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

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number 001-34245

THE YORK WATER COMPANY
(Exact name of registrant as specified in its charter)

graphic


Pennsylvania23-1242500
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
130 East Market Street, York, Pennsylvania
17401
(Address of principal executive offices)(Zip Code)

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

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

Common Stock, No par valueYORWThe Nasdaq Global Select Market
(Title of Class)(Trading Symbol)(Name of Each Exchange on Which Registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
⌧ Yes
☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
⌧ Yes
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ⌧
   
Smaller reporting company ☒
Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes
⌧ No
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date.
Common stock, No par value
14,276,32114,295,673 Shares outstanding
as of November 3, 2022May 2, 2023


TABLE OF CONTENTS


PART IFinancial Information 
   
Item 1.
Financial Statements
3
Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
1716
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2724
Item 4.
Controls and Procedures
2724
   
PART IIOther Information 
   
Item 6.
Exhibits
2825
   
Signatures
2926

Page 2

THE YORK WATER COMPANY

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements.

Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)

 Sep. 30, 2022  Dec. 31, 2021  Mar. 31, 2023  Dec. 31, 2022 
ASSETS            
UTILITY PLANT, at original cost $526,229  $485,750  $562,512  $549,141 
Plant acquisition adjustments  (3,586)  (3,637)  (9,161)  (9,178)
Accumulated depreciation  (104,816)  (99,204)  (110,930)  (108,758)
Net utility plant  417,827   382,909   442,421   431,205 
                
OTHER PHYSICAL PROPERTY, net of accumulated depreciation
of $493 in 2022 and $483 in 2021
  733   717 
OTHER PHYSICAL PROPERTY, net of accumulated depreciation
of $470 in 2023 and $463 in 2022
  1,594   696 
                
CURRENT ASSETS:                
Cash and cash equivalents  1   1   166   1 
Accounts receivable, net of reserves of $834 in 2022
and $855 in 2021
  5,461   4,634 
Accounts receivable, net of reserves of $875 in 2023
and $855 in 2022
  5,419   6,701 
Unbilled revenues  3,084   2,784   3,473   3,290 
Recoverable income taxes  870   894   880   882 
Materials and supplies inventories, at cost  2,347   1,917   3,187   2,335 
Prepaid expenses  1,557   1,032   1,741   1,025 
Total current assets  13,320   11,262   14,866   14,234 
                
OTHER LONG-TERM ASSETS:                
Prepaid pension cost  17,182   14,054   17,890   17,090 
Note receivable  255   255   255   255 
Deferred regulatory assets  39,821   45,280   42,840   42,545 
Other assets  4,517   4,376   4,636   4,570 
Total other long-term assets  61,775   63,965   65,621   64,460 
                
Total Assets $493,655  $458,853  $524,502  $510,595 

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Balance Sheets (Unaudited)
(In thousands of dollars, except per share amounts)

 Sep. 30, 2022  Dec. 31, 2021  Mar. 31, 2023  Dec. 31, 2022 
STOCKHOLDERS' EQUITY AND LIABILITIES      
COMMON STOCKHOLDERS' EQUITY:      
Common stock, no par value, authorized 46,500,000 shares,
issued and outstanding 14,275,456 shares in 2022
and 13,112,948 shares in 2021
 $133,730  $88,230 
STOCKHOLDERS’ EQUITY AND LIABILITIES      
COMMON STOCKHOLDERS’ EQUITY:      
Common stock, no par value, authorized 46,500,000 shares,
issued and outstanding 14,294,898 shares in 2023
and 14,285,584 shares in 2022
 $134,679  $134,220 
Retained earnings  70,846   64,392   73,719   72,963 
Total common stockholders' equity  204,576   152,622 
Total common stockholders’ equity  208,398   207,183 
                
PREFERRED STOCK, authorized 500,000 shares, no shares issued
  –   –   –   – 
                
LONG-TERM DEBT, excluding current portion  116,788   138,869   149,598   139,465 
                
COMMITMENTS  –   –   –   – 
                
CURRENT LIABILITIES:                
Current portion of long-term debt  7,500   7,500 
Accounts payable  12,076   6,712   10,864   10,766 
Dividends payable  2,523   2,293   2,633   2,628 
Accrued compensation and benefits  1,585   1,575   1,444   1,541 
Accrued interest  1,084   959   1,137   965 
Deferred regulatory liabilities  588   607   600   593 
Other accrued expenses  400   440   718   488 
Total current liabilities  25,756   20,086   17,396   16,981 
                
DEFERRED CREDITS:                
Customers' advances for construction  15,331   12,820 
Customers’ advances for construction  15,006   14,911 
Deferred income taxes  46,317   49,590   49,172   47,901 
Deferred employee benefits  4,597   4,530   3,745   3,725 
Deferred regulatory liabilities  37,699   36,374   38,095   37,448 
Other deferred credits  717   2,086   791   680 
Total deferred credits  104,661   105,400   106,809   104,665 
                
Contributions in aid of construction  41,874   41,876   42,301   42,301 
                
Total Stockholders' Equity and Liabilities $493,655  $458,853 
Total Stockholders’ Equity and Liabilities $524,502  $510,595 

The accompanying notes are an integral part of these statements.

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Page 4
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
  
Three Months
Ended March 31
 
 2022  2021  2022  2021  2023  2022 
                  
OPERATING REVENUES $15,811  $14,503  $44,950  $41,385  $15,401  $14,240 
                        
OPERATING EXPENSES:                        
Operation and maintenance  3,746   2,997   10,112   8,752   4,112   3,451 
Administrative and general  2,328   2,292   7,564   7,144   2,666   2,657 
Depreciation and amortization  2,572   2,223   7,545   6,595   2,814   2,480 
Taxes other than income taxes  309   307   1,001   954   391   354 
  8,955   7,819   26,222   23,445   9,983   8,942 
                        
Operating income  6,856   6,684   18,728   17,940   5,418   5,298 
                        
OTHER INCOME (EXPENSES):                        
Interest on debt  (1,204)  (1,237)  (3,706)  (3,673)  (1,513)  (1,297)
Allowance for funds used during construction  382   310   902   883   749   295 
Other pension costs  (318)  (304)  (956)  (911)  (364)  (319)
Other income (expenses), net  (117)  (34)  (546)  (179)  (94)  (349)
  (1,257)  (1,265)  (4,306)  (3,880)  (1,222)  (1,670)
                        
Income before income taxes  5,599   5,419   14,422   14,060   4,196   3,628 
                        
Income taxes  (82)  625   (147)  1,077 
Income tax (benefit) expense
  543   (231)
                        
Net Income $5,681  $4,794  $14,569  $12,983  $3,653  $3,859 
                        
Basic Earnings Per Share $0.40  $0.36  $1.05  $0.99  $0.26  $0.29 
                        
Diluted Earnings Per Share $0.40  $0.36  $1.05  $0.99  $0.26  $0.29 

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Statements of Common Stockholders'Stockholders’ Equity (Unaudited)
(In thousands of dollars, except per share amounts)
For the Periods Ended September 30,March 31, 2023 and 2022 and 2021

 
Common
Stock
Shares
  
Common
Stock
Amount
  
Retained
Earnings
  Total 
             
Balance, June 30, 2022
  14,264,763  $133,239  $67,945  $201,184 
Net income  –   –   5,681   5,681 
Cash dividends declared, $0.1949 per share
  –   –   (2,780)  (2,780)
Issuance of common stock  –   –   –   – 
Issuance of common stock under
dividend reinvestment, direct stock and
employee stock purchase plans
  11,160   441   –   441 
Stock-based compensation  (467)  50   –   50 
Balance, September 30, 2022
  14,275,456  $133,730  $70,846  $204,576 
                 
Balance, December 31, 2021
  13,112,948  $88,230  $64,392  $152,622 
Net income  –   –   14,569   14,569 
Cash dividends declared, $0.5847 per share
  –   –   (8,115)  (8,115)
Issuance of common stock  1,121,940   43,970   –   43,970 
Issuance of common stock under
dividend reinvestment, direct stock and
employee stock purchase plans
  33,016   1,322   –   1,322 
Stock-based compensation  7,552   208   –   208 
Balance, September 30, 2022
  14,275,456  $133,730  $70,846  $204,576 
  
Common
Stock
Shares
  
Common
Stock
Amount
  
Retained
Earnings
  Total 
             
Balance, December 31, 2022
  14,285,584  $134,220  $72,963  $207,183 
Net income  –   –   3,653   3,653 
Cash dividends declared, $0.2027 per share
  –   –   (2,897)  (2,897)
Issuance of common stock under
dividend reinvestment, direct stock and
employee stock purchase plans
  9,314   405   –   405 
Stock-based compensation  –   54   –   54 
Balance, March 31, 2023
  14,294,898  $134,679  $73,719  $208,398 

 
Common
Stock
Shares
  
Common
Stock
Amount
  
Retained
Earnings
  Total  
Common
Stock
Shares
  
Common
Stock
Amount
  
Retained
Earnings
  Total 
                        
Balance, June 30, 2021
  13,090,055  $87,100  $60,606  $147,706 
Balance, December 31, 2021
  13,112,948  $88,230  $64,392  $152,622 
Net income  –   –   4,794   4,794   –   –   3,859   3,859 
Cash dividends declared, $0.1874 per share
  –   –   (2,454)  (2,454)
Cash dividends declared, $0.1949 per share
  –   –   (2,556)  (2,556)
Issuance of common stock under
dividend reinvestment, direct stock and
employee stock purchase plans
  12,869   568   –   568   10,671   450   –   450 
Stock-based compensation  –   46   –   46   –   45   –   45 
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 
Balance, March 31, 2022
  13,123,619  $88,725  $65,695  $154,420 

The accompanying notes are an integral part of these statements.

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THE YORK WATER COMPANY

Statements of Cash Flows (Unaudited)
(In thousands of dollars, except per share amounts)
 
Nine Months
Ended September 30
  
Three Months
Ended March 31
 
 2022  2021  2023  2022 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income $14,569  $12,983  $3,653  $3,859 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  7,545   6,595   2,814   2,480 
Stock-based compensation  208   167   54   45 
Increase (decrease) in deferred income taxes  (170)  53   543   (230)
Other  38   46   (182)  15 
Changes in assets and liabilities:                
(Increase) decrease in accounts receivable and unbilled revenues  (1,431)  745   994   (161)
Decrease in recoverable income taxes  24   700 
(Increase) decrease in materials and supplies, prepaid expenses, prepaid pension cost,
regulatory and other assets
  771   (6,911)
Increase (decrease) in accounts payable, accrued compensation and benefits, accrued
expenses, deferred employee benefits, regulatory liabilities, and other deferred credits
  (4,368)  3,989 
(Increase) decrease in recoverable income taxes  2   (1)
Increase in materials and supplies, prepaid expenses, prepaid pension cost,
regulatory and other assets
  (3,185)  (3,242)
Increase in accounts payable, accrued compensation and benefits, accrued
expenses, deferred employee benefits, regulatory liabilities, and other deferred credits
  1,359   2,456 
Increase in accrued interest  125   109   172   112 
Net cash provided by operating activities  17,311   18,476   6,224   5,333 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Utility plant additions, including debt portion of allowance for funds used during
construction of $504 in 2022 and $493 in 2021
  (34,050)  (27,434)
Acquisitions of water and wastewater systems
  (2,826)  – 
Utility plant additions, including debt portion of allowance for funds used during
construction of $418 in 2023 and $165 in 2022
  (10,581)  (7,504)
Net cash used in investing activities  (36,876)  (27,434)  (10,581)  (7,504)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Customers' advances for construction and contributions in aid of construction  3,281   1,955 
Customers’ advances for construction and contributions in aid of construction  134   676 
Repayments of customer advances  (772)  (772)  (39)  (337)
Proceeds of long-term debt issues  26,000   37,452   49,484   13,375 
Debt issuance costs  (171)  – 
Repayments of long-term debt  (48,213)  (28,960)  (39,224)  (8,289)
Changes in cash overdraft position  1,862   14   (3,175)  (1,153)
Issuance of common stock  45,292   1,612   405   450 
Dividends paid  (7,885)  (7,344)  (2,892)  (2,551)
Net cash provided by financing activities  19,565   3,957   4,522   2,171 
                
Net change in cash, cash equivalents, and restricted cash  –   (5,001)
Cash, cash equivalents, and restricted cash at beginning of period  1   5,002 
Net change in cash and cash equivalents  165   – 
Cash and cash equivalents at beginning of period  1   1 
Cash and cash equivalents at end of period $1  $1  $166  $1 
                
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest, net of amounts capitalized $2,976  $2,936  $969  $964 
Income taxes  –   217 
                
Supplemental disclosure of non-cash investing and financing activities:
Accounts payable includes $5,536 in 2022 and $3,562 in 2021 for the construction of utility plant.
      
Supplemental disclosure of non-cash investing and financing activities:
Accounts payable includes $7,764 in 2023 and $3,715 in 2022 for the construction of utility plant.
      

The accompanying notes are an integral part of these statements.
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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'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.

Operating results for the three and nine months ended September 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023.  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.  Acquisitions

On August 11, 2022, the Company completed the acquisition of the water assets and wastewater collection and treatment assets of Country View Manor Community, LLC in York County, Pennsylvania.  The Company began operating the existing water assets and wastewater collection and treatment assets on August 15, 2022.  The acquisition resulted in the addition of approximately 50 water and wastewater customers with purchase price and acquisition costs of approximately $39.  This acquisition is immaterial to Company results.

On August 25, 2022, the Company completed the acquisition of the water assets and wastewater collection and treatment assets jointly owned by Letterkenny Industrial Development Authority and Franklin County General Authority in Franklin County, Pennsylvania.  The Company began operating the existing water assets and wastewater collection and treatment assets on August 29, 2022.  The acquisition resulted in the addition of approximately 90 water and wastewater customers with purchase price and acquisition costs of approximately $2,787.  This acquisition is immaterial to Company results.




3.2.  Accounts Receivable and Contract Assets

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

 As of  As of    
 
As of
Sep. 30, 2022
  
As of
Dec. 31, 2021
  Change  Mar. 31, 2023  Dec. 31, 2022  Change 
                  
Accounts receivable – customers $5,873  $5,034  $839 $5,923  $7,069  $(1,146)
Other receivables  422   455   (33)  371   487   (116)
  6,295   5,489   806  6,294   7,556   (1,262)
Less: allowance for doubtful accounts  (834)  (855)  21  (875)  (855)  (20)
Accounts receivable, net $5,461  $4,634  $827 $5,419  $6,701  $(1,282)
                        
Unbilled revenue $3,084  $2,784  $300  $3,473  $3,290  $183 

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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 the normal timing difference between performance and the customer’s payments.


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4.3.  Common Stock and Earnings Per Share

Net income of $5,681$3,653 and $4,794$3,859 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $14,569 and $12,983 for the nine months ended September 30, 2022 and 2021, respectively, is used to calculate both basic and diluted earnings per share.  Basic earnings per share is based on the weighted average number of common shares outstanding.  Diluted earnings per share is based on the weighted average number of common shares outstanding plus potentially dilutive shares.  The dilutive effect of employee stock-based compensation is included in the computation of diluted earnings per share and is calculated using the treasury stock method and expected proceeds upon exercise or issuance of the stock-based compensation.

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

 
Three Months
Ended September 30
  
Nine Months
Ended September 30
 
  2022  2021  2022  2021 
             
Weighted average common shares, basic  14,254,570   13,083,762   13,853,816   13,069,582 
Effect of dilutive securities:                
Employee stock-based compensation  703   563   407   347 
Weighted average common shares, diluted  14,255,273   13,084,325   13,854,223   13,069,929 

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.
 
Three Months
Ended March 31
 
  2023  2022 
       
Weighted average common shares, basic  14,275,866   13,105,674 
Effect of dilutive securities:        
Employee stock-based compensation  3,837   2,756 
Weighted average common shares, diluted  14,279,703   13,108,430 

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'sCompany’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, 2022March 31, 2023 and 2021.2022.  As of September 30, 2022,March 31, 2023, 618,004 shares remain authorized for repurchase.



4.  Debt

 
As of
Mar. 31, 2023
  
As of
Dec. 31, 2022
 
       
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 
5.50% Senior Notes, due 2053  40,000   – 
Committed Line of Credit, due September 2024  –   29,740 
Total long-term debt  152,370   142,110 
Less discount on issuance of long-term debt  (155)  (158)
 Less unamortized debt issuance costs  (2,617)  (2,487)
Long-term portion $149,598  $139,465 

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5.  Debt

 
As of
Sep. 30, 2022
  
As of
Dec. 31, 2021
 
         
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 2024  7,107   29,320 
Total long-term debt  126,977   149,190 
Less discount on issuance of long-term debt  (161)  (169)
Less unamortized debt issuance costs  (2,528)  (2,652)
 Less current maturities  (7,500)  (7,500)
Long-term portion $116,788  $138,869 

In the third quarter of 2022,On February 24, 2023, the Company renewed its committedentered 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 and extendedborrowings incurred by the maturity date to September 2024.  As partCompany as interim financing for various capital projects of the renewal, the interest rate will change from LIBOR plus 1.05% to a successor rate of the Secured Overnight Financing Rate, or SOFR, plus 1.17% on January 1, 2023, in advance of the likely discontinuation of LIBOR in 2023.  No other terms or conditions of the line of credit agreement were modified.
Company.


6.
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'sCompany’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 variable interest rate will change to 59% of the daily simple Secured Overnight Financing Rate, or SOFR, plus a spread adjustment of 11.448 basis points commencing upon the discontinuance of LIBOR in 2023.  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'sCompany’s interest rate risk.  The Company’s net payment rate on the swap was 1.78%0.44% and 3.13%2.90% for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and 2.43% and 3.06% for the nine months ended September 30, 2022 and 2021, respectively.

The interest rate swap agreement is classified as a financial derivative used for non-trading activities.  The accounting standards regarding accounting for derivatives and hedging activities require companies to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet.  In accordance with the standards, the interest rate swap is recorded on the balance sheet in other deferred credits at fair value (see Note 7)6).

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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 $52$14 and $94$90 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $220 and $278 for the nine months ended September 30, 2022 and 2021, respectively. The overall swap result was a gain(gain) loss of $357$127 and $31$(494) for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $1,132 and $250 for the nine months ended September 30, 2022 and 2021, respectively.  The Company expects to reclassify $70$42 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.Poor’s.  If the Company'sCompany’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 August 9, 2022, Standard & Poor'sPoor’s affirmed the Company'sCompany’s credit rating at A-, with a stable outlook and adequate liquidity.  The Company'sCompany’s interest rate swap was in a liability position as of September 30, 2022.March 31, 2023.  If a violation due to credit rating, or some other default provision, were triggered on September 30, 2022,March 31, 2023, the Company would have been required to pay the counterparty approximately $701.$827.

The interest rate swap will expire on October 1, 2029.2029.  Other than the interest rate swap, the Company has no other derivative instruments.


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7.6.  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.

Description September 30, 2022 
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
 March 31, 2023 
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
Interest Rate Swap $717 $717 $791 $791

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'sCompany’s credit quality as of September 30, 2022.March 31, 2023.  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, 2022.March 31, 2023.  The use of the Company’s credit rating resulted in a reduction in the fair value of the swap liability of $36 as of March 31, 2023.  The fair value of the swap reflecting the Company'sCompany’s credit quality as of December 31, 20212022 is shown in the table below.

Description December 31, 2021 
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
 December 31, 2022 
Fair Value Measurements
at Reporting Date Using
Significant Other Observable Inputs (Level 2)
Interest Rate Swap $2,086 $2,086 $680 $680

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The carrying amount of current assets and liabilities that are considered financial instruments approximates fair value as of the dates presented.  The Company'sCompany’s total long-term debt, with a carrying value of $126,977$152,370 at September 30, 2022,March 31, 2023, and $149,190$142,110 at December 31, 2021,2022, had an estimated fair value of approximately $105,000$142,000 and $168,000,$126,000, 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'Customers’ advances for construction and note receivable had carrying values at September 30, 2022March 31, 2023 of $15,331$15,006 and $255, respectively.  At December 31, 2021, customers'2022, customers’ advances for construction and note receivable had carrying values of $12,820$14,911 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.


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8.7.  Commitments

The Company has committed to capital expenditures of approximately $39,205 to armor and replace the spillway of the Lake Williams dam, of which $29,626$22,212 remains to be incurred as of September 30, 2022.March 31, 2023.  The Company may make additional commitments for this project in the future.

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection, or DEP, 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 and 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.  In June 2022, DEP determined the Company had completed all requirements and terminated the consent order agreement.

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 $1,501$1,559 and $1,351$1,518 through September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,700.$1,800.  This estimate is subject to adjustment as more facts become available.


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9.
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
  
Three Months
Ended March 31
 
 2022  2021  2022  2021  2023  2022 
Water utility service:                  
Residential $9,282  $8,872  $26,548  $25,560  $8,888  $8,447 
Commercial and industrial  4,208   3,952   11,692   10,891   4,004   3,588 
Fire protection  856   827   2,528   2,428   932   836 
Wastewater utility service:                        
Residential  976   481   2,830   1,426   1,084   929 
Commercial and industrial  209   79   434   237   221   109 
Billing and revenue collection services  149   121   363   360   126   130 
Collection services  3   18   151   29   7   59 
Other revenue  6   18   25   38   11   14 
Total Revenue from Contracts with Customers  15,689   14,368   44,571   40,969   15,273   14,112 
Rents from regulated property  122   135   379   416   128   128 
Total Operating Revenue $15,811  $14,503  $44,950  $41,385  $15,401  $14,240 

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.

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Billing and Revenue Collection Service
The Company provides billing and revenue collection service as distinct performance obligations to two municipalities within the service territory of the Company.  The municipalities provide 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.

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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.



10.9.  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.  The most recent rate request was filed by the Company on May 27, 2022 and seekssought an annual increase in water rates of $18,854 which would represent a 33.8% increase, and an annual increase in wastewater rates of $1,457, which would represent a 35% increase.  The request is currently under review by$1,457.  Effective March 1, 2023, the PPUC and other interested parties.  Any rate increase approved by the PPUC will be effective no later than March 1, 2023.  There can be no assurance that the PPUC will grant the Company's rateauthorized an increase in the amount requested, if at all.water rates designed to produce approximately $11,600 in additional annual revenues and an increase in wastewater rates designed to produce approximately $1,900 in additional annual revenues.

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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'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'sutility’s earnings exceed a regulatory benchmark.  The Company's earnings are currently belowDSIC reset to zero when the regulatory benchmark allowing the Company to collect DSIC.new base rates took effect March 1, 2023.  The DSIC provided revenues of $661$271 and $255$404 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $1,623 and $280 for the nine months ended September 30, 2022 and 2021, respectively.


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11.10.  Pensions

Components of Net Periodic Pension Cost

 
Three Months
Ended September 30
  
Nine Months
Ended September 30
  
Three Months
Ended March 31
 
 2022  2021  2022  2021  2023  2022 
                  
Service cost $257  $271  $769  $814  $149  $256 
Interest cost  334   302   1,002   906   469   334 
Expected return on plan assets  (1,054)  (913)  (3,163)  (2,739)  (903)  (1,055)
Amortization of actuarial loss  –   121   –   363 
Amortization of prior service cost  (4)  (3)  (10)  (9)  (3)  (3)
Rate-regulated adjustment  1,042   797   3,127   2,390   801   1,043 
Net periodic pension expense $575  $575  $1,725  $1,725  $513  $575 

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, 20212022 that it expected to contribute $2,3001,680 to its pension plans in 2022.2023.  For the ninethree months ended September 30, 2022,March 31, 2023, contributions of $1,725$513 have been made.  The Company expects to contribute the remaining $575$1,167 during the final quarterthree quarters of 2022.2023.



12.11.  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 May 2, 2022, the Board awarded stock to non-employee directors effective May 2, 2022.  This stock award vested immediately.  On May 2, 2022, the Compensation Committee awarded restricted stock to officers and key employees effective May 2, 2022.  This stock award vests ratably over three years beginning May 2, 2022.

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.

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The following tables summarizeNo long-term stock-based awards were granted under the stock grant amounts and activity forLTIP during the ninethree months ended September 30, 2022.

 Number of Shares  
Grant Date Weighted
Average Fair Value
      
Nonvested at beginning of the period 8,804  $46.91
Granted 8,052  $38.87
Vested (5,591) $42.60
Forfeited (500) $44.61
Nonvested at end of the period 10,765  $43.24

March 31, 2023. No previously issued restricted stock awards vested or were forfeited during the three months ended March 31, 2023. For the three months ended September 30,March 31, 2023 and 2022, and 2021, the statement of income includes $50$54 and $46$45 of stock-based compensation, respectively, and related recognized tax benefits of $14$15 and $13, respectively.  For the nine months ended September 30, 2022 and 2021, the statement of income includes $208 and $167 of stock-based compensation, respectively, and related recognized tax benefits of $60 and $48, respectively. The total fair value of the shares vested in the nine months ended September 30, 2022 was $238. Total stock-basedstock based compensation related to nonvested awards not yet recognized is $465 at March 31, 2023 which will be recognized over the remaining three yearthree-year vesting period.



13.12.  Income Taxes


Under the Internal Revenue Service tangible property regulations, or 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’s effective tax rate was (1.5)%12.9% and 11.5%(6.4)% for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and (1.0)% and 7.7% for the nine months ended September 30, 2022 and 2021, respectively.  The lowerhigher effective tax rate is primarily due to higherlower 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.

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 as of September 30, 2022.  The effect, net of the federal benefit, of $18 was recognized in income for the three and nine months ended September 30, 2022.  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 September 30, 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.

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Item 2.
Management'sManagement’s Discussion and Analysis of
Financial Condition and Results of Operations.
(In thousands of dollars, except per share amounts)
 
Forward-looking Statements

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

•the amount and timing of rate changes and other regulatory matters including the recovery of costs recorded as regulatory assets;
•expected profitability and results of operations;
•trends;
•goals, priorities and plans for, and cost of, growth and expansion;
•strategic initiatives;
•availability of water supply;
•water usage by customers; and
•the ability to pay dividends on common stock and the rate of those dividends.

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

•changes in weather, including drought conditions or extended periods of heavy rainfall;precipitation;
•natural disasters, including pandemics such as the current outbreak of the novel strain of coronavirus known as “COVID-19” and its variants and the effectiveness of the Company’s pandemic plans;
•levels of rate relief granted;
•the level of commercial and industrial business activity within the Company'sCompany’s service territory;
•construction of new housing within the Company'sCompany’s service territory and increases in population;
•changes in government policies or regulations, including the tax code;
•the ability to obtain permits for expansion projects;
•material changes in demand from customers, including the impact of conservation efforts which may reduceimpact the demand of customers for water;
•changes in economic and business conditions, including interest rates;
•loss of customers;
•changes in, or unanticipated, capital requirements;
•the impact of acquisitions;
•changes in accounting pronouncements;
•changes in the Company’s credit rating or the market price of its common stock; and
•the ability to obtain financing.


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General Information

The primary business of the Company is to impound, purify to meet or exceed safe drinking water standards and distribute water.  The Company also owns and operates three wastewater collection systems and seveneight wastewater collection and treatment systems.  The Company operates within its franchised water and wastewater territory, which covers portions of 54 municipalities within three 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'sCompany’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 ConodoquinetConodoguinet 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 11eleven wells which are capable of providing a safe yield of approximately 637,000 gallons per day to supply water to the customers of its groundwater satellite systems in York and Adams Counties.  As of September 30, 2022,March 31, 2023, the Company'sCompany’s average daily availability was 37.540.8 million gallons, and average daily consumption was approximately 21.1 million gallons.  The Company'sCompany’s service territory had an estimated population of 204,000208,000 as of December 31, 2021.2022.  Industry within the Company'sCompany’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'sCompany’s water business is somewhat dependent on weather conditions, particularly the amount and timing of rainfall.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.


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Impact of COVID-19

On March 11, 2020, the World Health Organization characterized an outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic.  The Company has taken steps, consistent with directions from federal, state, and local authorities, to mitigate known risks with the health and safety of its employees and customers as its first priority.

The Company is an essential, life-sustaining business and has continued normal operations.  Although most restrictions have been lifted, the Company continues to monitor guidance from federal, state, and local authorities.  Any new restrictions are not expected to materially impede the Company’s ability to complete its planned capital expenditures or acquisitions.  The Company has not experienced any material supply chain disruptions.  The Company has been informed of longer lead times for some items, although this does not impact daily operating supplies.  The Company maintains an adequate inventory of critical repair parts which are available as needed.  The Company continues to maintain relationships with its vendors to identify issues in a timely manner while also seeking out additional vendor relationships to diversify its supply chain.  The Company has addressed the longer lead times by placing orders proactively with its vendors to align with current lead times.  If the delays increase materially or if certain materials and supplies become unavailable, the Company may re-prioritize some of its capital projects or experience higher operating expenses or capital costs.  The Company believes it has sufficient liquidity and access to the capital markets if needed.

To date, there has been no material impact on the Company’s workforce, operations, financial performance, liquidity, or supply chain as a result of COVID-19.  However, the ultimate duration and severity of the pandemic or its effects on the economy, the capital and credit markets, or the Company’s workforce, customers, and suppliers, as well as governmental and regulatory responses, are uncertain.


Results of Operations

Three Months Ended September 30, 2022March 31, 2023 Compared
With Three Months Ended September 30, 2021March 31, 2022

Net income for the thirdfirst quarter of 20222023 was $5,681, an increase$3,653, a decrease of $887,$206, or 18.5%5.3%, from net income of $4,794$3,859 for the same period of 2021.2022.  The primary contributing factors to the increasedecrease were higher operating revenuesincome taxes and lower income taxesexpenses which were partially offset by higher expenses.operating revenues.

Operating revenues for the thirdfirst quarter of 20222023 increased $1,308,$1,161, or 9.0%8.2%, from $14,503$14,240 for the three months ended September 30, 2021March 31, 2022 to $15,811$15,401 for the corresponding 20222023 period.  The primary reason for the increase was primarily due to growtha rate increase effective March 1, 2023.  Growth in the customer base andalso added to revenues.  The average number of water customers served in 2023 increased as compared to 2022 by 1,156 customers, from 69,995 to 71,151 customers.  The average number of wastewater customers served in 2023 increased as compared to 2022 by 429 customers, from 5,466 to 5,895 customers, primarily due to acquisitions.  The increased revenues were partially offset by a $133 decrease from thea lower distribution system improvement charge, or DSIC, allowed by the PPUC of $661.PPUC.  The average number of wastewater customers served in 2022 increased as comparedDSIC reset to 2021 by 2,308 customers, from 3,333 to 5,641 customers, primarily due to acquisitions.  The average number of water customers served in 2022 increased as compared to 2021 by 805 customers, from 69,756 to 70,561 customers.zero on March 1, 2023 when the rate order took effect.  Total per capita consumption for 20222023 was approximately 2.1% higher thanconsistent with the same period of last year.

Operating expenses for the third quarter of 2022 increased $1,136, or 14.5%, from $7,819 for the third quarter of 2021 to $8,955 for the corresponding 2022 period.  The increase was primarily due to higher expenses of approximately $372 for wastewater treatment, $349 for depreciation, $172 for water treatment, $131 for billing and revenue collection services, $84 for distribution system maintenance, and $58 for wages.  Other expenses increased by a net of $56.  The increased expenses were partially offset by reduced expenses of $86 for outside services.

Interest on debt for the third quarter of 2022 decreased $33, or 2.7%, from $1,237 for the third quarter of 2021 to $1,204 for the corresponding 2022 period.  The decrease was primarily due a decrease in long-term debt outstanding.  Upon the completion of the underwritten common stock offering in April 2022, the Company repaid its line of credit.  The average debt outstanding under the line of credit was $2,587 for the third quarter of 2022 and $12,911 for the third quarter of 2021.  The weighted average interest rate on the line of credit was 2.29% for the quarter ended September 30, 2022 and 1.30% for the quarter ended September 30, 2021.

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Allowance for funds used during construction increased $72, from $310 in the third quarter of 2021 to $382 in the corresponding 2022 period due to a higher volume of eligible construction.

Other income (expenses), net for the third quarter of 2022 reflects increased expenses of $83 as compared to the same period of 2021.  Lower earnings on life insurance policies of approximately $57 were the primary reason for the decrease.  Other expenses increased by a net of $26.

Income taxes for the third quarter of 2022 decreased $707, or 113.1%, compared to the same period of 2021 primarily due to higher deductions from the Internal Revenue Service, or IRS, tangible property regulations, or TPR.  The Company’s effective tax rate was (1.5)% for the third quarter of 2022 and 11.5% for the third quarter of 2021.

Nine Months Ended September 30, 2022 Compared
With Nine Months Ended September 30, 2021

Net income for the first nine months of 2022 was $14,569, an increase of $1,586, or 12.2%, from net income of $12,983 for the same period of 2021.  The primary contributing factors to the increase were higher operating revenues and lower income taxes which were partially offset by higher expenses.

Operating revenues for the first nine months of 2022 increased $3,565, or 8.6%, from $41,385 for the nine months ended September 30, 2021 to $44,950 for the corresponding 2022 period.  The increase was primarily due to growth in the customer base and revenues from the DSIC of $1,623.  The average number of wastewater customers served in 2022 increased as compared to 2021 by 2,231 customers, from 3,316 to 5,547 customers, primarily due to the West Manheim Township acquisition.  The average number of water customers served in 2022 increased as compared to 2021 by 723 customers, from 69,565 to 70,288 customers.  Total per capita consumption for 2022 was approximately 1.1% higher than the same period of last year.  For the remainder of the year, the Company expects revenues to increase due to the increase in rates, higher summer demand and an increase in the number of water and wastewater customers from acquisitions and growth within the Company’s service territory and the DSIC.  The duration and severity of the COVID-19 pandemic including any resulting economic slowdown or changes in consumption patterns could impact results.territory.  Other regulatory actions, and weather patterns, and economic conditions could also impact results.

Operating expenses for the first nine monthsquarter of 20222023 increased $2,777,$1,041, or 11.8%11.6%, from $23,445$8,942 for the first nine monthsquarter of 20212022 to $26,222$9,983 for the corresponding 20222023 period.  The increase was primarily due to higher expenses of approximately $950$334 for depreciation, $452$249 for wages, $209 for water treatment, $88 for insurance, $73 for wastewater treatment, $335 for water treatment, $240 for distribution system maintenance, $239 for wages, $178and $55 for billing and revenue collection services, and $169 for outside services.  Other expenses increased by a net of $214.  $33.  For the remainder of the year, the Company expects depreciation expense to continue to rise due to additional investment in utility plant, and other expenses to increase at a moderate rate as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.

Interest on debt for the first nine monthsquarter of 20222023 increased $33,$216, or 0.9%16.7%, from $3,673$1,297 for the first nine monthsquarter of 20212022 to $3,706$1,513 for the corresponding 20222023 period.  The increase was primarily due to an increase in long-term debt outstanding.outstanding upon completion of a debt offering in February 2023 at a higher amount than the line of credit balance it was used to repay.  The average debt outstanding under the linesline of credit was $12,102$20,412 for the first nine monthsquarter of 20222023 and $9,405$32,524 for the first nine monthsquarter of 2021.2022.  The weighted average interest rate on the linesline of credit was 1.22%2.96% for the nine monthsquarter ended September 30, 2022March 31, 2023 and 1.30% for the nine monthsquarter ended September 30, 2021.March 31, 2022.  Interest expense for the remainder of the year is expected to increase due to continued borrowings under the line of credit and higher interest rates.increase in long-term debt outstanding.

Allowance for funds used during construction increased $19,$454, from $883$295 in the first nine monthsquarter of 20212022 to $902$749 in the corresponding 20222023 period due to a higher volume of eligible construction.  Allowance for funds used during construction for the remainder of the year is expected to increase based on a projected increase in the amount of eligible construction.

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Other income (expenses), net for the first nine monthsquarter of 20222023 reflects increaseddecreased expenses of $367$255 as compared to the same period of 2021.  Higher2022.  Lower charitable contributions of approximately $259,$307, partially offset by lower earnings on life insurance policies of $87, and higher retirement expenses of $20approximately $52 were the primary reasons for the increase.  Other expenses increased by a net of $1.  decrease.For the remainder of the year, other income (expenses) will be largely determined by the change in market returns and discount rates for retirement programs and related assets.

Income taxes for the first nine monthsquarter of 2022 decreased $1,224, or (113.6)%,2023 increased $774 as compared to the same period of 20212022 primarily due to higherlower deductions from the IRSInternal Revenue Service tangible property regulations, or TPR.  The Company’s effective tax rate was (1.0)12.9% for the first quarter of 2023 and (6.4)% for the first nine monthsquarter of 2022 and 7.7% for the first nine months of 2021.2022.  The Company'sCompany’s effective tax rate for the remainder of 20222023 will largely be largely determined by the level of eligible asset improvements expensed for tax purposes under TPR each period.  The Company expects the level to be higher in the remainder of the year than the first quarter, lowering the effective tax rate.

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Rate Matters

See Note 109 to the financial statements included herein for a discussion of rate matters.

Effective October 1, 2022, the Company's tariff includedThe Company does not expect to collect a DSIC on revenues of 4.91%.distribution system improvement charge or file a rate increase request in 2023.


Acquisitions and Growth

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 2023 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 2023 at which time the Company will add approximately 280 wastewater customers.

On June 9, 2022, the Company signed an agreement to purchase the wastewater collection and treatment assets of MESCO, Inc. in Monaghan Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the first half of 2023 at which time the Company will add approximately 180 wastewater customers.

On April 28, 2022, the Company signed an agreement to purchase the water assets and wastewater collection and treatment assets of Conewago Industrial Park Water & Sewer Company in Donegal Township, Lancaster County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the first half of 2023 at which time the Company will add approximately 30 commercial and industrial water and wastewater customers.

On July 30, 2021, the Company signed an agreement to purchase the water assets of Scott Water Company in Greene Township, Franklin County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2022 at which time the Company will add approximately 25 water customers.

On October 8, 2013, the Company signed an agreement to purchase the wastewater collection and treatment assets of SYC WWTP, L.P. in Shrewsbury and Springfield Townships, York County, Pennsylvania.  On July 1, 2020, the Company signed an agreement to purchase the Albright Trailer Park water assets and wastewater collection assets of R.T. Barclay, Inc. in Springfield Township, York County, Pennsylvania.  Completion of the acquisitions is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in 2022, at which time the Company will add approximately 90 combined wastewater customers and approximately 60 water customers through an interconnection with its current water distribution system.  The wastewater customers of the Albright Trailer Park are currently served by SYC WWTP, L.P. and the water customers are currently served by the Company, each through a single customer connection to the park.

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.

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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 2023 at which time the Company will begin construction of a water main extension to a single point of interconnection and either supply a minimum agreed upon amount of water to the authority, receive a payment in lieu of water, or provide water during an emergency, at current tariff rates.


Capital Expenditures

For the ninethree months ended September 30, 2022,March 31, 2023, the Company invested $34,050$10,581 in construction expenditures for routine items, armoring and replacing the spillway of the Lake Williams dam, and wastewater treatment plant construction as well as various replacements and improvements to infrastructure.infrastructure and routine items.  The Company was able to fund construction expenditures using internally-generated funds, line of credit borrowings, cash generated from the underwritten common stock offering, proceeds from its stock purchase plans and customer advances and contributions from developers, municipalities, customers, or builders.


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The Company anticipates construction expenditures for the remainder of 20222023 of approximately $11,000$45,700 exclusive of any potential acquisitions not yet approved.  In addition to routine transmission and distribution projects, a portion of the anticipated expenditures will be for armoring and replacing the spillway of the Lake Williams dam, additional main extensions, andwastewater treatment plant construction, as well as various replacements and improvements to infrastructure.infrastructure and routine items.  The Company intends to use primarily internally-generated funds for its anticipated construction and fund the remainder through line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions.  Customer advances and contributions are expected to account for between 5% and 10% of funding requirements during the remainder of 2022.2023.  The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2023, to fund anticipated capitalconstruction and acquisition expenditures in 2022 and 2023.expenditures.


Liquidity and Capital Resources

Cash
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 September 30, 2022,March 31, 2023, the Company borrowed $7,107had no borrowings on its line of credit and incurredhad a cash overdraft onbalance of $166.  Upon completion of the debt offering in February 2023, the Company repaid its line of credit and generated a cash management accountbalance with the remaining portion of $3,608.the proceeds.  The Company expects the cash andbalance to be fully utilized in 2023, after which the cash management facility connected to the line of credit areis expected to provide the necessary liquidity and funding for the Company'sCompany’s operations, capital expenditures, and acquisitions for the foreseeable future.

Accounts Receivable
The accounts receivable balance tends to follow the change in revenues but is also affected by the timeliness of payments by customers and the level of the reserve for doubtful accounts.  In the three months ended September 30, 2022, higher revenue levels asMarch 31, 2023, a strengthening in the timeliness of payments, compared to the end of 2021three months ended December 31, 2022, resulted in an increasea decrease in accounts receivable – customers.  A reserve is maintained at a level considered adequate to provide for expected credit losses.  Expected credit losses that can be reasonably anticipatedare based on historical write-offs combined with an evaluation of current conditions and reasonable and supportable forecasts including inactive accounts with outstanding balances.  Management periodically evaluatesbalances, the adequacyaging of the reserve based on past experience, agings of the receivables,balances in payment agreements, adverse situations that may affect a customer’s ability to pay, current economic conditions, and other relevant factors.  During 2022, management’s assessment included consideration offactors applied to the COVID-19 pandemic along with past trends during times of economic instability and regulations from the PPUC regarding customer collections, including thecurrent aging of balances in payment agreements, and determined its allowance for doubtfulreceivables.  Customer accounts should remain elevated compared to historical norms.are written off when collection efforts have been exhausted.  If the status of thesethe evaluated factors deteriorates,deteriorate, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its internally-generated funds.

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Internally-generated Funds
The amount of internally-generated funds available for operations and construction depends on the Company’s ability to obtain timely and adequate rate relief, changes in regulations including taxes, customers’ water usage, weather conditions, customer growth and controlled expenses.  During the first ninethree months of 2022,2023, the Company generated $17,311$6,224 internally from operations as compared to the $18,476$5,333 it generated during the first ninethree months of 2021.2022.  The decreaseincrease was primarily due to the increasedecrease in accounts receivable – customers.customers due to a strengthening in the timeliness of payments.

Common Stock
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.

Common stockholders’ equity as a percent of the total capitalization was 61.7%57.8% as of September 30, 2022,March 31, 2023, compared with 50.6%59.3% as of December 31, 2021.  Based on the equity percentage falling to fifty percent, the Company completed the underwritten common stock offering, increasing equity as a percentage of total capitalization.2022.  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-fourfifty-five percent of total capitalization.

The Company has the ability to issue approximately $4,000 of additional shares of its common stock or debt securities remaining under an effective “shelf” Registration Statement on Form S-3 on file with the Securities and Exchange Commission subject to market conditions at the time of any such offering.


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Credit Line
Historically, the Company has borrowed under its line of credit before refinancing with long-term debt or equity capital.  As of September 30, 2022,March 31, 2023, the Company maintained an unsecured line of credit in the amount of $50,000 at an interest rate of LIBORthe Secured Overnight Financing Rate, or SOFR, plus 1.05%1.17% with an unused commitment fee and an interest rate floor.  The Company had $7,107 inno outstanding borrowings under its line of credit as of September 30, 2022.March 31, 2023.  Upon completion of the debt offering in February 2023, the Company repaid its line of credit.  The interest rate onCompany expects to extend the maturity for this line of credit borrowings as of September 30, 2022 was 3.61%.  In the third quarter of 2022, the Company renewed its committed line of creditinto 2025 under similar terms and extended the maturity date to September 2024.  As part of the renewal, the interest rate will change from LIBOR plus 1.05% to a successor rate of the Secured Overnight Financing Rate, or SOFR, plus 1.17% on January 1, 2023, in advance of the likely discontinuation of LIBOR in 2023.  No other terms or conditions of the line of credit agreement were modified.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 anticipated financing needs throughout 2022 and 2023.

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Long-term Debt
The Company’s loan agreements contain various covenants and restrictions.  Management believes it is currently in compliance with all of these restrictions.  See Note 6 to the financial statements included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 20212022 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 38.3%42.2% as of September 30, 2022,March 31, 2023, compared with 49.4%40.7% as of December 31, 2021.  Based on the debt percentage reaching fifty percent, the Company completed an underwritten common stock offering in April 2022 and repaid its line of credit, decreasing long-term debt as a percentage of total capitalization.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-sixforty-five and fifty percent has historically been acceptable to the PPUC in rate filings.

The variable rate line of credit and the interest rate swap of the Company use the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the rates.  The United Kingdom’s Financial Conduct Authority (UK FCA), which regulates LIBOR, has previously announced that it intends to stop encouraging or compelling banks to submit rates for the calculation of LIBOR rates after 2021.  On January 4, 2022, the UK FCA announced that certain dollar denominated LIBOR settings, including the 1-month setting used by the Company’s variable line of credit and interest rate swap, would be calculated through June 30, 2023.  This indicates that the continuation of LIBOR on the current basis is not guaranteed after that date and based on the foregoing, it appears likely that LIBOR will be discontinued or modified.  As part of the renewal of its line of credit in the third quarter of 2022, the agreement has been amended to change the reference rate from LIBOR to SOFR on January 1, 2023.  The margin was established at the historical spread between LIBOR and SOFR to minimize the impact on the Company’s financial position, results of operations and cash flows upon this change.  The Company believes that it is implicit in its other agreements that a successor rate to LIBOR may be used.  The Company is not yet aware what successor rate will be used in those agreements and therefore cannot estimate the impact to the Company’s financial position, results of operations and cash flows, but it could include an increase in the cost of the variable rate indebtedness.

Income Taxes, Deferred Income Taxes and Uncertain Tax Positions
Under the Internal Revenue Service 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 the level of eligible asset improvements expensed for tax purposes that would have been capitalized for tax purposes prior to the implementation of 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 as of September 30, 2022.  The effect, net of the federal benefit, of $18 was recognized in income for the three and nine months ended September 30, 2022.  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 September 30, 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.


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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 September 30, 2022.March 31, 2023.

Credit Rating
On August 9, 2022, Standard & Poor’s affirmed the Company’s credit rating at A-, with a stable outlook and adequate liquidity.  The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, which it has been successful in obtaining, its ability to fund capital expenditures in a balanced manner using both debt and equity and its ability to generate cash flow.  The Company’s objectives are to continue to maximize its funds provided by operations and maintain a strong capital structure in order to be able to attract capital.


Physical and Cyber Security

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

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

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

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


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Environmental Matters

The Company entered into a consent order agreement with the Pennsylvania Department of Environmental Protection, or DEP, 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 and 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.  In June 2022, DEP determined the Company had completed all requirements and terminated the consent order agreement.

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 $1,501$1,559 and $1,351$1,518 through March 31,September 30, 2022 2023 and December 31, 2021,2022, respectively, and is included as a regulatory asset.  Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $1,700.$1,800.  This estimate is subject to adjustment as more facts become available.


Labor Relations

The current union contract expired on April 30, 2023.  Management and the union leadership have agreed to honor the expired contract and continue to work under its terms.  Both sides are negotiating in good faith and the Company expects to reach an operationally and fiscally responsible agreement with no interruption of service.


Critical Accounting Estimates

The methods, estimates, and judgments the Company used in applying its accounting policies have a significant impact on the results reported in its financial statements.  The Company’s accounting policies require management to make subjective judgments because of the need to make estimates of matters that are inherently uncertain.  The Company’s most critical accounting estimates include regulatory assets and liabilities, revenue recognition, accounting for its pension plans, and income taxes.  There has been no significant change in accounting estimates or the method of estimation during the quarter ended September 30, 2022.March 31, 2023.


Off-Balance Sheet Arrangements

The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.  The Company does not use securitization of receivables or unconsolidated entities. For risk management purposes, the Company uses a derivative financial instrument, an interest rate swap agreement discussed in Note 65 to the financial statements included herein.  The Company does not engage in trading or other risk management activities, does not use other derivative financial instruments for any purpose, has no guarantees and does not have material transactions involving related parties.


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Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.


Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

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


Page 2724

PART II - OTHER INFORMATION


Item 6.Exhibits.

Exhibit No. Description
   
3
 
Amended and Restated Articles of Incorporation.  Incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 4, 2010.
   
3.1
 
Amended and Restated By-Laws.  Incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012.
   
31.1
 
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
  
31.2
 
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
   
32.1
 
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
 
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
   
101.SCH Inline XBRL Taxonomy Extension Schema.
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase.
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase.
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase.
   
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).


Page 2825
SIGNATURES


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


THE YORK WATER COMPANY
  
  
 /s/ Joseph T. Hand
Date: November 3, 2022May 2, 2023
Joseph T. Hand
Principal Executive Officer
  
  
  
 /s/ Matthew E. Poff
Date: November 3, 2022May 2, 2023
Matthew E. Poff
Principal Financial and Accounting Officer


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