YORK WATER CO - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 001-34245

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Securities registered pursuant to Section 12(g) of the Act:

TABLE OF CONTENTS

THE YORK WATER COMPANY

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements.

THE YORK WATER COMPANY

Balance Sheets (Unaudited)

(In thousands of dollars, except per share amounts)

The accompanying notes are an integral part of these statements.

THE YORK WATER COMPANY

Balance Sheets (Unaudited)

(In thousands of dollars, except per share amounts)

The accompanying notes are an integral part of these statements.

THE YORK WATER COMPANY

Statements of Income (Unaudited)

(In thousands of dollars, except per share amounts)

The accompanying notes are an integral part of these statements.

THE YORK WATER COMPANY

Statements of Common Stockholders' Equity (Unaudited)

(In thousands of dollars, except per share amounts)

For the Periods Ended September 30, 2019 and 2018

The accompanying notes are an integral part of these statements.

THE YORK WATER COMPANY

Statements of Cash Flows (Unaudited)

(In thousands of dollars, except per share amounts)

The accompanying notes are an integral part of these statements.

THE YORK WATER COMPANY

 

Notes to Interim Financial Statements

(In thousands of dollars, except per share amounts)

 

1.  Basis of Presentation

 

The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of results for such periods.  Because the financial statements cover an interim period, they do not include all disclosures and notes normally provided in annual financial statements, and therefore, should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

 

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

2.  Acquisitions

 

On August 29, 2019, the Company completed the acquisition of the wastewater collection assets of the Jacobus Borough Sewer Authority in York County, Pennsylvania. The Company began operating the existing collection facilities on August 30, 2019.  The acquisition resulted in the addition of approximately 700 wastewater customers with purchase price and acquisition cost of approximately $2,088. This acquisition is expected to be immaterial to Company results.

3.  Accounts Receivable and Contract Assets

Accounts receivable and contract assets are summarized in the following table:

Differences in timing of revenue recognition, billings, and cash collections result in receivables and contract assets.  Generally, billing occurs subsequent to revenue recognition, resulting in a contract asset reported as unbilled revenue on the balance sheet.  The Company does not receive advances or deposits from customers before revenue is recognized so no contract liabilities are reported.  Accounts receivable are recorded when the right to consideration becomes unconditional and are presented separately on the balance sheet.  The changes in accounts receivable – customers and in unbilled revenue were primarily due to normal timing difference between performance and the customer’s payments.

4.  Common Stock and Earnings Per Share

Net income of $4,483 and $3,800 for the three months ended September 30, 2019 and 2018, respectively, and $11,013 and $9,699 for the nine months ended September 30, 2019 and 2018, respectively, is used to calculate both basic and diluted earnings per share.  Basic earnings per share is based on the weighted average number of common shares outstanding.  Diluted earnings per share is based on the weighted average number of common shares outstanding plus potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted earnings per share and is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.

The following table summarizes the shares used in computing basic and diluted earnings per share:

On March 11, 2013, the Board of Directors, or the Board, authorized a share repurchase program granting the Company authority to repurchase up to 1,200,000 shares of the Company's common stock from time to time.  The stock repurchase program has no specific end date and the Company may repurchase shares in the open market or through privately negotiated transactions.  The Company may suspend or discontinue the repurchase program at any time.  No shares were repurchased during the three or nine months ended September 30, 2019 and 2018.  As of September 30, 2019, 618,004 shares remain authorized for repurchase.

5.  Debt

On January 31, 2019, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $20,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 4.54% per annum payable semiannually and mature on January 31, 2049.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $19,820.  The net proceeds were used to refinance the $11,000 aggregate principal amount of the Company’s 10.17% Series A Senior Notes due February 1, 2019 and the 9.60% Series B Senior Notes due February 1, 2019, and to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects of the Company.

In the second quarter of 2019, the Company renewed its $13,000 and $11,000 committed lines of credit and extended the maturity date of each to May 2021, and it renewed its $7,500 committed line of credit and extended the maturity date to June 2021.

In the third quarter of 2019, the Company renewed its $10,000 committed line of credit and extended the maturity date to September 2020.

6.  Interest Rate Swap Agreement

The Company is exposed to certain risks relating to its ongoing business operations.  The primary risk managed by using derivative instruments is interest rate risk.  The Company utilizes an interest rate swap agreement to effectively convert the Company's $12,000 variable-rate debt issue to a fixed rate.  Interest rate swaps are contracts in which a series of interest rate cash flows are exchanged over a prescribed period.  The notional amount on which the interest payments are based ($12,000) is not exchanged.  The interest rate swap provides that the Company pays the counterparty a fixed interest rate of 3.16% on the notional amount of $12,000.  In exchange, the counterparty pays the Company a variable interest rate based on 59% of the U.S. Dollar one-month LIBOR rate on the notional amount.  The intent is for the variable rate received from the swap counterparty to approximate the variable rate the Company pays to bondholders on its variable rate debt issue, resulting in a fixed rate being paid to the swap counterparty and reducing the Company's interest rate risk.  The Company’s net payment rate on the swap was 1.88% and 1.92% during the three months ended September 30, 2019 and 2018, respectively, and 1.75% and 2.02% for the nine months ended September 30, 2019 and 2018, respectively.

 

The interest rate swap agreement is classified as a financial derivative used for non-trading activities.  The accounting standards regarding accounting for derivatives and hedging activities require companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet.  In accordance with the standards, the interest rate swap is recorded on the balance sheet in other deferred credits at fair value (see Note 7).

The Company uses regulatory accounting treatment rather than hedge accounting to defer the unrealized gains and losses on its interest rate swap.  These unrealized gains and losses are recorded as a regulatory asset.  Based on current ratemaking treatment, the Company expects the unrealized gains and losses to be recognized in rates as a component of interest expense as the swap settlements occur.  Swap settlements are recorded in the income statement with the hedged item as interest expense.  Swap settlements resulted in the reclassification from regulatory assets to interest expense of $57 and $58 during the three months ended September 30, 2019 and 2018, respectively, and $158 and $183 during the nine months ended September 30, 2019 and 2018, respectively. The overall swap result was a (gain) loss of $290 and $(87) for the three months ended September 30, 2019 and 2018, respectively, and $776 and $(434) for the nine months ended September 30, 2019 and 2018, respectively. The Company expects to reclassify $265 from regulatory assets to interest expense as a result of swap settlements over the next 12 months.

 

The interest rate swap agreement contains provisions that require the Company to maintain a credit rating of at least BBB- with Standard & Poor's.  If the Company's rating were to fall below this rating, it would be in violation of these provisions, and the counterparty to the derivative could request immediate payment if the derivative was in a liability position.  On April 5, 2019, Standard & Poor's affirmed the Company's credit rating at A-, with a stable outlook and adequate liquidity.  The Company's interest rate swap was in a liability position as of September 30, 2019.  If a violation due to credit rating, or some other default provision, were triggered on September 30, 2019, the Company would have been required to pay the counterparty approximately $2,600.

 

The interest rate swap will expire on October 1, 2029.  Other than the interest rate swap, the Company has no other derivative instruments.

 

7.  Fair Value of Financial Instruments

 

The accounting standards regarding fair value measurements establish a fair value hierarchy which indicates the extent to which inputs used in measuring fair value are observable in the market.  Level 1 inputs include quoted prices for identical instruments and are the most observable.  Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, commodity rates and yield curves.  Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability.

The Company has recorded its interest rate swap liability at fair value in accordance with the standards.  The liability is recorded under the caption “Other deferred credits” on the balance sheet.  The table below illustrates the fair value of the interest rate swap as of the end of the reporting period.

 

 

Fair values are measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curve as of the date of the valuation.  These inputs to this calculation are deemed to be Level 2 inputs.  The balance sheet carrying value reflects the Company's credit quality as of September 30, 2019.  The rate used in discounting all prospective cash flows anticipated to be made under this swap reflects a representation of the yield to maturity for 30-year debt on utilities rated A- as of September 30, 2019.  The use of the Company's credit rating resulted in a reduction in the fair value of the swap liability of $165 as of September 30, 2019.  The fair value of the swap reflecting the Company's credit quality as of December 31, 2018 is shown in the table below.

 

 

The carrying amount of current assets and liabilities that are considered financial instruments approximates fair value as of the dates presented.  The Company's total long-term debt, with a carrying value of $103,328 at September 30, 2019, and $95,908 at December 31, 2018, had an estimated fair value of approximately $123,000 and $105,000, respectively.  The estimated fair value of debt was calculated using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile.  These inputs to this calculation are deemed to be Level 2 inputs.  The Company recognized its credit rating in determining the yield curve, and did not factor in third party credit enhancements including bond insurance on the 2006 York County Industrial Development Authority issue and the letter of credit on the 2008 Pennsylvania Economic Development Financing Authority Series A issue.

Customers' advances for construction and note receivable had carrying values at September 30, 2019 of $7,916 and $255, respectively.  At December 31, 2018, customers' advances for construction and note receivable had carrying values of $6,849 and $255, respectively.  The relative fair values of these amounts cannot be accurately estimated since the timing of future payment streams is dependent upon several factors, including new customer connections, customer consumption levels and future rate increases.

8.  Commitments

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection in December 2016 after the Company determined it exceeded the action level for lead as established by the Lead and Copper Rule, or LCR, issued by the U.S. Environmental Protection Agency.  The Company did not have an exceedance in any subsequent compliance test.  Under the agreement, the Company committed to exceed the LCR replacement schedule by replacing all of the remaining known company-owned lead service lines within four years from the agreement.  The cost for these service line replacements was approximately $2,580 and $2,341 through September 30, 2019 and December 31, 2018, respectively, and is included in utility plant.  As of September 30, 2019, all known company-owned lead service lines have been replaced.  Any additional company-owned lead service lines that are discovered will be replaced but are not expected to have a material impact on the financial position of the Company.

The Company was granted approval by the Pennsylvania Public Utility Commission, or PPUC, to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned service lines over nine years from the agreement.  The tariff modification allows the Company to replace customer-owned service lines at its own initial cost.  The Company will record the costs as a regulatory asset to be recovered in future base rates to customers, over a four-year period.  The cost for the customer-owned lead service line replacements was approximately $821 and $304 through September 30, 2019 and December 31, 2018, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,100.  This estimate is subject to adjustment as more facts become available.

9.  Revenue

The following table shows the Company’s revenues disaggregated by service and customer type.

The Company provides utility service as a distinct and single performance obligation to each of its water and wastewater customers.  The transaction price is detailed in the tariff pursuant to an order by the PPUC and made publicly available.  There is no variable consideration and no free service, special rates, or subnormal charges to any customer.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied over time through the continuous provision of utility service through a stand-ready obligation to perform and the transfer of water or the collection of wastewater through a series of distinct transactions that are identical in nature and have the same pattern of transfer to the customer.  The Company uses an output method to recognize the utility service revenue over time.  The stand-ready obligation is recognized through the passage of time in the form of a fixed charge and the transfer of water or the collection of wastewater is recognized at a per unit rate based on the actual or estimated flow through the meter.  Each customer is invoiced every month and the invoice is due within twenty days.  The utility service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.  A contract asset for unbilled revenue is recognized for the passage of time and the actual or estimated usage from the latest meter reading to the end of the accounting period.  The methodology is standardized and consistently applied to reduce bias and the need for judgment.

The Company provides billing and revenue collection service as distinct performance obligations to three municipalities within the service territory of the Company.  The municipalities provide wastewater service to their residents and the Company acts as the billing and revenue collection agent for the municipalities.  The transaction price is a fixed amount per bill prepared as established in the contract.  There is no variable consideration.  Due to the fact that both the billing performance obligation and the revenue collection performance obligation are materially complete by the end of the reporting period, the Company does not allocate the transaction price between the two performance obligations.  The performance obligations are satisfied at a point in time when the bills are sent as the municipalities receive all the benefits and bears all of the risk of non-collection at that time.  Each municipality is invoiced when the bills are complete and the invoice is due within thirty days.  The billing and revenue collection service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.

The Company provides collection service as a distinct and single performance obligation to several municipalities within the service territory of the Company.  The municipalities provide wastewater service to their residents.  If those residents are delinquent in paying for their wastewater service, the municipalities request that the Company post for and shut off the supply of water to the premises of those residents.  When the resident is no longer delinquent, the Company will restore water service to the premises.  The transaction price for each posting, each shut off, and each restoration is a fixed amount as established in the contract.  There is no variable consideration.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied at a point in time when the posting, shut off, or restoration is completed as the municipalities receive all the benefits in the form of payment or no longer providing wastewater service.  Each municipality is invoiced periodically for the posting, shut offs, and restorations that have been completed since the last billing and the invoice is due within thirty days.  The collection service has no returns or warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period.  A contract asset for unbilled revenue is recognized for postings, shut offs, and restorations that have been completed from the last billing to the end of the accounting period.

The Company provides service line protection as a distinct and single performance obligation to current water customers that choose to participate.  The transaction price is detailed in the plan’s terms and conditions and made publicly available.  There is no variable consideration.  Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price.  The performance obligation is satisfied over time through the continuous provision of service line protection through a stand-ready obligation to perform.  The Company uses an output method to recognize the service line protection revenue over time.  The stand-ready obligation is recognized through the passage of time.  A customer has a choice to prepay for an entire year or to pay in advance each month.  The service line protection plan has no returns or extended warranties associated with it.  No revenue is recognized from performance obligations satisfied in prior periods and no material performance obligations remain unsatisfied as of the end of the reporting period.

10.  Rate Matters

 

From time to time, the Company files applications for rate increases with the PPUC and is granted rate relief as a result of such requests.  The most recent rate request was filed by the Company on May 30, 2018, and sought an annual increase in water rates of $6,399 and an annual increase in wastewater rates of $289.  Effective March 1, 2019, the PPUC authorized an increase in water rates designed to produce approximately $3,361 in additional annual revenues and an increase in wastewater rates designed to produce approximately $289 in additional annual revenues.

As part of a rate order approved by the PPUC, the Company has agreed to return $2,117 to customers as a reconcilable negative surcharge on their bills generated from March 2019 through February 2020 for the benefit of the lower tax rate effective January 1, 2018 resulting from the enactment of the Tax Cuts and Jobs Act of 2017, or 2017 Tax Act.  During the three and nine months ended September 30, 2019, the Company increased its regulatory liability by reducing revenue by $14 and $319, respectively, including the gross-up of revenue necessary to return, in rates, the effect of this temporary tax difference, and reclassified $0 and $27, respectively, from excess accumulated deferred income taxes on accelerated depreciation recorded at December 31, 2017.  During the three and nine months ended September 30, 2019 and 2018, the Company returned negative surcharges of $562 and $1,360, respectively.

The PPUC permits water utilities to collect a distribution system improvement charge, or DSIC.  The DSIC allows the Company to add a charge to customers' bills for qualified replacement costs of certain infrastructure without submitting a rate filing.  This surcharge mechanism typically adjusts periodically based on additional qualified capital expenditures completed or anticipated in a future period.  The DSIC is capped at 5% of base rates, and is reset to zero when new base rates that reflect the costs of those additions become effective or when a utility's earnings exceed a regulatory benchmark. The DSIC reset to zero when the new base rates took effect March 1, 2019. The DSIC provided revenues of $0 and $512 for the three months ended September 30, 2019 and 2018, respectively, and $249 and $1,428 for the nine months ended September 30, 2019 and 2018, respectively.

11.  Pensions

 

Components of Net Periodic Pension Cost

Pension service cost is recorded in operating expenses.  All other components of net periodic pension cost are recorded as other pension costs in other income (expenses).

Employer Contributions

 

The Company previously disclosed in its financial statements for the year ended December 31, 2018 that it expected to contribute $2,300 to its pension plans in 2019.  For the nine months ended September 30, 2019, contributions of $1,725 have been made.  The Company expects to contribute the remaining $575 during the final quarter of 2019.

12.  Stock-Based Compensation

The restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period.  As a result, the awards are included in common shares outstanding on the balance sheet.  Restricted stock awards result in compensation expense valued at the fair market value of the stock on the date of the grant and are amortized ratably over the restriction period.

The following tables summarize the stock grant amounts and activity for the nine months ended September 30, 2019.

For the three months ended September 30, 2019 and 2018, the statement of income includes $40 and $11 of stock-based compensation, respectively, and related recognized tax benefits of $12 and $3, respectively. For the nine months ended September 30, 2019 and 2018, the statement of income includes $119 and $68 of stock-based compensation, respectively, and related recognized tax benefits of $35 and $19, respectively. The total fair value of the shares vested in the nine months ended September 30, 2019 was $86. Total stock-based compensation related to nonvested awards not yet recognized is $252 which will be recognized over the remaining three year vesting period.

13.  Income Taxes

The Company filed for a change in accounting method under the Internal Revenue Service tangible property regulations, or TPR, effective in 2014.  Under the change in accounting method, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return.  This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable.  It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions.

The Company’s effective tax rate was 11.7% and 19.6% for the three months ended September 30, 2019 and 2018, respectively, and 15.1% and 17.6% for the nine months ended September 30, 2019 and 2018, respectively.  The effective tax rate is lower for the three and nine months ended September 30, 2019 compared to 2018, primarily due to higher deductions from the TPR.  The effective tax rate will vary depending on the level of eligible asset improvements expensed for tax purposes under TPR each period.

14.  Subsequent Events

On October 1, 2019, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $15,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 3.23% per annum payable semiannually and mature on October 1, 2040.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $14,888.  The net proceeds were used to refinance the $15,000 aggregate principal amount of the Company’s 5.00% Monthly Senior Notes Series 2010A due October 1, 2040.

On October 8, 2019, the Pennsylvania Economic Development Financing Authority, or PEDFA, issued and sold $10,500 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series A of 2019, or the Series A Bonds, and $14,870 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series B of 2019, or the Series B Bonds, for the Company's benefit pursuant to the terms of a trust indenture, dated as of September 1, 2019, between the PEDFA and Manufacturers and Traders Trust Company, as trustee.  The PEDFA then loaned the proceeds of the issuance and sale of the Series A and the Series B Bonds to the Company pursuant to a loan agreement dated as of September 1, 2019, between the Company and the PEDFA.  The Series A Bonds, and therefore the loan, bears interest at 3.00% per annum payable semiannually and the maturity date of the loan is October 1, 2036 subject to optional and mandatory redemption provisions.  The Series B Bonds, and therefore the loan, bears interest at 3.10% per annum payable semiannually and the maturity date of the loan is November 1, 2038 subject to optional and mandatory redemption provisions.  Amounts outstanding under the loan agreement are direct, unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $25,049.  The net proceeds were used to refinance the $10,500 aggregate principal amount of the Company’s 4.75% York County Industrial Development Authority Revenue Bonds Series 2006 due October 1, 2036 and the $14,870 aggregate principal amount of the Company’s 4.50% PEDFA Exempt Facilities Revenue Refunding Bonds Series 2014 due November 1, 2038.

15.  Impact of Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), which replaces the existing guidance in Accounting Standard Codification 840 – Leases.  This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases.  Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability.  For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense.  This ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years.  The Company adopted the standard on January 1, 2019.  The Company did not identify any material leases under this standard, and therefore the adoption did not have a material effect on its financial position, results of operations or cash flows.

Forward-looking Statements

Certain statements contained in this report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933.  Words such as "may," "should," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements.  These forward-looking statements include certain information relating to the Company’s business strategy; statements including, but not limited to:

The forward-looking statements in this report reflect what the Company currently anticipates will happen.  What actually happens could differ materially from what it currently anticipates will happen.  The Company does not intend to make a public announcement when forward-looking statements in this report are no longer accurate, whether as a result of new information, what actually happens in the future or for any other reason.  Important matters that may affect what will actually happen include, but are not limited to:

General Information

The primary business of the Company is to impound, purify to meet or exceed safe drinking water standards and distribute water.  The Company also owns and operates two wastewater collection systems and two wastewater collection and treatment systems.  The Company operates within its franchised water territory, which covers 39 municipalities within York County, Pennsylvania and nine municipalities within Adams County, Pennsylvania.  The Company’s wastewater operations include portions of five municipalities in York County, Pennsylvania.  The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, for both water and wastewater in the areas of billing, payment procedures, dispute processing, terminations, service territory, debt and equity financing and rate setting.  The Company must obtain PPUC approval before changing any practices associated with the aforementioned areas.

Water service is supplied through the Company's own distribution system.  The Company obtains the bulk of its water supply from both the South Branch and East Branch of the Codorus Creek, which together have an average daily flow of 73.0 million gallons.  This combined watershed area is approximately 117 square miles.  The Company has two reservoirs, Lake Williams and Lake Redman, which together hold up to approximately 2.2 billion gallons of water.  The Company supplements its reservoirs with a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional supply of 12.0 million gallons of untreated water per day.  The Company also owns seven wells which are capable of providing a safe yield of approximately 366,000 gallons per day to supply water to its customers in Carroll Valley Borough and Cumberland Township, Adams County.  As of September 30, 2019, the Company's average daily availability was 35.4 million gallons, and average daily consumption was approximately 20.4 million gallons.  The Company's service territory had an estimated population of 199,000 as of December 31, 2018.  Industry within the Company's service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergent, barbells and motorcycles.

The Company's water business is somewhat dependent on weather conditions, particularly the amount and timing of rainfall.  Revenues are particularly vulnerable to weather conditions in the summer months.  Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping golf courses and sports fields irrigated.  Conversely, prolonged periods of dry weather could lead to drought restrictions from governmental authorities.  Despite the Company’s adequate water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact revenues.  The Company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.

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 for a material portion of its business.  Increases in revenues are generally dependent on the Company’s ability to obtain rate increases from the PPUC in a timely manner and in adequate amounts and to increase volumes of water sold through increased consumption and increases in the number of customers served.  The Company continuously looks for water and wastewater acquisition and expansion opportunities both within and outside its current service territory as well as additional opportunities to enter into bulk water contracts with municipalities and other entities to supply water.

The Company has agreements with several municipalities to provide sewer billing and collection services.  The Company also has a service line protection program on a targeted basis in order to further diversify its business.  Under this optional program, customers pay a fixed monthly fee, and the Company will repair or replace damaged customer service lines, as needed, subject to an annual maximum dollar amount.  Opportunities to expand both initiatives are being pursued.

Results of Operations

Three Months Ended September 30, 2019 Compared

With Three Months Ended September 30, 2018

Net income for the third quarter of 2019 was $4,483, an increase of $683, or 18.0%, from net income of $3,800 for the same period of 2018.  The primary contributing factors to the increase were higher operating revenues and lower income taxes which were partially offset by higher operating expenses.

Operating revenues for the third quarter of 2019 increased $982, or 7.7%, from $12,698 for the three months ended September 30, 2018 to $13,680 for the corresponding 2019 period.  The primary reason for the increase was a rate increase effective March 1, 2019.  The Company reduced revenue by $14 in the third quarter of 2019 and $208 in the same period of 2018, by recording a regulatory liability for the benefit of the lower tax rate effective January 1, 2018 resulting from the enactment of the 2017 Tax Act, which it has agreed to give back to customers as part of the new rate order, including the gross-up of revenue necessary to return the effect of the temporary tax difference.  Growth in the customer base also added to revenues.  The average number of water customers served in 2019 increased as compared to 2018 by 544 customers, from 67,863 to 68,407 customers.  The average number of wastewater customers served in 2019 increased as compared to 2018 by 230 customers, from 2,292 to 2,522 customers, due to the recent Jacobus Borough acquisition.  The increased revenues were partially offset by a $512 decrease from a lower distribution system improvement charge, or DSIC, allowed by the PPUC.  The DSIC reset to zero on March 1, 2019 when the rate order took effect.  Total per capita consumption for the third quarter of 2019 was approximately 1.3% higher than the same period of last year.

Operating expenses for the third quarter of 2019 increased $696, or 11.1%, from $6,269 for the third quarter of 2018 to $6,965 for the corresponding 2019 period.  The increase was primarily due to higher expenses of approximately $171 for maintenance, $156 for depreciation, $123 for wages, $80 for wastewater operating expenses, $68 for health insurance, and $41 for technology upgrades.  Other expenses increased by a net of $57.

Interest on debt for the third quarter of 2019 decreased $63, or 4.6%, from $1,377 for the third quarter of 2018 to $1,314 for the corresponding 2019 period.  The decrease was primarily due to lower interest on long-term debt due to the refinancing of the 10.17% and 9.60% Senior Notes with 4.54% Senior Notes.  The average debt outstanding under the lines of credit was $4,873 for the third quarter of 2019 and $7,355 for the third quarter of 2018.  The weighted average interest rate on the lines of credit was 3.45% for the quarter ended September 30, 2019 and 3.29% for the quarter ended September 30, 2018.

Allowance for funds used during construction increased $64, from $53 in the third quarter of 2018 to $117 in the corresponding 2019 period, due to higher volume of eligible construction.  Eligible 2019 construction expenditures include dam improvements.

Other income (expenses), net for the third quarter of 2019 reflects increased expenses of $27 as compared to the same period of 2018.  Lower earnings on life insurance policies of approximately $21 were the primary reason for the increased expenses.  Other expenses increased by a net of $6.

Income taxes for the third quarter of 2019 decreased $337, or 36.3%, compared to the same period of 2018, due primarily to a higher volume of asset improvements eligible for the tax benefit under the Internal Revenue Service, or IRS, tangible property regulations, or TPR.  The Company’s effective tax rate was 11.7% for the third quarter of 2019 and 19.6% for the third quarter of 2018.

Nine Months Ended September 30, 2019 Compared

With Nine Months Ended September 30, 2018

Net income for the first nine months of 2019 was $11,013, an increase of $1,314, or 13.5%, from net income of $9,699 for the same period of 2018.  The primary contributing factor to the increase was higher operating revenues which were partially offset by higher operating expenses.

Operating revenues for the first nine months of 2019 increased $2,191, or 6.0%, from $36,368 for the nine months ended September 30, 2018 to $38,559 for the corresponding 2019 period.  The primary reason for the increase was a rate increase effective March 1, 2019.  The Company reduced revenue by $319 in the first nine months of 2019 and $1,191 in the same period of 2018, by recording a regulatory liability for the benefit of the lower tax rate effective January 1, 2018 resulting from the enactment of the 2017 Tax Act, which it has agreed to give back to customers as part of the new rate order, including the gross-up of revenue necessary to return the effect of the temporary tax difference.  Growth in the customer base also added to revenues.  The average number of water customers served in 2019 increased as compared to 2018 by 561 customers, from 67,664 to 68,225 customers.  The average number of wastewater customers served in 2019 increased as compared to 2018 by 84 customers, from 2,289 to 2,373 customers, due to the recent Jacobus Borough acquisition.  The increased revenues were partially offset by a $1,179 decrease from a lower DSIC allowed by the PPUC.  The DSIC reset to zero on March 1, 2019 when the rate order took effect.  Total per capita consumption for the first nine months of 2019 was approximately 0.8% lower than the same period of last year.  For the remainder of the year, the Company expects revenues to increase due to the increase in rates and an increase in the number of water and wastewater customers from acquisitions and growth within the Company’s service territory.  Other regulatory actions and weather patterns could impact results.

Operating expenses for the first nine months of 2019 increased $1,003, or 5.1%, from $19,481 for the first nine months of 2018 to $20,484 for the corresponding 2019 period.  The increase was primarily due to higher expenses of approximately $515 for depreciation, $275 for wages, $242 for maintenance, $75 for technology upgrades, $61 for rate case expense, $59 for purchased power related to raw water pumping, and $58 for taxes other than income taxes.  The increase was partially offset by reduced expenses of approximately $191 for health insurance and $48 for a prior year consulting engagement, not repeated this year.  Other expenses decreased by a net of $43.  For the remainder of the year, the Company expects depreciation expense to continue to rise due to additional investment in utility plant, and other expenses to increase at a moderate rate as costs to treat water and wastewater and to maintain and extend the distribution system continue to rise.

Interest on debt for the first nine months of 2019 decreased $180, or 4.4%, from $4,117 for the nine months of 2018 to $3,937 for the corresponding 2019 period.  The decrease was primarily due to lower interest on long-term debt due to the refinancing of the 10.17% and 9.60% Senior Notes with 4.54% Senior Notes.  The average debt outstanding under the lines of credit was $3,914 for the first nine months of 2019 and $6,922 for the first nine months of 2018.  The weighted average interest rate on the lines of credit was 3.62% for the nine months ended September 30, 2019 and 3.10% for the nine months ended September 30, 2018.  Interest expense for the remainder of the year is expected to decrease due to the refinancing of the Company’s various long-term debt issues (see Note 14 to the financial statements included herein) partially offset by continued borrowings under lines of credit.

Allowance for funds used during construction increased $97, from $176 in the first nine months of 2018 to $273 in the corresponding 2019 period, due to a higher volume of eligible construction.  Eligible 2019 construction expenditures include dam improvements.  Allowance for funds used during construction for the remainder of the year is expected to increase based on a projected increase in the amount of eligible construction.

Other income (expenses), net for the first nine months of 2019 reflects increased expenses of $140 as compared to the same period of 2018.  Lower earnings on life insurance policies of approximately $122 were the primary reason for the increased expenses.  Other expenses increased by a net of $18.  For the remainder of the year, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.

Income taxes for the first nine months of 2019 decreased $113, or 5.5%, compared to the same period of 2018, due primarily to a higher volume of asset improvements eligible for the tax benefit under the IRS TPR.  The Company’s effective tax rate was 15.1% for the first nine months of 2019 and 17.6% for the first nine months of 2018.  The Company's effective tax rate for the remainder of 2019 will largely be determined by the level of eligible asset improvements expensed for tax purposes under TPR.

Rate Matters

See Note 10 to the financial statements included herein for a discussion of rate matters.

The Company does not expect to collect a distribution system improvement charge or file a rate increase request in 2019.

Acquisitions and Growth

On October 8, 2013, the Company signed an agreement to purchase the wastewater collection and treatment assets of SYC WWTP, L.P. in Shrewsbury and Springfield Townships, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2020, at which time the Company will add approximately 30 commercial and industrial wastewater customers.

On December 28, 2018, the Company signed an agreement to purchase the wastewater collection and treatment assets of Felton Borough in York County Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2020 at which time the Company will add approximately 130 wastewater customers.

On March 4, 2019, the Company signed an agreement to purchase the wastewater collection assets of West Manheim Township in York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2020 at which time the Company will add approximately 1,800 wastewater customers.  These wastewater customers are currently water customers of the Company.

On June 25, 2019, the Company signed an agreement to purchase the wastewater collection and treatment assets of the Letterkenny Township Municipal Authority in Franklin County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2020 at which time the Company will add approximately 180 wastewater customers.

In total, these acquisitions are expected to be immaterial to Company results.  The Company is also pursuing other bulk water contracts and acquisitions in and around its service territory to help offset any further declines in per capita water consumption and to grow its business.

On May 10, 2017, the Company signed an emergency interconnect agreement with Dallastown-Yoe Water Authority.  The effectiveness of this agreement is contingent upon receiving approval from all required regulatory authorities.  Approval is expected to be granted in 2020 at which time the Company will begin construction of a water main extension to a single point of interconnection and either supply a minimum agreed upon amount of water to the authority, receive a payment in lieu of water, or provide water during an emergency, at current tariff rates.

Capital Expenditures

For the nine months ended September 30, 2019, the Company invested $13,284 in construction expenditures for routine items and dam improvements as well as various replacements and improvements to infrastructure.  In addition, the Company invested $2,088 in the acquisition of a wastewater system.  The Company was able to fund construction expenditures using internally-generated funds, line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions.

The Company anticipates construction expenditures for the remainder of 2019 of approximately $4,500 exclusive of any potential acquisitions not yet approved.  In addition to routine transmission and distribution projects, a portion of the anticipated expenditures will be for additional main extensions, expansion of a wastewater treatment plant, and various replacements and improvements to infrastructure.  The Company intends to use primarily internally-generated funds for its anticipated construction and fund the remainder through line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions.  Customer advances and contributions are expected to account for between 5% and 10% of funding requirements during the remainder of 2019.  The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, to meet its anticipated capital needs in 2019 and 2020.

Liquidity and Capital Resources

Cash

The Company manages its cash through a cash management account that is directly connected to one of its lines of credit.  Excess cash generated automatically pays down outstanding borrowings under the line of credit arrangement.  If there are no outstanding borrowings, the cash is used as an earnings credit to reduce banking fees.  Likewise, if additional funds are needed beyond what is generated internally for payroll, to pay suppliers, to fund capital expenditures, or to pay debt service, funds are automatically borrowed under the line of credit.  As of September 30, 2019, the Company has borrowed $6,958 on its lines of credit and incurred a cash overdraft on its cash management account of $1,063.  The cash management facility and other lines of credit are expected to provide the necessary liquidity and funding for the Company's operations, capital expenditures, acquisitions and potential buybacks of stock for the foreseeable future.

Accounts Receivable

The accounts receivable balance tends to follow the change in revenues but is also affected by the timeliness of payments by customers and the level of the reserve for doubtful accounts.  In the three months ended September 30, 2019, the negative surcharge to return to customers the benefit of the lower tax rate resulted in a decrease in accounts receivable – customers as compared to the end of 2018.  Other receivables decreased due to the receipt of a large receivable to fund a capital project, which was outstanding at December 31, 2018.  A reserve is maintained at a level considered adequate to provide for losses that can be reasonably anticipated based on inactive accounts with outstanding balances.  Management periodically evaluates the adequacy of the reserve based on past experience, agings of the receivables, adverse situations that may affect a customer’s ability to pay, current economic conditions, and other relevant factors.  If the status of these factors deteriorates, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its internally-generated funds.

Internally-generated Funds

The amount of internally-generated funds available for operations and construction depends on the Company’s ability to obtain timely and adequate rate relief, changes in regulations including taxes, customers’ water usage, weather conditions, customer growth and controlled expenses.  During the first nine months of 2019, the Company generated $13,553 internally from operations as compared to the $14,410 it generated during the first nine months of 2018 primarily due to higher interest and income taxes paid and increased expenditures to replace customer-owned lead service lines (see Note 8 to the financial statements included herein).

Credit Lines

Historically, the Company has borrowed $15,000 to $20,000 under its lines of credit before refinancing with long-term debt or equity capital.  As of September 30, 2019, the Company maintained unsecured lines of credit aggregating $41,500 with four banks at interest rates of LIBOR plus 1.15% to LIBOR plus 1.25%.  The Company had $6,958 in outstanding borrowings under its lines of credit as of September 30, 2019.  The weighted average interest rate on line of credit borrowings as of September 30, 2019 was 3.29%.

In the second quarter of 2019, the Company renewed its $13,000 and $11,000 committed lines of credit and extended the maturity date of each to May 2021, and it renewed its $7,500 committed line of credit and extended the maturity date to June 2021.  In the third quarter of 2019, the Company renewed its $10,000 committed line of credit and extended the maturity date to September 2020.

The Company has taken steps to manage the risk of reduced credit availability.  It has maintained committed lines of credit that cannot be called on demand and obtained a 2-year revolving maturity on most of its facilities.  There is no guarantee that the Company will be able to obtain sufficient lines of credit with favorable terms in the future.  If the Company is unable to obtain sufficient lines of credit or to refinance its line of credit borrowings with long-term debt or equity when necessary, it may have to eliminate or postpone capital expenditures.  Management believes the Company will have adequate capacity under its current lines of credit to meet anticipated financing needs throughout 2019 and 2020.

Long-term Debt

The Company’s loan agreements contain various covenants and restrictions.  Management believes it is currently in compliance with all of these restrictions.  See Note 6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding these restrictions.

On January 31, 2019, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $20,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 4.54% per annum payable semiannually and mature on January 31, 2049.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $19,820.  The net proceeds were used to refinance the $11,000 aggregate principal amount of the Company’s 10.17% Series A Senior Notes due February 1, 2019 and the 9.60% Series B Senior Notes due February 1, 2019, and to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects of the Company.

On October 1, 2019, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $15,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 3.23% per annum payable semiannually and mature on October 1, 2040.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $14,888.  The net proceeds were used to refinance the $15,000 aggregate principal amount of the Company’s 5.00% Monthly Senior Notes Series 2010A due October 1, 2040.

On October 8, 2019, the Pennsylvania Economic Development Financing Authority, or PEDFA, issued and sold $10,500 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series A of 2019, or the Series A Bonds, and $14,870 aggregate principal amount of PEDFA Exempt Facilities Revenue Refunding Bonds, Series B of 2019, or the Series B Bonds, for the Company's benefit pursuant to the terms of a trust indenture, dated as of September 1, 2019, between the PEDFA and Manufacturers and Traders Trust Company, as trustee.  The PEDFA then loaned the proceeds of the issuance and sale of the Series A and the Series B Bonds to the Company pursuant to a loan agreement dated as of September 1, 2019, between the Company and the PEDFA.  The Series A Bonds, and therefore the loan, bears interest at 3.00% per annum payable semiannually and the maturity date of the loan is October 1, 2036 subject to optional and mandatory redemption provisions.  The Series B Bonds, and therefore the loan, bears interest at 3.10% per annum payable semiannually and the maturity date of the loan is November 1, 2038 subject to optional and mandatory redemption provisions.  Amounts outstanding under the loan agreement are direct, unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $25,049.  The net proceeds were used to refinance the $10,500 aggregate principal amount of the Company’s 4.75% York County Industrial Development Authority Revenue Bonds Series 2006 due October 1, 2036 and the $14,870 aggregate principal amount of the Company’s 4.50% PEDFA Exempt Facilities Revenue Refunding Bonds Series 2014 due November 1, 2038.

The Company’s total long-term debt as a percentage of the total capitalization, defined as total common stockholders’ equity plus total long-term debt, was 43.9% as of September 30, 2019 and 43.2% as of December 31, 2018.  The Company expects the debt to total capitalization ratio to increase with additional line of credit borrowings.  The Company expects to allow the debt percentage to trend upward until it approaches fifty percent before considering additional equity.  A debt to total capitalization ratio between forty-six and fifty percent has historically been acceptable to the PPUC in rate filings.  Due to its ability to generate more cash internally, the Company has been able to keep its ratio below fifty percent.

Income Taxes, Deferred Income Taxes and Uncertain Tax Positions

The Company filed for a change in accounting method under the IRS TPR effective in 2014.  Under the change in accounting method, the Company is permitted to deduct the costs of certain asset improvements that were previously being capitalized and depreciated for tax purposes as an expense on its income tax return.  This ongoing deduction results in a reduction in the effective income tax rate, a net reduction in income tax expense, and a reduction in the amount of income taxes currently payable.  It also results in increases to deferred tax liabilities and regulatory assets representing the appropriate book and tax basis difference on capital additions.

The Company’s effective tax rate will largely be determined by the level of eligible asset improvements expensed for tax purposes that would have been capitalized for tax purposes prior to the implementation of TPR.

The Company has a substantial deferred income tax asset primarily due to the excess accumulated deferred income taxes on accelerated depreciation from the 2017 Tax Act and the differences between the book and tax balances of the pension and deferred compensation plans.  The Company does not believe a valuation allowance is required due to the expected generation of future taxable income during the periods in which those temporary differences become deductible.

The Company has seen an increase in its deferred income tax liability amounts primarily as a result of the accelerated and bonus depreciation deduction available for federal tax purposes which creates differences between book and tax depreciation expense.  The Company expects this trend to continue as it makes significant investments in capital expenditures subject to accelerated depreciation or TPR, but at a more modest rate due to the elimination of bonus depreciation on qualified water and wastewater property.

The Company has determined there are no uncertain tax positions that require recognition as of September 30, 2019.

Common Stock

Common stockholders’ equity as a percent of the total capitalization was 56.1% as of September 30, 2019 and 56.8% as of December 31, 2018.  The volume of share repurchases and line of credit borrowings, among other things, could reduce this percentage in the future.  It is the Company’s general intent to target a ratio between fifty and fifty-four percent.

Credit Rating

On April 5, 2019, Standard & Poor’s affirmed the Company’s credit rating at A-, with a stable outlook and adequate liquidity.  The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, which it has been successful in obtaining, its ability to fund capital expenditures in a balanced manner using both debt and equity and its ability to generate cash flow.  The Company’s objectives are to continue to maximize its funds provided by operations and maintain a strong capital structure in order to be able to attract capital.

Physical and Cyber Security

The Company maintains security measures at its facilities, and collaborates with federal, state and local authorities and industry trade associations regarding information on possible threats and security measures for water and wastewater utility operations.  The costs incurred are expected to be recoverable in water and wastewater rates and are not expected to have a material impact on its business, financial condition, or results of operations.

The Company relies on information technology systems in connection with the operation of the business, especially with respect to customer service, billing, accounting, and in some cases, the monitoring and operation of treatment, storage and pumping facilities.  In addition, the Company relies on these systems to track utility assets and to manage maintenance and construction projects, materials and supplies, and human resource functions.  The information technology systems may be vulnerable to damage or interruption from cyber security attacks or other cyber-related events, including, but not limited to, power loss, computer systems failures, internet, telecommunications or data network failures, physical and electronic loss of data, computer viruses, intentional security breaches, hacking, denial of service actions, misappropriation of data, and similar events.  In some cases, administration of certain functions may be outsourced to third-party service providers that could also be targets of cyber security attacks.  A loss of these systems, or major problems with the operation of these systems, could harm the business, financial condition, and results of operations of the Company through the loss or compromise of customer, financial, employee, or operational data, disruption of billing, collections or normal field service activities, disruption of electronic monitoring and control of operational systems, and delays in financial reporting and other normal management functions.

Possible impacts associated with a cyber security attack or other events may include remediation costs related to lost, stolen, or compromised data, repairs to data processing systems, increased cyber security protection costs, adverse effects on our compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation, and reputational damage.

The Company has implemented processes, procedures and controls to prevent or limit the effect of these possible events, and maintains insurance to help defray costs associated with cyber security attacks.  The Company has not experienced a material impact on business or operations from these attacks.  Although the Company does not believe its systems are at a materially greater risk of cyber security attacks than other similar organizations and despite the implementation of robust security measures, the Company cannot provide assurance that the insurance will fully cover the costs of a cyber security event, and its robust security measures do not guarantee that reputation and financial results will not be adversely affected by such an incident.

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection in December 2016 after the Company determined it exceeded the action level for lead as established by the Lead and Copper Rule, or LCR, issued by the U.S. Environmental Protection Agency.  The Company did not have an exceedance in any subsequent compliance test.  Under the agreement, the Company committed to exceed the LCR replacement schedule by replacing all of the remaining known company-owned lead service lines within four years from the agreement.  The cost for these service line replacements was approximately $2,580 and $2,341 through September 30, 2019 and December 31, 2018, respectively, and is included in utility plant.  As of September 30, 2019, all known company-owned lead service lines have been replaced.  Any additional company-owned lead service lines that are discovered will be replaced but are not expected to have a material impact on the financial position of the Company.

The Company was granted approval by the Pennsylvania Public Utility Commission, or PPUC, to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned service lines over nine years from the agreement.  The tariff modification allows the Company to replace customer-owned service lines at its own initial cost.  The Company will record the costs as a regulatory asset to be recovered in future base rates to customers, over a four-year period.  The cost for the customer-owned lead service line replacements was approximately $821 and $304 through September 30, 2019 and December 31, 2018, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,100.  This estimate is subject to adjustment as more facts become available.

Critical Accounting Estimates

The methods, estimates, and judgments the Company used in applying its accounting policies have a significant impact on the results reported in its financial statements.  The Company’s accounting policies require management to make subjective judgments because of the need to make estimates of matters that are inherently uncertain.  The Company’s most critical accounting estimates include regulatory assets and liabilities, revenue recognition and accounting for its pension plans.  There has been no significant change in accounting estimates or the method of estimation during the quarter ended September 30, 2019.

Off-Balance Sheet Arrangements

The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.  The Company does not use securitization of receivables or unconsolidated entities. For risk management purposes, the Company uses a derivative financial instrument, an interest rate swap agreement discussed in Note 6 to the financial statements included herein.  The Company does not engage in trading or other risk management activities, does not use other derivative financial instruments for any purpose, has no guarantees and does not have material transactions involving related parties.

Not applicable.

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the Company's President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report.  Based upon this evaluation, the Company's President and Chief Executive Officer along with the Chief Financial Officer concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Company’s management, including the President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

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.