YORK WATER CO 10-Q

Item 1. Financial Statements. Balance Sheets (Unaudited) (In thousands of dollars, except per share amounts) Sep. 30, 2021 Dec. 31, 2020 ASSETS UTILITY PLANT, at original cost $ 467,343 $ 438,670 Plant acquisition adjustments ( 3,657 ) ( 3,707 ) Accumulated depreciation ( 96,123 ) ( 91,340 ) Net utility plant 367,563 343,623 OTHER PHYSICAL PROPERTY, net of accumulated depreciation of $ 477 in 2021 and $ 458 in 2020 723 742 CURRENT ASSETS: Cash and cash equivalents 1 2 Restricted cash – 5,000 Accounts receivable, net of reserves of $ 856 in 2021 and $ 655 in 2020 3,935 5,184 Unbilled revenues 3,047 2,847 Recoverable income taxes 21 721 Materials and supplies inventories, at cost 1,379 1,010 Prepaid expenses 1,790 1,526 Total current assets 10,173 16,290 OTHER LONG-TERM ASSETS: Prepaid pension cost 4,598 2,209 Note receivable 255 255 Deferred regulatory assets 43,151 39,893 Other assets 4,285 3,945 Total other long-term assets 52,289 46,302 Total Assets $ 430,748 $ 406,957 The accompanying notes are an integral part of these statements. Page 3 Table of Contents THE YORK WATER COMPANY Balance Sheets (Unaudited) (In thousands of dollars, except per share amounts) Sep. 30, 2021 Dec. 31, 2020 STOCKHOLDERS' EQUITY AND LIABILITIES COMMON STOCKHOLDERS' EQUITY: Common stock, no par value, authorized 46,500,000 shares, issued and outstanding 13,102,924 shares in 2021 and 13,060,817 shares in 2020 $ 87,714 $ 85,935 Retained earnings 62,946 57,317 Total common stockholders' equity 150,660 143,252 PREFERRED STOCK, authorized 500,000 shares, no shares issued – – LONG-TERM DEBT 132,197 123,573 COMMITMENTS – – CURRENT LIABILITIES: Accounts payable 7,455 6,540 Dividends payable 2,202 2,192 Accrued compensation and benefits 1,519 1,417 Accrued interest 1,068 959 Deferred regulatory liabilities 607 525 Other accrued expenses 360 360 Total current liabilities 13,211 11,993 DEFERRED CREDITS: Customers' advances for construction 11,358 10,326 Deferred income taxes 46,922 43,538 Deferred employee benefits 4,834 4,793 Deferred regulatory liabilities 27,905 25,444 Other deferred credits 2,203 2,731 Total deferred credits 93,222 86,832 Contributions in aid of construction 41,458 41,307 Total Stockholders' Equity and Liabilities $ 430,748 $ 406,957 The accompanying notes are an integral part of these statements. Page 4 Table of Contents THE YORK WATER COMPANY Statements of Income (Unaudited) (In thousands of dollars, except per share amounts) Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 OPERATING REVENUES $ 14,503 $ 14,257 $ 41,385 $ 40,454 OPERATING EXPENSES: Operation and maintenance 2,997 2,659 8,752 7,940 Administrative and general 2,292 2,257 7,144 6,573 Depreciation and amortization 2,223 2,046 6,595 6,113 Taxes other than income taxes 307 274 954 898 7,819 7,236 23,445 21,524 Operating income 6,684 7,021 17,940 18,930 OTHER INCOME (EXPENSES): Interest on debt ( 1,237 ) ( 1,152 ) ( 3,673 ) ( 3,503 ) Allowance for funds used during construction 310 115 883 330 Other pension costs ( 304 ) ( 341 ) ( 911 ) ( 1,022 ) Gain on life insurance – – – 515 Other income (expenses), net ( 34 ) ( 41 ) ( 179 ) ( 287 ) ( 1,265 ) ( 1,419 ) ( 3,880 ) ( 3,967 ) Income before income taxes 5,419 5,602 14,060 14,963 Income taxes 625 898 1,077 2,075 Net Income $ 4,794 $ 4,704 $ 12,983 $ 12,888 Basic Earnings Per Share $ 0.36 $ 0.36 $ 0.99 $ 0.99 Diluted Earnings Per Share $ 0.36 $ 0.36 $ 0.99 $ 0.99 The accompanying notes are an integral part of these statements. Page 5 Table of Contents THE YORK WATER COMPANY Statements of Common Stockholders' Equity (Unaudited) (In thousands of dollars, except per share amounts) For the Periods Ended September 30, 2021 and 2020 Common Stock Shares Common Stock Amount Retained Earnings Total Balance, June 30, 2021 13,090,055 $ 87,100 $ 60,606 $ 147,706 Net income – – 4,794 4,794 Cash dividends declared, $ 0.1874 per share – – ( 2,454 ) ( 2,454 ) Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans 12,869 568 – 568 Stock-based compensation – 46 – 46 Balance, September 30, 2021 13,102,924 $ 87,714 $ 62,946 $ 150,660 Balance, December 31, 2020 13,060,817 $ 85,935 $ 57,317 $ 143,252 Net income – – 12,983 12,983 Cash dividends declared, $ 0.5622 per share – – ( 7,354 ) ( 7,354 ) Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans 35,937 1,612 – 1,612 Stock-based compensation 6,170 167 – 167 Balance, September 30, 2021 13,102,924 $ 87,714 $ 62,946 $ 150,660 Common Stock Shares Common Stock Amount Retained Earnings Total Balance, June 30, 2020 13,033,999 $ 84,872 $ 53,700 $ 138,572 Net income – – 4,704 4,704 Cash dividends declared, $ 0.1802 per share – – ( 2,351 ) ( 2,351 ) Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans 10,326 429 – 429 Stock-based compensation 4,912 74 – 74 Balance, September 30, 2020 13,049,237 $ 85,375 $ 56,053 $ 141,428 Balance, December 31, 2019 13,014,898 $ 83,976 $ 50,209 $ 134,185 Net income – – 12,888 12,888 Cash dividends declared, $ 0.5406 per share – – ( 7,044 ) ( 7,044 ) Issuance of common stock under dividend reinvestment, direct stock and employee stock purchase plans 29,427 1,273 – 1,273 Stock-based compensation 4,912 126 – 126 Balance, September 30, 2020 13,049,237 $ 85,375 $ 56,053 $ 141,428 The accompanying notes are an integral part of these statements. Page 6 Table of Contents THE YORK WATER COMPANY Statements of Cash Flows (Unaudited) (In thousands of dollars, except per share amounts) Nine Months Ended September 30 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,983 $ 12,888 Adjustments to reconcile net income to net cash provided by operating activities: Gain on life insurance – ( 515 ) Depreciation and amortization 6,595 6,113 Stock-based compensation 167 126 Increase in deferred income taxes 53 93 Other 46 342 Changes in assets and liabilities: (Increase) decrease in accounts receivable and unbilled revenues 745 ( 1,657 ) Decrease in recoverable income taxes 700 497 Increase in materials and supplies, prepaid expenses, prepaid pension cost, regulatory and other assets ( 6,911 ) ( 6,184 ) Increase in accounts payable, accrued compensation and benefits, accrued expenses, deferred employee benefits, regulatory liabilities, and other deferred credits 3,989 4,449 Increase in accrued interest 109 154 Net cash provided by operating activities 18,476 16,306 CASH FLOWS FROM INVESTING ACTIVITIES: Utility plant additions, including debt portion of allowance for funds used during construction of $ 493 in 2021 and $ 184 in 2020 ( 27,434 ) ( 15,973 ) Acquisitions of wastewater systems – ( 1,158 ) Cash received from surrender of life insurance policies – 672 Net cash used in investing activities ( 27,434 ) ( 16,459 ) CASH FLOWS FROM FINANCING ACTIVITIES: Customers' advances for construction and contributions in aid of construction 1,955 2,760 Repayments of customer advances ( 772 ) ( 225 ) Proceeds of long-term debt issues 37,452 53,671 Debt issuance costs – ( 162 ) Repayments of long-term debt ( 28,960 ) ( 37,843 ) Changes in cash overdraft position 14 ( 1,384 ) Issuance of common stock 1,612 1,273 Dividends paid ( 7,344 ) ( 7,038 ) Net cash provided by financing activities 3,957 11,052 Net change in cash, cash equivalent, and restricted cash ( 5,001 ) 10,899 Cash, cash equivalents, and restricted cash at beginning of period 5,002 2 Cash and cash equivalents at end of period $ 1 $ 10,901 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 2,936 $ 3,029 Income taxes 217 1,753 Supplemental disclosure of non-cash investing and financing activities: Accounts payable includes $ 3,562 in 2021 and $ 3,647 in 2020 for the construction of utility plant. Contributions in aid of construction includes $ 1,024 in 2020 recorded as part of the Felton Borough acquisition. The accompanying notes are an integral part of these statements. Page 7 Table of Contents 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, 2020. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 . Additionally, based on the duration and severity of the novel coronavirus ("COVID-19") pandemic, the Company is uncertain of the ultimate impact it could have on the business. 2. Accounts Receivable and Contract Assets Accounts receivable and contract assets are summarized in the following table: As of Sep. 30, 2021 As of Dec. 31, 2020 Change Accounts receivable – customers $ 4,716 $ 5,633 $ ( 917 ) Other receivables 75 206 ( 131 ) 4,791 5,839 ( 1,048 ) Less: allowance for doubtful accounts ( 856 ) ( 655 ) ( 201 ) Accounts receivable, net $ 3,935 $ 5,184 $ ( 1,249 ) Unbilled revenue $ 3,047 $ 2,847 $ 200 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. 3. Common Stock and Earnings Per Share Net income of $ 4,794 and $ 4,704 for the three months ended September 30, 2021 and 2020, respectively, and $ 12,983 and $ 12,888 for the nine months ended September 30, 2021 and 2020, 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. Page 8 Table of Contents The following table summarizes the shares used in computing basic and diluted earnings per share: Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Weighted average common shares, basic 13,083,762 13,032,389 13,069,582 13,021,398 Effect of dilutive securities: Employee stock-based compensation 563 1,164 347 565 Weighted average common shares, diluted 13,084,325 13,033,553 13,069,929 13,021,963 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, 2021 and 2020. As of September 30, 2021, 618,004 shares remain authorized for repurchase. 4. Debt As of Sep. 30, 2021 As of Dec. 31, 2020 8.43 % Senior Notes, Series D, due 2022 $ 7,500 $ 7,500 Variable Rate Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series 2008A, due 2029 12,000 12,000 3.00 % Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series A of 2019, due 2036 10,500 10,500 3.10 % Pennsylvania Economic Development Financing Authority Exempt Facilities Revenue Refunding Bonds, Series B of 2019, due 2038 14,870 14,870 3.23 % Senior Notes, due 2040 15,000 15,000 4.00 % - 4.50 % York County Industrial Development Authority Exempt Facilities Revenue Bonds, Series 2015, due 2029 - 2045 10,000 10,000 4.54 % Senior Notes, due 2049 20,000 20,000 3.24 % Senior Notes, due 2050 30,000 30,000 Committed Line of Credit, due September 2023 15,192 6,700 Total long-term debt 135,062 126,570 Less discount on issuance of long-term debt ( 172 ) ( 181 ) Less unamortized debt issuance costs ( 2,693 ) ( 2,816 ) Long-term portion $ 132,197 $ 123,573 In the third quarter of 2021, the Company renewed its committed line of credit and extended the maturity date to September 2023. Page 9 Table of Contents 5. 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 3.13 % and 3.08 % for the three months ended September 30, 2021 and 2020, respectively, and 3.06 % and 2.76 % for the nine months ended September 30, 2021 and 2020, 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 6). 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 $ 94 and $ 93 for the three months ended September 30, 2021 and 2020, respectively, and $ 278 and $ 249 for the nine months ended September 30, 2021 and 2020, respectively. The overall swap result was a (gain) loss of $( 31 ) and $ 10 for the three months ended September 30, 2021 and 2020, respectively, and $( 250 ) and $ 911 for the nine months ended September 30, 2021 and 2020, respectively. The Company expects to reclassify $ 371 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 October 8, 2021, 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, 2021. If a violation due to credit rating, or some other default provision, were triggered on September 30, 2021, the Company would have been required to pay the counterparty approximately $ 2,232 . The interest rate swap will expire on October 1, 2029. Other than the interest rate swap, the Company has no other derivative instruments. 6. 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. Page 10 Table of Contents Description September 30, 2021 Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) Interest Rate Swap $ 2,203 $ 2,203 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, 2021. 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, 2021. The use of the Company's credit rating resulted in a reduction in the fair value of the swap liability of $ 29 as of September 30, 2021. The fair value of the swap reflecting the Company's credit quality as of December 31, 2020 is shown in the table below. Description December 31, 2020 Fair Value Measurements at Reporting Date Using Significant Other Observable Inputs (Level 2) Interest Rate Swap $ 2,731 $ 2,731 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 $ 135,062 at September 30, 2021, and $ 126,570 at December 31, 2020, had an estimated fair value of approximately $ 150,000 and $ 151,000 , 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 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, 2021 of $ 11,358 and $ 255 , respectively. At December 31, 2020, customers' advances for construction and note receivable had carrying values of $ 10,326 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. 7. 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 successfully completed its commitment to exceed the LCR replacement schedule by replacing all the known company-owned lead service lines within four years from the agreement. Any additional company-owned lead service lines that are discovered will be replaced and included in utility plant 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 $ 1,307 and $ 1,204 through September 30, 2021 and December 31, 2020 , respectively, and is included as a regulatory asset. Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $ 1,500 . This estimate is subject to adjustment as more facts become available. Page 11 Table of Contents 8. Revenue The following table shows the Company’s revenues disaggregated by service and customer type. Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Water utility service Residential $ 8,872 $ 8,902 $ 25,560 $ 25,643 Commercial and industrial 3,952 3,774 10,891 10,331 Fire protection 827 795 2,428 2,379 Wastewater utility service Residential 481 446 1,426 1,281 Commercial and industrial 79 78 237 229 Billing and revenue collection services 121 118 360 147 Collection services 18 – 29 14 Other revenue 18 4 38 14 Total Revenue from Contracts with Customers 14,368 14,117 40,969 40,038 Rents from regulated property 135 140 416 416 Total Operating Revenue $ 14,503 $ 14,257 $ 41,385 $ 40,454 Utility Service The Company provides utility service as a distinct and single performance obligation to each of its water and wastewater customers. The transaction price is detailed in the tariff pursuant to an order by the PPUC and made publicly available. There is no variable consideration and no free service, special rates, or subnormal charges to any customer. Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price. The performance obligation is satisfied over time through the continuous provision of utility service through a stand-ready obligation to perform and the transfer of water or the collection of wastewater through a series of distinct transactions that are identical in nature and have the same pattern of transfer to the customer. The Company uses an output method to recognize the utility service revenue over time. The stand-ready obligation is recognized through the passage of time in the form of a fixed charge and the transfer of water or the collection of wastewater is recognized at a per unit rate based on the actual or estimated flow through the meter. Each customer is invoiced every month and the invoice is due within twenty days . The utility service has no returns or warranties associated with it. No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period. A contract asset for unbilled revenue is recognized for the passage of time and the actual or estimated usage from the latest meter reading to the end of the accounting period. The methodology is standardized and consistently applied to reduce bias and the need for judgment. Billing and Revenue Collection Service The Company provides billing and revenue collection service as distinct performance obligations to 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. Page 12 Table of Contents Collection Service The Company provides collection service as a distinct and single performance obligation to several municipalities within the service territory of the Company. The municipalities provide wastewater service to their residents. If those residents are delinquent in paying for their wastewater service, the municipalities request that the Company post for and shut off the supply of water to the premises of those residents. When the resident is no longer delinquent, the Company will restore water service to the premises. The transaction price for each posting, each shut off, and each restoration is a fixed amount as established in the contract. There is no variable consideration. Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price. The performance obligation is satisfied at a point in time when the posting, shut off, or restoration is completed as the municipalities receive all the benefits in the form of payment or no longer providing wastewater service. Each municipality is invoiced periodically for the posting, shut offs, and restorations that have been completed since the last billing and the invoice is due within thirty days . The collection service has no returns or warranties associated with it. No revenue is recognized from performance obligations satisfied in prior periods and no performance obligations remain unsatisfied as of the end of the reporting period. A contract asset for unbilled revenue is recognized for postings, shut offs, and restorations that have been completed from the last billing to the end of the accounting period. Service Line Protection Plan The Company provides service line protection as a distinct and single performance obligation to current water customers that choose to participate. The transaction price is detailed in the plan’s terms and conditions and made publicly available. There is no variable consideration. Due to the fact that the contract includes a single performance obligation, no judgment is required to allocate the transaction price. The performance obligation is satisfied over time through the continuous provision of service line protection through a stand-ready obligation to perform. The Company uses an output method to recognize the service line protection revenue over time. The stand-ready obligation is recognized through the passage of time. A customer has a choice to prepay for an entire year or to pay in advance each month. The service line protection plan has no returns or extended warranties associated with it. No revenue is recognized from performance obligations satisfied in prior periods and no material performance obligations remain unsatisfied as of the end of the reporting period. 9. 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. Most recently, the PPUC authorized an increase in rates effective March 1, 2019. 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 Company's earnings are currently below the regulatory benchmark allowing the Company to collect DSIC. The DSIC provided revenues of $ 255 and $ 280 for the three and nine months ended September 30, 2021, respectively, and revenues of $ 0 for the three and nine months ended September 30, 2020. Page 13 Table of Contents 10. Pensions Components of Net Periodic Pension Cost Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Service cost $ 271 $ 234 $ 814 $ 703 Interest cost 302 365 906 1,093 Expected return on plan assets ( 913 ) ( 800 ) ( 2,739 ) ( 2,399 ) Amortization of actuarial loss 121 92 363 277 Amortization of prior service cost ( 3 ) ( 3 ) ( 9 ) ( 9 ) Rate-regulated adjustment 797 687 2,390 2,060 Net periodic pension expense $ 575 $ 575 $ 1,725 $ 1,725 Pension service cost is recorded in operating expenses. All other components of net periodic pension cost are recorded as other pension costs in other income (expenses). Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2020 that it expected to contribute $ 2,300 to its pension plans in 2021 . For the nine months ended September 30, 2021, contributions of $ 1,725 have been made. The Company expects to contribute the remaining $ 575 during the final quarter of 2021. 11. Stock-Based Compensation On May 2, 2016 , the Company’s stockholders approved The York Water Company Long-Term Incentive Plan, or LTIP. The LTIP was adopted to provide the incentive of long-term stock-based awards to officers, directors and key employees. The LTIP provides for the granting of nonqualified stock options, incentive stock options, stock appreciation rights, performance restricted stock grants and units, restricted stock grants and units, and unrestricted stock grants. A maximum of 100,000 shares of common stock may be issued under the LTIP over the ten-year life of the plan. The maximum number of shares of common stock subject to awards that may be granted to any participant in any one calendar year is 2,000 . Shares of common stock issued under the LTIP may be treasury shares or authorized but unissued shares. The LTIP will be administered by the Compensation Committee of the Board, or the full Board, provided that the full Board will administer the LTIP as it relates to awards to non-employee directors of the Company. The Company filed a registration statement with the Securities and Exchange Commission on May 11, 2016 covering the offering of stock under the LTIP. The LTIP was effective on July 1, 2016 . On August 19, 2019 , the Board accelerated the vesting period for restricted stock granted in 2017, 2018 , and 2019 to one retiring officer from three years to that officer’s 2020 retirement date which had been fully recognized as of March 31, 2020 . On May 3, 2021, the Board awarded stock to non-employee directors effective May 3, 2021. This stock award vested immediately. On May 3, 2021, the Compensation Committee awarded restricted stock to officers and key employees effective May 3, 2021. This restricted stock award vests ratably over three years beginning May 3, 2021. 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. Page 14 Table of Contents The following tables summarize the stock grant amounts and activity for the nine months ended September 30, 2021. Number of Shares Grant Date Weighted Average Fair Value Nonvested at beginning of the period 6,682 $ 39.30 Granted 6,170 $ 51.40 Vested ( 4,048 ) $ 41.19 Forfeited – – Nonvested at end of the period 8,804 $ 46.91 For the three months ended September 30, 2021 and 2020, the statement of income includes $ 46 and $ 74 of stock-based compensation, respectively, and related recognized tax benefits of $ 13 and $ 21 , respectively. For the nine months ended September 30, 2021 and 2020, the statement of income includes $ 167 and $ 126 of stock-based compensation, respectively, and related recognized tax benefits of $ 48 and $ 36 , respectively. The total fair value of the shares vested in the nine months ended September 30, 2021 was $ 167 . Total stock-based compensation related to nonvested awards not yet recognized is $ 413 which will be recognized over the remaining three year vesting period. 12. 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 11.5 % and 16.0 % for the three months ended September 30, 2021 and 2020 , respectively, and 7.7 % and 13.9 % for the nine months ended September 30, 2021 and 2020 , respectively. The lower effective tax rate is 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. Page 15 Table of Contents