-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DOcdoVtmeMYkYdDGzzRQQypy5xMun0pOLUk7ZmBLpW78hSeTxXHc9IhY2q/Jcj9x 7tfib8P13uAPEnylipYmbg== 0000108985-02-000007.txt : 20020415 0000108985-02-000007.hdr.sgml : 20020415 ACCESSION NUMBER: 0000108985-02-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YORK WATER CO CENTRAL INDEX KEY: 0000108985 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 231242500 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00690 FILM NUMBER: 02585516 BUSINESS ADDRESS: STREET 1: 130 E MARKET ST CITY: YORK STATE: PA ZIP: 17405 BUSINESS PHONE: 7178453601 MAIL ADDRESS: STREET 1: PO BOX 15089 10-K 1 asci10k.txt 2001 FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number 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 17405 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 845-3601 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the Common Stock, no par value, held by nonaffiliates of the registrant on March 7, 2002 was $94,756,133. As of March 7, 2002 there were 3,154,332 shares of Common Stock, no par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2001 Annual Report to Shareholders are incorporated by reference into Part II. Portions of the Proxy Statement for the Company's 2002 Annual Meeting of Shareholders are incorporated by reference into Part III. PART I Item 1. Business. The Company is a corporation duly organized under the laws of the Commonwealth of Pennsylvania in 1816. The business of the Company is to impound, purify and distribute water. The Company operates entirely within its franchised territory located in York County, Pennsylvania. The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, in the areas of billing, payment procedures, dispute processing, terminations, service territory, and rate setting. The Company must obtain PPUC approval before changing any of the aforementioned procedures. Water service is supplied through the Company's own distribution system to the City of York, the Boroughs of North York, West York, Manchester, Mount Wolf, New Salem, Hallam, Jacobus, Loganville, Yorkana, Seven Valleys, East Prospect, Jefferson, Glen Rock, New Freedom, Railroad, and portions of the Townships of Manchester, East Manchester, West Manchester, North Codorus, Shrewsbury, North Hopewell, Hopewell, Springettsbury, Spring Garden, Conewago, Springfield, York, Hellam, Windsor, Lower Windsor, Dover and Jackson. The Company obtains its water supply from the south branch and east branch of the Codorus Creek which drains an area of approximately 117 square miles. The Company has two reservoirs, Lake Williams and Lake Redman, which together hold up to 2.75 billion gallons of water. The Company's present average daily consumption is 19,734,260 gallons, and its present safe daily yield is 23,000,000 gallons. The Company's service territory has an estimated population of 149,000. Territory expansion during 2001 included: the completion of the water main to sell bulk water to Stewartstown Borough, additional water district mains for Windsor Water District 3, Cape Horn Water District and Croll School Water District, and the start of a new water district in North Codorus Township. Industry within the Company's service territory is diversified, manufacturing such items as furniture, electrical machinery, food products, paper, ordnance, textile products, air conditioning equipment and weight training equipment. Within the area served by the Company there are no competitors. An evaluation of the need for additional sources of supply was conducted during 1998 by an engineering consulting firm retained by the Company. The analysis indicated that an additional source of supply would be needed by the year 2006. Available options were identified and analyzed by the Company and its consultants, including estimates of construction costs. The option selected was a pipeline from the Susquehanna River to Lake Redman, the Company's largest reservoir. The Company plans to build an intake and a pump station on its land in Lower Windsor Township, York County. The water would then be pumped 13 miles through a 30-inch diameter pipe and released into Lake Redman. This option has the lowest estimated cost, provides potential expandability, and has the least impact on the environment. The Company began the process of applying for permits in 2001, but expects no major expenses until after 2002. The estimated cost of the project is $18-$20 million. The project will be funded through various debt and equity issues. The Company's business is somewhat dependent on weather conditions, particularly the amount of rainfall; however, minimum customer charges are in place, and the Company expects to cover its fixed costs of operations under all likely weather conditions. On February 12, 2002, the Governor issued a drought emergency which imposes mandatory water use restrictions on the Company's service territory. The drought did not have a noticeable impact on 2001 because it occurred at a time of the year in which customers were already using less water. The drought, if it continues, could have a material impact on 2002. The Company's business does not require large amounts of working capital and is not dependent on any single customer or a very few customers. Operating revenue is derived from the following sources and in the following percentages: residential, 60%; commercial and industrial, 28%; other, 12%. The Company presently has 90 employees. During the last five years ended in 2001, the Company has maintained an increasing growth in number of customers and distribution facilities as shown by the following chart: 2001 2000 1999 1998 1997 Average daily consumption (gallons per day) 19,734,260 19,541,520 20,928,000 19,488,000 19,405,000 Miles of mains at year end 717 703 696 671 655 Additional distribution mains installed (ft.) 77,923 67,072 130,262 85,431 77,274 Number of customers 50,079 49,195 48,144 47,173 46,458 Population served 149,000 146,000 144,000 142,000 140,700 During 2001, the per capita volume of water sold declined in the industrial class due to the loss of a large customer in December 2000. Per capita consumption in all other classes was consistent. The Company does not anticipate any change in the level of water usage which would have a material impact on future results of operations. Item 2. Properties. The accounting and executive offices of the Company are located in two two-story brick and masonry buildings, containing a total of approximately 21,861 square feet, at 124 and 130 East Market Street, York, Pennsylvania. The Company has two impounding dams located in York and Springfield Townships adjoining the Borough of Jacobus to the south. The lower dam is constructed of compacted earth with a concrete core wall and is 660 feet long and 50 feet high and creates a reservoir covering approximately 220 acres containing about 1,150,000,000 gallons of water. About 800 acres surrounding the reservoir are planted with more than 1,200,000 evergreen trees which the Company believes will protect the area both from pollution and also from soil erosion which might otherwise fill the reservoir with silt. The upper dam, Lake Redman, is constructed of compacted earth and is 1,000 feet long and 50 feet high and creates a reservoir covering approximately 290 acres containing about 1,600,000,000 gallons of water. About 600 acres surrounding the reservoir are planted with grass which the Company believes will protect the area both from pollution and also from soil erosion which might otherwise fill the reservoir with silt. The Company's main pumping station is located in Spring Garden Township on the south branch of the Codorus Creek about 1,500 feet upstream from its confluence with the west branch of the Codorus Creek and about four miles downstream from the Company's lower impounding dam. The pumping station presently houses pumping equipment consisting of three electrically driven centrifugal pumps and two diesel-engine driven centrifugal pumps with a combined pumping capacity of 75,000,000 gallons per day. From here, raw water is pumped approximately two miles to the filtration plant through pipes located on a right-of-way owned by the Company. The Company's filtration plant is located in Spring Garden Township about one-half mile south of the City of York. Water at this plant is filtered through 12 dual media filters having a stated capacity of 31,000,000 gallons per day and being capable of filtering 46,500,000 gallons per day for short periods if necessary. Based on an average daily consumption in 2001 of 19,734,260 gallons, the Company believes the pumping and filtering facilities are adequate to meet present and anticipated demands. Clear water reservoirs of the Company which are located in Spring Garden Township adjacent to the filtration plant are capable of storing up to 32,000,000 gallons of water, and there are standpipes located throughout the Company's service area capable of storing another 19,890,000 gallons of clear water. The Company's distribution center and material and supplies warehouse are located at 1801 Mt. Rose Avenue, Springettsbury Township. There are two one-story concrete block buildings aggregating 26,680 square feet of area. Construction of a third facility at that same location amounting to 3,764 square feet is expected to begin around mid-year 2002 and be completed by the end of the year. Estimated costs of the project are $330,300 which include renovations to one of the older buildings. The distribution system of the Company has approximately 717 miles of main water lines. All of the Company's properties described above are held in fee by the Company. There are no material encumbrances on such properties. In addition, the Company has entered into a "Joint Use and Park Management Agreement" dated December 29, 1976, with the County of York, Pennsylvania, whereby the Company has licensed its present reservoir lands and waters, comprised of approximately 1,175 acres and including two lakes, to the County of York for fifty (50) years for county park purposes. Item 3. Legal Proceedings. There are no material legal proceedings involving the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters. The information set forth under the caption "Market for Common Stock and Dividends" on page 7 of the 2001 Annual Report to Shareholders is incorporated herein by reference. Item 6. Selected Financial Data. The information set forth under the caption "Highlights of Our 186th Year" of the 2001 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2001 Annual Report to Shareholders is incorporated herein by reference. This annual report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements made with respect to the results of operations and businesses of the Company. Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include certain information relating to the Company's business strategy, including the markets in which it operates, the services it provides, its plans for construction, its expansion of its service territories, water usage by its customers and its plans to invest in new technologies. These forward-looking statements are based upon management's current plans, expectations, estimates and assumptions and are subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions and the Company's financial condition and results of operations. Factors that may cause actual results to differ materially from those discussed in such forward-looking statements include, among others, the following possibilities: (i) weather conditions, particularly the amount of rainfall; (ii) the level of commercial and industrial business activity within the Company's service territory; (iii) construction of new housing within the Company's service territory; (iv) governmental regulations affecting the Company's rates and service obligations; and (v) general economic and business conditions, including interest rates, which are less favorable than expected. The Company does not intend to update these cautionary statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is not aware of demands, events or uncertainties that will result in a decrease of liquidity or in a material change in the mix and relative cost of capital resources. The Company does not use off-balance sheet arrangements such as securitization of receivables or unconsolidated entities. The Company has no lease obligations, does not engage in trading or risk management activities, and does not have material transactions involving related parties. The Company does not use derivative financial instruments for speculative trading purposes. The Company's operations are exposed to market risks primarily as a result of changes in interest rates and foreign currency exchange rates. This exposure to these market risks relates to the Company's debt obligations under its lines of credit. Loans granted under these lines bear interest based upon the prime or LIBOR rate plus 1 to 1.5 percent. The Company has not entered into financial instruments such as interest rate swaps or interest rate lock agreements. The Company's 4.40% Industrial Development Authority Revenue Refunding Bonds Series 1994 have a mandatory tender date of May 15, 2004. The 6% Series 1995 bonds have a mandatory tender date of June 1, 2005. The Company is required to purchase any unremarketed 1994 and 1995 bonds, despite the rate. Item 8. Financial Statements and Supplementary Data. The following financial statements set forth in the 2001 Annual Report to Shareholders are incorporated herein by reference: Balance Sheets as of December 31, 2001 and 2000 Page 11 Statements of Income for Years Ended December 31, 2001, 2000 and 1999 Page 12 Statements of Shareholders' Investment for Years Ended December 31, 2001, 2000 and 1999 Page 12 Statements of Cash Flows for Years Ended December 31, 2001, 2000 and 1999 Page 13 Notes to Financial Statements Page 14 Independent Auditors' Report Page 20 Except for the above financial data and the information specified under Items 5, 6 and 7 of this report, the 2001 Annual Report to Shareholders is not deemed to be filed as part of this report. Selected Quarterly Financial Data (Unaudited) 2001 First Second Third Fourth Year Water operating revenue $4,495,450 $4,763,382 $5,110,284 $5,033,426 $19,402,542 Utility operating income 1,937,388 2,003,759 2,934,894 2,058,596 8,934,637 Net income 802,200 856,689 1,363,695 983,483 4,006,067 Basic earnings per share .26 .28 .45 .31 1.30 Dividends per share .25 .25 .25 .26 1.01 2000 Water operating revenue $4,501,175 $4,608,768 $4,746,370 $4,624,850 $18,481,163 Utility operating income 1,903,345 2,072,436 2,504,577 1,992,181 8,472,539 Net income 803,283 934,892 1,141,769 877,843 3,757,787 Basic earnings per share .27 .31 .38 .29 1.25 Dividends per share .24 .24 .25 .25 .98 Per share data does not reflect the impact of the proposed stock split. See Note 12 to the financial statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no changes in or disagreements with accountants on accounting and financial disclosure. PART III Item 10. Directors and Executive Officers of the Registrant. The information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement issued pursuant to Regulation 14A for the Company's 2002 Annual Meeting of Shareholders to be held May 6, 2002 is incorporated herein by reference. Item 11. Executive Compensation. The information set forth under the caption "Compensation of Directors and Executive Officers" of the Proxy Statement issued pursuant to Regulation 14A for the Company's 2002 Annual Meeting of Shareholders to be held May 6, 2002 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information set forth under the caption "Voting Securities and Principal Holders Thereof" of the Proxy Statement issued pursuant to Regulation 14A for the Company's 2002 Annual Meeting of Shareholders to be held May 6, 2002 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information set forth under the caption "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement issued pursuant to Regulation 14A for the Company's 2002 Annual Meeting of Shareholders to be held May 6, 2002 is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) Certain documents filed as a part of the Form 10-K. The financial statements set forth under Item 8 of this Form 10-K. (a)(2) Financial Statement schedules. Schedule Schedule Page Number Description Number II Valuation and Qualifying Accounts 9 The report of the Company's independent auditors with respect to the financial statement schedule appears on page 7. All other financial statements and schedules not listed have been omitted since the required information is included in the financial statements or the notes thereto, or is not applicable or required. The exhibits are set forth in the Index to Exhibits shown on pages 11, 12 and 13. (b) Reports on Form 8-k There were no Form 8-k's filed during the fourth quarter 2001. The Company filed a Form 8-k on February 21, 2002 announcing that its Board of Directors had unanimously approved a two-for-one split of the Company's common stock, subject to approval by the Pennsylvania Public Utility Commission. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of The York Water Company: Under date of February 26, 2002, we reported on the balance sheets of The York Water Company as of December 31, 2001 and 2000 and the related statements of income, shareholders' investment, and cash flows for the years then ended as contained in the 2001 annual report to shareholders. The financial statements of The York Water Company as of December 31, 1999 were audited by other auditors whose report was dated February 25, 2000. These financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2001. In connection with our audit of the aforementioned financial statements, we also audited the related financial statement schedule as of December 31, 2001, as listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the 2001 financial statement schedule based upon our audit. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. February 26, 2002 Stambaugh Ness, PC York, Pennsylvania Independent Auditors' Report To The Shareholders and Board of Directors of The York Water Company: We have audited the accompanying statements of income, shareholders' investment, and cash flows of The York Water Company for the year ended December 31, 1999. In connection with our audit of the financial statements, we have also audited the financial statement schedule as listed in Item 14(a)(2)for the year ended December 31, 1999. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of The York Water Company's operations and its cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Baltimore, Maryland KPMG LLP February 25, 2000 THE YORK WATER COMPANY SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2001 Additions Charged to Balance at Costs Balance Beginning and Recov- Deduc- At End Of Year Expenses eries tions Of Year FOR THE YEAR ENDED DECEMBER 31, 2001: Reserve for uncollectible accounts $130,000 $ 89,265 $11,098 $100,363 $130,000 FOR THE YEAR ENDED DECEMBER 31, 2000: Reserve for uncollectible accounts $120,000 $ 85,356 $19,193 $ 94,549 $130,000 FOR THE YEAR ENDED DECEMBER 31, 1999: Reserve for uncollectible accounts $120,000 $ 87,795 $12,992 $100,787 $120,000 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) Dated: March 25, 2002 By: /s/ W. T. Morris William T. Morris Chairman, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ W. T. Morris By: /s/ Jeffrey S. Osman William T. Morris Jeffrey S. Osman (Principal Executive and (Principal Accounting Officer) Financial Officer and Director) Dated: March 25, 2002 Dated: March 25, 2002 Directors: Date By: /s/ Irvin S. Naylor March 25, 2002 Irvin S. Naylor By: /s/ Chloe Eichelberger March 25, 2002 Chloe Eichelberger By: /s/ John L. Finlayson March 25, 2002 John L. Finlayson By: /s/ George Hay Kain, III March 25, 2002 George Hay Kain, III By: /s/ Michael W. Gang March 25, 2002 Michael W. Gang By: /s/ George W. Hodges March 25, 2002 George W. Hodges By: /s/ Thomas C. Norris March 25, 2002 Thomas C. Norris By: /s/ Jeffrey S. Osman March 25, 2002 Jeffrey S. Osman INDEX TO EXHIBITS Page Number of Exhibit Exhibit Incorporation Number Description By Reference 3 Amended and Restated Incorporated herein by Articles of Incorporation reference. Filed previously with the Securities and Exchange Commission as Exhibit 4.1 to Amendment No. 1 to Form S-3 dated June 12, 1997 (File No. 33-81246). 3.1 By-Laws Incorporated herein by reference. Filed previously with the Securities and Exchange Commission as Exhibit 4.2 to Form S-3 dated July 1, 1996 (File No. 333-7307). 4.1 Optional Dividend Incorporated herein by Reinvestment Plan reference. Filed previously with the Securities and Exchange Commission as the Prospectus included in Amendment No. 1 to Form S-3 dated June 12, 1997 (File No. 33-81246). 4.2 Loan Agreement between Incorporated herein by The York Water Company reference. Filed previously and the Pennsylvania with the Securities and Infrastructure Invest- Exchange Commission as Exhibit ment Authority for 4.2 to the Company's 2000 $800,000 at 1.00% Form 10K. dated August 24, 1999 4.6 Note Agreement Relative Incorporated herein by to the $6,000,000 10.17% reference. Filed previously Senior Notes, Series A with the Securities and and $5,000,000 9.60% Exchange Commission as Exhibit Senior Notes, Series B 4.5 to the Company's 1989 dated January 2, 1989 Form 10-K. 4.8 Note Agreement Relative Incorporated herein by to the $6,500,000 10.05% reference. Filed previously Senior Notes, Series C with the Securities and dated August 15, 1990 Exchange Commission as Exhibit 4.6 to the Company's 1990 Form 10-K. 4.11 Note Agreement Relative Incorporated herein by to the $7,500,000 8.43% reference. Filed previously Senior Notes, Series D with the Securities and dated December 15, 1992 Exchange Commission as Exhibit 4.7 to the Company's 1992 Form 10-K. 4.12 Fourth Supplemental Incorporated herein by Acquisition, Financing reference. Filed previously and Sale Agreement with the Securities and Relative to the Exchange Commission as Exhibit $2,700,000 4.75% Water 4.8 to the Company's Quarterly Facilities Revenue Report Form 10-Q for the Refunding Bonds dated quarter ended June 30, 1994. February 1, 1994 4.13 Fifth Supplemental Incorporated herein by Acquisition, Financing reference. Filed previously and Sale Agreement with the Securities and Relative to the Exchange Commission as Exhibit $4,300,000 5% Water 4.9 to the Company's Quarterly Facilities Revenue Report Form 10-Q for the Refunding Bonds dated quarter ended September 30, October 1, 1995 1995. 4.14 Shareholder Rights Incorporated herein by Agreement reference. Filed previously with the Securities and Exchange Commission as Exhibit 1 to Form 8-A dated January 26, 1999. 10.1 Articles of Agreement Incorporated herein by Between The York Water reference. Filed previously Company and Springetts- with the Securities and bury Township Relative Exchange Commission as Exhibit to Extension of Water 10.1 to the Company's 1989 Mains dated April 17, Form 10-K. 1985 10.2 Articles of Agreement Incorporated herein by Between The York Water reference. Filed previously Company and Windsor with the Securities and Township Relative to Exchange Commission as Exhibit Extension of Water Mains 10.2 to the Company's 1989 dated February 9, 1989 Form 10-K. 10.3 Articles of Agreement Incorporated herein by Between The York Water reference. Filed previously Company and Windsor with the Securities and Township, Yorkana Exchange Commission as Exhibit Borough, Modern Trash 10.3 to the Company's 1989 Removal of York, Inc. and Form 10-K. Lower Windsor Township Relative to Extension of Water Mains dated July 18, 1989 10.4 Articles of Agreement Incorporated herein by Between The York Water reference. Filed previously Company and North Codorus with the Securities and Township Relative to Exchange Commission as Exhibit Extension of Water Mains 10.4 to the Company's 1990 dated September 20, 1989 Form 10-K. 10.5 Articles of Agreement Incorporated herein by Between The York Water reference. Filed previously Company and York Township with the Securities and Relative to Extension of Exchange Commission as Exhibit Water Mains dated 10.5 to the Company's 1990 December 29, 1989 Form 10-K. 11 Common Shares Used in Filed herewith. Computing Earnings Per Share 13 2001 Annual Report to Filed herewith. Shareholders 23 Consent of Independent Filed herewith. Auditors Stambaugh Ness, PC 23.1 Consent of Independent Filed herewith. Auditors KPMG LLP EXHIBIT 11 THE YORK WATER COMPANY COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE 2001 2000 1999 1998 1997 Common shares outstanding, beginning of the year 3,042,733 2,989,091 2,979,722 2,934,782 2,900,524 Weighted average shares issued in connection with 2001 stock subscription 19,601 - - - - Weighted average shares repurchased in 1999 - - (7,392) - - Weighted average shares issued in connection with the Employee Stock Purchase Plan 1,325 2,156 1,701 1,565 1,569 Weighted average shares issued in connection with the Optional Dividend Reinvest- ment Plan 12,966 19,428 16,236 14,938 10,376 3,076,625 3,010,675 2,990,267 2,951,285 2,912,469 EXHIBIT 13 THE YORK WATER COMPANY 2001 ANNUAL REPORT TO SHAREHOLDERS The York Water Company's 2001 Annual Report to Shareholders is attached hereto. EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of The York Water Company: We consent to the incorporation by reference in the registration statements No. 2-80547 on Form S-3, No. 33-81246 on Form S-3 as amended, and No. 33-26180 on Form S-8, as amended, of The York Water Company of our report dated February 26, 2002, relating to the balance sheet of The York Water Company as of December 31, 2001, and the related statements of income, shareholders' investment, and cash flows for the year then ended, which report appears in the 2001 annual report to shareholders and is incorporated by reference in the annual report on Form 10-K of The York Water Company. We also consent to incorporation by reference in the registration statements No. 2-80547 on Form S-3, No. 33-81246 on Form S-3, as amended, and No. 33-26180 on Form S-8, as amended, of The York Water Company of our report dated February 26, 2002 relating to the financial statement schedule as listed in Item 14(a) (2) for the year ended December 31, 2001, which is a part of the Company's December 31, 2001 annual report on Form 10-K, which report appears in such annual report on Form 10-K. Stambaugh Ness, PC York, Pennsylvania March 26, 2002 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of The York Water Company: We consent to incorporation by reference in the registration statements No. 2-80547 on Form S-3, No. 33-81246 on Form S-3 as amended, and No. 33-26180 on Form S-8, as amended, of The York Water Company of our report included herein. Baltimore, Maryland KPMG LLP March 25, 2002 EX-13 3 yr2001.txt ANNUAL REPORT TO SHAREHOLDERS 2001 The York Water Company Highlights of Our 186th Year
Summary of Operations For the Year 2001 2000 1999 1998 1997 Water operating revenue $19,402,542 $18,481,163 $17,511,251 $17,137,029 $16,996,706 Operating expenses 10,467,905 10,008,624 10,255,553 9,721,428 9,678,694 Operating income 8,934,637 8,472,539 7,255,698 7,415,601 7,318,012 Interest expense 2,855,565 2,797,705 2,643,579 2,673,614 2,707,310 Other income, net 159,536 166,003 252,058 158,329 150,588 Income taxes 2,232,541 2,083,050 1,710,104 1,764,927 1,641,229 Net income $ 4,006,067 $ 3,757,787 $3,154,073 $ 3,135,389 $ 3,120,061 Per Share of Common Stock Book value $11.38 $10.66 $10.31 $10.20 $9.93 Net income 1.30 1.25 1.05 1.06 1.07 Dividends 1.01 .98 .945 .93 .91 Number of shares outstanding at year-end 3,154,332 3,042,733 2,989,091 2,979,722 2,934,782 Utility Plant Original cost $121,109,335 $114,748,545 $108,804,699 $102,088,220 $97,487,926 Construction expenditures 7,095,827 6,413,721 7,050,376 4,989,967 4,500,517 Other Total assets $113,351,492 $107,626,319 $108,600,110 $102,479,091 $98,854,074 Long-term debt 32,690,343 32,728,220 32,765,943 32,000,000 32,000,000
Per share data does not reflect the impact of the proposed stock split. See Note 12 to the financial statements. Cash dividends per share reflect dividends declared on shares outstanding at each dividend date. For Management's Discussion and Analysis of Financial Condition and Results of Operations, Please Refer to Page 3. Total assets do not reflect the reclassification of deferred tax assets and liabilities and the related regulatory assets and liabilities that were made for 2001 and 2000. The York Water Company Description of Business The business of the Company is to impound, purify and distribute water. The Company operates entirely within its franchised territory located in York County, Pennsylvania, and is subject to regulation by the Pennsylvania Public Utility Commission, or PPUC. Water service is supplied through the Company's own distribution system to the City of York, the Boroughs of North York, West York, Manchester, Mount Wolf, New Salem, Hallam, Jacobus, Loganville, Yorkana, Seven Valleys, East Prospect, Jefferson, Glen Rock, New Freedom, Railroad, and portions of the Townships of Manchester, East Manchester, West Manchester, North Codorus, Shrewsbury, North Hopewell, Hopewell, Springettsbury, Spring Garden, Conewago, Springfield, York, Hellam, Windsor, Lower Windsor, Dover and Jackson. The Company's service territory has an estimated population of 149,000. Industry of the area served is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance, textile products, air conditioning, barbells, etc. The Company's present average daily consumption is 19,734,260 gallons, and its present safe daily yield is 23,000,000 gallons. In the area served by the Company, under the regulation of the PPUC, there are no competitors. During the five years ended in 2001, the Company has maintained an increasing growth in number of customers and distribution facilities as shown by the following chart: 2001 2000 1999 1998 1997 Average daily consumption (gallons per day) 19,734,260 19,541,520 20,928,000 19,488,000 19,405,000 Miles of mains at year-end 717 703 696 671 655 Additional distribution mains installed (ft.) 77,923 67,072 130,262 85,431 77,274 Number of customers 50,079 49,195 48,144 47,173 46,458 Population served 149,000 146,000 144,000 142,000 140,700 Operating revenue in 2001 is derived from the following sources and in the following percentages: Residential 60%; Commercial and Industrial, 28%; Other, 12%. Market for Common Stock and Dividends Beginning January 16, 2001, the common stock of The York Water Company is traded on the Nasdaq National Market. Prior to January 16, 2001, the common stock of The York Water Company was traded over-the-counter. Over-the-counter quotations reflect inter-dealer prices without retail mark-ups, markdown or commissions and may not necessarily represent actual transactions. Quarterly price ranges and cash dividends per share for the last two years follow: 2001 2000 HIGH LOW DIVIDEND HIGH LOW DIVIDEND 1st Quarter $25.50 $17.88 $0.25 $17.13 $13.50 $0.24 2nd Quarter 25.25 22.00 0.25 14.75 13.75 0.24 3rd Quarter 25.31 22.75 0.25 16.38 14.25 0.25 4th Quarter 30.32 23.00 0.26 18.50 15.00 0.25 Cash dividends per share reflect dividends declared on shares actually outstanding at each dividend date. (Refer to Note 4 to the Financial Statements for a description of the restriction on the declaration and payment of cash dividends.) Prices for the year 2001 are closing prices listed on Nasdaq, prices for the year 2000 are bid prices quoted from local newspapers. Shareholders of record as of December 31, 2001 numbered 1,327. Per share data does not reflect the impact of the proposed stock split. See Note 12 to the financial statements. Financial Reports and Investor Relations Shareholders may request, without charge, copies of the Company's financial reports including Annual Reports and Forms 10-K and 10-Q. Such requests, as well as other investor relations inquiries, should be addressed to : Jeffrey S. Osman - Vice President-Finance The York Water Company or visit our web page at: Box 15089, York, PA 17405-7089 www.yorkwater.com The York Water Company Management's Discussion and Analysis of Financial Condition and Results of Operations This Annual Report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements made with respect to the results of operations and businesses of the Company. Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements include certain information relating to the Company's business strategy, including the markets in which it operates, the services it provides, its plans for construction, its expansion of its service territories, water usage by its customers and its plans to invest in new technologies. These forward-looking statements are based upon management's current plans, expectations, estimates and assumptions and are subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions and the Company's financial condition and results of operations. Factors that may cause actual results to differ materially from those discussed in such forward-looking statements include, among others, the following possibilities: (i) weather conditions, particularly the amount of rainfall; (ii) the level of commercial and industrial business activity within the Company's service territory; (iii) construction of new housing within the Company's service territory; (iv) governmental regulation affecting the Company's rates and service obligations; and (v) general economic and business conditions, including interest rates, which are less favorable than expected. The Company does not intend to update these cautionary statements. Results of Operations 2001 Compared with 2000 Net income for 2001 was $4,006,067, an increase of $248,280, or 6.6%, compared to 2000. Water operating revenues for 2001 increased $921,379, or 5.0%, compared to 2000. The increase resulted primarily from an increase in customers and to a lesser extent from the 4.2% rate increase approved by the PPUC, effective September 1, 2001. Operating expenses for 2001 increased $459,281, or 4.6%, compared to 2000. The increase was due to a number of factors including: increased service line maintenance due to highway relocation, Nasdaq listing fees, higher power costs, increased general insurance premiums, increased pension and supplemental retirement costs, and increased water treatment plant and equipment maintenance expenses. Reduced public utility realty taxes, lower depreciation expense due to the lengthening of asset lives, and lower health insurance premiums partially offset the increase in operating expenses. Interest on long-term debt increased $20,083 in 2001 compared to 2000 due to the remarketing of the Series 1995 5% Industrial Development Bonds at 6%. The higher interest rate was in effect for all of 2001. Short-term interest also increased by $69,720 in 2001 compared to 2000 despite lower interest rates, due to an increase in short-term debt outstanding. The average short-term debt outstanding in 2001 and 2000 was $3,298,887 and $1,415,595, respectively. Allowance for funds used during construction for 2001 increased $31,943, or 57.1%, when compared to 2000. Interest on the pipeline to the river project accounts for the increase. Federal and state income taxes rose by $149,491, or 7.2%, due to an increase in taxable income. The effective tax rates for 2001 and 2000 were 35.8% and 35.7%, respectively. 2000 Compared with 1999 Net income for 2000 was $3,757,787, an increase of $603,714, or 19.1%, compared to 1999. Water operating revenues for 2000 increased $969,912, or 5.5%, compared to 1999. The increase resulted from a 5.3% rate increase approved by the PPUC, effective October 1, 1999. Consumption for 2000 increased 1.1% for residential customers and decreased 7.5% for commercial and industrial customers combined. Operating expenses for 2000 decreased $246,929, or 2.4%, compared to 1999. The decrease was primarily due to reduced public utility realty taxes and deferred compensation costs. In addition, pension expenses, year 2000 system costs, legal fees, capital stock tax and hydrant maintenance costs decreased in 2000 compared to 1999. Increased main and service line maintenance due to highway relocation, increased insurance premiums, rate case amortization, and depreciation due to increased plant investment partially offset the decrease in operating expenses. Interest on long-term debt increased $24,397 in 2000 compared to 1999 due to the remarketing of the Series 1995 5% Industrial Development Bonds at 6%. Short-term interest also increased by $82,683 in 2000 compared to 1999 due to higher interest rates and an increase in short-term debt outstanding. The average short-term debt outstanding in 2000 and 1999 was $1,415,595 and $463,530, respectively. Allowance for funds used during construction for 2000 decreased $47,046, or 45.7%, when compared to 1999. Interest was capitalized due to large main extension projects in 1999, such as Railroad, Windsor, and Conewago Township, while 2000 projects were of smaller magnitude. Federal and state income taxes rose by $372,946, or 21.8%, due to an increase in taxable income. The effective tax rates for 2000 and 1999 were 35.7% and 35.2%, respectively. Rate Developments Within the last several years the Company has filed applications for rate increases with the PPUC and has been granted rate relief as a result of such requests. The most recent rate request was filed by the Company on March 20, 2001, seeking an 11.1% increase in rates. Effective September 1, 2001, the PPUC authorized an increase in rates designed to produce approximately $800,000 in additional annual operating revenues, an increase of 4.2%. The Company does not plan to file an application for a rate increase in 2002. Liquidity and Capital Resources The Company is not aware of demands, events or uncertainties that will result in a decrease of liquidity or in a material change in the mix and relative cost of capital resources. The Company does not use off-balance sheet arrangements such as securitization of receivables or unconsolidated entities. The Company has no lease obligations, does not engage in trading or risk management activities, and does not have material transactions involving related parties. During 2001, the per capita volume of water sold declined in the industrial class primarily due to the loss of a large industrial customer who closed its operation in December 2000. The per capita volume of water sold did not change significantly in the other customer classifications. The Company does not anticipate any further change in the level of water usage which would have a material impact on its financial condition or results of operations. During 2001, the Company had $7,095,827 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), employee stock purchase plan, and stock subscription. The Company anticipates construction expenditures for 2002 and 2003 of approximately $6,518,500 and $5,131,000, respectively. The Company plans to finance such expenditures with internally generated funds, customers' advances, short-term borrowings, proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends) and employee stock purchase plan. During 2001, net cash provided by operating activities exceeded net cash used in investing and financing activities. The Company anticipates that during 2002 net cash used in investing and financing activities will equal 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 will be used to satisfy the need for additional cash. As of December 31, 2001, current liabilities exceeded current assets by $981,090. As of December 31, 2000, current liabilities exceeded current assets by $2,159,841. Short-term borrowings from lines of credit as of December 31, 2001 and 2000 were $2,000,000 and $2,648,946, respectively. The Company maintains lines of credit aggregating $19,000,000. Loans granted under these lines of credit bear interest based on the prime or LIBOR rates plus 1 to 1.5 percent. All lines of credit are unsecured and payable upon demand. The Company is not required to maintain compensating balances on its lines of credit. During 2001, the Company's dividend payout ratios relative to net income and cash provided by operating activities were 78.0% and 45.2%, respectively. The Company believes that these payout ratios are appropriate. Shareholders' investment as a percent of total capitalization was 52.3% as of December 31, 2001 compared with 49.8% as of December 31, 2000. The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs incurred to maintain and expand its service capacity. The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows. The ability of the Company to recover this increased investment in facilities is dependent upon future revenue increases, which are subject to approval by the PPUC. Over the past several years, the Company and an outside consultant have been evaluating the source of supply. Studies indicate that a new source will be needed by 2006. Available options have been analyzed, and the Company has decided on a pipeline from the Susquehanna River to Lake Redman. This alternative had the lowest cost, provided expandability, and was the best for the environment. The Company plans to build an intake and a pump station on its land at Long Level in Lower Windsor Township, York County. The water would then be pumped 13 miles through a 30 inch diameter pipe and released into Lake Redman. The cost of this project is estimated at $18 to $20 million. Funds will be raised through a combination of debt and equity issues. While the permitting process began in 2001, major expenditures are not expected until after 2002. Drought On November 6, 2001, the Governor issued a drought warning, which called for voluntary reductions in water use. On February 12, 2002, the drought warning became a drought emergency which imposes mandatory water use restrictions on our service territory. The drought did not have a noticeable impact on 2001 because it occurred at a time in which our customers were already using less water due to the season. The drought, if it continues, could have a material impact in 2002. New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. The pooling method of accounting is prohibited except for transactions initiated before July 1, 2001. SFAS No. 142 prescribes accounting for all purchased goodwill and intangible assets. The Statement requires that acquired goodwill is no longer amortized over a prescribed period, but is tested for impairment at least annually or whenever an impairment indicator arises. Acquired intangible assets, other than goodwill, are initially recognized at fair value and amortized over their useful life. This Statement is effective for fiscal years beginning after December 15, 2001, and until adoption of SFAS No. 142, goodwill and intangibles continue to be amortized under previously existing standards. The Company has consummated business combinations prior to June 30, 2001, which have been accounted for by the purchase method. The Statement provides for transition provisions which will require the Company to: (a) reassess the estimated useful lives of intangible assets that were previously recognized separately from goodwill; (b) cease amortization on intangible assets determined to have an indefinite life and subsequently test for impairment and (c) recognize any unamortized deferred negative goodwill. At December 31, 2001, the utility plant includes a credit acquisition adjustment of $1,447,968, which is the unamortized difference between the purchase price of prior acquisitions and the carrying values at the time of the acquisitions. Management has initially determined that none of this amount is deemed to be negative goodwill. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which is effective for financial statements issued for fiscal years beginning after June 15, 2001. The Statement requires the entity to recognize a liability for an asset retirement obligation where the entity has a legal obligation associated with the retirement of a tangible long-lived asset. This Statement is not expected to have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal periods. This Statement will require an entity to recognize an impairment loss if the carrying value of a long-lived asset or asset group is not recoverable and exceeds fair value. This Statement is not expected to have a material impact on the Company's financial position or results of operations. The York Water Company Balance Sheets December 31 Assets 2001 2000 UTILITY PLANT, at original cost $121,109,335 $114,748,545 Less-Reserve for depreciation 19,356,553 18,314,880 101,752,782 96,433,665 OTHER PHYSICAL PROPERTY: Less-Reserve for depreciation of $89,392 in 2001 and $80,985 in 2000 . . . . . 511,007 519,414 CURRENT ASSETS: Cash and cash equivalents 97,447 - Receivables, less reserves of $130,000 in 2001 and 2000. . . . . . . 2,995,000 2,854,593 Materials and supplies, at cost 449,777 402,770 Prepaid expenses 229,248 258,236 Deferred income taxes (Note 3) 88,655 88,655 3,860,127 3,604,254 OTHER LONG-TERM ASSETS: Prepaid pension cost (Note 6) 2,202,995 2,178,423 Deferred debt expense 354,346 394,422 Deferred rate case expense 144,042 46,950 Notes receivable (Note 7) 1,121,916 985,794 Deferred regulatory assets (Note 1) 1,886,658 1,600,420 Other. . . . . . . . . . . . . . . 1,517,619 1,862,977 7,227,576 7,068,986 $113,351,492 $107,626,319 Capitalization and Liabilities CAPITALIZATION: Common stock, no par value, authorized 31,000,000 shares, outstanding 3,154,332 shares in 2001 and 3,042,733 shares in 2000 (Note 5) $ 31,473,194 $ 28,899,504 Earnings retained in the business 4,418,280 4,226,051 Treasury stock, 38,000 shares in 2000 - (687,800) 35,891,474 32,437,755 Long-term debt (Note 4) 32,690,343 32,728,220 68,581,817 65,165,975 CURRENT LIABILITIES: Short-term borrowings (Note 4) 2,000,000 2,648,946 Current portion of long-term debt 37,877 37,500 Accounts payable 478,423 1,168,824 Dividends payable 623,498 577,914 Accrued taxes 527,674 165,002 Advance water revenues 25,037 21,182 Accrued interest 678,163 678,164 Other accrued expenses 470,545 466,563 4,841,217 5,764,095 DEFERRED CREDITS: Customers' advances for construction (Note 7). . . . . . . . 17,777,685 16,746,170 Contributions in aid of construction 10,784,143 10,157,133 Deferred income taxes (Note 3) 8,519,594 7,179,769 Deferred regulatory liabilities (Note 1) . . . . . . . . . . 970,330 988,781 Deferred employee benefits 1,876,706 1,624,396 39,928,458 36,696,249 $113,351,492 $107,626,319 The accompanying notes are an integral part of these statements. The York Water Company Statements of Income Year Ended December 31 2001 2000 1999 WATER OPERATING REVENUES: Residential $11,570,453 $10,979,596 $10,198,707 Commercial and industrial 5,472,782 5,301,362 5,368,833 Other 2,359,307 2,200,205 1,943,711 19,402,542 18,481,163 17,511,251 OPERATING EXPENSES: Operation and maintenance 4,565,022 4,217,504 4,130,342 Administrative and general 3,921,598 3,386,889 3,283,359 Depreciation and amortization 1,571,441 1,673,715 1,618,357 Taxes other than income taxes 409,844 730,516 1,223,495 10,467,905 10,008,624 10,255,553 Operating income. . . . . 8,934,637 8,472,539 7,255,698 INTEREST EXPENSE AND OTHER INCOME: Interest on long-term debt (Note 4). . . . . . . . . 2,759,985 2,739,902 2,715,505 Interest on short-term debt (Note 4) . . . . . . . . 183,429 113,709 31,026 Allowance for funds used during construction . . . . (87,849) (55,906) (102,952) Other income, net (159,536) (166,003) (252,058) 2,696,029 2,631,702 2,391,521 Income before income taxes 6,238,608 5,840,837 4,864,177 Federal and state income taxes (Note 3) 2,232,541 2,083,050 1,710,104 Net income . . . . . $ 4,006,067 $ 3,757,787 $ 3,154,073 BASIC EARNINGS PER SHARE (Note 5). . . . . . . . . . $1.30 $1.25 $1.05 Statements of Shareholders' Investment Earnings Retained Common In The Treasury Stock Business Stock Balance, January 1, 1999 27,292,726 3,087,710 - Net income - 3,154,073 - Cash dividends ($.945 per share) . . . . . . . . . - (2,823,526) - Issuance of common stock under dividend reinvestment plan 728,166 - - Issuance of common stock under employee stock purchase plan. . . . . 78,305 - - Repurchase of 38,000 shares of common stock. . . . - - (687,800) Balance, December 31, 1999 28,099,197 3,418,257 (687,800) Net income - 3,757,787 - Cash dividends ($.98 per share). . . . . . . . . . - (2,949,993) - Issuance of common stock under dividend reinvestment plan. . . . . . 722,609 - - Issuance of common stock under employee stock purchase plan. . . . . 77,698 - - Balance, December 31, 2000 28,899,504 4,226,051 (687,800) Net income - 4,006,067 - Cash dividends ($1.01 per share) . . . . . . . . . - (3,126,038) - Issuance of 76,930 shares of common stock. . . . . 1,783,726 - - Issuance of common stock under dividend reinvestment plan. . . . . . 715,023 - - Issuance of common stock under employee stock purchase plan. . . . . 74,941 - - Retirement of treasury stock - (687,800) 687,800 Balance, December 31, 2001 $31,473,194 $4,418,280 $ -0- The accompanying notes are an integral part of these statements. The York Water Company Statements of Cash Flows Year Ended December 31 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $4,006,067 $3,757,787 $3,154,073 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,571,441 1,673,715 1,618,357 Provision for losses on accounts receivable. . . . . 89,265 85,357 87,795 Increase in deferred income taxes (including regulatory assets and liabilities) 1,035,136 924,785 947,655 Changes in assets and liabilities: Increase in accounts receivable. . . . . . . (229,672) (186,690) (359,256) Decrease (increase) in recoverable income taxes - 5,702 (5,702) Increase in materials and supplies . . . . . . . . (47,007) (12,330) (29,040) Decrease (increase) in prepaid expenses and prepaid pension costs 4,416 (233,670) (201,587) (Decrease) increase in accounts payable, accrued expenses, other liabilities and deferred employee benefits (384,670) 677,666 729,785 Increase (decrease) in accrued interest and taxes. . . . . 362,671 135,021 (314,860) Decrease (increase) in other assets. . . . . . . . 502,018 (432,002) (131,476) Net Cash Provided by Operating Activities 6,909,665 6,395,341 5,495,744 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of temporary investments. . . . . . . . (2,940,152) (249,046) (3,281,000) Maturities of temporary investments. . . . . . . . 2,940,152 249,046 3,281,000 Construction expenditures (7,095,827) (6,413,721) (7,050,376) Customers' advances for construction and contributions in aid of construction 1,658,525 1,189,961 1,741,382 (Increase) decrease in notes receivable. . . . . . . (136,122) (202,000) 29,281 Net Cash Used in Investing Activities . . . . (5,573,424) (5,425,760) (5,279,713) CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments) proceeds of long-term debt. . . . . . . (37,500) (37,723) 800,000 Net (repayments) borrowings under line-of-credit agreements. . . . . (648,946) 1,217,828 1,431,118 Repurchase of 38,000 shares of common stock. . . . . - - (687,800) Issuance of 76,930 shares of common stock. . . . . . 1,783,726 - - Issuance of common stock under dividend reinvestment plan 715,023 722,609 728,166 Issuance of common stock under employee stock purchase plan 74,941 77,698 78,305 Dividends paid (3,126,038) (2,949,993) (2,823,526) Net Cash Used in Financing Activities . . . . (1,238,794) (969,581) (473,737) Net increase (decrease) in cash and cash equivalents 97,447 - (257,706) Cash and cash equivalents at beginning of year - - 257,706 Cash and cash equivalents at end of year . . . . . . $ 97,447 $ - $ - Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized . . . . . . . $2,851,378 $2,783,830 $2,636,394 Income taxes . . . . . . 757,162 1,076,981 940,540 The accompanying notes are an integral part of these statements. The York Water Company Notes to Financial Statements l. Accounting Policies The business of The York Water Company is to impound, purify and distribute water. The Company operates entirely within its franchised territory located in York County, Pennsylvania, and is subject to regulation by the PPUC. The Company is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, and, therefore, certain of the accounting principles followed may differ from enterprises in general to reflect the economic effect of rate decisions by regulatory authorities. The following summarizes the significant accounting policies employed by The York Water Company. Property, Plant and Equipment and Depreciation Property, plant and equipment consists of utility plant. The cost of additions includes contracted cost, direct labor and fringe benefits, materials, overheads and, for certain utility plant, allowance for funds used during construction. Water systems acquired are recorded at estimated original cost of utility plant when first devoted to utility service and the applicable depreciation is recorded to accumulated depreciation. The difference between the estimated original cost less applicable accumulated depreciation, and the purchase price is recorded as an acquisition adjustment within utility plant. At December 31, 2001 and 2000, utility plant includes a credit acquisition adjustment of $1,447,968 and $1,481,554, respectively, which is being amortized over the remaining life of the respective assets. Amortization amounted to $33,586 in 2001 and $33,585 in 2000. Upon normal retirement of depreciable property, the estimated or actual cost of the asset is credited to the utility plant account, and such amounts, together with the cost of removal less salvage value, is charged to the reserve for depreciation. Gains or losses from abnormal retirements are reflected in income currently. The Company charges to maintenance expense the cost of repairs and replacements and renewals of minor items of property. Maintenance of transportation equipment is charged to clearing accounts and apportioned therefrom in a manner similar to depreciation. The cost of replacements, renewals and betterments of units of property is capitalized to the utility plant accounts. The straight-line remaining life method is used to compute depreciation on utility plant cost, exclusive of land and land rights. The effective rate of depreciation was 1.74% in 2001, 1.96% in 2000, and 2.02% in 1999 on average utility plant, net of customers' advances and contributions. Larger depreciation provisions are deducted for tax purposes. Annual provisions for depreciation of transportation and mechanical equipment included in utility plant are computed on a straight-line basis over the estimated service lives. Such provisions are charged to clearing accounts and apportioned therefrom to operating expenses and other accounts in accordance with the Uniform System of Accounts as prescribed by the PPUC. During 2001, the estimated lives were lengthened for certain assets that resulted in less depreciation expense of approximately $170,000 in 2001. Deferred Charges- Deferred debt expense is amortized on a straight-line basis over the term of the related debt. Deferred rate case expense is amortized over two years as specified by the PPUC for rate-making purposes. Revenues- Revenues include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the latest meter reading to the end of the accounting period. Customers' Advances for Construction- Advances are received from customers for construction of utility plant and are refundable as operating revenues are earned and any notes receivable have been paid after the completion of construction (see also Note 7). After all refunds to which the customer is entitled are made, any remaining balance is transferred to contributions in aid of construction. Contributions in Aid of Construction- Contributions in aid of construction include direct contributions and the portion of customers' advances for construction which become nonrefundable. Transfers to other accounts may not be made without approval of the PPUC. Income Taxes and Deferred Regulatory Assets and Liabilities- Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent such income taxes increase or decrease future rates, an offsetting regulatory asset or liability has been recorded. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. Notes Receivable- Notes receivable are recorded at cost, less the related allowance for impaired notes receivable. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a note to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate. Pension Plans- The Company has defined benefit pension plans covering substantially all of its employees. The benefits are based on years of service and the employee's compensation before retirement. Allowance for Funds Used During Construction- Allowance for funds used during construction (AFUDC) represents the cost of funds used for construction purposes during the period of construction. These costs are reflected as non-cash income during the construction period and as an addition to the cost of plant constructed. The AFUDC rate was 10.04% for 2001, 2000, and 1999. Statements of Cash Flows- For the purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents except for those instruments earmarked to fund construction expenditures or repay long-term debt. Use of Estimates in the Preparation of Financial Statements- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification- Throughout 2001, management evaluated the classification of deferred income tax assets and liabilities and the related regulatory assets and liabilities. Several components of these accounts were reclassified which resulted in significant changes when compared to prior financial reporting periods. These reclassifications did not affect current or prior year income tax expense or net income. Certain 2000 amounts have been reclassified to conform to 2001 presentation. 2. Rate Increases The Company has increased rates as approved by the PPUC in August 2001 (4.2%). The new rates became effective September 1, 2001 and are designed to produce approximately $800,000 in additional annual operating revenues. The next application to increase rates will be filed sometime after 2002. 3. Income Taxes The provisions for income taxes consist of: 2001 2000 1999 Federal current.. $ 710,573 $ 926,825 $ 674,116 State current.... 348,373 297,378 215,860 Federal deferred. 1,217,628 811,966 805,778 State deferred... (6,427) 83,563 51,373 Federal investment tax credit, net of current utilization... (37,606) (36,682) (37,023) Total income taxes......... $2,232,541 $2,083,050 $1,710,104 A reconciliation of the statutory Federal tax provision (34%) to the total provision follows: 2001 2000 1999 Statutory Federal tax provision..... $2,121,127 $1,985,885 $1,653,820 Tax-exempt interest...... (54,145) (47,524) (73,715) Effect of depreciation flowed through.. - (65,061) (46,021) Effect of cost of removal flowed through......... - (27,990) (23,163) Amortization of investment tax credit.......... (38,332) (38,118) (38,325) State income taxes, net of Federal benefit. 225,684 251,441 176,374 Debt issuance expenses........ 9,612 (31,956) 10,356 Other, net....... (31,405) 56,373 50,778 Total income taxes........... $2,232,541 $2,083,050 $1,710,104 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2001 and 2000 are summarized in the following table: 2001 2000 Deferred tax assets: Allowance for doubtful accounts $ 88,655 $ 88,655 Deferred compensation 263,009 173,291 Customers' advances and contributions 512,339 567,910 Alternative minimum tax credit carryforward 768,511 1,135,705 Other 35,104 29,592 Total gross deferred tax assets 1,667,618 1,995,153 Less valuation allowance - - Total deferred tax assets 1,667,618 1,995,153 Deferred tax liabilities: Accelerated depreciation 8,616,012 7,598,115 Investment tax credit 351,804 365,443 Pension income 894,271 884,296 Other, net 236,470 238,413 Total deferred tax liabilities 10,098,557 9,086,267 Net deferred tax liability $ 8,430,939 $ 7,091,114 Reflected on balance sheets as: Current deferred tax asset $ (88,655) $ (88,655) Noncurrent deferred tax liability 8,519,594 7,179,769 Net deferred tax liability $ 8,430,939 $ 7,091,114 No valuation allowance is required for deferred tax assets as of December 31, 2001 and 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and the current regulatory environment, management believes it is more likely than not the Company will realize the benefits of these deductible differences. 4. Borrowings Long-term debt as of December 31, 2001 and 2000 is summarized in the following table: 2001 2000 10.17% Senior Notes, Series A, due 2019.. $ 6,000,000 $ 6,000,000 9.60% Senior Notes, Series B, due 2019.. 5,000,000 5,000,000 10.05% Senior Notes, Series C, due 2020.. 6,500,000 6,500,000 8.43% Senior Notes, Series D, due 2022.. 7,500,000 7,500,000 4.40% Industrial Development Authority Revenue Refunding Bonds, Series 1994, due 2009 2,700,000 2,700,000 1% Pennvest Note, due 2019 690,343 728,220 6% Industrial Development Authority Revenue Refunding Bonds, Series 1995, due 2010 4,300,000 4,300,000 $32,690,343 $32,728,220 During 2000, the Company issued $4,300,000 of 6% Industrial Development Authority Revenue Refunding Bonds, Series 1995. Proceeds of these bonds were used to redeem the outstanding amount of the 5% Industrial Development Authority Revenue Refunding Bonds, Series 1995. These bonds have a mandatory tender date of June 1, 2005. The Company is required to purchase any unremarketed bonds. The 4.40% Industrial Development Authority Revenue Refunding Bonds, Series 1994, have a mandatory tender date of May 15, 2004. The Company is required to repurchase any unremarketed bonds. The terms of the debt agreements limit in some cases the Company's ability to prepay its borrowings and include certain restrictions with respect to declaration and payment of cash dividends and acquisition of the Company's stock. Under the terms of the most restrictive agreements, cumulative payments for dividends and acquisition of stock since December 31, 1982 may not exceed $1,500,000 plus net income since that date. As of December 31, 2001, none of the earnings retained in the business are restricted under these provisions. The Company maintains lines of credit aggregating $19,000,000. Loans granted under these lines as of December 31, 2001 bear interest based on the prime or LIBOR rate plus 1 to 1.5 percent. There were $2,000,000 of short-term borrowings as of December 31, 2001 and $2,648,946 as of December 31, 2000. The weighted average interest rate on short-term borrowings outstanding as of December 31, 2001 was 3.14%. All of the lines of credit are payable upon demand. The Company is not required to maintain compensating balances on its lines of credit. 5. Common Stock and Earnings Per Share Earnings per share are based upon the weighted average number of shares outstanding of 3,076,625 in 2001; 3,010,675 in 2000; and 2,990,267 in 1999. The Company does not have dilutive securities. Under the employee stock purchase plan, all full-time employees who have been employed at least six consecutive months may purchase shares of the Company's common stock through payroll deductions limited to 10% of gross compensation. The purchase price is 95% of the fair market value (as defined). As of December 31, 2001, 57,286 shares have been issued under the plan. Under the optional dividend reinvestment plan, holders of the Company's common stock may purchase additional shares. The purchase price is 95% of the fair market value (as defined). As of December 31, 2001, 504,748 shares of the 960,000 shares authorized have been issued. On October 22, 1999, the Company purchased 38,000 shares of its common stock in a private transaction. These shares were retired in 2001. On July 23, 2001, the Company offered to holders of its common stock non-transferable subscription rights to purchase up to an aggregate of 120,000 shares of common stock. All shareholders were granted one subscription right for every 25 shares of common stock held of record as of June 30, 2001. Each subscription right entitled the holder to purchase one share at a purchase price of $23.61 per share. On September 10, 2001, subscription rights to purchase 76,930 shares were exercised. The net proceeds, $1,783,726, were used to repay short-term borrowings. 6. Employee Benefit Plans The Company maintains two defined benefit pension plans covering substantially all of its employees. The benefits are based upon years of service times the sum of $17.50 plus 1.5% of final average monthly earnings in excess of $400. The Company's funding policy is to contribute annually the maximum amount permitted by the Employee Retirement Income Security Act of 1974, as amended. The following table sets forth the plans' funded status and amounts recognized in the Company's balance sheets as of December 31, 2001 and 2000. The measurement of assets and obligations of the plans is as of December 31, 2001 and 2000. 2001 2000 Pension benefit obligations beginning of year $11,993,805 $10,903,511 Service cost 384,287 332,258 Interest cost 795,934 752,667 (Decrease) increase due to actuarial (gain) loss (697,159) 513,657 Benefit payments (522,781) (508,288) Pension benefit obligation end of year $11,954,086 $11,993,805 Fair value of plan assets beginning of year $15,006,375 $15,487,253 Actual return on plan assets (1,156,567) 27,410 Benefits paid (522,781) (508,288) Fair value of plan assets end of year $13,327,027 $15,006,375 Funded status $ 1,372,941 $ 3,012,570 Unrecognized transition asset (36,333) (242,333) Unrecognized net prior service cost 236,404 267,740 Unrecognized net loss (gain) 629,983 (859,554) Prepaid pension cost as of December 31, 2001 and 2000 $ 2,202,995 $ 2,178,423 Net periodic pension income for 2001, 2000 and 1999 included the following components: 2001 2000 1999 Service cost-benefits earned during the year $ 384,287 $ 332,258 $ 369,469 Interest cost on projected benefit obligation 795,934 752,667 659,340 Expected return on plan assets (1,030,129) (1,064,600) (1,000,896) Amortization of transition asset (206,000) (206,000) (206,000) Amortization of prior service cost 31,336 31,017 26,717 Amortization of accumulated gain - (45,882) - Net periodic pension income $ (24,572) $(200,540) $(151,370) The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% in 2001, 6.75% in 2000 and 7.0% in 1999. The rate of increase in future compensation levels was 5%. The expected long-term rate of return on assets was 7%. The Company has a savings plan pursuant to the provisions of section 401(k) of the Internal Revenue Code. The plan provides for elective employee contributions of up to 15% of compensation and Company matching contributions of 50% of the participant's contribution, up to a maximum annual Company contribution of $1,000 for each employee. Contributions to the plan amounted to $61,584 in 2001, $58,952 in 2000, and $51,519 in 1999. 7. Notes Receivable and Customers' Advances for Construction The Company has entered into agreements with five municipalities to extend water service into newly-formed water districts. The Company loaned funds to the municipalities to cover the costs related to the projects. The municipalities concurrently advanced these funds back to the Company in the form of customers' advances for construction. The municipalities are required by enacted ordinance to charge application fees and water revenue surcharges (fees) to customers connected to the system which are remitted to the Company. The principal and the related customer advance are reduced periodically as operating revenues are earned by the Company from customers connected to the system and refunds of advances are made. There is no due date for the notes nor expiration date for the advances. The Company has recorded interest income of $142,560 in 2001, $122,828 in 2000, and $198,590 in 1999. Included in the accompanying balance sheets at December 31, 2001 and 2000 were the following amounts related to these projects. 2001 2000 Notes receivable, including interest $ 947,852 $ 804,307 Customers' advances for construction 3,090,261 2,775,234 The Company has other notes receivable totaling $174,064 and $181,487 at December 31, 2001 and 2000, respectively. The Company has other customers' advances for construction totaling $14,687,424 and $13,970,936 at December 31, 2001 and 2000, respectively. 8. Capital Commitments The Company plans to finance ongoing capital expenditures with internally generated funds, customers' advances, short-term borrowings and proceeds from the issuance of common stock under its dividend reinvestment plan (stock issued in lieu of cash dividends) and employee stock purchase plan. As additional funds are needed for the pipeline to the river, various debt and equity financing will be used. 9. Commitments and Contingent Liabilities The Company is involved in certain legal and administrative proceedings before various courts and governmental agencies concerning rates and other matters. The Company expects that the ultimate disposition of these proceedings will not have a material effect on the Company's financial position, results of operations and cash flows. 10. Fair Value of Financial Instruments The estimated fair value of financial instruments has been determined based on available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company might realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value. The carrying amount of current assets and liabilities that are considered financial instruments approximates their fair value as of the dates presented. The Company's long-term debt, with a carrying value of $32,690,343 at December 31, 2001 and $32,728,220 at December 31, 2000, had an estimated fair value of approximately $39,000,000 in 2001 and in 2000. The weighted average rates used to calculate the carrying value were based on the 30-year Treasury Bond yield. The 2001 and 2000 rates were 6.58% and 6.55%, respectively. The Company's customers' advances for construction and notes receivable have carrying values at December 31, 2001 of $17,777,685 and $1,121,916, 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. 11. Shareholder Rights Plan On January 25, 1999, the Company's Board of Directors approved a Shareholder Rights Plan designed to protect the Company's shareholders in the event of an unsolicited, unfair offer to acquire the Company. Each outstanding common share is entitled to one Right which is evidenced by the common share certificate. In the event any person acquires 15% or more of the outstanding common shares or commences a tender or exchange offer which, if consummated, would result in a person owning 15% or more of the outstanding common shares, the Rights will begin to trade independently from the common shares, and would entitle the holder to purchase a number of common shares having approximately twice the value of the exercise price of the Rights. If the Company is involved in a merger or other business combination at any time after the Rights become exercisable, the Rights will entitle the holder to acquire a number of shares of the acquiring company having approximately twice the value of the exercise price of the Rights. The Rights are redeemable by the Company at a redemption price of $0.01 per Right at any time before the Rights become exercisable. The Rights will expire on January 24, 2009, unless previously redeemed. 12. Subsequent Event On February 21, 2002, the Board of Directors approved a two-for-one stock split, subject to the approval by the Pennsylvania Public Utility Commission, or PPUC. The record date for the stock split will be determined after the PPUC acts on the Company's application. Assuming the Company receives approval of the two-for-one stock split from the PPUC, per share data would be as follows: Per share of common stock, assuming the two-for-one stock split approval: 2001 2000 1999 Net Income $0.650 $0.625 $0.525 Dividends $0.505 $0.490 $0.473 Per share of common stock, historical: 2001 2000 1999 Net Income $1.30 $1.25 $1.05 Dividends $1.01 $0.98 $0.945 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of The York Water Company: We have audited the accompanying balance sheets of The York Water Company as of December 31, 2001 and 2000, and the related statements of income, shareholders' investment, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of The York Water Company as of December 31, 1999 were audited by other auditors whose report dated February 25, 2000, expressed an unqualified opinion on those statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 2001 and 2000 financial statements referred to above present fairly, in all material respects, the financial position of The York Water Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. York, Pennsylvania Stambaugh Ness, PC February 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----