The York Water Company (YORW) 10-K2023 FY Annual report

The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States and is duly organized under the laws of the Commonwealth of Pennsylvania.  The Company has operated continuously since 1816.  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 three wastewater collection systems and ten wastewater collection and treatment systems.  The Company operates within its franchised water and wastewater territory, which covers portions of 56 municipalities within four counties in south-central 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 for its primary system for York and Adams Counties from both the South Branch and East Branch of the Codorus Creek, which together have an average daily flow of approximately 73.0 million gallons from a combined watershed area of approximately 117 square miles.  The Company has two reservoirs on this primary system, Lake Williams and Lake Redman, which together hold up to approximately 2.2 billion gallons of water.  The Company supplements these 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 obtains its water supply for its system for Franklin County from the Roxbury Dam on the Conodoguinet Creek, which has an average daily flow of approximately 26.0 million gallons from a watershed area of approximately 33 square miles.  The Company has a reservoir on this system which holds up to approximately 330 million gallons of water.  The Company also owns thirteen wells which are capable of providing a safe yield of approximately 808,000 gallons per day to supply water to the customers of its groundwater satellite systems in York, Adams, and Lancaster Counties.  As of December 31, 2023, the Company’s average daily availability was 41.0 million gallons, and average daily consumption was approximately 21.8 million gallons.  The Company’s service territory had an estimated population of 209,000 as of December 31, 2023.  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 precipitation.  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 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.  The Company continues to review and consider opportunities to expand both initiatives.

As a regulated utility, the Company operates within an exclusive franchised territory that is substantially free from direct competition with other public utilities, municipalities, and other entities.  Although the Company has been granted an exclusive franchise for each of its existing community water and wastewater systems, the ability of the Company to expand or acquire new service territories may be affected by currently unknown competitors obtaining franchises to surrounding systems by application or acquisition.  These competitors may include other investor-owned utilities, nearby municipally-owned utilities and sometimes competition from strategic or financial purchasers seeking to enter or expand in the water and wastewater industry.  The addition of new service territory and the acquisition of other utilities are generally subject to review and approval by the PPUC.

Provisions of water and wastewater service are subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act and related state laws, and under federal and state regulations issued under these laws.  In addition, the Company is subject to federal and state laws and other regulations relating to solid waste disposal, dam safety and other aspects of its operations.

The federal Safe Drinking Water Act establishes criteria and procedures for the U.S. Environmental Protection Agency, or EPA, to develop national quality standards.  Regulations issued under this Act, and its amendments, set standards on the amount of certain contaminants allowable in drinking water.  Current requirements are not expected to have a material impact on the Company’s operations or financial condition as it already meets or exceeds standards.  In the future, the Company may be required to change its method of treating drinking water and may incur additional capital investments if new regulations become effective.

Under the requirements of the Pennsylvania Safe Drinking Water Act, or SDWA, the Pennsylvania Department of Environmental Protection, or DEP, regulates the quality of the finished water supplied to customers.  The DEP requires the Company to submit monthly reports showing the results of daily bacteriological and other chemical and physical analyses. As part of this requirement, the Company conducts over 70,000 laboratory tests annually.  Management believes that the Company complies with the standards established by the agency under the SDWA.  The DEP assists the Company by regulating discharges into the Company’s watershed area to prevent and eliminate pollution.

The federal Groundwater Rule establishes protections against microbial pathogens in community water supplies.  This rule requires additional testing of water from well sources, and under certain circumstances requires demonstration and maintenance of effective disinfection.  The Company holds public water supply permits issued by the DEP, which establishes the groundwater source operating conditions for its wells, including demonstrated 4-log treatment of viruses.  All of the groundwater satellite systems operated by the Company are in compliance with the federal Groundwater Rule.

The Clean Water Act regulates discharges from water and wastewater treatment facilities into lakes, rivers, streams, and groundwater.  The Company complies with this Act by obtaining and maintaining all required permits and approvals for discharges from its water and wastewater facilities and by satisfying all conditions and regulatory requirements associated with the permits.

The DEP monitors the quality of wastewater discharge effluent under the provisions of the National Pollutant Discharge Elimination System, or NPDES.  The Company submits monthly reports to the DEP showing the results of its daily effluent monitoring and removal of sludge and biosolids.  The Company is not aware of any significant environmental remediation costs necessary from the handling and disposal of waste material from its wastewater operations.

Lead and copper may enter drinking water primarily through plumbing materials.  The Company is required to comply with the Lead and Copper Rule established by the EPA and administered by the DEP.  The Company must monitor drinking water at customer taps for compliance with this rule.  If lead concentrations exceed an action level, the Company must undertake a number of additional actions to control corrosion, inform the public about steps they should take to protect their health and may be required to replace lead service lines under its control.  The Company is currently in compliance with standards under the Lead and Copper Rule.

The EPA has published the Lead and Copper Rule Revisions, or LCRR, that includes a requirement to submit a service line inventory and a lead service line replacement plan to the respective states or agencies by October 16, 2024, as well as provide public education and sampling at elementary schools and childcare facilities.  Additionally, the EPA is developing a new regulation, the Lead and Copper Rule Improvements, or LCRI, to better protect communities from exposure to lead in drinking water.  The LCRI is expected to delay the due dates for lead service line replacement plans and result in modifications to other parts of the LCRR.  The Company is executing an implementation plan to comply with the initial LCRR requirement to complete a lead service line inventory and begin additional sampling.

The DEP and the Susquehanna River Basin Commission, or SRBC, regulate the amount of water withdrawn from streams in the watershed to assure that sufficient quantities are available to meet the needs of the Company and other regulated users.  Through its Division of Dam Safety, the DEP regulates the operation and maintenance of the Company’s impounding dams.  The Company routinely inspects its dams and prepares annual reports of their condition as required by DEP regulations.  The DEP reviews these reports and inspects the Company’s dams.

Since 1980, the DEP has required any new dam to have a spillway that is capable of passing the design flood without overtopping the dam.  The design flood is either the Probable Maximum Flood, or PMF, or some fraction of it, depending on the size and location of the dam.  PMF is very conservative and is calculated using the most severe combination of meteorological and hydrologic conditions reasonably possible in the watershed area of a dam.

The Company engaged a professional engineer to analyze the spillway capacities at the Lake Williams and Lake Redman dams and validate the DEP’s recommended flood design for the dams.  Management presented the results of the study to the DEP in December 2004, and DEP then requested that the Company submit a proposed schedule for the actions to address the spillway capacities.  Thereafter, the Company retained an engineering firm to prepare preliminary designs for increasing the spillway capacities to pass the PMF through armoring the dams with roller compacted concrete.  Management met with the DEP on a regular basis to review the preliminary design and discuss scheduling, permitting, and construction requirements including their concern regarding the stability of the Lake Williams spillway in light of current design standards.  The Company completed the final design and the permitting process to armor the dam and replace the spillway of the Lake Williams dam and began construction in 2022.  The Company completed the dam armoring and spillway replacement in 2023 at a total cost of approximately $40 million.  Additional capital expenditures will be incurred in 2024 to complete the sitework around the dam and reservoir.  The Lake Redman dam will be reviewed following the completion of the work on the Lake Williams dam.

Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state public utility commissions as appropriate for inclusion in establishing rates.  The capital expenditures currently required as a result of water quality standards and environmental requirements have been budgeted in the Company’s capital program and represent less than 15% of its expected total capital expenditures over the next five years.  The Company is currently in compliance with wastewater environmental standards and does not anticipate any major capital expenditures for its current wastewater business.

The Company continues to grow its number of customers and distribution facilities.

The growth in the number of customers is due primarily to the acquisition of water and wastewater systems and organic growth. During the year ended December 31, 2023, the Company increased its number of customers from 76,731 to 77,893.  See “Management’s Discussion and Analysis – Acquisitions and Growth” for a discussion of the Company’s recent acquisitions.

The Company continues to grow its water distribution and wastewater collection systems to provide reliable service to its expanding franchised service territory and the increasing population within that territory.  During the year ended December 31, 2023, the Company installed an additional 41,300 feet of water distribution mains and acquired an additional 16,300 feet of water distribution mains resulting in 1,076 miles of water mains as of December 31, 2023.  During the year ended December 31, 2023, the Company acquired an additional 16,400 feet of wastewater collection mains resulting in 102 miles of wastewater mains as of December 31, 2023.

The Company’s growth in revenues is primarily a result of customer growth and increases in water and wastewater rates.  During the year ended December 31, 2023, the Company recognized revenue of $71,031, an increase of $10,970, or 18.3%, as compared to $60,061 during the year ended December 31, 2022.  In 2023, operating revenue was derived from the following sources and in the following percentages: residential, 64%; commercial and industrial, 29%; and other, 7%, which is primarily from the provision for fire service but includes other water and wastewater service-related income.  See “Management’s Discussion and Analysis – Rate Matters” for a discussion of the Company’s rate case management.

The Company presently has 130 employees, all but one of which are full time employees including the officers detailed in the information set forth under the caption “Executive Officers of the Company” of the 2024 Proxy Statement incorporated herein by reference.

The Company makes available free of charge, on or through its website (www.yorkwater.com), its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.  The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, and other information about SEC registrants, including the Company.

Shareholders may request, without charge, copies of the Company’s financial reports.  Such requests, as well as other investor relations inquiries, should be addressed to:

None.

The Company obtains the bulk of its water supply for its primary system for York and Adams Counties from both the South Branch and East Branch of the Codorus Creek, which together have an average daily flow of approximately 73.0 million gallons from a combined watershed area of approximately 117 square miles.  The Company owns two impounding dams on this primary system located in York and Springfield Townships adjoining the Borough of Jacobus to the south.  The lower dam, the Lake Williams Impounding Dam, creates a reservoir covering approximately 165 acres containing about 870 million gallons of water.  The upper dam, the Lake Redman Impounding Dam, creates a reservoir covering approximately 290 acres containing about 1.3 billion gallons of water.  The Company supplements these 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 per day, or MGD.

The Company obtains its water supply for its system for Franklin County from the Roxbury Dam on the Conodoguinet Creek, which has an average daily flow of approximately 26.0 million gallons from a watershed area of approximately 33 square miles.  The Company has a reservoir on this system which holds up to approximately 330 million gallons of water.

The Company also owns satellite groundwater systems in York, Adams, and Lancaster Counties.  The systems consist of thirteen wells capable of providing a combined safe yield of approximately 808,000 gallons per day.

As of December 31, 2023, the Company’s present average daily availability was 41.0 million gallons, and daily consumption was approximately 21.8 million gallons.

The Company’s main pumping station is located in Spring Garden Township, York County, on the south branch of the Codorus Creek about four miles downstream from the Company’s lower impounding dam.  The pumping station houses pumping equipment with a combined permitted capacity of 42.0 MGD.  A large diesel backup generator is installed to provide power to the pumps in the event of an emergency.  The untreated water is pumped approximately two miles to the filtration plant through pipes owned by the Company.

The Susquehanna River Pumping Station is located on the western shore of the Susquehanna River in York County, several miles south of Wrightsville.  The pumping station houses pumping equipment with a combined permitted capacity of 12.0 MGD.  The pumping station pumps water from the Susquehanna River approximately 15 miles through a combination of 30 inch and 36 inch ductile iron main to the Company’s upper impounding dam, located at Lake Redman.

The Lake Redman Pumping Station is located in York Township, York County, adjacent to Lake Redman.  The pumping station is designed to provide a redundant source with permitted capacity to pump 20.0 MGD of untreated water through a company-owned 36 inch force main approximately 3.5 miles to the filtration plant, meeting the Company’s daily consumption needs.

The Company’s primary water filtration plant is located in Spring Garden Township, York County, about one-half mile south of the City of York. Water at this plant is filtered through twelve dual media filters having a rated capacity of 39.0 MGD, with a maximum supply of 42.0 MGD for short periods if necessary.

The Company’s sediment recycling facility is located adjacent to this water filtration plant.  This state of the art facility employs cutting edge technology to remove fine, suspended solids from untreated water.  The Company estimates that through this energy-efficient, environmentally friendly process, approximately 600 tons of sediment will be removed annually, thereby improving the quality of the Codorus Creek watershed.

The Company also operates a water filtration plant in Greene Township, Franklin County.  Water at this plant is filtered through filters having a rated capacity of 1.16 MGD.

Based on a total average daily consumption in 2023 of approximately 21.8 million gallons, the Company believes the water pumping and filtering facilities are adequate to meet present and anticipated demands.

The Company has ten wastewater treatment facilities located in four counties within south-central Pennsylvania.  The wastewater treatment plants range from small extended aeration package plants to three larger facilities that utilize Biological Nutrient Removal/tertiary treatment technology, and have a combined permitted flow capacity of 922,500 gallons.  With a projected maximum daily demand of 389,000 gallons, the plants’ flow paths offer both capacity and operational redundancy for maintenance, high flow events, and potential growth.

The distribution systems of the Company have approximately 1,076 miles of water main lines which range in diameter from 2 inches to 36 inches.  The distribution systems include booster stations and standpipes and reservoirs capable of storing approximately 59.7 million gallons of potable water.  All booster stations are equipped with at least two pumps for protection in case of mechanical failure.  Following a deliberate study of customer demand and pumping capacity, the Company installed standby generators at all critical booster stations to provide an alternate energy source or emergency power in the event of an electric utility interruption.

The thirteen wastewater collection systems of the Company have approximately 102 miles of gravity collection mains and pressure force mains along with redundant sewage pumping stations.

The Company’s distribution center and material and supplies warehouse are located in Springettsbury Township and are composed of three one-story concrete block buildings aggregating 30,680 square feet.

The administrative and executive offices of the Company are located in one three-story and one two-story brick and masonry buildings, containing a total of approximately 21,861 square feet, in the City of York, Pennsylvania.

All of the Company’s properties described above are held in fee by the Company.  There are no material encumbrances on such properties.

In 1976, the Company entered into a Joint Use and Park Management Agreement with York County under which the Company licensed use of certain of its lands and waters for public park purposes for a period of 50 years.  Under the agreement, York County has agreed not to erect a dam upstream on the East Branch of the Codorus Creek or otherwise obstruct the flow of the creek.

There are no material legal proceedings involving the Company.

Not applicable.

The common stock of The York Water Company is traded on the NASDAQ Global Select Market under the symbol YORW.

Shareholders of record (excluding individual participants in securities positions listings) as of December 31, 2023 numbered approximately 1,824.

The information required by this item with respect to securities authorized for issuance under equity compensation plans is set forth in Part III, Item 12 of this Annual Report.

The Company did not repurchase any of its securities during the fourth quarter of 2023.

(All dollar amounts are stated in thousands of dollars.)

The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States, operated continuously since 1816. The Company also owns and operates three wastewater collection systems and ten wastewater collection and treatment systems.  The Company is a purely regulated water and wastewater utility.  Profitability is largely dependent on water revenues.  Due to the size of the Company and the limited geographic diversity of its service territory, weather conditions, particularly precipitation, economic, and market conditions can have an adverse effect on revenues.  The Company experienced increased revenues in 2023 compared to 2022 primarily due to a rate increase effective March 1, 2023 and an increase in the number of customers, which was partially offset by lower revenues from the distribution system improvement charge, or DSIC.

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.  In 2023, operating revenue was derived from the following sources and in the following percentages: residential, 64%; commercial and industrial, 29%; and other, 7%, which is primarily from the provision for fire service, but includes other water and wastewater service-related income.  The diverse customer mix helps to reduce volatility in consumption.

The Company seeks to grow revenues by increasing the volume of water sold and wastewater service provided through increases in the number of customers, making timely and prudent investments in infrastructure replacements, expansion and improvements, and timely filing for rate increases.  The Company continuously looks for acquisition and expansion opportunities both within and outside its current service territory as well as through contractual services and bulk water supply.

The Company has entered into agreements with municipalities to provide billing and collection services.  The Company also has a service line protection program on a targeted basis.  The Company continues to review and consider opportunities to expand both initiatives to further diversify the business.

In addition to increasing revenue, the Company consistently focuses on minimizing costs without sacrificing water quality or customer service.  Paperless billing, expanding online services, negotiation of favorable electric, banking, and other costs, as well as taking advantage of the Tax Cuts and Jobs Act of 2017, or the 2017 Tax Act, and the Internal Revenue Service, or IRS, tangible property regulations, or TPR, are examples of the Company’s recent efforts to minimize costs.

Company management uses financial measures including operating revenues, net income, earnings per share and return on equity to evaluate its financial performance.  Additional statistical measures including number of customers, customer complaint rate, annual customer rates and the efficiency ratio are used to evaluate performance quality.  These measures are calculated on a regular basis and compared with historical information, budget and the other publicly-traded water and wastewater companies.

The Company’s performance in 2023 was strong under the above measures.  Operating revenues increased in 2023 compared to 2022 primarily due to a rate increase effective March 1, 2023 and an increase in the number of customers, which was partially offset by the lower revenues from the DSIC.  The increase in operating revenues offset the increases in operating expenses.  The Company incurred higher income taxes primarily due to higher income before income taxes.  The overall effect was an increase in net income in 2023 over 2022 of 21.3% and a return on year end common equity of 10.7%.  The return on year end common equity was strong and higher than the 2022 result of 9.5% which included an increase in common equity from an underwritten public stock offering completed in 2022.  The 2023 results were in line with the five year historical average return on year end common equity of 10.7%.

The efficiency ratio, which is calculated as net income divided by revenues, is used by management to evaluate its ability to control expenses.  Over the five previous years, the Company’s ratio averaged 30.0%.  In 2023, the ratio was higher than the average at 33.4% due primarily to the increase in operating revenues and lower income taxes than are included in the historical average.  Management is confident that its ratio will compare favorably to that of its peers.  Management continues to look for ways to decrease expenses and increase efficiency as well as to file for rate increases promptly when needed.

Net income for 2023 was $23,757, an increase of $4,177, or 21.3%, from net income of $19,580 for 2022.  The primary contributing factors to the increase were higher operating revenues, which were partially offset by higher operating expenses and income taxes.

Operating revenues for 2023 increased $10,970, or 18.3%, from $60,061 for 2022 to $71,031 for 2023.  The primary reason for the increase was a rate increase effective March 1, 2023.  Growth in the customer base also added to revenues.  The average number of water customers served in 2023 increased as compared to 2022 by 996 customers, from 70,420 to 71,416 customers.  The average number of wastewater customers served in 2023 increased as compared to 2022 by 390 customers, from 5,609 to 5,999 customers, primarily due to acquisitions.  Total per capita consumption for 2023 was approximately 0.3% higher than last year.  The increased revenues were partially offset by a $1,994 decrease from a lower DSIC allowed by the PPUC.  The DSIC reset to zero on March 1, 2023 when the rate order took effect.  In 2024, the Company expects revenues to show a modest increase over 2023 due to a full year at the new 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, drought warnings or restrictions, weather patterns, and economic conditions could impact results.

Operating expenses for 2023 increased $5,922, or 16.6%, from $35,578 for 2022 to $41,500 for 2023.  The increase was primarily due to higher expenses of approximately $1,607 for depreciation and amortization, $975 for water treatment, $713 for wages, $683 for wastewater treatment as the prior year included a one-time reimbursement not repeated in the current year, $362 for insurance, $282 for distribution system maintenance, $281 for outside services, $213 for billing and revenue collection services, $202 for fuel to pump raw water from the Susquehanna River, $189 for reduced capitalized overhead, $106 for an increased allowance for uncollectible accounts, and $89 for source maintenance.  Other operating expenses increased by a net of $220.  In 2024, the Company expects depreciation and amortization expense to continue to rise due to additional investment in utility plant, and other expenses to increase as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.  Drought conditions and weather patterns could further increase operating expenses.

Interest on debt for 2023 increased $1,933, or 37.8%, from $5,114 for 2022 to $7,047 for 2023.  The increase was primarily due to an increase in long-term debt outstanding and higher interest rates.  The average debt outstanding under the lines of credit was $16,316 for 2023 and $13,428 for 2022.  The weighted average interest rate on the lines of credit was 5.36% for 2023 and 2.11% for 2022.  Interest expense for 2024 is expected to be higher due to continued borrowings and continued higher interest rates.

Allowance for funds used during construction increased $2,652, from $1,501 in 2022 to $4,153 in 2023 due to a higher volume of eligible construction.  Allowance for funds used during construction in 2024 is expected to decrease based on the completion of the Lake Williams Dam project and a projected decrease in the amount of eligible construction.

Other income (expenses), net for 2023 reflects increased expenses of $521 as compared to 2022.  Higher retirement expenses of approximately $843 were the primary reason for the increase.  Lower charitable contributions of approximately $288 partially offset the increase.  Other expenses decreased by a net of $34.  In 2024, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.

Income tax expense for 2023 increased $1,262 compared to 2022 primarily due to higher income before income taxes partially offset by higher deductions from the IRS TPR.  The Company’s effective tax rate was 5.1% for 2023 and 0.1% for 2022.  The Company’s effective tax rate for 2024 will be largely determined by income before income taxes and the level of eligible asset improvements expensed for tax purposes under TPR each period.

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

The Company does not expect to file a rate increase request in 2024.

See Note 2 to the Company’s financial statements included herein for a discussion of completed acquisitions included in financial results.

On February 7, 2024, the Company signed an agreement to purchase the wastewater collection assets of Margaretta Mobile Home Park in Lower Windsor Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2025 at which time the Company will add approximately 65 wastewater customers.

On July 17, 2023, the Company signed an agreement to purchase the wastewater collection and treatment assets of York Haven Sewer Authority in York Haven Borough, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the third quarter of 2024 at which time the Company will add approximately 230 wastewater customers.

On June 1, 2023, the Company signed an agreement to purchase the water assets of Longstown Mobile Estates in Windsor Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the first quarter of 2024 at which time the Company will add approximately 90 water customers.  The water customers are currently served by the Company through a single customer connection to the mobile home park.

On May 23, 2023, the Company signed an agreement to purchase the Brookhaven Mobile Home Park water assets of ATG Properties, LLC in Hellam Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second half of 2024 at which time the Company will add approximately 150 water customers.

On May 18, 2023, the Company signed an agreement to purchase the water assets of Houston Run Community Water System, LLC in Salisbury Township, Lancaster County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second quarter of 2024 at which time the Company will add approximately 15 water customers.

On March 27, 2023, the Company signed an agreement to purchase the water assets of Pine Run Retirement Community in Hamilton Township, Adams County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second half of 2024 at which time the Company will add approximately 100 water customers.

On November 9, 2022, the Company signed an agreement to purchase the wastewater collection and treatment assets of CMV Sewage Co., Inc. in Chanceford Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second half of 2024 at which time the Company will add approximately 280 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 potential 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 2024 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.

During 2023, the Company invested $64,640 in construction expenditures for armoring and replacing the spillway of the Lake Williams dam, wastewater treatment plant construction as well as various replacements and improvements to infrastructure and routine items.  In addition, the Company invested $625 in the acquisition of water and wastewater systems.  The Company replaced approximately 50,200 feet of water main and 500 feet of wastewater main in 2023.  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 from developers, municipalities, customers, or builders.  See Notes 1, 4 and 5 to the Company’s financial statements included herein.

The Company anticipates construction and acquisition expenditures for 2024 and 2025 of approximately $42,200 and $46,100, respectively, exclusive of any acquisitions not yet approved.  In addition to routine transmission and distribution projects, a portion of the anticipated 2024 and 2025 expenditures will be for additional main extensions, completion of armoring and replacing the spillway of the Lake Williams dam, wastewater treatment plant construction, an upgrade to the enterprise software system, and various replacements of infrastructure.  The Company intends to use primarily internally-generated funds for its anticipated 2024 and 2025 construction and fund the remainder through line of credit borrowings, potential debt and equity offerings, proceeds from its stock purchase plans and customer advances and contributions (see Note 1 to the Company’s financial statements included herein).  Customer advances and contributions are expected to account for between 5% and 10% of funding requirements in 2024 and 2025.  The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2024 and 2025, to fund anticipated construction and acquisition expenditures.

The Company manages its cash through a cash management account that is directly connected to its line 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 December 31, 2023, the Company borrowed $30,273 under its line of credit and incurred a cash overdraft on its cash management account of $1,547, which was recorded in accounts payable.  The cash management facility connected to the line of credit is expected to provide the necessary liquidity and funding for the Company’s operations, capital expenditures, and acquisitions for the foreseeable future.

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 2023, higher revenue levels as compared to 2022 resulted in an increase in accounts receivable – customers.  A reserve is maintained at a level considered adequate to provide for expected credit losses.  Expected credit losses are based on historical write-offs combined with an evaluation of current conditions and reasonable and supportable forecasts including inactive accounts with outstanding balances, the aging of balances in payment agreements, adverse situations that may affect a customer’s ability to pay, economic conditions, and other relevant factors applied to the current aging of receivables.  Customer accounts are written off when collection efforts have been exhausted.  If the status of the evaluated factors deteriorate, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its 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, customers’ water usage, weather conditions, customer growth and controlled expenses.  In 2023, the Company generated $31,908 internally as compared to $22,018 in 2022.  The increase from 2022 was primarily due to the increase in net income and the increase in depreciation and amortization, a non-cash expense.

Common stockholders’ equity as a percent of the total capitalization was 54.8% as of December 31, 2023, compared with 59.3% as of December 31, 2022.  The ratio decreased in 2023 due to higher debt primarily from increased capital expenditures.  The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward until it approaches fifty percent before considering additional equity.  It is the Company’s general intent to target equity between fifty and fifty-five percent of total capitalization.

Historically, the Company has borrowed under its lines of credit before refinancing with long-term debt or equity capital.  As of December 31, 2023, the Company maintained a $50,000, unsecured, committed line of credit at an interest rate of the Secured Overnight Financing Rate, or SOFR, plus 1.17% with an unused commitment fee and an interest rate floor.  The Company had $30,273 in outstanding borrowings under its line of credit as of December 31, 2023.  The interest rate on line of credit borrowings as of December 31, 2023 was 6.51%.  In the third quarter of 2023, the Company renewed its committed line of credit and extended the maturity date to September 2025.  No other terms or conditions of the line of credit agreement were modified.  On January 1, 2023, the interest rate changed from LIBOR plus 1.05% to a successor rate of the SOFR plus 1.17% in advance of the discontinuation of LIBOR in 2023.  The Company expects to renew this line of credit as it matures under similar terms and conditions.

The Company has taken steps to manage the risk of reduced credit availability.  It has established a committed line of credit with a 2-year revolving maturity that cannot be called on demand.  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 line of credit to meet financing needs throughout 2024.

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 financial statements included herein for additional information regarding these restrictions.

On February 24, 2023, the Company entered into a note purchase agreement with certain institutional investors relating to the private placement of $40,000 aggregate principal amount of the Company’s senior notes.  The senior notes bear interest at 5.50% per annum payable semiannually and mature on February 24, 2053.  The senior notes are unsecured and unsubordinated obligations of the Company.  The Company received net proceeds, after deducting issuance costs, of approximately $39,829.  The net proceeds were used to refinance line of credit borrowings incurred by the Company as interim financing for various capital projects of the Company.

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 45.2% as of December 31, 2023, compared with 40.7% as of December 31, 2022.  The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward.  A debt to total capitalization ratio between forty-five and fifty percent has historically been acceptable to the PPUC in rate filings.  See Note 6 to the Company’s financial statements included herein for the details of its long-term debt outstanding as of December 31, 2023.

Under the IRS TPR, 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 expects to continue to expense these asset improvements in the future.

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

On July 8, 2022, the Pennsylvania budget for the fiscal year ending June 30, 2023 was signed into law.  A provision within the tax code bill included with the budget provides for an annual phase-down of the Pennsylvania corporate net income tax rate of one percentage point in the first year beginning January 1, 2023 from 9.99% to 8.99%, and a one-half percentage point each year thereafter until it reaches 4.99% beginning January 1, 2031.  The Company has remeasured the state portion of the Company’s deferred income taxes.  The effect, net of the federal benefit recognized in income for the years ended December 31, 2023 and 2022, was immaterial.  Deferred income taxes for differences that are recognized for ratemaking purposes on a cash or flow-through basis were remeasured with offsetting changes to regulatory assets and liabilities on the balance sheet as of December 31, 2023 and 2022.  The Company expects any savings in its Pennsylvania current income taxes to be returned to its customers through the rate making process or as a future negative surcharge on their bills.

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 customers’ advances for construction and contributions in aid of construction 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 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.

The Company has determined there are no uncertain tax positions that require recognition as of December 31, 2023.  See Note 14 to the Company’s financial statements included herein for additional details regarding income taxes.

On July 26, 2023, 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.  In 2024, 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.

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 the Company’s 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 was granted approval by the 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 date of 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 $1,762 and $1,518 through December 31, 2023 and 2022, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,900.  This estimate is subject to adjustment as more facts become available.

On January 26, 2024, Pennsylvania state officials moved York County to a drought watch, moved Lancaster County to normal status, and continued the drought watch for Adams County and the drought warning for Franklin County.  The warning calls for a voluntary reduction in nonessential water use of 10 to 15 percent and the watch calls for a voluntary reduction in nonessential water use of 5 to 10 percent.  In addition, the Company has implemented a voluntary restriction on nonessential water use within its service territory.  These measures could potentially impact future revenues, operating expenses, and net income depending on the length and severity of the dry conditions.

During 2023, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 49.3% and 36.3%, respectively.  During 2022, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 56.2% and 48.5%, respectively.  During the fourth quarter of 2023, the Board increased the dividend by 4.00% from $0.2027 per share to $0.2108 per share per quarter.

The Company’s Board declared a dividend in the amount of $0.2108 per share at its January 2024 meeting.  The dividend is payable on April 15, 2024 to shareholders of record as of February 29, 2024.  While the Company expects to maintain this dividend amount in 2024, future dividends will be dependent upon the Company’s earnings, financial condition, capital demands and other factors and will be determined by the Company’s Board.  See Note 6 to the Company’s financial statements included herein for restrictions on dividend payments.

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

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: revenue recognition and accounting for its pension plans.

Operating revenues include amounts billed to metered water and certain wastewater customers on a cycle basis and unbilled amounts based on both actual and estimated usage from the latest meter reading to the end of the accounting period.  Estimates are based on average daily usage for those particular customers.  The unbilled revenue amount is recorded as a current asset on the balance sheet.  Actual results could differ from these estimates and would result in operating revenues being adjusted in the period in which the actual usage is known.  Based on historical experience, the Company believes its estimate of unbilled revenues is reasonable.

Accounting for defined benefit pension plans requires estimates of future compensation increases, mortality, the discount rate, and expected return on plan assets as well as other variables.  These variables are reviewed annually with the Company’s pension actuary.  The Company used compensation increases of 2.5% to 3.0% in 2022 and 2023.

The Company adopted a new mortality table in 2019, the Pri-2012, using the white collar table for the administrative and general plan and the blue collar table for the union plan.  In 2021, the Company adopted the MP-2021 mortality improvement scale, which slightly increased the life expectancy of pension plan participants, resulting in a slight increase to the pension benefit obligation, and ultimately, a decrease in the Company’s funded status of the plans.

The Company selected its December 31, 2023 and 2022 discount rates based on the FTSE Pension Liability Index.  This index uses spot rates for durations out to 30 years and matches them to expected disbursements from the plan over the long term.  The Company believes this index most appropriately matches its pension obligations.  The present values of the Company’s future pension obligations were determined using a discount rate of 4.75% at December 31, 2023 and 5.00% at December 31, 2022.

Adopting a new mortality table that represents a change in life expectancy and choosing a different discount rate normally changes the amount of pension expense and the corresponding liability.  In the case of the Company, these items change its liability, but do not have an impact on its pension expense.  The PPUC, in a previous rate settlement, agreed to grant recovery of the Company’s contribution to the pension plans in customer rates.  As a result, under the accounting standards regarding rate-regulated activities, expense in excess of the Company’s pension plan contribution can be deferred as a regulatory asset and expensed as contributions are made to the plans and are recovered in customer rates.  Therefore, these changes affect regulatory assets rather than pension expense.

In 2023, the Company modified its investment policy statements.  The Company’s estimate of the expected return on plan assets is primarily based on the historic returns and projected future returns of the asset classes represented in its plans.  The target allocation of pension assets is 70% to 90% fixed income securities, 10% to 30% equity securities, and 0% to 10% cash reserves.  The Company used 5.00% as its expected rate of return in 2023, a decrease from the 6.50% used in 2022 based on the modified investment policy statements.  A decrease in the expected pension return would normally cause an increase in pension expense; however due to the aforementioned rate settlement, the Company’s expense would continue to be equal to its contributions to the plans.  The change would instead be recorded in regulatory assets.

Lower discount rates and underperformance of assets could cause future required contributions and expense to increase substantially.  If this were to happen, the Company would have to consider changes to its pension plan benefits and possibly request additional recovery of expenses through increased rates charged to customers.  See Note 11 to the Company’s financial statements included herein for additional details regarding the pension plans.

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 7 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 material lease obligations, no guarantees and does not have material transactions involving related parties.

There are currently no recent accounting pronouncements that are expected to have a material impact to the Company’s financial statements.

Not applicable.

On April 5, 2022, the Company closed an underwritten public offering of 975,600 shares of its common stock, with an offering price of $41 per share.  On April 7, 2022, the Company closed on the full exercise of the underwriter’s option to purchase an additional 146,340 shares of its common stock at the same price.  Janney Montgomery Scott LLC was the underwriter in the offering.  The Company received net proceeds in the offering, after deducting offering expenses and underwriters’ discounts and commissions, of $43,970.  The net proceeds were used to repay the Company’s borrowings under its line of credit agreement incurred to fund capital expenditures and acquisitions, and for general corporate purposes.

The Company utilizes a cash management account that is directly connected to its line of credit.  Excess cash generated automatically pays down outstanding borrowings under the line of credit.  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, funds are automatically borrowed under the line of credit.  The Company borrowed $30,273 and $29,740 under its line of credit and incurred a cash overdraft of $1,547 and $3,175, which was recorded in accounts payable, as of December 31, 2023 and 2022, respectively.