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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934



For Quarter ended June 30, 2004
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
 
17401
(Address of principal executive offices)
(Zip Code)
 
 
 
 

(717) 845-3601
(Registrant's telephone number, including area code)


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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES x
NO ¨
 
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
   
Common stock, No par value
6,859,689 Shares outstanding
as of August 2, 2004

 
   
 
THE YORK WATER COMPANY
 
  
 
 
PART I - FINANCIAL INFORMATION
 
  
 
 
Item 1.      Financial Statements
  
 
 
 
  
 
 
Balance Sheets
 
  
 
 
 
  
(Unaudited)
 
 
  
As of
As of
 
  
June 30, 2004
Dec. 31, 2003
 
    
 
    
 
  
ASSETS
    
 
    
 
  
Utility Plant, at original cost
 
$
155,048,175
 
$
139,695,088
 
Plant acquisition adjustments
    
(1,364,005
)
  
(1,380,797
)
Reserve for depreciation
   
(23,478,188
)
  
(22,512,047
)
   
 
 
 
    
130,205,982
   
115,802,244
 
   
 
 
Other Physical Property:
    
 
    
 
  
Less-Reserve for depreciation of $112,363 in 2004
   
 
    
 
  
and $104,571 in 2003
   
679,855
   
664,982
 
   
 
 
 
    
 
    
 
  
Current Assets:
    
 
    
 
  
Receivables, less reserves of $130,000 in 2004 and 2003
   
3,204,494
   
3,163,285
 
Recoverable income taxes
    
143,888
   
-
 
Materials and supplies, at cost
   
721,342
   
592,376
 
Prepaid expenses
   
485,678
   
262,980
 
Deferred income taxes
   
88,655
   
88,655
 
   
 
 
Total Current Assets
    
4,644,057
   
4,107,296
 
   
 
 
 
    
 
    
 
  
Other Long-Term Assets:
    
 
    
 
  
Prepaid pension cost
   
1,288,308
   
1,836,228
 
Deferred debt expense
   
304,575
   
294,612
 
Deferred rate case expense
   
199,375
   
143,390
 
Notes receivable
   
825,038
   
658,878
 
Deferred regulatory assets
   
2,422,532
   
1,847,406
 
Other
   
2,189,572
   
2,153,422
 
   
 
 
 
    
7,229,400
   
6,933,936
 
   
 
 
 
    
 
    
 
  
 
    
 
    
 
  
Total Assets
  
$
142,759,294
 
$
127,508,458
 
 
  
 
 
 
    
 
    
 
  
The accompanying notes are an integral part of these statements.
    
 
    
 
  
 

 

Page 2   
 
 
THE YORK WATER COMPANY
 
  
 
 
Balance Sheets
 
  
 
 
 
  
(Unaudited)
 
 
  
As of
As of
 
  
June 30, 2004
Dec. 31, 2003
 
    
 
    
 
  
CAPITALIZATION AND LIABILITIES
    
 
    
 
  
CAPITALIZATION:
    
 
    
 
  
Common stock, no par value, authorized 31,000,000 shares,
  
$
33,702,313
 
$
33,234,985
 
issued and outstanding 6,444,689 shares in 2004
    
 
    
 
  
and 6,419,230 shares in 2003
   
 
    
 
  
Preferred stock, authorized 500,000 shares, no shares issued
    
-
   
-
 
Earnings retained in the business
   
6,585,159
   
5,821,544
 
   
 
 
 
    
40,287,472
   
39,056,529
 
   
 
 
 
    
 
    
 
  
Long-Term Debt:
    
 
    
 
  
1.0% Pennvest Loan, due 2019
    
632,814
   
652,086
 
6.0% Industrial Development Authority Revenue
    
 
    
 
  
Refunding Bonds, Series 1995, due 2010
    
4,300,000
   
4,300,000
 
10.05% Senior Notes, Series C, due 2020
    
6,500,000
   
6,500,000
 
10.17% Senior Notes, Series A, due 2019
    
6,000,000
   
6,000,000
 
9.6% Senior Notes, Series B, due 2019
   
5,000,000
   
5,000,000
 
8.43% Senior Notes, Series D, due 2022
    
7,500,000
   
7,500,000
 
3.6% Industrial Development Authority Revenue
    
 
    
 
  
Refunding Bonds, Series 1994, due 2009
    
2,700,000
   
2,700,000
 
4.05% Pennsylvania Economic Development Financing Authority
    
 
    
 
  
Exempt Facilities Revenue Bonds, Series A, due 2016
    
2,350,000
   
-
 
5.0% Pennsylvania Economic Development Financing Authority
    
 
    
 
  
Exempt Facilities Revenue Bonds, Series A, due 2016
    
4,950,000
   
-
 
   
 
 
Total long-term debt
    
39,932,814
   
32,652,086
 
Less current maturities
    
(4,338,835
)
  
(2,738,641
)
   
 
 
Long-term portion
    
35,593,979
   
29,913,445
 
   
 
 
 
    
 
    
 
  
COMMITMENTS AND CONTINGENT LIABILITIES
    
 
    
 
  
 
    
 
    
 
  
CURRENT LIABILITIES:
    
 
    
 
  
Short-term borrowings
    
10,017,924
   
7,153,119
 
Current portion of long-term debt
   
4,338,835
   
2,738,641
 
Accounts payable
    
3,026,716
   
1,743,094
 
Dividends payable
   
719,913
   
718,540
 
Accrued taxes
   
81,715
   
361,936
 
Advance water revenues
   
33,232
   
26,435
 
Accrued interest
   
755,421
   
678,164
 
Deferred regulatory liabilities
   
88,655
   
88,655
 
Other accrued expenses
   
504,319
   
538,662
 
   
 
 
Total Current Liabilities
    
19,566,730
   
14,047,246
 
   
 
 
 
    
 
    
 
  
DEFERRED CREDITS:
    
 
    
 
  
Customers' advances for construction
   
19,877,237
   
18,445,063
 
Contributions in aid of construction
   
12,843,798
   
12,776,288
 
Deferred income taxes
   
10,740,128
   
9,412,313
 
Deferred investment tax credits
   
1,143,274
   
1,165,892
 
Deferred regulatory liabilities
   
817,104
   
830,523
 
Deferred employee benefits
   
1,889,572
   
1,861,159
 
   
 
 
 
    
47,311,113
   
44,491,238
 
   
 
 
Total Capitalization and Liabilities
  
$
142,759,294
 
$
127,508,458
 
 
  
 
 
The accompanying notes are an integral part of these statements.
    
 
    
 
  
 
 
Page 3   
 

THE YORK WATER COMPANY
 
  
 
 
 
 
Statements of Income
 
  
 
 
 
 
 
  
 
 
 
 
 
  
(Unaudited)
(Unaudited)
 
  
Three Months
Six Months
 
  
Ended June 30
Ended June 30
           
 
  
2004
2003
2004
2003
 
    
 
    
 
    
 
    
 
  
WATER OPERATING REVENUES:
    
 
    
 
    
 
    
 
  
Residential
 
$
3,341,538
 
$
3,032,814
 
$
6,645,953
 
$
5,911,448
 
Commercial and industrial
   
1,472,637
   
1,378,640
   
2,842,304
   
2,619,113
 
Other
   
683,787
   
636,220
   
1,373,070
   
1,275,053
 
   
 
 
 
 
 
    
5,497,962
   
5,047,674
   
10,861,327
   
9,805,614
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
OPERATING EXPENSES:
    
 
    
 
    
 
    
 
  
Operation and maintenance
   
1,251,669
   
1,181,024
   
2,422,896
   
2,283,050
 
Administrative and general
   
1,170,845
   
990,372
   
2,305,760
   
2,128,050
 
Depreciation and amortization
   
473,935
   
444,668
   
947,870
   
889,336
 
Taxes other than income taxes
   
235,761
   
217,521
   
465,766
   
424,294
 
   
 
 
 
 
 
    
3,132,210
   
2,833,585
   
6,142,292
   
5,724,730
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
Operating income
    
2,365,752
   
2,214,089
   
4,719,035
   
4,080,884
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
OTHER INCOME (EXPENSES):
    
 
    
 
    
 
    
 
  
Interest on long-term debt
   
(766,981
)
  
(689,819
)
  
(1,456,728
)
  
(1,379,662
)
Interest on short-term debt
   
(32,271
)
  
(17,675
)
  
(73,988
)
  
(34,140
)
Allowance for funds used during construction
   
239,679
   
62,341
   
443,070
   
113,233
 
Gain on sale of land
    
-
   
-
   
743,195
   
-
 
Other (expense) income, net
   
(182,813
)
  
28,245
   
(238,411
)
  
(55,586
)
   
 
 
 
 
 
    
(742,386
)
  
(616,908
)
  
(582,862
)
  
(1,356,155
)
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
Income before income taxes
    
1,623,366
   
1,597,181
   
4,136,173
   
2,724,729
 
 
    
 
    
 
    
 
    
 
  
Federal and state income taxes
   
573,576
   
547,560
   
1,509,202
   
917,538
 
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
Net income
  
$
1,049,790
 
$
1,049,621
 
$
2,626,971
 
$
1,807,191
 
 
  
 
 
 
 
Basic Earnings Per Share
 
$
0.16
 
$
0.16
 
$
0.41
 
$
0.28
 
 
  
 
 
 
 
Cash Dividends Per Share
  
$
0.145
 
$
0.135
 
$
0.290
 
$
0.270
 
 
  
 
 
 
 
 
    
 
    
 
    
 
    
 
  
The accompanying notes are an integral part of these statements.
    
 
    
 
    
 
    
 
  
 
 
Page 4   
 
 
THE YORK WATER COMPANY
 
  
 
 
Statements of Shareholders' Investment
(Unaudited)
 
  
 
 
 
  
 
Earnings
 
  
 
Retained
 
  
Common
In The
 
  
Stock
Business
   
 
    
 
    
 
  
Balance, December 31, 2003
 
$
33,234,985
 
$
5,821,544
 
 
    
 
    
 
  
Net income
   
 
    
2,626,971
 
 
    
 
    
 
  
Dividends
   
 
    
(1,863,356
)
 
    
 
    
 
  
Issuance of common stock under dividend reinvestment plan
    
425,207
   
 
  
 
    
 
    
 
  
Issuance of common stock under employee stock purchase plan
    
42,121
   
 
  
   
 
 
 
    
 
    
 
  
Balance, June 30, 2004
  
$
33,702,313
 
$
6,585,159
 
 
  
 
 
 
    
 
    
 
  
The accompanying notes are an integral part of these statements.
    
 
    
 
  
 
 
Page 5   
 
 
THE YORK WATER COMPANY
 
  
 
 
Statements of Cash Flows
 
  
 
 
 
  
(Unaudited)
(Unaudited)
 
  
Six Months
Six Months
 
  
Ended
Ended
 
  
June 30, 2004
June 30, 2003
 
    
 
    
 
  
CASH FLOWS FROM OPERATING ACTIVITIES:
    
 
    
 
  
Net income
 
$
2,626,971
 
$
1,807,191
 
Adjustments to reconcile net income to net cash provided by operating activities:
    
 
    
 
  
Gain on sale of land
    
(743,195
)
  
-
 
Depreciation and amortization
   
947,870
   
889,336
 
Provision for losses on accounts receivable
   
65,000
   
65,000
 
Increase in deferred income taxes (including regulatory
    
 
    
 
  
assets and liabilities)
    
716,652
   
457,270
 
Changes in assets and liabilities:
    
 
    
 
  
Increase in accounts receivable
   
(106,209
)
  
(136,647
)
Increase in recoverable income taxes
    
(143,888
)
  
(39,796
)
Increase in materials and supplies
   
(128,966
)
  
(71,954
)
Decrease in prepaid expenses and prepaid pension costs
    
325,222
   
268,513
 
Increase in accounts payable, accrued expenses,
    
 
    
 
  
other liabilities and deferred employee benefits
   
633,077
   
107,412
 
Decrease in accrued interest and taxes
    
(202,964
)
  
(11,496
)
Increase in other assets
   
(105,564
)
  
(68,938
)
   
 
 
Net cash provided by operating activities
   
3,884,006
   
3,265,891
 
 
    
 
    
 
  
CASH FLOWS FROM INVESTING ACTIVITIES:
    
 
    
 
  
Construction expenditures
    
(14,760,429
)
  
(3,152,852
)
Proceeds from sale of land
    
792,021
   
-
 
Customers' advances for construction and
    
 
    
 
  
contributions in aid of construction
    
1,499,684
   
618,702
 
(Increase) decrease in notes receivable
    
(166,160
)
  
5,888
 
   
 
 
Net cash used in investing activities
    
(12,634,884
)
  
(2,528,262
)
 
    
 
    
 
  
CASH FLOWS FROM FINANCING ACTIVITIES:
    
 
    
 
  
Borrowings of long-term debt
   
7,300,000
   
-
 
Repayments of long-term debt
   
(19,272
)
  
(19,081
)
Net borrowings under line-of-credit agreements
   
2,864,805
   
550,044
 
Issuance of common stock under dividend reinvestment plan
   
425,207
   
408,656
 
Issuance of common stock under employee stock purchase plan
   
42,121
   
40,534
 
Dividends paid
    
(1,861,983
)
  
(1,717,782
)
   
 
 
Net cash provided by (used in) financing activities
    
8,750,878
   
(737,629
)
   
 
 
 
    
 
    
 
  
Net change in cash and cash equivalents
    
-
   
-
 
Cash and cash equivalents at beginning of period
    
-
   
-
 
   
 
 
Cash and cash equivalents at end of period
  
$
-
 
$
-
 
 
  
 
 
Supplemental disclosures of cash flow information:
    
 
    
 
  
Cash paid during the year for:
    
 
    
 
  
Interest, net of amounts capitalized
 
$
1,006,510
 
$
1,302,173
 
Income taxes
   
771,754
   
260,334
 
 
    
 
    
 
  
Supplemental schedule of non cash investing and financing activities:
    
 
    
 
  
accounts payable includes $1,857,023 in 2004 for the construction of utility plant.
    
 
    
 
  
 
    
 
    
 
  
The accompanying notes are an integral part of these statements.
    
 
    
 
  

 

 
Page 6   
 
 
THE YORK WATER COMPANY


Notes to Interim Financial Statements
 
1.
Interim Financial Information
 
 
The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair presentation of results for such periods. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report to Shareholders for the year ended December 31, 2003.
 
Operating results for the three month and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
 
2.
Basic Earnings Per Share
 
 
Basic earnings per share for the six months ended June 30, 2004 and 2003 were based on weighted average shares outstanding of 6,426,533 and 6,373,419, respectively.
 
Since the Company has no common stock equivalents outstanding, there is no required calculation for diluted earnings per share.
 
3. Reclassification 
 
 
Certain 2003 amounts have been reclassified to conform to the 2004 presentation. Such reclassifications had no effect on net income.
 
4.
Capital Commitments
 
 
The Company has capital commitments with regard to its Susquehanna River Pipeline Project to the pipe supplier, subcontractor, and engineer on the project. Of the total committed of approximately $20.7 million, $8.2 million remains to be incurred as of June 30, 2004.
 
5.
Pensions
 
Components of Net Periodic Pension Cost
 
 
 
  
Three Months Ended June 30
Six Months Ended June 30
 
  
2004
2003
2004
2003
 
    
 
    
 
    
 
    
 
  
Service Cost
  
$
125,880
 
$
95,595
  
$
251,760
 
$
191,190
 
Interest Cost
    
247,290
   
220,301
   
494,580
   
440,602
 
Expected return on plan assets
    
(228,958
)
  
(208,212
)
  
(457,916
)
  
(416,424
)
Amortization of loss
    
32,570
   
30,981
    
65,140
   
63,962
 
Amortization of prior service cost
    
97,178
   
7,834
    
194,356
   
15,668
 
Increase in deferred regulatory assets
    
(213,431
)
  
(173,940
)
  
(426,862
)
  
(173,940
)
   
 
 
 
 
Net periodic pension expense
  
$
60,529
 
$
(27,441
)
$
121,058
 
$
121,058
 
   
 
 
 
 
Employer Contributions
 
 
The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $327,000 to its pension plans in 2004. As of June 30 2004, no contributions have been made. The Company presently anticipates contributing at least $242,116 to fund its pension plans in 2004.
 
 
Page 7   
 
 
THE YORK WATER COMPANY


Notes to Interim Financial Statements (continued)

6.
Notes Receivable
 
 
During the second quarter, the Company offset notes receivable in the amount of $211,862 against the related advances for construction based on its determination that the principal recoverable from note holders was less than the recorded amount, and the fact that advances are not fully refundable to the extent that payments are not received on the notes.
 
Due to increased construction activity resulting in the collection of application fees and surcharges to recoup construction costs, the Company reinstated notes receivable in the amount of $388,078 which had been offset against the related advances for construction during the second quarter of 2002.
 
Neither of these transactions affected net income.
 
7.
Long-Term Debt
 
 
On April 1, 2004 the Pennsylvania Economic Development Financing Authority, or the PEDFA, issued $7,300,000 aggregate principal amount of Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds, Series A of 2004 for the benefit of the Company. The PEDFA then loaned the proceeds of the offering to the Company pursuant to a loan agreement. The loan agreement provides for a $4,950,000 loan bearing interest at 5.00% and a $2,350,000 loan bearing interest at 4.05%. The bonds and the related loans will mature on April 1, 2016. The loan agreement contains various covenants and restrictions. We believe that we are currently in compliance with all of these restrictions. The bonds were issued as part of the financing plan for the Susquehanna River Pipeline Project. The proceeds, net of issuance costs, were used to pay down short-term borrowings related to the Pro ject.
 
The Company's 4.40% Industrial Development Authority Revenue Refunding Bonds, Series 1994, had a mandatory tender date of May 15, 2004. The bonds were remarketed and the interest rate redetermined to 3.60% on May 17, 2004. Under the terms of the bonds, existing bond holders were permitted to retain their bonds at the 3.60% interest rate. All bonds not retained by current bond holders were remarketed. The newly issued bonds will mature on May 15, 2009.
 
The Company's 6.0% Industrial Development Authority Revenue Refunding Bonds, Series 1995, have a mandatory tender date of June 1, 2005. The bonds will be remarketed and the interest rate redetermined in 2005. The Company will be required to repurchase any unremarketed bonds. As a result of this mandatory tender, this $4.3 million was reclassified as current maturities.
 
8.
Subsequent Event
 
 
In July, 2004, the Company closed on an underwritten public offering of 415,000 shares of its common stock to Janney Montgomery Scott LLC, who was the sole underwriter. The Company received net proceeds in the offering, after deducting offering expenses and underwriter’s discounts and commissions, of approximately $6.9 million. The Company has also granted the underwriter an option to purchase up to an additional 62,250 shares. The net proceeds were used to repay a portion of the Company’s short-term indebtedness under its revolving credit facilities primarily incurred to finance the Susquehanna River Pipeline Project.

 
  Page 8  
 
 
THE YORK WATER COMPANY


Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Safe Harbor Statement

Certain statements contained herein and elsewhere in this Form 10-Q which are not historical facts are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements address among other things: various federal and state regulations concerning water quality and environmental standards; the adequacy of approved rates to allow for a fair rate of return on the investment in utility plant; the timeliness of rate relief; quantity of rainfall and temperature; industrial demand; financing costs; energy rates; consummation of capital markets transactions to finance capital expenditure projects; and environmental and water quality regulations, as well as information contained elsewhere in this report preceded by, followed by, or including the words "believes," "expects ," "anticipates," "plans," or similar expressions.

The statements are based on a number of assumptions concerning future events, many of which are outside the Company's control. The Company cautions that a number of important factors could cause the actual results to differ materially from those expressed in any forward-looking statements made on behalf of the Company. The Company undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

Results of Operations

Three Months Ended June 30, 2004 Compared
With Three Months Ended June 30, 2003

Net income for the second quarter of 2004 was $1,049,790, which was consistent with net income of $1,049,621 for the same period of 2003.

Water operating revenues for the three months ended June 30, 2004 increased $450,288, or 8.9%, from $5,047,674 for the three months ended June 30, 2003 to $5,497,962 for the corresponding 2004 period. Increases in our revenues are generally dependent on our ability to obtain rate increases from regulatory authorities and increasing our volumes of water sold through increased consumption and increases in the number of customers served. An 8.5% rate increase effective June 26, 2003 accounted for approximately $431,000, or 95.7%, of the increase in water operating revenues in the second quarter of 2004. The average number of customers served in the second quarter of 2004 increased as compared to the same period in 2003 by 1,073, from 51,257 to 52,330 customers. This increase in customers, along with increased usage by our existing customers, resulted in increased consumption in the sec ond quarter of 2004 as compared to the corresponding 2003 period. During the second quarter of 2004, the total per capita volume of water sold increased 2.0% compared to the second quarter of 2003.

Operating expenses for the second quarter of 2004 increased $298,625, or 10.5%, from $2,833,585 for the second quarter of 2003 to $3,132,210 for the corresponding 2004 period. Higher depreciation expense of approximately $29,000 due to increased plant investment, higher health insurance premiums of approximately $20,000, higher wage expenses and directors fees of approximately $54,000 and main maintenance expenses of approximately $31,000 were the principal reasons for the increase. In addition, pension costs were approximately $87,000 higher during the second quarter of 2004 compared to the same period of 2003 due to the 2003 retroactive reclassification of pension expenses to regulatory assets in accordance with SFAS No. 71. Pension expenses in excess of the pension contribution were classified as regulatory assets and will be expensed in the income statement in the same period th at it is reflected in rates charged for water service.

Interest expense on long-term debt for the second quarter of 2004 was $77,162, or 11.2%, higher than the same period in 2003 due to an increase in amounts outstanding. The Company issued $7,300,000 in tax-exempt bonds in April, 2004.

 
  Page 9  
 
 
THE YORK WATER COMPANY


Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Results of Operations (continued)

Interest expense on short-term debt for the second quarter of 2004 was $14,596, or 82.6%, higher than the same period in 2003 due to an increase in short-term borrowings. The average short-term debt outstanding was $5,924,489 for the second quarter of 2004 and $2,861,328 for the second quarter of 2003. Much of the short-term debt was incurred to fund the Susquehanna River Pipeline Project.

Allowance for funds used during construction increased $177,338 from $62,341 in the second quarter of 2003 to $239,679 in the 2004 period. An increased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $161,000 accounted for the majority of the increase.

Other expense, net increased by $211,058 in the second quarter of 2004 as compared to the same period of 2003 primarily due to a termination settlement of approximately $144,000 and a decrease in interest income on water district notes of approximately $30,000.

Federal and state income taxes increased by $26,016, or 4.8%, due to an increase in pre-tax income. The effective tax rate was 35.3% in the second quarter of 2004 and 34.3% in the second quarter of 2003.

Six Months Ended June 30, 2004 Compared
With Six Months Ended June 30, 2003

Net income for the first half of 2004 was $2,626,971, an increase of $819,780 or 45.4%, compared to net income of $1,807,191 for the same period of 2003. Higher net income of approximately $670,000 due to increased operating revenues and an after-tax gain on the sale of land of approximately $467,000 were the primary contributing factors.

Water operating revenues for the six-month period ended June 30, 2004 increased $1,055,713 or 10.8%, from $9,805,614 for the six months ended June 30, 2003 to $10,861,327 for the corresponding 2004 period. An 8.5% rate increase effective June 26, 2003 accounted for approximately $851,000, or 80.6%, of the increase in water operating revenues in the first half of 2004. The average number of customers served in the first half of 2004 increased as compared to the same period in 2003 by 1,003, from 51,189 to 52,192 customers. This increase in customers, along with increased usage by our existing customers resulted in increased consumption in the first half of 2004 as compared to the corresponding 2003 period. During the first half of 2004, the total per capita volume of water sold increased 2.7% compared to the first half of 2003.

Operating expenses for the first six months of 2004 increased $417,562, or 7.3%, from $5,724,730 for the first half of 2003 to $6,142,292 for the corresponding 2004 period. Higher depreciation expense of approximately $59,000 due to increased plant investment, higher health insurance premiums of approximately $42,000, higher wage expenses and directors fees of approximately $111,000, main maintenance expenses of approximately $29,000 and increased miscellaneous maintenance expenses for meter upgrades, hydrant repair parts, and phone and radio system repairs in the amount of approximately $54,000 were the principal reasons for the increase. Capital stock taxes also increased by approximately $18,000 and will continue to rise over prior year levels due to the increase in the number of shares of common stock outstanding during the remainder of 2004 following the closing of our common s tock offering in July. Reduced wages of approximately $32,000 and reduced postage costs of approximately $15,000 partially offset the increase.

Interest expense on long-term debt for the first half of 2004 was $77,066, or 5.6%, higher than the same period in 2003 due to an increase in amounts outstanding. The Company issued $7,300,000 in tax-exempt bonds in April, 2004.

 
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THE YORK WATER COMPANY


Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations (continued)

Interest expense on short-term debt for the first half of 2004 was $39,848, or 116.7%, higher than the same period in 2003 due to an increase in short-term borrowings. The average short-term debt outstanding was $6,846,761 for the first half of 2004 and $2,903,172 for the first half of 2003. Much of the short-term debt was incurred to fund the Susquehanna River Pipeline Project.

Allowance for funds used during construction increased $329,837 from $113,233 in the first six months of 2003 to $443,070 in the 2004 period. An increased allowance on the costs associated with the Susquehanna River Pipeline Project of approximately $284,000 accounted for the majority of the increase.

A gain of $743,195 was recorded in the first quarter of 2004 for the sale of land. No other significant land sales or other unusual events are planned at this time. As a result, additional earnings such as these should not be expected in future periods.

Other expense, net increased by $182,825 in the first half of 2004 as compared to the same period of 2003 primarily due to a termination settlement of approximately $144,000 and increased charitable contributions of approximately $28,000.

Federal and state income taxes increased by $591,664, or 64.5%, due to an increase in pre-tax income. The effective tax rate was 36.5% in the first half of 2004 and 33.7% in the first half of 2003.

Rate Developments

From time to time the Company files applications for rate increases with the Pennsylvania Public Utility Commission, or PPUC, and is granted rate relief as a result of such requests. The most recent rate request was filed by the Company on April 28, 2004 seeking an increase of $4,869,970, which would represent a 22.1% increase in rates. The request is currently under review. Any rate increase approved by the PPUC will be effective not later than January 27, 2005. There can be no assurance that the PPUC will grant the Company’s rate increase in the amount requested, if at all.

Liquidity and Capital Resources

As of June 30, 2004, current liabilities exceeded current assets by $14,922,673. The excess was due to increased payables and short-term borrowings primarily related to the Susquehanna River Pipeline Project and the classification of the Company’s $4.3 million 6.0% Industrial Development Authority Revenue Refunding Bonds from long-term to short-term. Short-term borrowings from lines of credit as of June 30, 2004 were $10,017,924. The Company maintains lines of credit aggregating $26,500,000. Loans granted under these lines of credit bear interest at the LIBOR rate plus 1 to 1.25%. 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 the first six months of 2004, net cash used in investing and provided by financing activities equaled net cash provided by operating activities due to the use of the cash management facility. The Company anticipates that during the remainder of 2004, the same situation will occur. 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), or DRIP, and employee stock purchase plan, or ESPP, customer advances, and proceeds from an additional issuance of tax-exempt debt will be used to satisfy cash requirements during the remainder of 2004.

During the first quarter of 2004, the Company sold a parcel of land which provided cash of $792,021. This unusual event is not likely to recur in the foreseeable future and can not be relied upon for future liquidity.

 
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THE YORK WATER COMPANY


Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Liquidity and Capital Resources (continued)

During the first half of 2004, the Company incurred $15,411,841 of construction expenditures. Approximately $11,700,000, or 76%, of the expenditures were for the Susquehanna River Pipeline Project. The Company financed such expenditures through internally generated funds, customers’ advances, short-term borrowings, proceeds from the issuance of common stock under its DRIP and ESPP and a tax-exempt bond offering. The Company anticipates construction expenditures for the remainder of 2004 to be approximately $13,000,000. The Company plans to finance future expenditures using the same sources as it did in the first half of 2004, supplemented by an additional tax-exempt bond offering.

On April 1, 2004 the Pennsylvania Economic Development Financing Authority, or the PEDFA, issued $7,300,000 aggregate principal amount of Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Bonds, Series A of 2004 for the benefit of the Company. The PEDFA then loaned the proceeds of the offering to the Company pursuant to a loan agreement. The loan agreement provides for a $4,950,000 loan bearing interest at 5.00% and a $2,350,000 loan bearing interest at 4.05%. The bonds and the related loans will mature on April 1, 2016. The loan agreement contains various covenants and restrictions. We believe that we are currently in compliance with all of these restrictions. The bonds were issued as part of the financing plan for the Susquehanna River Pipeline Project. The proceeds, net of issuance costs, were used to pay down short-term borrowings related to the Pro ject.

The Company's 4.40% Industrial Development Authority Revenue Refunding Bonds, Series 1994, had a mandatory tender date of May 15, 2004. The bonds were remarketed and the interest rate redetermined to 3.60% on May 17, 2004. Under the terms of the bonds, existing bond holders were permitted to retain their bonds at the 3.60% interest rate. All bonds not retained by current bond holders were remarketed. The newly issued bonds will mature on May 15, 2009.

The Company's 6.0% Industrial Development Authority Revenue Refunding Bonds, Series 1995, have a mandatory tender date of June 1, 2005. The bonds will be remarketed and the interest rate redetermined in 2005. The Company will be required to repurchase any unremarketed bonds. As a result of this mandatory tender, this $4.3 million was reclassified as current maturities.

In July, 2004, the Company closed on an underwritten public offering of 415,000 shares of its common stock to Janney Montgomery Scott LLC, who was the sole underwriter. The Company received net proceeds in the offering, after deducting offering expenses and underwriter’s discounts and commissions, of approximately $6.9 million. The Company has also granted the underwriter an option to purchase up to an additional 62,250 shares. The net proceeds were used to repay a portion of the Company’s short-term indebtedness under its revolving credit facilities primarily incurred to finance the Susquehanna River Pipeline Project.

The Company is currently planning a $12 million tax-exempt bonds issuance in the fourth quarter of 2004 to complete the financing of the Susquehanna River Pipeline Project.

The Company, like all other businesses, is affected by inflation, most notably by the continually increasing costs incurred to maintain and expand its service capacity. The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows. The ability of the Company to recover this increased investment in facilities is dependent upon future revenue increases, which are subject to approval by the PPUC. The Company can provide no assurances that its rate increases will be approved by the PPUC; and, if approved, the Company cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which the rate increase was sought.

 
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THE YORK WATER COMPANY


Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
 
Susquehanna River Pipeline Project Update

The Company has made substantial progress on the Susquehanna River Pipeline Project since the end of the first quarter. The wet well for the pumping station was completed April 23, 2004.  The 15-mile pipeline was completed on July 22, 2004. The intake structures were completed on August 2, 2004. The entire project is expected to be completed by December 2004 at an estimated cost of $23 million.  Projected pipeline construction expenditures and other capital expenditures are expected to be funded through internally generated funds, customer advances, short-term borrowings, an additional tax-exempt bond issue and the proceeds from stock issuances under the Company’s DRIP and ESPP.

Off-Balance Sheet Transactions

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. The Company does not engage in trading or risk management activities, has no lease obligations, and does not have material transactions involving related parties.


Item 3.
Quantitative and Qualitative Disclosures About Market Risk

The Company does not use derivative financial instruments. The Company's operations are exposed to market risks primarily as a result of changes in interest 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 rate or LIBOR plus 1 to 1.25 percent. The Company has not entered into financial instruments such as interest rate swaps or interest rate lock agreements.

Item 4.
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 Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon this evaluation, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the obj ectives 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.

 
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THE YORK WATER COMPANY


Part II - Other Information
 
Item 4.
Submission of Matters to a Vote of Security Holders
 
The Annual Meeting of the Shareholders of The York Water Company was convened May 3, 2004 at the Yorktowne Hotel, 48 East Market Street, in the City of York, Pennsylvania, at 1:00 P.M. for the purpose of taking action upon the following proposals:
 
(1)  To elect three (3) Directors to three-year terms of office.
 
The actions taken by the Shareholders concerning the election of Directors are as follows:
 
 
 
     Votes for Each Nominee
 
Votes Withheld for Each Nominee
 
 
Irvin S. Naylor
5,288,541.958
    votes
 
43,904.000
    votes
 
 
William T. Morris
5,275,428.958
    votes
 
57,016.000
    votes
 
 
Jeffrey S. Osman
5,296,952.960
    votes
 
35,493.000
    votes
 
 
The following Directors’ terms of office continued after the Annual Meeting:
 
 
John L. Finlayson
George Hay Kain, III
 
 
Chloé R. Eichelberger
George W. Hodges
 
 
Thomas C. Norris
Michael W. Gang
 
 
(2)  To appoint Beard Miller Company LLP as independent accountants to audit the financial statements of the Company for the year 2004.
 
The actions taken by the Shareholders concerning the appointment of Beard Miller Company LLP independent accountants are as follows:
 
 
For Approval
5,270,416.958
    Shares
 
 
Against Approval
24,859.000
    Shares
 
 
Abstaining From Voting
37,174.000
    Shares
 
 
 
Page 14   
 

THE YORK WATER COMPANY


Part II - Other Information (continued)
 
Item 6.
Exhibits and Reports on Form 8-K
 
(a) The following exhibits are attached to this report
 
4.1
Loan Agreement between The York Water Company and Pennsylvania Economic Development Financing Authority, dated as of April 1, 2004 (incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-115937) filed on May 27, 2004).
 
10.1
Demand Line of Credit between The York Water Company and Farmers First Bank, dated June 8, 2004.
 
31.1
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
 
31.2
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
 
32.1
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
(b) Reports on Form 8-K
 
On April 28, 2004, the Company furnished a Current Report on Form 8-K relating to the press release announcing its filing with the Pennsylvania Public Utility Commission for a general increase in rates.
 
On May 7, 2004 the Company furnished a Current Report on Form 8-K relating to the press release announcing its first quarter earnings for 2004.
 
 
 
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THE YORK WATER COMPANY


SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 
THE YORK WATER COMPANY
 
 
 
 
 
/s/ Jeffrey S. Osman
Date: August 6, 2004
Jeffrey S. Osman
Principal Executive Officer
 
 
 
 
 
 
 
/s/ Kathleen M. Miller
Date: August 6, 2004
Kathleen M. Miller
Principal Financial and
Accounting Officer
 
 

 
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