SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1998 Commission File No. 0-690 THE YORK WATER COMPANY (Exact name of Registrant as specified in its Charter) PENNSYLVANIA 23-1242500 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 East Market Street, York, Pennsylvania 17401 (Address of principal executive offices) (Zip Code) Registrant's telephone number including Area Code 717-845-3601 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value 2,968,394 Shares outstanding as of September 30, 1998 THE YORK WATER COMPANY PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited) As Of As of Sept.30,1998 Dec. 31, 1997 UTILITY PLANT, at original cost $100,740,044 $97,487,926 Less-Reserve for depreciation 15,465,957 14,332,890 85,274,087 83,155,036 OTHER PHYSICAL PROPERTY: Less-Reserve for depreciation of $68,970 in 1998 and $65,193 in 1997 496,754 498,859 CURRENT ASSETS: Cash and cash equivalents 801,034 - Receivables, less reserves of $110,000 in 1998 and $110,000 in 1997 2,648,623 2,540,075 Recoverable income taxes 123,708 547,182 Materials and supplies, at cost 321,926 337,837 Prepaid expenses 239,847 190,314 Deferred income taxes 75,017 75,017 4,210,155 3,690,425 OTHER LONG-TERM ASSETS: Prepaid pension cost 1,802,984 1,732,394 Deferred debt expense 414,749 440,163 Deferred rate case expense - 57,055 Notes receivable 882,431 913,934 Deferred regulatory assets 7,545,850 7,287,799 Other 1,188,124 1,078,409 11,834,138 11,509,754 $101,815,134 $98,854,074 THE YORK WATER COMPANY Balance Sheets (Unaudited) As Of As Of Sept.30,1998 Dec. 31, 1997 CAPITALIZATION Common stock, no par value, authorized 6,000,000 shares in 1998 and in 1997, outstanding 2,968,394 shares in 1998 and 2,934,782 shares in 1997 $27,083,057 $26,453,873 Earnings retained in the business 3,074,684 2,696,913 30,157,741 29,150,786 LONG-TERM DEBT 5.0% Industrial Development Authority Refunding Bonds, Series 1995, due 2010 4,300,000 4,300,000 10.05% Senior Notes, Series C, due 2020 6,500,000 6,500,000 10.17% Senior Notes, Series A, due 2019 6,000,000 6,000,000 9.6% Senior Notes, Series B,due 2019 5,000,000 5,000,000 8.43% Senior Notes,Series D,due 2022 7,500,000 7,500,000 4.75% Industrial Development Authority Revenue Refunding Bonds, Series 1994, due 2009 2,700,000 2,700,000 32,000,000 32,000,000 CURRENT LIABILITIES Short-term borrowings 500,000 843,000 Accounts payable 240,648 551,402 Dividends payable 501,035 488,483 Accrued taxes 119,725 115,073 Advance water revenues 213,998 182,118 Accrued interest 483,774 675,761 Other accrued expenses 423,191 345,939 2,482,371 3,201,776 DEFERRED CREDITS Customers' advances for construction 17,846,539 16,219,638 Contributions in aid of construction 5,944,300 5,861,487 Deferred income taxes 10,425,561 9,807,788 Deferred regulatory liabilities 1,706,942 1,572,985 Deferred employee benefits 1,251,680 1,039,614 37,175,022 34,501,512 101,815,134 98,854,074 THE YORK WATER COMPANY Statements of Income (Unaudited) (Unaudited) Three Months Ended Nine Months Ended Sept. 30 Sept. 30 1998 1997 1998 1997 WATER OPERATING REVENUES Residential $2,699,361 $2,718,675 $7,528,069 $7,527,350 Commercial and industrial 1,459,238 1,442,767 4,014,440 3,974,357 Other 454,237 451,465 1,347,172 1,278,181 4,612,836 4,612,907 12,889,681 12,779,888 OPERATING EXPENSES Operation and maintenance 986,421 1,066,201 2,927,474 2,834,492 Administrative and general 858,476 822,852 2,337,909 2,347,843 1,844,897 1,889,053 5,265,383 5,182,335 Depreciation 409,144 388,085 1,227,433 1,164,254 Taxes other than income taxes 289,931 263,168 821,041 779,045 Federal and state income taxes 500,261 524,469 1,253,940 1,244,320 3,044,233 3,064,775 8,567,797 8,369,954 Operating Income 1,568,603 1,548,132 4,321,884 4,409,934 INTEREST EXPENSE AND OTHER EXPENSE/(INCOME) Interest on long-term debt 679,738 679,738 2,039,213 2,039,213 Interest on short-term debt 7,177 2,158 29,732 27,670 Allowance for funds used during construction (15,327) (12,140) (67,474) (21,642) Other income, net (69,575) (73,132) (104,389) (139,119) 602,013 596,624 1,897,082 1,906,122 Net Income $ 966,590 $ 951,508 $2,424,802 $2,503,812 Basic Earnings Per Share $.33 $.33 $.82 $.86 Cash Dividends Per Share $.24 $.23 $.70 $.68 /TABLE THE YORK WATER COMPANY Statements of Cash Flows (Unaudited) (Unaudited) Nine Months Nine Months Ended Ended Sept.30, 1998 Sept.30, 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,424,802 $2,503,812 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,227,433 1,164,254 Provision for losses on accounts receivable 76,500 73,500 Increase (decrease) in deferred income taxes (including regulatory assets and liabilities) 493,679 (101,477) Changes in assets and liabilities: Increase in accounts receivable (185,048) (217,398) Decrease in recoverable income taxes 423,474 159,203 Decrease in materials and supplies 15,911 2,363 Increase in prepaid expenses and prepaid pension costs (120,123) (171,380) Increase (decrease) in accounts payable, accrued expenses, other liabilities and deferred employee benefits 22,996 (71,023) (Decrease) increase in accrued interest and taxes (187,335) 58,348 Decrease in other assets 84,667 112,176 Net cash provided by operating activities 4,276,956 3,512,378 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (3,456,292) (2,727,389) Customers' advances for construction and contributions in aid of construction 1,709,714 1,013,485 Net cash used in investing activities (1,746,578) (1,713,904) CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments under line-of-credit agreements (343,000) (898,000) Issuance of common stock under dividend reinvestment plan 569,006 413,205 Issuance of common stock under employee stock purchase plan 60,178 59,125 Dividends paid (2,047,031) (1,977,672) Decrease in notes receivable 31,503 43,374 Net cash used in financing activities (1,729,344) (2,359,968) Net increase (decrease) in cash and cash equivalents 801,034 (561,494) Cash and cash equivalents at beginning of period - 694,491 Cash and cash equivalents at end of period $801,034 $ 132,997 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized $2,188,142 $2,241,957 Income taxes 765,075 1,029,567 /TABLE THE YORK WATER COMPANY Notes to Interim Financial Statements 1. Interim Financial Information The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of results for such periods. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report to Shareholders for the year ended 1997. Operating results for the three month and nine month periods ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 2. Basic Earnings Per Share Basic earnings per share for the nine months ended September 30, 1998 and 1997 were based on weighted average shares outstanding of 2,951,146 and 2,912,372, respectively. THE YORK WATER COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended September 30, 1998 Compared with Three Months Ended September 30, 1997 Net income for the three months ended September 30, 1998 was $966,590, an increase of $15,082 (1.6%) compared to the three months ended September 30, 1997. Water operating revenues for the three months ended September 30, 1998 were consistent with the three months ended September 30, 1997. Operating expenses, exclusive of depreciation and taxes, for the three months ended September 30, 1998 decreased $44,156 or 2.3% compared to the three months ended September 30, 1997. Reduced expenses for maintenance of purification structures and mains were the primary reasons for the decrease. Higher expenses for pumping equipment maintenance, deferred compensation, professional services, and pensions partially offset the decrease. Depreciation expense for the three months ended September 30, 1998 increased $21,059 or 5.4% compared to the three months ended September 30, 1997 due to increased plant investment. Increased realty taxes caused the 10.1% increase in taxes other than income taxes. Federal and state income taxes for the three months ended September 30, 1998 decreased $24,208 or 4.6% compared to the three months ended September 30, 1997 principally as a result of a decrease in taxable net income. The effective tax rates for the quarters ended September 30, 1998 and 1997 were 34.1% and 35.5%, respectively. Nine Months Ended September 30, 1998 Compared with Nine Months Ended September 30, 1997 Net income for the nine months ended September 30, 1998 was $2,424,802, a decrease of $79,010 (3.2%) compared to the nine months ended September 30, 1997. Water operating revenues for the nine months ended September 30, 1998 increased $109,793 (.9%) compared to the nine months ended September 30, 1997. Consumption was higher in the commercial and industrial sectors, while declining slightly in the residential sector. Operating expenses, exclusive of depreciation and taxes, for the nine months ended September 30, 1998 increased $83,048 or 1.6% compared to the nine months ended September 30, 1997. The main causes of the increase were higher pension expense, additional deferred compensation liability, and higher pumping equipment maintenance costs. Expenses for water analysis required by the Safe Drinking Water Act and computer system maintenance for the year 2000 added to the increase. Workers compensation and package commercial insurance credits, reduced legal fees, lower postage, lower meter reading expenses, and lower purification structure maintenance substantially reduced the increase. Depreciation expense for the nine months ended September 30, 1998 increased $63,179 or 5.4% compared to the nine months ended September 30, 1997 due to increased plant investment. Increased realty taxes and capital stock taxes caused the 5.4% increase in taxes other than income taxes. Allowance for funds used during construction for the first nine months of 1998 increased $45,832 when compared to the same period in 1997. The increase was due to two main projects, the Southern York County main extension and the Hametown Booster Station. Year 2000 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" issue 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 has done an inventory of programs and has developed a plan, including a timetable, for solving and testing year 2000 issues. The Company has identified three areas that do have 2000 compliance issues: Accounting, communications and embedded technology. As far as accounting, the Company will be replacing all of its current software. The software upgrade is approximately 50% complete and is expected to be completely installed by the end of 1998. This will allow for testing and adjustments to be made throughout 1999. Current software will be used in the event something unanticipated occurs with the software upgrade. The Company's electronic communications review has been completed and all necessary changes have been made. Only slight modifications were required. In the area of embedded technology, the Company is working with the manufacturers of all our time sensitive equipment to make sure the date field in the software has been located and updated to accept a four-digit date. The Company has identified filter plant control units, PC's, burglar alarms, and the check encoder as some of the items to be addressed for year 2000 problems. The Company expects to solve problems and test solutions in this area by the end of March 1999. As of September 1998, the Company incurred costs of approximately $27,000, and estimates total costs of year 2000 remediation efforts to reach $80,000. While the Company anticipates that critical vendors and suppliers will be year 2000 compliant, contingency plans will be put in place so that water service to customers will not be interrupted. In one of our most critical areas, energy, the Company already has emergency power generators installed as backups at most locations. Those locations which currently have no emergency backup, will have alternate energy sources by the year 2000. 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 revenues, an increase of approximately 6.0%. The Company does not expect to file for another rate increase until after 1998. Liquidity and Capital Resources During the first nine months of 1998, the per capita volume of water sold did not significantly change compared to the first nine months of 1997. 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 the nine months ended September 30, 1998, the Company had $3,456,292 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 the first nine months of 1998, net cash provided by operating activities exceeded net cash used in investing and financing activities. The Company anticipates that during the remainder of 1998 net cash used in investing and financing activities will exceed net cash provided by operating activities. Borrowings against the Company's lines of credit, proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends) and employee stock purchase plan, and customers' advances are expected to be used to satisfy the need for additional cash. As of September 30, 1998, current assets exceeded current liabilities by $1,727,784. Short-term borrowings from lines of credit as of September 30, 1998 were $500,000. 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. Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward- looking statements address activities or events which the Company expects will or may occur in the future. The Company cautions that a number of important factors could cause the actual results to differ materially from those expressed in any forward-looking statements made on behalf of the Company. Recently Issued Accounting Standards 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, did not have a material effect on the Company's financial statements. In June 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosure 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 did not 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 Pension Plans and for Termination Benefits" (SFAS 88), and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). The statement is effective for fiscal years beginning after December 15, 1997. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity as of June 30, 1998. In June 1998, the FASB issued Statement of Financial Position No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The statement establishes accounting and reporting standards for derivative instruments and is effective for fiscal years beginning after June 15, 1999. Adoption of this statement is not expected to have a material effect on the Company's financial position, results of operations, or liquidity. THE YORK WATER COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE YORK WATER COMPANY /s/ William T. Morris William T. Morris Principal Executive Officer Date: November 13, 1998 /s/ Jeffrey S. Osman Jeffrey S. Osman Principal Financial and Accounting Officer Date: November 13, 1998