liabilities
(Note 1). . . . . . . . . . . . . . . 1,572,985 1,528,582
Deferred employee benefits . . . . . . 1,039,614 888,203
34,501,512 33,239,063
$98,854,074 $96,736,434
The accompanying notes are an integral part of these statements.
Statements of Income
Year Ended December 31
1997 1996 1995
WATER OPERATING REVENUES:
Residential $ 9,975,226 $ 9,273,216 $ 8,895,601
Commercial and industrial 5,293,730 4,925,781 5,292,109
Other 1,727,750 1,522,465 1,261,586
16,996,706 15,721,462 15,449,296
OPERATING EXPENSES:
Operation and maintenance. 3,826,546 3,616,765 3,467,540
Administrative and general 3,244,384 3,235,491 3,187,771
7,070,930 6,852,256 6,655,311
Depreciation 1,552,338 1,370,453 1,509,918
Taxes other than income taxes 1,055,426 1,000,518 954,603
Federal and state income taxes
(Note 3) 1,641,229 1,258,704 1,419,907
11,319,923 10,481,931 10,539,739
Operating income 5,676,783 5,239,531 4,909,557
INTEREST EXPENSE AND OTHER INCOME:
Interest on long-term debt
(Note 4) 2,718,950 2,718,950 2,789,721
Interest on short-term debt
(Note 4) 35,589 286,322 175,424
Allowance for funds
used during construction (47,229) (112,149) (226,299)
Gain on sale of land - (134,117) -
Other income, net (150,588) (279,231) (141,536)
2,556,722 2,479,775 2,597,310
Net income $ 3,120,061 $ 2,759,756 $ 2,312,247
Earnings per share (Note 5) $1.07 $1.05 $0.92
Statements of Shareholders' Investment
Earnings
Retained
Common In The
Stock Business
Balance, January 31, 1995 19,442,989 1,808,925
Net income - 2,312,247
Cash dividends ($.90 per share) - (2,277,190)
Issuance of common stock under dividend
reinvestment plan 409,182 -
Issuance of common stock under employee
stock purchase plan 75,614 -
Balance, December 31, 1995 19,927,785 1,843,982
Net income - 2,759,756
Cash dividends ($.90 per share) - (2,376,620)
Issuance of common stock under dividend
reinvestment plan 436,433 -
Issuance of common stock under employee
stock purchase plan 79,502 -
Issuance of 319,924 shares of common
stock (Note 5) 5,331,919 -
Balance, December 31, 1996 25,775,639 2,227,118
Net income - 3,120,061
Cash dividends ($.91 per share) - (2,650,266)
Issuance of common stock under dividend
reinvestment plan 596,663 -
Issuance of common stock under employee
stock purchase plan 81,682 -
Balance, December 31, 1997 $26,453,873 $2,696,913
The accompanying notes are an integral part of these statements.
Statements of Cash Flows
Year Ended December 31
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . $3,120,061 $ 2,759,756 $ 2,312,247
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of land . . . . . . . .. - (134,117) -
Depreciation . . . . . . . . . . . .. 1,552,338 1,370,453 1,509,918
Provision for losses on accounts rec 97,923 73,201 67,319
Increase in deferred income taxes (including
regulatory assets and liabilities).. 634,065 552,557 308,755
Changes in assets and liabilities:
Increase in accounts receivable.. . (114,488) (153,582) (299,160)
Increase in recoverable income taxes (387,979) (63,080) (96,123)
Increase in materials and supplies . (35,016) (3,184) (1,281)
Increase in prepaid expenses and prepaid
pension costs . . . . . . . . . . (21,020) (256,058) (131,406)
Increase (decrease) in accounts payable,
accrued expenses, other liabilities and
deferred employee benefits. . . .. 255,168 245,921 (409,051)
(Decrease) increase in accrued interest
and taxes . . . . . . . . . . . .. (2,595) 61,335 (279,993)
(Increase) decrease in other assets. (6,435) (142,980) 18,800
Net Cash Provided by Operating Activ 5,092,022 4,310,222 3,000,025
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of temporary investments. (5,878,000) (101,000) -
Maturities of temporary investments. . 5,878,000 101,000 -
Proceeds from the sale of land . . . - 191,700 -
Costs incurred related to sale of land - (57,583) -
Construction expenditures. . . . . . (4,500,517) (4,936,816) (5,256,959)
Customers' advances for construction and
contributions in aid of construction 1,003,522 587,064 1,077,693
Net Cash Used in Investing Activities(3,496,995) (4,215,635) (4,179,266)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under
line-of-credit agreements . . . . .. (394,000) (2,927,000) 2,862,000
Issuance of 319,924 shares common stock - 5,331,919 -
Issuance of common stock under dividend
reinvestment plan . . . . . . . . . . 596,552 436,433 409,182
Issuance of common stock under employee
stock purchase plan . . . . . . . .. 81,682 79,502 75,614
Dividends paid . . . . . . . . . . .. (2,650,266) (2,376,620) (2,277,190)
Decrease in notes receivable . . . .. 76,514 55,670 109,635
Net Cash (Used in) Provided by
Financing Activities . . . . . . . (2,289,518) 599,904 1,179,241
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . (694,491) 694,491 -
Cash and cash equivalents at beginning
of year 694,491 - -
Cash and cash equivalents at
end of year $ - $ 694,491 $ -
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest, net of amounts capitalized $2,712,436 $2,934,054 $2,552,529
Income taxes . . . . . . . . . . . 1,492,592 874,388 1,488,488
The accompanying notes are an integral part of these statements.
Notes to Financial Statements
l. Accounting Policies
The business of The York Water Company is to impound, purify
and distribute water. The Company operates entirely within its
franchised territory located in York County, Pennsylvania, and is
subject to regulation by the PPUC.
The following summarizes the significant accounting policies
employed by The York Water Company.
Depreciation, Amortization, Maintenance and Repairs-
The straight-line remaining life method is used to compute
depreciation on utility plant cost. The effective rate of
depreciation was 2.09% in 1997, 1.99% in 1996 and 2.42% in 1995
on average utility plant, net of customers' advances and
contributions. Larger depreciation provisions are deducted for
tax purposes.
During the second quarter of 1996, the Company revised its
estimates of remaining useful lives of the utility plant based on
an external engineering study. The effect of applying these new
lives was to reduce depreciation expense by approximately
$283,000, increase operating income and net income by
approximately $187,000 and net income per share by approximately
$.07.
Annual provisions for depreciation of transportation and
mechanical equipment included in utility plant are computed on a
straight-line basis over the estimated service lives. Such
provisions are charged to clearing accounts and apportioned
therefrom to operating expenses and other accounts in accordance
with the Uniform System of Accounts as prescribed by the PPUC.
The Company charges to maintenance expense the cost of
repairs and replacements and renewals of less than units of
property. Maintenance of transportation equipment is charged to
clearing accounts and apportioned therefrom in a manner similar
to depreciation. The cost of replacements, renewals and
betterments of units of property is capitalized to the utility
plant accounts.
Upon normal retirement of depreciable property, the estimated
or actual cost of the asset is credited to the utility plant
account, and such amounts, together with the cost of removal less
salvage, is charged to the reserve for depreciation. Gains or
losses from abnormal retirements are reflected in income
currently.
Deferred Charges-
Deferred debt expense is amortized on a straight-line basis
over the term of the related debt.
Deferred rate case expense is amortized over two years as
specified by the PPUC for ratemaking purposes.
Revenues-
Revenues include amounts billed to customers on a cycle basis
and unbilled amounts based on estimated usage from the latest
meter reading to the end of the accounting period.
Customers' Advances for Construction-
Advances are received from customers for construction of
utility plant and are refundable as operating revenues are earned
and any notes receivable have been paid after the completion of
construction (see also Note 7). After all refunds to which the
customer is entitled are made, any remaining balance is
transferred to contributions in aid of construction.
Contributions in Aid of Construction-
Contributions in aid of construction include direct
contributions and the portion of customers' advances for
construction which become nonrefundable. Transfers to other
accounts may not be made without approval of the PPUC.
Income Taxes-
Certain income and expense items are accounted for in
different time periods for financial reporting than for income
tax reporting purposes.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company is also required to recognize regulatory assets
and liabilities for the effect on revenues expected to be
realized as the tax effects of temporary differences previously
flowed through to customers reverse.
Investment tax credits have been deferred and are being
amortized to income over the average estimated service lives of
the related assets.
Notes Receivable-
Notes receivable are recorded at cost, less the related
allowance for impaired notes receivable. Management, considering
current information and events regarding the borrowers' ability
to repay their obligations, considers a note to be impaired when
it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount
of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective
interest rate.
Pension Plans-
The Company has defined benefit pension plans covering
substantially all of its employees. The benefits are based on
years of service and the employee's compensation before
retirement.
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of-
The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of," on January 1, 1996. This
Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact
on the Company's financial position, results of operations, or
liquidity.
Allowance for Funds Used During Construction-
Allowance for funds used during construction (AFUDC)
represents the cost of funds used for construction purposes
during the period of construction. These costs are reflected as
non-cash income during the construction period and as an addition
to the cost of plant constructed. The AFUDC rate was 10.04% for
1997, 1996, and 1995.
Statements of Cash Flows-
For the purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents except
for those instruments earmarked to fund construction expenditures
or repay long-term debt.
Use of Estimates in the Preparation of Financial Statements-
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. Rate Increases
The Company has increased rates as approved by the PPUC in
September 1996 (6.0%).
Notes to Financial Statements (Continued)
3. Income Taxes
The provisions for income taxes consist of:
1997 1996 1995
Federal current $ 838,367 $ 570,390 $ 805,004
State current 168,797 111,026 254,807
Federal deferred 626,113 523,452 279,490
State deferred 84,284 50,834 117,915
Federal investment tax
credit, net of current
utilization........... (76,332) 3,002 (37,309)
Total income
taxes................. $1,641,229 $1,258,704 $1,419,907
A reconciliation of the statutory Federal tax provision (34%) to
the total provision follows:
1997 1996 1995
Statutory Federal
tax provision $1,618,839 $1,360,298 $1,268,932
Reversal of
taxes related to
rate cases........... 29,012 (33,961) 33,104
Tax-exempt
interest............. (39,968) (53,421) (27,674)
Effect of
depreciation
flowed through (32,921) (54,906) (58,448)
Effect of cost of
removal flowed
through.............. (19,835) (19,603) (24,163)
Amortization of
investment tax
credit............... (37,765) (38,495) (38,108)
Tank painting expenses. (37,308) - -
State income
taxes, net of
Federal benefit...... 167,033 106,828 245,997
Other, net............. (5,858) (8,036) 20,267
Total income
taxes................ $1,641,229 $1,258,704 $1,419,907
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities as of December 31, 1997 and 1996 are summarized in
the following table:
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $ 75,017 $ 61,377
Deferred compensation 521,228 496,637
Customers' advances
and contributions 4,444,641 4,612,474
Alternative minimum tax
credit carryforward 1,007,001 748,514
Other 30,504 -
Total gross deferred tax assets 6,078,391 5,919,002
Less valuation allowance - -
Total deferred tax assets 6,078,391 5,919,002
Deferred tax liabilities:
Accelerated depreciation 12,198,349 12,195,132
Investment tax credit 400,652 452,652
Depreciation on customers'
advance assets 1,089,048 924,318
Pension income 953,119 917,584
Cost of removal 396,873 357,089
Tank painting 351,829 276,997
Other 421,292 478,528
Total deferred tax liabilities 15,811,162 15,602,300
Net deferred tax liability $ 9,732,771 $9,683,298
Reflected on balance sheets as:
Current deferred tax asset $ 75,017 $ 61,377
Noncurrent deferred tax liability (9,807,788) (9,744,675)
Net deferred tax liability $(9,732,771)$(9,683,298)
No valuation allowance is required for deferred tax assets as
of December 31, 1997 and 1996. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income
and the current regulatory environment, management believes it is
more likely than not the Company will realize the benefits of
these deductible differences.
During 1996, the Company recorded a gain on sale of land of
$134,117. Federal and state income taxes relative to the gain
amounted to $54,443.
4. Borrowings
Long-term debt as of December 31, 1997 and 1996 is summarized
in the following table:
1997 1996
10.17% Senior Notes,
Series A, due 2019.............. $ 6,000,000 $ 6,000,000
9.60% Senior Notes,
Series B, due 2019.............. 5,000,000 5,000,000
10.05% Senior Notes,
Series C, due 2020.............. 6,500,000 6,500,000
8.43% Senior Notes,
Series D, due 2022.............. 7,500,000 7,500,000
4.75% Industrial Development
Authority Revenue Refunding
Bonds, Series 1994, due 2009.... 2,700,000 2,700,000
5% Industrial Development
Authority Revenue Refunding
Bonds, Series 1995, due 2010..... 4,300,000 4,300,000
$32,000,000 $32,000,000
The Company maintains lines of credit aggregating $20,000,000.
Loans granted under these lines as of December 31, 1997 bear
interest based on the prime or LIBOR rate plus basis points, as
defined. Short-term borrowings amounted to $843,000 as of
December 31, 1997 and $1,237,000 as of December 31, 1996. The
weighted average interest rate on short-term borrowings
outstanding as of December 31, 1997 and 1996 is 7.41% and 7.12%,
respectively. All of the lines of credit expire within one year,
and all are payable upon demand. The Company is not required to
maintain compensating balances on its lines of credit.
Long-term debt maturing in the next five years is as follows:
1999 $2,700,000
2000 4,300,000
The terms of the debt agreements limit in some cases the
Company's ability to prepay its borrowings and include certain
restrictions with respect to declaration and payment of cash
dividends and acquisition of the Company's stock. Under the
terms of the most restrictive agreements, cumulative payments for
dividends and acquisition of stock since December 31, 1982 may
not exceed $1,500,000 plus net income since that date. As of
December 31, 1997, none of the earnings retained in the business
are restricted under these provisions.
5. Common Stock and Earnings Per Share
Earnings per share are based upon the weighted average number
of shares outstanding of 2,912,469 in 1997; 2,627,564 in 1996;
and 2,530,380 in 1995.
During 1997, amendments to the existing Articles of
Incorporation were approved. The amendments (i) increased the
authorized capital stock of the Company from 1,200,000 shares of
common stock, par value $10.00 to 6,500,000 shares (6,000,000
shares of common stock, without par value, and 500,000 shares of
Series Preferred Stock, without par value); (ii) eliminated the
concept of par value of the capital stock; and (iii) deleted
certain provisions relating to dividends and shares in
distribution and common stock in order to allow for possible
future issuance of Series Preferred Stock.
Also, during 1997, the Board of Directors declared a four-for-
one stock split for shareholders of record on June 2, 1997, in
conjunction with the increase in authorized shares. The stock
was distributed on June 10, 1997. Shareholders of record
received three additional shares of common stock for each share
owned. The transaction had no effect on total shareholders'
equity, but caused a restatement of all per share amounts
included in this annual report for periods prior to the split.
The Board of Directors also approved an increase in the number of
authorized shares for both the Employee Stock Purchase Plan and
the Dividend Reinvestment Program by a factor of four to reflect
the stock split.
Under the employee stock purchase plan, all full-time
employees who have been employed at least six consecutive months
may purchase shares of the Company's common stock through payroll
deductions limited to 10% of gross compensation. The purchase
price is 95% of the fair market value (as defined). Ninety
thousand shares of common stock have been authorized to be
offered under the plan, of which 39,929 shares have been issued
as of December 31, 1997. During 1997, the Company's Board of
Directors approved an increase in the number of authorized shares
of common stock under the plan.
Under the optional dividend reinvestment plan, holders of the
Company's stock may purchase additional shares. The purchase
price is 95% of the fair market value (as defined). Four hundred
eighty thousand shares of common stock have been authorized to be
offered under the plan, of which 341,477 shares have been issued
as of December 31, 1997.
On August 8, 1996, the Company offered to holders of its
common stock non-transferable subscription rights to purchase
common stock. On September 16, 1996, subscription rights to
purchase 319,924 shares (restated to reflect the June 1997 four-
for-one stock split) were exercised.
6. Employee Benefit Plans
The Company maintains two defined benefit pension plans
covering substantially all of its employees. The benefits are
based upon years of service times the sum of $16.50 plus 1.5% of
final average monthly earnings in excess of $400. The Company's
funding policy is to contribute annually the maximum amount
permitted by the Employee Retirement Income Security Act of 1974.
The following table sets forth the plans' funded status and
amounts recognized in the Company's balance sheets as of December
31, 1997 and 1996. The measurement of assets and obligations of
the plans is as of December 31, 1997 and 1996.
1997 1996
Actuarial present value
of benefit obligations:
Accumulated benefit
obligation, including
vested benefits of
$7,014,770 in 1997 and
$6,211,500 in 1996........ $(7,373,837) $(6,521,300)
Projected benefit
obligation for service
rendered to date $ 8,916,175 $(7,805,600)
Plan assets at fair value,
primarily common trust
stock and bond funds....... 12,512,833 11,163,660
Plan assets in excess of
projected benefit
obligation........................ 3,596,658 3,358,060
Unrecognized prior service
cost.............................. 274,002 182,671
Unrecognized net gain.............. (1,277,933) (794,117)
Unrecognized net transition
asset as of December 31, 1997
and 1996 being recognized
over 15 years..................... (860,333) (1,066,328)
Prepaid pension cost as of
of December 31, 1997 and
1996.............................. $1,732,394 $ 1,680,286
Net periodic pension income for 1997, 1996 and 1995 included the
following components:
1997 1996 1995
Service cost-benefits
earned during the
period $ 256,840 $ 247,100 $ 215,700
Interest cost on
projected benefit
obligation 551,189 500,970 469,119
Actual return on plan
assets (1,680,397) (1,139,905) (1,459,203)
Net amortization and
deferral 732,800 241,787 647,092
One-time charge for
early retirement window 87,460 - -
Net periodic pension
income $ (52,108) $(150,048) $(127,292)
Included in net periodic pension income for 1997 is a one-time
charge for an early retirement incentive of $87,460.
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was
6.50% in 1997 and 6.75% in 1996. The rate of increase in future
compensation levels was 4%. The expected long-term rate of
return on assets was 7%.
The Company has a savings plan pursuant to the provisions of
section 401(k) of the Internal Revenue Code. The plan provides
for elective employee contributions of up to 15% of compensation
and Company matching contributions of 50% of the participant's
contribution, up to a maximum annual Company contribution of $500
for the union represented employees and $1,000 for the general
and administrative employees. Contributions to the plan amounted
to $52,526 in 1997 and $28,210 in 1996.
7. Notes Receivable
The Company has entered into agreements with municipalities to
extend water service into newly-formed water districts. The
Company loaned funds to the municipalities to cover the costs
related to the projects. The municipalities concurrently
advanced these funds to the Company in the form of customers'
advances for construction. The municipalities are required to
charge application fees and water revenue surcharges (fees) to
customers connected to the system which are remitted to the
Company. The principal and the related customer advance are
reduced periodically as operating revenues are earned by the
Company from customers connected to the system and refunds of
advances are made. There is no due date for the notes nor
expiration date for the advances.
The Company has recorded interest income of $98,382 in 1997,
$152,979 in 1996 and $61,322 in 1995 on these notes.
Included in the accompanying balance sheets at December 31,
1997 and 1996 were the following amounts related to these
projects.
1997 1996
Notes receivable, including
interest $ 714,025 $ 785,696
Customers' advances for
construction 2,433,568 2,465,620
8. Capital Commitments
The estimated funds needed for the Company's construction
program for 1998 are $5,940,000. The Company plans to finance
such expenditures with internally generated funds, customers'
advances, short-term borrowings and proceeds from the issuance of
common stock under its dividend reinvestment plan (stock issued
in lieu of cash dividends) and employee stock purchase plan.
9. Commitments and Contingent Liabilities
The Company is involved in certain legal and administrative
proceedings before various courts and governmental agencies
concerning rates and other matters. The Company expects that the
ultimate disposition of these proceedings will not have a
material effect on the Company's financial position or results of
operations.
10. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined based on available market information and appropriate
valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the
Company might realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value.
The carrying amount of current assets and liabilities that are
considered financial instruments approximates their fair value as
of the dates presented. The Company's long-term debt, with a
carrying value of $32,000,000 at December 31, 1997, had an
estimated fair value of approximately $37,800,000.
The Company's customers' advances for construction and notes
receivable have carrying values at December 31, 1997 of
$16,217,638 and $913,934, respectively. The relative fair values
of these amounts cannot be accurately estimated since future
payment streams are dependent upon several factors, including new
customer connections, customer consumption levels and future rate
increases.
Independent Auditors' Report
To the Shareholders and Board of Directors of The York Water
Company:
We have audited the accompanying balance sheets of The York
Water Company as of December 31, 1997 and 1996, and the related
statements of income, shareholders' investment, and cash flows
for each of the years in the three-year period ended December 31,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of The York Water Company as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Harrisburg, PA
February 17, 1998