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, 1999 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 3,014,570 Shares outstanding as of September 30, 1999 THE YORK WATER COMPANY PART I - FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets (Unaudited) As Of As of Sept.30,1999 Dec. 31, 1998 UTILITY PLANT, at original cost $106,574,353 $102,088,220 Less-Reserve for depreciation 16,745,540 15,687,003 89,828,813 86,401,217 OTHER PHYSICAL PROPERTY: Less-Reserve for depreciation of $74,405 in 1999 and $70,457 in 1998 753,889 495,267 CURRENT ASSETS: Cash and cash equivalents - 257,706 Receivables, less reserves of $120,000 in 1999 and in 1998 2,628,792 2,481,799 Recoverable income taxes 14,393 - Materials and supplies, at cost 394,984 361,400 Prepaid expenses 200,305 174,888 Deferred income taxes 81,836 81,836 3,320,310 3,357,629 OTHER LONG-TERM ASSETS: Prepaid pension cost 1,897,104 1,826,514 Deferred debt expense 400,502 406,277 Deferred rate case expense 120,339 4,820 Notes receivable 774,472 813,075 Deferred regulatory assets 8,186,189 7,959,948 Other 1,347,219 1,214,344 12,725,825 12,224,978 $106,628,837 $102,479,091 THE YORK WATER COMPANY Balance Sheets (Unaudited) As Of As Of Sept.30,1999 Dec. 31, 1998 CAPITALIZATION Common stock, no par value, authorized 31,000,000 shares in 1999 and 6,000,000 shares in 1998, outstanding 3,014,570 shares in 1999 and 2,979,722 shares in 1998 $ 27,899,823 $ 27,292,726 Earnings retained in the business 3,322,287 3,087,710 31,222,110 30,380,436 LONG-TERM DEBT 5.00% Industrial Development Authority Revenue 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 4.40% 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 1,027,000 - Accounts payable 423,859 290,179 Dividends payable 525,188 506,415 Accrued taxes 26,953 347,244 Advance water revenues 228,200 216,478 Accrued interest 480,624 675,761 Other accrued expenses 352,662 338,431 3,064,486 2,374,508 DEFERRED CREDITS Customers' advances for construction 18,066,350 16,689,050 Contributions in aid of construction 7,092,089 7,080,610 Deferred income taxes 11,705,756 10,967,235 Deferred regulatory liabilities 1,874,450 1,681,584 Deferred employee benefits 1,603,596 1,305,668 40,342,241 37,724,147 $106,628,837 $102,479,091 THE YORK WATER COMPANY Statements of Income (Unaudited) (Unaudited) Three Months Ended Nine Months Ended Sept. 30 Sept. 30 1999 1998 1999 1998 WATER OPERATING REVENUES Residential $2,649,564 $2,699,361 $7,700,196 $7,528,069 Commercial and industrial 1,494,749 1,459,238 4,054,982 4,014,440 Other 474,468 454,237 1,425,790 1,347,172 4,618,781 4,612,836 13,180,968 12,889,681 OPERATING EXPENSES Operation and maintenance 1,136,752 986,421 3,045,055 2,927,474 Administrative and general 810,259 858,476 2,589,234 2,337,909 Depreciation 413,287 409,144 1,239,859 1,227,433 Taxes other than income taxes 231,127 289,931 765,705 821,041 2,591,425 2,543,972 7,639,853 7,313,857 Operating Income 2,027,356 2,068,864 5,541,115 5,575,824 INTEREST EXPENSE AND OTHER INCOME Interest on long-term debt 677,376 679,738 2,036,063 2,039,213 Interest on interim bank loans 8,105 7,177 12,793 29,732 Allowance for funds used during construction (33,939) (15,327) (63,821) (67,474) Other income, net (89,424) (69,575) (169,849) (104,389) 562,118 602,013 1,815,186 1,897,082 Income before income taxes 1,465,238 1,466,851 3,725,929 3,678,742 Federal and state income taxes 552,199 500,261 1,382,204 1,253,940 Net Income $ 913,039 $ 966,590 $2,343,725 $2,424,802 Basic earnings per share $.30 $.33 $.78 $.82 Cash dividends per share $.24 $.24 $.71 $.70 THE YORK WATER COMPANY Statements of Cash Flows (Unaudited) (Unaudited) Nine Months Nine Months Ended Ended Sept.30, 1999 Sept.30, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $2,343,725 $2,424,802 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,239,859 1,227,433 Provision for losses on accounts receivable 87,750 76,500 Increase in deferred income taxes (including regulatory assets and liabilities) 705,146 493,679 Changes in assets and liabilities: Increase in accounts receivable (234,743) (185,048) (Increase) decrease in recoverable income taxes (14,393) 423,474 (Increase) decrease in materials and supplies (33,584) 15,911 Increase in prepaid expenses and prepaid pension costs (96,007) (120,123) Increase in accounts payable, accrued expenses, other liabilities and deferred employee benefits 476,334 22,996 (Decrease) in accrued interest and taxes (515,428) (187,335) (Increase) decrease in other assets (177,034) 84,667 Net cash provided by operating activities 3,781,625 4,276,956 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (4,991,662) (3,456,292) Customers' advances for construction and contributions in aid of construction 1,388,779 1,709,714 Decrease in notes receivable 38,603 31,503 Net cash used in investing activities (3,564,280) (1,715,075) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line-of-credit agreements 1,027,000 (343,000) Issuance of common stock under dividend reinvestment plan 549,320 569,006 Issuance of common stock under employee stock purchase plan 57,777 60,178 Dividends paid (2,109,148) (2,047,031) Net cash used in financing activities (475,051) (1,760,847) Net (decrease) increase in cash and cash equivalents (257,706) 801,034 Cash and cash equivalents at beginning of period 257,706 - Cash and cash equivalents at end of period $ -0- $ 801,034 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $2,177,208 $2,188,142 Income taxes 881,413 765,075 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 1998. Operating results for the three month and nine month periods ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 2. Basic Earnings Per Share Basic earnings per share for the nine months ended September 30, 1999 and 1998 were based on weighted average shares outstanding of 2,997,524 and 2,951,146, 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, 1999 Compared with Three Months Ended September 30, 1998 Net income for the three months ended September 30, 1999 was $913,039, a decrease of $53,551 (5.5%) compared to the three months ended September 30, 1998. Water operating revenues for the three months ended September 30, 1999 were consistent with the three months ended September 30, 1998. Commercial consumption rose for the three-month period while residential and industrial consumption declined. Operating expenses for the three months ended September 30, 1999 increased $47,453 or 1.9% compared to the three months ended September 30, 1998. Increased main maintenance, chemical expenses due to the new hypochlorination system, year 2000 system maintenance, deferred compensation, and purification equipment maintenance were the primary reasons for the increase. Reduced pumping equipment maintenance, electric costs, rate case expense, capital stock tax and realty taxes partially offset the increase. Allowance for funds used during construction for the three months ended September 30, 1999 increased $18,612 when compared to the same period in 1998 due to the Railroad/New Freedom and Windsor main extensions which are larger than average. A loss recorded in 1998 on the sale of land previously occupied by the York New Salem standpipe caused other income, net to be higher for the three months ended September 30, 1999 than the three months ended September 30, 1998. Federal and state income taxes for the three months ended September 30, 1999 increased $51,938 or 10.4% when compared to the same period in 1998 primarily as a result of an increase in taxable net income. The effective tax rates for the quarters ended September 30, 1999 and 1998 were 37.7% and 34.1%, respectively. Nine Months Ended September 30, 1999 Compared with Nine Months Ended September 30, 1998 Net income for the nine months ended September 30, 1999 was $2,343,725, a decrease of $81,077 or 3.3% compared to the nine months ended September 30, 1998. Water operating revenues for the nine months ended September 30, 1999 increased $291,287 or 2.3% compared to the nine months ended September 30, 1998. Consumption was up by .9% overall. Operating expenses for the nine months ended September 30, 1999 increased $325,996 or 4.5% compared to the nine months ended September 30, 1998. Deferred compensation, maintenance of mains, legal fees related to strategic planning, shareholder rights, and union negotiations, year 2000 system maintenance, reduced premium credits for insurance, increased chemical expenses due to the new hypochlorination system, and expenses related to the printing of the water quality report were the primary reasons for the increase. Declines in electric costs, filter plant maintenance, rate case expense, capital stock and realty taxes partially offset the increase. Interest on interim bank loans decreased $16,939 or 57.0% through September 30, 1999 compared to September 30, 1998 due to a decrease in short-term debt outstanding in 1999. The average short-term debt outstanding in 1999 and 1998 was $253,059 and $596,220, respectively. Other income net increased by $65,460 or 62.7% through September 30, 1999 compared to September 30, 1998 due to a 1998 loss on the sale of land in York New Salem, a decline in donations, and increased interest income on water district notes receivable. Federal and state income taxes for the nine months ended September 30, 1999 increased $128,264 or 10.2% when compared to the same period in 1998 primarily as a result of an increase in taxable net income. The effective tax rates for the year-to-date periods ended September 30, 1999 and 1998 were 37.1% and 34.1%, respectively. 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 April 22, 1999 seeking an 8.8% increase in annual revenues. Effective October 1, 1999, the PPUC authorized an increase in rates designed to produce approximately $651,000 in additional annual revenues. Liquidity and Capital Resources During the first nine months of 1999, the per capita volume of water sold did not significantly change compared to the first nine months of 1998, despite the drought. 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, 1999, the Company had $4,991,662 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 1999, net cash used in investing and financing activities exceeded net cash provided by operating activities. The Company anticipates that during the remainder of 1999 net cash used in investing and financing activities will again 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, a Pennvest loan, and customers' advances are expected to be used to satisfy the need for additional cash. As of September 30, 1999, current assets exceeded current liabilities by $255,824. Short-term borrowings from lines of credit as of September 30, 1999 were $1,027,000. The Company maintains lines of credit aggregating $17,000,000. 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. Year 2000 This statement constitutes a year 2000 readiness disclosure by The York Water Company, under the Year 2000 Information and Readiness Disclosure Act. 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 year 2000 compliance issues: Accounting, communications and embedded technology. As far as accounting, the Company is replacing all of its current software. The software upgrade is completely installed and is currently being tested and customized. Modifications are expected to be completed by the end of November 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. The Company's embedded technology review has been completed and all necessary changes have been made. Only slight modifications were required. As of September 30, 1999, the Company incurred costs of approximately $126,000, and estimates total costs of year 2000 remediation efforts to reach $140,000. 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 all locations. Drought Emergency On October 8, 1999, Pennsylvania Governor Tom Ridge lifted the drought emergency. The drought emergency had some impact on September revenues, but did not materially affect the Company's financial position. Any further drought impact should be negated by the rate increase. Item 6. Exhibits and Reports on Form 8-K The Company filed a report on Form 8-K on October 28, 1999 regarding the repurchase of 38,000 shares of its common stock in a private transaction. 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 12, 1999 /s/ Jeffrey S. Osman Jeffrey S. Osman Principal Financial and Accounting Officer Date: November 12, 1999