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, 20192020 |
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.) |
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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.
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).
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 ◻⌧ |
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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).
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 | 12,988,56713,049,958 Shares outstanding
as of November 7, 20196, 2020 |
PART I | Financial Information | |
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PART II | Other Information | |
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THE YORK WATER COMPANY
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE YORK WATER COMPANY
Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)
| | Sep. 30, 2019 | | | Dec. 31, 2018 | | | Sep. 30, 2020 | | | Dec. 31, 2019 | |
ASSETS | | | | | | | | | | | | |
UTILITY PLANT, at original cost | | $ | 397,524 | | | $ | 380,784 | | | $ | 423,676 | | | $ | 401,383 | |
Plant acquisition adjustments | | | (3,064 | ) | | | (3,108 | ) | | | (2,973 | ) | | | (3,318 | ) |
Accumulated depreciation | | | (83,122 | ) | | | (78,519 | ) | | | (90,217 | ) | | | (84,841 | ) |
Net utility plant | | | 311,338 | | | | 299,157 | | | | 330,486 | | | | 313,224 | |
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OTHER PHYSICAL PROPERTY, net of accumulated depreciation of $427 in 2019 and $410 in 2018 | | | 697 | | | | 714 | | |
OTHER PHYSICAL PROPERTY, net of accumulated depreciation of $452 in 2020 and $435 in 2019 | | | | 748 | | | | 769 | |
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CURRENT ASSETS: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 2 | | | | 2 | | | | 10,901 | | | | 2 | |
Accounts receivable, net of reserves of $317 in 2019 and $305 in 2018 | | | 4,545 | | | | 4,811 | | |
Accounts receivable, net of reserves of $477 in 2020 and $305 in 2019 | | | | 5,193 | | | | 4,421 | |
Unbilled revenues | | | 2,394 | | | | 2,427 | | | | 2,801 | | | | 2,276 | |
Recoverable income taxes | | | 508 | | | | – | | | | 50 | | | | 547 | |
Materials and supplies inventories, at cost | | | 1,022 | | | | 876 | | | | 1,158 | | | | 1,007 | |
Prepaid expenses | | | 1,442 | | | | 895 | | | | 1,679 | | | | 1,131 | |
Total current assets | | | 9,913 | | | | 9,011 | | | | 21,782 | | | | 9,384 | |
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OTHER LONG-TERM ASSETS: | | | | | | | | | | | | | | | | |
Prepaid pension cost | | | | 3,878 | | | | 1,819 | |
Note receivable | | | 255 | | | | 255 | | | | 255 | | | | 255 | |
Deferred regulatory assets | | | 33,764 | | | | 32,353 | | | | 37,314 | | | | 34,189 | |
Other assets | | | 4,972 | | | | 3,650 | | | | 3,954 | | | | 3,889 | |
Total other long-term assets | | | 38,991 | | | | 36,258 | | | | 45,401 | | | | 40,152 | |
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Total Assets | | $ | 360,939 | | | $ | 345,140 | | | $ | 398,417 | | | $ | 363,529 | |
The accompanying notes are an integral part of these statements.
THE YORK WATER COMPANY
Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)
| | Sep. 30, 2019 | | | Dec. 31, 2018 | | |
| | | | | | | | 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 12,984,826 shares in 2019 and 12,943,536 shares in 2018 | | $ | 82,644 | | | $ | 81,305 | | |
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 | | | 49,164 | | | | 44,890 | | | | 56,053 | | | | 50,209 | |
Total common stockholders' equity | | | 131,808 | | | | 126,195 | | | | 141,428 | | | | 134,185 | |
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PREFERRED STOCK, authorized 500,000 shares, no shares issued | | | – | | | | – | | | | – | | | | – | |
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LONG-TERM DEBT, excluding current portion | | | 94,212 | | | | 93,328 | | | | 116,829 | | | | 94,535 | |
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COMMITMENTS | | | – | | | | – | | | | – | | | | – | |
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CURRENT LIABILITIES: | | | | | | | | | | | | | | | | |
Short-term borrowings | | | – | | | | 1,000 | | |
Current portion of long-term debt | | | 6,500 | | | | 30 | | | | – | | | | 6,500 | |
Accounts payable | | | 4,751 | | | | 3,030 | | | | 6,770 | | | | 3,452 | |
Dividends payable | | | 2,008 | | | | 1,999 | | | | 2,102 | | | | 2,096 | |
Accrued compensation and benefits | | | 1,136 | | | | 1,191 | | | | 1,175 | | | | 1,247 | |
Accrued income taxes | | | – | | | | 150 | | |
Accrued interest | | | 1,079 | | | | 992 | | | | 1,068 | | | | 914 | |
Deferred regulatory liabilities | | | 1,138 | | | | 2,104 | | | | 453 | | | | 609 | |
Other accrued expenses | | | 327 | | | | 345 | | | | 352 | | | | 338 | |
Total current liabilities | | | 16,939 | | | | 10,841 | | | | 11,920 | | | | 15,156 | |
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DEFERRED CREDITS: | | | | | | | | | | | | | | | | |
Customers' advances for construction | | | 7,916 | | | | 6,849 | | | | 10,291 | | | | 7,844 | |
Deferred income taxes | | | 39,134 | | | | 36,962 | | | | 42,195 | | | | 40,426 | |
Deferred employee benefits | | | 3,909 | | | | 4,715 | | | | 4,545 | | | | 4,317 | |
Deferred regulatory liabilities | | | 24,835 | | | | 24,710 | | | | 27,149 | | | | 24,790 | |
Other deferred credits | | | 2,435 | | | | 1,815 | | | | 2,919 | | | | 2,247 | |
Total deferred credits | | | 78,229 | | | | 75,051 | | | | 87,099 | | | | 79,624 | |
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Contributions in aid of construction | | | 39,751 | | | | 39,725 | | | | 41,141 | | | | 40,029 | |
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Total Stockholders' Equity and Liabilities | | $ | 360,939 | | | $ | 345,140 | | | $ | 398,417 | | | $ | 363,529 | |
The accompanying notes are an integral part of these statements.
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 | |
| | Three Months Ended September 30 | | | Nine Months Ended September 30 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | | | | | | | | | |
OPERATING REVENUES | | $ | 13,680 | | | $ | 12,698 | | | $ | 38,559 | | | $ | 36,368 | | | $ | 14,257 | | | $ | 13,680 | | | $ | 40,454 | | | $ | 38,559 | |
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OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operation and maintenance | | | 2,586 | | | | 2,280 | | | | 7,639 | | | | 7,197 | | | | 2,659 | | | | 2,586 | | | | 7,940 | | | | 7,639 | |
Administrative and general | | | 2,172 | | | | 1,944 | | | | 6,181 | | | | 6,193 | | | | 2,257 | | | | 2,172 | | | | 6,573 | | | | 6,181 | |
Depreciation and amortization | | | 1,926 | | | | 1,770 | | | | 5,750 | | | | 5,235 | | | | 2,046 | | | | 1,926 | | | | 6,113 | | | | 5,750 | |
Taxes other than income taxes | | | 281 | | | | 275 | | | | 914 | | | | 856 | | | | 274 | | | | 281 | | | | 898 | | | | 914 | |
| | | 6,965 | | | | 6,269 | | | | 20,484 | | | | 19,481 | | | | 7,236 | | | | 6,965 | | | | 21,524 | | | | 20,484 | |
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Operating income | | | 6,715 | | | | 6,429 | | | | 18,075 | | | | 16,887 | | | | 7,021 | | | | 6,715 | | | | 18,930 | | | | 18,075 | |
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OTHER INCOME (EXPENSES): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest on debt | | | (1,314 | ) | | | (1,377 | ) | | | (3,937 | ) | | | (4,117 | ) | | | (1,152 | ) | | | (1,314 | ) | | | (3,503 | ) | | | (3,937 | ) |
Allowance for funds used during construction | | | 117 | | | | 53 | | | | 273 | | | | 176 | | | | 115 | | | | 117 | | | | 330 | | | | 273 | |
Other pension costs | | | (362 | ) | | | (322 | ) | | | (1,088 | ) | | | (964 | ) | | | (341
| )
| | | (362
| )
| | | (1,022
| ) | | | (1,088
| )
|
Gain on life insurance | | | | – | | | | – | | | | 515 | | | | – | |
Other income (expenses), net | | | (81 | ) | | | (54 | ) | | | (353 | ) | | | (213 | ) | | | (41 | ) | | | (81 | ) | | | (287 | ) | | | (353 | ) |
| | | (1,640 | ) | | | (1,700 | ) | | | (5,105 | ) | | | (5,118 | ) | | | (1,419 | ) | | | (1,640 | ) | | | (3,967 | ) | | | (5,105 | ) |
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Income before income taxes | | | 5,075 | | | | 4,729 | | | | 12,970 | | | | 11,769 | | | | 5,602 | | | | 5,075 | | | | 14,963 | | | | 12,970 | |
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Income taxes | | | 592 | | | | 929 | | | | 1,957 | | | | 2,070 | | | | 898 | | | | 592 | | | | 2,075 | | | | 1,957 | |
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Net Income | | $ | 4,483 | | | $ | 3,800 | | | $ | 11,013 | | | $ | 9,699 | | | $ | 4,704 | | | $ | 4,483 | | | $ | 12,888 | | | $ | 11,013 | |
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Basic Earnings Per Share | | $ | 0.35 | | | $ | 0.29 | | | $ | 0.85 | | | $ | 0.75 | | | $ | 0.36 | | | $ | 0.35 | | | $ | 0.99 | | | $ | 0.85 | |
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Diluted Earnings Per Share | | $ | 0.35 | | | $ | 0.29 | | | $ | 0.85 | | | $ | 0.75 | | | $ | 0.36 | | | $ | 0.35 | | | $ | 0.99 | | | $ | 0.85 | |
The accompanying notes are an integral part of these statements.
THE YORK WATER COMPANY
Statements of Common Stockholders' Equity (Unaudited)
(In thousands of dollars, except per share amounts)
For the Periods Ended September 30, 20192020 and 20182019
| | Common Stock Shares | | | Common Stock Amount | | | Retained Earnings | | | Total | | | Common Stock Shares | | | Common Stock Amount | | | Retained Earnings | | | Total | |
Balance, June 30, 2019 | | | 12,974,287 | | | $ | 82,183 | | | $ | 46,931 | | | $ | 129,114 | | |
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Balance, June 30, 2020 | | | | 13,033,999 | | | $ | 84,872 | | | $ | 53,700 | | | $ | 138,572 | |
Net income | | | – | | | | – | | | | 4,483 | | | | 4,483 | | | | – | | | | – | | | | 4,704 | | | | 4,704 | |
Cash dividends declared, $0.1733 per share | | | – | | | | – | | | | (2,250 | ) | | | (2,250 | ) | |
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 | | | 10,539 | | | | 421 | | | | – | | | | 421 | | | | 10,326 | | | | 429 | | | | – | | | | 429 | |
Stock-based compensation | | | – | | | | 40 | | | | – | | | | 40 | | | | 4,912 | | | | 74 | | | | – | | | | 74 | |
Balance, September 30, 2019 | | | 12,984,826 | | | $ | 82,644 | | | $ | 49,164 | | | $ | 131,808 | | |
Balance, September 30, 2020 | | | | 13,049,237 | | | $ | 85,375 | | | $ | 56,053 | | | $ | 141,428 | |
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Balance, December 31, 2018 | | | 12,943,536 | | | $ | 81,305 | | | $ | 44,890 | | | $ | 126,195 | | |
Balance, December 31, 2019 | | | | 13,014,898 | | | $ | 83,976 | | | $ | 50,209 | | | $ | 134,185 | |
Net income | | | – | | | | – | | | | 11,013 | | | | 11,013 | | | | – | | | | – | | | | 12,888 | | | | 12,888 | |
Cash dividends declared, $0.5199 per share | | | – | | | | – | | | | (6,739 | ) | | | (6,739 | ) | |
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 | | | 34,327 | | | | 1,220 | | | | – | | | | 1,220 | | | | 29,427 | | | | 1,273 | | | | – | | | | 1,273 | |
Stock-based compensation | | | 6,963 | | | | 119 | | | | – | | | | 119 | | | | 4,912 | | | | 126 | | | | – | | | | 126 | |
Balance, September 30, 2019 | | | 12,984,826 | | | $ | 82,644 | | | $ | 49,164 | | | $ | 131,808 | | |
Balance, September 30, 2020 | | | | 13,049,237 | | | $ | 85,375 | | | $ | 56,053 | | | $ | 141,428 | |
| | Common Stock Shares | | | Common Stock Amount | | | Retained Earnings | | | Total | | | Common Stock Shares | | | Common Stock Amount | | | Retained Earnings | | | Total | |
Balance, June 30, 2018 | | | 12,914,267 | | | $ | 80,404 | | | $ | 41,807 | | | $ | 122,211 | | |
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Balance, June 30, 2019 | | | | 12,974,287 | | | $ | 82,183 | | | $ | 46,931 | | | $ | 129,114 | |
Net income | | | – | | | | – | | | | 3,800 | | | | 3,800 | | | | – | | | | – | | | | 4,483 | | | | 4,483 | |
Cash dividends declared, $0.1666 per share | | | – | | | | – | | | | (2,152 | ) | | | (2,152 | ) | |
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 | | | 13,818 | | | | 402 | | | | – | | | | 402 | | | | 10,539 | | | | 421 | | | | – | | | | 421 | |
Stock-based compensation | | | – | | | | 11 | | | | – | | | | 11 | | | | – | | | | 40 | | | | – | | | | 40 | |
Balance, September 30, 2018 | | | 12,928,085 | | | $ | 80,817 | | | $ | 43,455 | | | $ | 124,272 | | |
Balance, September 30, 2019 | | | | 12,984,826 | | | $ | 82,644 | | | $ | 49,164 | | | $ | 131,808 | |
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Balance, December 31, 2017 | | | 12,872,742 | | | $ | 79,201 | | | $ | 40,204 | | | $ | 119,405 | | |
Balance, December 31, 2018 | | | | 12,943,536 | | | $ | 81,305 | | | $ | 44,890 | | | $ | 126,195 | |
Net income | | | – | | | | – | | | | 9,699 | | | | 9,699 | | | | – | | | | – | | | | 11,013 | | | | 11,013 | |
Cash dividends declared, $0.4998 per share | | | – | | | | – | | | | (6,448 | ) | | | (6,448 | ) | |
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 | | | 51,600 | | | | 1,548 | | | | – | | | | 1,548 | | | | 34,327 | | | | 1,220 | | | | – | | | | 1,220 | |
Stock-based compensation | | | 3,743 | | | | 68 | | | | – | | | | 68 | | | | 6,963 | | | | 119 | | | | – | | | | 119 | |
Balance, September 30, 2018 | | | 12,928,085 | | | $ | 80,817 | | | $ | 43,455 | | | $ | 124,272 | | |
Balance, September 30, 2019 | | | | 12,984,826 | | | $ | 82,644 | | | $ | 49,164 | | | $ | 131,808 | |
The accompanying notes are an integral part of these statements.
THE YORK WATER COMPANY
Statements of Cash Flows (Unaudited)
(In thousands of dollars, except per share amounts)
| | Nine Months Ended September 30 | | | Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income | | $ | 11,013 | | | $ | 9,699 | | | $ | 12,888 | | | $ | 11,013 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Gain on life insurance | | | | (515 | ) | | | – | |
Depreciation and amortization | | | 5,750 | | | | 5,235 | | | | 6,113 | | | | 5,750 | |
Stock-based compensation | | | 119 | | | | 68 | | | | 126 | | | | 119 | |
Increase in deferred income taxes | | | 313 | | | | 298 | | | | 93 | | | | 313 | |
Other | | | 195 | | | | 234 | | | | 342 | | | | 195 | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | |
(Increase) decrease in accounts receivable and unbilled revenues | | | 95 | | | | (253 | ) | | | (1,657 | ) | | | 95 | |
Increase in recoverable income taxes | | | (508 | ) | | | – | | |
Increase in materials and supplies, prepaid expenses, regulatory and other assets | | | (5,166 | ) | | | (4,741 | ) | |
(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 | | | 1,805 | | | | 3,821 | | | | 4,449 | | | | 1,805 | |
Increase (decrease) in accrued interest and taxes | | | (63 | ) | | | 49 | | | | 154 | | | | (63 | ) |
Net cash provided by operating activities | | | 13,553 | | | | 14,410 | | | | 16,306 | | | | 13,553 | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Utility plant additions, including debt portion of allowance for funds used during construction of $153 in 2019 and $98 in 2018 | | | (13,284 | ) | | | (10,664 | ) | |
Acquisition of wastewater system | | | (2,088 | ) | | | - | | |
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 | | | – | | | | 108 | | | | 672 | | | | – | |
Net cash used in investing activities | | | (15,372 | ) | | | (10,556 | ) | | | (16,459 | ) | | | (15,372 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Customers' advances for construction and contributions in aid of construction | | | 1,336 | | | | 1,289 | | | | 2,760 | | | | 1,336 | |
Repayments of customer advances | | | (243 | ) | | | (371 | ) | | | (225 | ) | | | (243 | ) |
Proceeds of long-term debt issues | | | 46,113 | | | | 20,319 | | | | 53,671 | | | | 46,113 | |
Debt issuance costs | | | (180 | ) | | | – | | | | (162 | ) | | | (180 | ) |
Repayments of long-term debt | | | (38,690 | ) | | | (20,239 | ) | | | (37,843 | ) | | | (38,690 | ) |
Repayments under short-term line of credit agreements | | | (1,000 | ) | | | – | | | | – | | | | (1,000 | ) |
Changes in cash overdraft position | | | (7 | ) | | | 26 | | | | (1,384 | ) | | | (7 | ) |
Issuance of common stock | | | 1,220 | | | | 1,548 | | | | 1,273 | | | | 1,220 | |
Dividends paid | | | (6,730 | ) | | | (6,426 | ) | | | (7,038 | ) | | | (6,730 | ) |
Net cash used in financing activities | | | 1,819 | | | | (3,854 | ) | |
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 | | | | 2 | | | | 2 | |
Cash and cash equivalents at end of period | | $ | 2 | | | $ | 2 | | | $ | 10,901 | | | $ | 2 | |
| | | | | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | | | | | |
Interest, net of amounts capitalized | | $ | 3,588 | | | $ | 3,470 | | | $ | 3,029 | | | $ | 3,588 | |
Income taxes | | | 2,184 | | | | 2,050 | | | | 1,753 | | | | 2,184 | |
| | | | | | | | | | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | Supplemental disclosure of non-cash investing and financing activities: | | Supplemental disclosure of non-cash investing and financing activities: | |
Accounts payable includes $2,050 in 2019 and $1,871 in 2018 for the construction of utility plant. | | |
Accounts payable includes $3,647 in 2020 and $2,050 in 2019 for the construction of utility plant. | | 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. | | 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.
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, 2018.2019.
Operating results for the three and nine months ended September 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020. 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 August 29, 2019,April 9, 2020, the Company completed the acquisition of the wastewater collection and treatment assets of the JacobusFelton Borough Sewer Authority in York County, Pennsylvania. The Company began operating the existing collection and treatment facilities on August 30, 2019.April 16, 2020. The acquisition resulted in the addition of approximately 700130 wastewater customers with purchase price and acquisition costs of approximately $914, which is more than the depreciated original cost of approximately $2,088.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 expected to be 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.
3.4. 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 | |
| | As of Sep. 30, 2019 | | | As of Dec. 31, 2018 | | | Change | | | | | | | | | | | | | |
Accounts receivable – customers | | $ | 4,651 | | | $ | 4,731 | | | $ | (80 | ) | | $ | 5,392 | | | $ | 4,574 | | | $ | 818 | |
Other receivables | | | 211 | | | | 385 | | | | (174 | ) | | | 278 | | | | 152 | | | | 126 | |
| | | 4,862 | | | | 5,116 | | | | (254 | ) | | | 5,670 | | | | 4,726 | | | | 944 | |
Less: allowance for doubtful accounts | | | (317 | ) | | | (305 | ) | | | (12 | ) | | | (477 | ) | | | (305 | ) | | | (172 | ) |
Accounts receivable, net | | $ | 4,545 | | | $ | 4,811 | | | $ | (266 | ) | | $ | 5,193 | | | $ | 4,421 | | | $ | 772 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Unbilled revenue | | $ | 2,394 | | | $ | 2,427 | | | $ | (33 | ) | | $ | 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.
4.5. Common Stock and Earnings Per Share
Net income of $4,483$4,704 and $3,800$4,483 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $11,013$12,888 and $9,699$11,013 for the nine months ended September 30, 20192020 and 2018,2019, 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 | | Three Months Ended September 30 | | Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average common shares, basic | | | 12,968,540 | | | | 12,912,833 | | | | 12,955,602 | | | | 12,895,144 | | | | 13,032,389 | | | | 12,968,540 | | | | 13,021,398 | | | | 12,955,602 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Employee stock-based compensation | | | 2,131 | | | | 196 | | | | 1,506 | | | | 120 | | | | 1,164 | | | | 2,131 | | | | 565 | | | | 1,506 | |
Weighted average common shares, diluted | | | 12,970,671 | | | | 12,913,029 | | | | 12,957,108 | | | | 12,895,264 | | | | 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, 20192020 and 2018.2019. As of September 30, 2019, 2020, 618,004 shares remain authorized for repurchase.
| | As of Sep. 30, 2019 | | | As of Dec. 31, 2018 | |
| | | | | | |
10.17% Senior Notes, Series A, due 2019 | | $ | – | | | $ | 6,000 | |
9.60% Senior Notes, Series B, due 2019 | | | – | | | | 5,000 | |
1.00% Pennvest Note, due 2019 | | | – | | | | 30 | |
10.05% Senior Notes, Series C, due 2020 | | | 6,500 | | | | 6,500 | |
8.43% Senior Notes, Series D, due 2022 | | | 7,500 | | | | 7,500 | |
Variable Rate Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2008A, due 2029 | | | 12,000 | | | | 12,000 | |
4.75% York County Industrial Development Authority Revenue Bonds, Series 2006, due 2036 | | | 10,500 | | | | 10,500 | |
4.50% Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2014, due 2038 | | | 14,870 | | | | 14,870 | |
5.00% Monthly Senior Notes, Series 2010A, due 2040 | | | 15,000 | | | | 15,000 | |
4.00% - 4.50% York County Industrial Development Authority Exempt Facilities Revenue Bonds, Series 2015, due 2029 - 2045 | | | 10,000 | | | | 10,000 | |
4.54% Senior Notes, due 2049 | | | 20,000 | | | | – | |
Committed Lines of Credit, due 2021 | | | 6,958 | | | | 8,508 | |
Total long-term debt | | | 103,328 | | | | 95,908 | |
Less discount on issuance of long-term debt | | | (195 | ) | | | (204 | ) |
Less unamortized debt issuance costs | | | (2,421 | ) | | | (2,346 | ) |
Less current maturities | | | (6,500 | ) | | | (30 | ) |
Long-term portion | | $ | 94,212 | | | $ | 93,328 | |
| | 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 January 31, 2019,September 30, 2020, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $20,000$30,000 aggregate principal amount of the Company’s senior notes. The senior notes bear interest at 4.54%3.24% per annum payable semiannually and mature on January 31, 2049.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 $19,820.$29,838. The net proceeds were used to refinance the $11,000$6,500 aggregate principal amount of the Company’s 10.17% Series A10.05% Senior Notes, Series C, due February 1, 2019 and the 9.60% Series B Senior Notes due February 1, 2019, and September 30, 2020, to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects, of the Company.
In the second quarter of 2019, the Company renewed its $13,000to fund acquisitions and $11,000 committed lines of credit and extended the maturity date of each to May 2021, and it renewed its $7,500 committed line of credit and extended the maturity date to June 2021.
In the third quarter of 2019, the Company renewed its $10,000 committed line of credit and extended the maturity date to September 2020.for general corporate purposes.
6.7. 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$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)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.$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 1.88%3.08% and 1.92%1.88% during the three months ended September 30, 20192020 and 2018,2019, respectively, and 1.75%2.76% and 2.02%1.75% for the nine months ended September 30, 20192020 and 2018,2019, respectively.
The interest rate swap agreement is classified as a financial derivative used for non-trading activities. The accounting standards regarding accounting for derivatives and hedging activities require companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. In accordance with the standards, the interest rate swap is recorded on the balance sheet in other deferred credits at fair value (see Note 7)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 $57$93 and $58 during$57 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $158$249 and $183 during$158 for the nine months ended September 30, 20192020 and 2018,2019, respectively. The overall swap result was a (gain) loss of $290$10 and $(87)$290 for the three months ended September 30, 20192020 and 2018,2019, respectively, and $776$911 and $(434)$776 for the nine months ended September 30, 20192020 and 2018,2019, respectively. The Company expects to reclassify $265$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 5, 2019,9, 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, 2019.2020. If a violation due to credit rating, or some other default provision, were triggered on September 30, 2019,2020, the Company would have been required to pay the counterparty approximately $2,600.$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.
7.8. 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, 2019 | | Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) | September 30, 2020 | Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) |
Interest Rate Swap | | $2,435 | | $2,435 | $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, 2019.2020. 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, 2019.2020. The use of the Company's credit rating resulted in a reduction in the fair value of the swap liability of $165$126 as of September 30, 2019.2020. The fair value of the swap reflecting the Company's credit quality as of December 31, 20182019 is shown in the table below.
Description | | December 31, 2018 | | Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) |
Interest Rate Swap | | $1,815 | | $1,815 |
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 $103,328$119,870 at September 30, 2019,2020, and $95,908$104,042 at December 31, 2018,2019, had an estimated fair value of approximately $123,000$138,000 and $105,000,$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 bond insurance on the 2006 York County Industrial Development Authority issue and 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, 20192020 of $7,916$10,291 and $255, respectively. At December 31, 2018,2019, customers' advances for construction and note receivable had carrying values of $6,849$7,844 and $255,$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.
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8. Commitments 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 $2,580$2,734 and $2,341$2,713 through September 30, 20192020 and December 31, 2018,2019, respectively, and is included in utility plant. As of September 30, 2019,2020, 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 Pennsylvania Public Utility Commission, or 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 $821$1,174 and $304$1,000 through September 30, 20192020 and December 31, 2018,2019, respectively, and is included as a regulatory asset. Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,100.$1,400. This estimate is subject to adjustment as more facts become available.
The following table shows the Company’s revenues disaggregated by service and customer type.
| | Three Months Ended September 30 | | | Nine Months Ended September 30 | | | Three Months Ended September 30 | | | Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Water utility service | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | $ | 8,460 | | | $ | 7,969 | | | $ | 24,060 | | | $ | 22,740 | | | $ | 8,902 | | | $ | 8,460 | | | $ | 25,643 | | | $ | 24,060 | |
Commercial and industrial | | | 3,864 | | | | 3,598 | | | | 10,630 | | | | 10,093 | | | | 3,774 | | | | 3,864 | | | | 10,331 | | | | 10,630 | |
Fire protection | | | 780 | | | | 744 | | | | 2,290 | | | | 2,178 | | | | 795 | | | | 780 | | | | 2,379 | | | | 2,290 | |
Wastewater utility service | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | | 334 | | | | 186 | | | | 878 | | | | 696 | | | | 446 | | | | 334 | | | | 1,281 | | | | 878 | |
Commercial and industrial | | | 72 | | | | 46 | | | | 203 | | | | 171 | | | | 78 | | | | 72 | | | | 229 | | | | 203 | |
Billing and revenue collection services | | | 19 | | | | 16 | | | | 56 | | | | 48 | | | | 118 | | | | 19 | | | | 147 | | | | 56 | |
Collection services | | | 16 | | | | 13 | | | | 48 | | | | 45 | | | | – | | | | 16 | | | | 14 | | | | 48 | |
Other revenue | | | 4 | | | | 3 | | | | 11 | | | | 15 | | | | 4 | | | | 4 | | | | 14 | | | | 11 | |
Total Revenue from Contracts with Customers | | | 13,549 | | | | 12,575 | | | | 38,176 | | | | 35,986 | | | | 14,117 | | | | 13,549 | | | | 40,038 | | | | 38,176 | |
Rents from regulated property | | | 131 | | | | 123 | | | | 383 | | | | 382 | | | | 140 | | | | 131 | | | | 416 | | | | 383 | |
Total Operating Revenue | | $ | 13,680 | | | $ | 12,698 | | | $ | 38,559 | | | $ | 36,368 | | | $ | 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.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 threefour 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.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.
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.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.
10.11. 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$6,399 and an annual increase in wastewater rates of $289.$289. Effective March 1, 2019, the PPUC authorized an increase in water rates designed to produce approximately $3,361$3,361 in additional annual revenues and an increase in wastewater rates designed to produce approximately $289$289 in additional annual revenues.
As part of a rate order approved by the PPUC, the Company has agreed to return $2,117$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. During the three and nine months ended September 30, 2019, theThe Company increased its regulatory liability by reducing revenue by $14$0 and $319,$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, anddifference. The Company reclassified $0 and $27, respectively, fromno excess accumulated deferred income taxes on accelerated depreciation recorded at December 31, 2017. During2017 during the three months ended September 30, 2020and 2019 and $0 and $27 during the nine months ended September 30, 20192020 and 2018,2019, respectively. As of September 30, 2020, the Company has returned $2,117 in negative surcharges of $562 and $1,360, respectively.to customers.
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 norevenues of $0 and $512 for the three months ended September 30, 20192020 and 2018, respectively,2019, and $249$0 and $1,428$249 for the nine months ended September 30, 20192020 and 2018,2019, respectively.
Components of Net Periodic Pension Cost
| | Three Months Ended September 30 | | | Nine Months Ended September 30 | | | Three Months Ended September 30 | | | Nine Months Ended September 30 | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 213 | | | $ | 253 | | | $ | 637 | | | $ | 761 | | | $ | 234 | | | $ | 213 | | | $ | 703 | | | $ | 637 | |
Interest cost | | | 412 | | | | 378 | | | | 1,234 | | | | 1,136 | | | | 365 | | | | 412 | | | | 1,093 | | | | 1,234 | |
Expected return on plan assets | | | (684 | ) | | | (698 | ) | | | (2,050 | ) | | | (2,094 | ) | | | (800 | ) | | | (684 | ) | | | (2,399 | ) | | | (2,050 | ) |
Amortization of actuarial loss | | | 106 | | | | 102 | | | | 316 | | | | 305 | | | | 92 | | | | 106 | | | | 277 | | | | 316 | |
Amortization of prior service cost | | | (4 | ) | | | (3 | ) | | | (10 | ) | | | (10 | ) | | | (3 | ) | | | (4 | ) | | | (9 | ) | | | (10 | ) |
Rate-regulated adjustment | | | 532 | | | | 543 | | | | 1,598 | | | | 1,627 | | | | 687 | | | | 532 | | | | 2,060 | | | | 1,598 | |
Net periodic pension expense | | $ | 575 | | | $ | 575 | | | $ | 1,725 | | | $ | 1,725 | | | $ | 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, 20182019 that it expected to contribute $2,300 to its pension plans in 2019.2020. For the nine months ended September 30, 20192020, contributions of $1,725$1,725 have been made. The Company expects to contribute the remaining $575$575 during the final quarter of 2019.2020.
12.13. 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.
On May 6, 2019, the Board awarded stock to non-employee directors effective May 6, 2019. This stock award vested immediately. On May 6, 2019, the Compensation Committee awarded restricted stock to officers and key employees effective May 6, 2019. This restricted stock award vests ratably over three years beginning May 6, 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.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, 2019.2020.
| Number of Shares | | Grant Date Weighted Average Fair Value | Number of Shares | | Grant Date Weighted Average Fair Value |
Nonvested at beginning of the period | 3,080 | |
| $33.85 | 7,342 | | $33.57 |
Granted | 6,963 | | | $33.61 | 4,912 | | $44.07 |
Vested | (2,556) | | | $33.80 | (5,491) | | $36.00 |
Forfeited | – | | | – | (82) | | $33.61 |
Nonvested at end of the period | 7,487 | |
| $33.64 | 6,681 | | $39.30 |
For the three months ended September 30, 20192020 and 2018,2019, the statement of income includes $40$74 and $11$40 of stock-based compensation, respectively, and related recognized tax benefits of $12$21 and $3,$12, respectively. For the nine months ended September 30, 20192020 and 2018,2019, the statement of income includes $119$126 and $68$119 of stock-based compensation, respectively, and related recognized tax benefits of $35$36 and $19,$35, respectively. The total fair value of the shares vested in the nine months ended September 30, 20192020 was $86.$198. Total stock-based compensation related to nonvested awards not yet recognized is $252$263 which will be recognized over the remaining three year vesting period.
13.14. 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 11.7%16.0% and 19.6%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, 2019 and 2018, respectively, and 15.1% and 17.6%2020 is primarily due to lower deductions from the TPR. The lower effective tax rate for the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate2020 is lower for the three and nine months ended September 30, 2019 compared to 2018, primarily due to higher deductions from the TPR.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.
14. Subsequent Events
On October 1, 2019, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $15,000 aggregate principal amount of the Company’s senior notes. The senior notes bear interest at 3.23% per annum payable semiannually and mature on October 1, 2040. The senior notes are unsecured and unsubordinated obligations of the Company. The Company received net proceeds, after deducting issuance costs, of approximately $14,888. The net proceeds were used to refinance the $15,000 aggregate principal amount of the Company’s 5.00% Monthly Senior Notes Series 2010A due October 1, 2040.
On October 8, 2019, the Pennsylvania Economic Development Financing Authority, or PEDFA, issued and sold $10,500 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series A of 2019, or the Series A Bonds, and $14,870 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series B of 2019, or the Series B Bonds, for the Company's benefit pursuant to the terms of a trust indenture, dated as of September 1, 2019, between the PEDFA and Manufacturers and Traders Trust Company, as trustee. The PEDFA then loaned the proceeds of the issuance and sale of the Series A and the Series B Bonds to the Company pursuant to a loan agreement dated as of September 1, 2019, between the Company and the PEDFA. The Series A Bonds, and therefore the loan, bears interest at 3.00% per annum payable semiannually and the maturity date of the loan is October 1, 2036 subject to optional and mandatory redemption provisions. The Series B Bonds, and therefore the loan, bears interest at 3.10% per annum payable semiannually and the maturity date of the loan is November 1, 2038 subject to optional and mandatory redemption provisions. Amounts outstanding under the loan agreement are direct, unsecured and unsubordinated obligations of the Company. The Company received net proceeds, after deducting issuance costs, of approximately $25,049. The net proceeds were used to refinance the $10,500 aggregate principal amount of the Company’s 4.75% York County Industrial Development Authority Revenue Bonds Series 2006 due October 1, 2036 and the $14,870 aggregate principal amount of the Company’s 4.50% PEDFA Exempt Facilities Revenue Refunding Bonds Series 2014 due November 1, 2038.
15. Impact of Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), which replaces the existing guidance in Accounting Standard Codification 840 – Leases. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. The Company adopted the standard on January 1, 2019. The Company did not identify any material leases under this standard, and therefore the adoption did not have a material effect on its financial position, results of operations or cash flows.
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, 2019.2020.
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 67 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.
| Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
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.
PART II - OTHER INFORMATION
| Exhibits. |
Exhibit No. | Description
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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 |
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 |
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| /s/ Jeffrey R. HinesJoseph T. Hand |
Date: November 7, 20196, 2020 | Jeffrey R. HinesJoseph T. Hand
Principal Executive Officer |
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| /s/ Matthew E. Poff |
Date: November 7, 20196, 2020 | Matthew E. Poff Principal Financial and Accounting Officer |
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