# YORK WATER CO (YORW) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from YORK WATER CO's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/108985/000010898525000015/form10k.htm
Accession: 0000108985-25-000015
Filing date: 2025-03-04
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/YORW/
All MD&A years: /company/YORW/mda/
Previous year: /company/YORW/mda/fy2023/ (FY 2023)
Next year: /company/YORW/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Overview

The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States, operated continuously since 1816. The Company
also owns and operates three wastewater collection systems and eleven wastewater collection and treatment systems.  The Company is a purely regulated water and wastewater utility.  Profitability is largely dependent on water revenues.  Due to the
size of the Company and the limited geographic diversity of its service territory, weather conditions, particularly precipitation, economic, and market conditions can have an adverse effect on revenues.  The Company experienced increased revenues
in 2024 compared to 2023 primarily due to the residual effects of a rate increase effective March 1, 2023, an increase in the number of customers, and higher revenues from the distribution system improvement charge, or DSIC.

The Company’s business does not require large amounts of working capital and is not dependent on any single customer or a very few customers for a
material portion of its business.  In 2024, operating revenue was derived from the following sources and in the following percentages: residential, 64%; commercial and industrial, 29%; and other, 7%, which is primarily from the provision for fire
service, but includes other water and wastewater service-related income.  The diverse customer mix helps to reduce volatility in consumption.

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

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

In addition to increasing revenue, the Company consistently focuses on minimizing costs without sacrificing water quality or customer service.  Paperless
billing, expanding online services, negotiation of favorable electric, banking, and other costs, and reduced pension contributions are examples of the Company’s recent efforts to minimize costs.

Performance Measures

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

The Company’s performance in 2024 was strong under the above measures.  Operating revenues increased in 2024 compared to 2023 primarily due to the
residual effects of a rate increase effective March 1, 2023, an increase in the number of customers, and higher revenues from the DSIC.  The increase in operating expenses offset the increase in operating revenues.  The Company incurred higher
interest expense and lower allowance for funds used during construction.  The Company did benefit from a lower contribution to the pension plans.  The overall effect was a decrease in net income in 2024 over 2023 of 14.4% and a return on year end
common equity of 8.8%.  The return on year end common equity was lower than the 2023 result and the five year historical average return on year end common equity of 10.7%.  The Company expects to file a rate increase request in 2025 which may increase its opportunity to earn a higher return on year end common equity in the future.

The efficiency ratio, which is calculated as net income divided by revenues, is used by management to evaluate its ability to control expenses.  Over the
five previous years, the Company’s ratio averaged 31.1%.  In 2024, the ratio was lower than the average at 27.1% due primarily to the increase in operating expenses, higher interest expense, and lower allowance for funds used during construction. 
Management is confident that its ratio will compare favorably to that of its peers.  Management continues to look for ways to decrease expenses and increase efficiency as well as to file for rate increases promptly when needed.

2024 Compared with 2023

Net income for 2024 was $20,325, a decrease of $3,432, or 14.4%, from net income of $23,757 for the same period of 2023.  The primary contributing
factors to the decrease were higher operating expenses, a lower allowance for funds used during construction, and higher interest on debt, which were partially offset by higher operating revenues and lower pension costs.

Operating revenues for 2024 increased $3,928, or 5.5%, from $71,031 for 2023 to $74,959 for 2024.  The primary reason for the increase was a rate increase
effective March 1, 2023.  Growth in the customer base also added to revenues.  The average number of water customers served in 2024 increased as compared to 2023 by 999 customers, from 71,416 to 72,415 customers.  The average number of wastewater
customers served in 2024 increased as compared to 2023 by 522 customers, from 5,999 to 6,521 customers, primarily due to acquisitions.  There was increased revenues from the DSIC allowed by the PPUC of $137.  The DSIC allows the Company to add a
charge to customers’ water bills for qualified replacement costs of certain infrastructure without submitting a rate filing.  The DSIC reset to zero on March 1, 2023 when the new rate order took effect and began again in June 2024 for bills
rendered after July 1, 2024.  Total per capita consumption for 2024 was approximately 0.8% lower than the same period of last year.  In 2025, the Company expects revenues to show a modest increase due to revenues from the DSIC and an increase in
the number of water and wastewater customers from acquisitions and growth within the Company’s service territory.  Other regulatory actions, weather patterns, and economic conditions could impact results.

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Operating expenses for 2024 increased $5,418, or 13.1%, from $41,500 for 2023 to $46,918 for 2024.  The increase was primarily due to higher expenses of
approximately $1,216 for depreciation and amortization, $1,007 for wages and benefits, $992 for distribution system maintenance, $534 for an increased allowance for uncollectible accounts, $504 for wastewater treatment, $268 for purchased power,
$226 for insurance, $200 for outside services, $163 for water treatment, and $92 for billing and revenue collection services.  Other operating expenses increased by a net of $415.  The increase was partially offset by reduced fuel expenses of $199
for the prior year pumping of raw water from the Susquehanna River, not repeated in 2024.  In 2025, the Company expects depreciation and amortization expense to continue to rise due to additional investment in utility plant, and other expenses to
increase as costs to treat water and wastewater, and to maintain and extend the distribution system, continue to rise.  Weather patterns could further increase operating expenses.

Interest on debt for 2024 increased $1,857, or 26.4%, from $7,047 for 2023 to $8,904 for 2024.  The increase was primarily due to an increase in
long-term debt outstanding and higher interest rates upon issuance of the 5.67% Senior Notes.  The average debt outstanding under the line of credit was $10,087 in 2024 and $16,316 in 2023.  The weighted average interest rate on the line of credit
was 5.23% during 2024 and 5.36% during 2023.  Interest expense for 2025 is expected to increase due to the increase in long-term debt outstanding.

Allowance for funds used during construction decreased $2,101, from $4,153 in 2023 to $2,052 in 2024 due to a higher volume of eligible construction in
2023.  Allowance for funds used during construction in 2025 is expected to decrease based on a projected decrease in the amount of eligible construction.

Other pension costs reflect decreased expense of $1,606 in 2024 due to a lower contribution to the pension plans.  In 2025, other pension costs is
expected to be similar to 2024.

Other income (expenses), net for 2024 reflects decreased expenses of $483 as compared to 2023.  The decrease was primarily due to lower retirement
expenses of approximately $315, higher earnings on life insurance policies of approximately $113, and lower charitable contributions of approximately $112.  Other expenses increased by a net of $57.  In 2025, other income (expenses) will be largely
determined by the change in market returns and discount rates for retirement programs and related assets.

Income tax expense for 2024 increased $73 as compared to 2023 due to lower deductions for the Internal Revenue Service, or IRS, tangible property
regulations, or TPR.  The Company’s effective tax rate was 6.2% for 2024 and 5.1% for 2023.  The Company’s effective tax rate for 2025 will be largely determined by the level of eligible asset improvements expensed for tax purposes under the IRS
TPR each period.

Rate Matters

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

Effective January 1, 2025, the Company’s tariff included a DSIC on revenues of 2.20%.

The Company expects to file a rate increase request in 2025.

Acquisitions and Growth

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

On January 24, 2025, the Company signed an agreement to purchase the water assets of Eagle View Manufactured Housing Community in Berwick Township, Adams
County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second half of 2025 at which time the Company will add approximately 140 water
customers.

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On June 27, 2024, the Company signed an agreement to purchase the wastewater collection and treatment assets of CMV Sewage Co., Inc. in Chanceford
Township, York County, Pennsylvania.  Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities.  Closing is expected in the second half of 2025 at which time the Company will add approximately 280
wastewater customers.

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

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

Capital Expenditures

During 2024, the Company invested $48,226 in construction expenditures for armoring and replacing the spillway of the Lake Williams dam, wastewater
treatment plant construction as well as various replacements and improvements to infrastructure and routine items.  In addition, the Company invested $783 in the acquisition of water and wastewater systems.  The Company replaced approximately
50,200 feet of water main in 2024.  The Company was able to fund construction expenditures using internally-generated funds, line of credit borrowings, proceeds from its stock purchase plans and customer advances and contributions from developers,
municipalities, customers, or builders.  See Notes 1, 4 and 5 to the Company’s financial statements included herein.

The Company anticipates construction and acquisition expenditures for 2025 and 2026 of approximately $46,000 and $48,500, respectively, exclusive of any
acquisitions not yet approved.  In addition to routine transmission and distribution projects, a portion of the anticipated 2025 and 2026 expenditures will be for additional main extensions, water tank replacement, wastewater treatment plant
construction, an upgrade to the enterprise software system, and various replacements of infrastructure.  The Company intends to use primarily internally-generated funds for its anticipated 2025 and 2026 construction and fund the remainder through
line of credit borrowings, potential debt and equity offerings, proceeds from its stock purchase plans and customer advances and contributions (see Note 1 to the Company’s financial statements included herein).  Customer advances and contributions
are expected to account for between 5% and 10% of funding requirements in 2025 and 2026.  The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2025 and 2026, to fund anticipated
construction and acquisition 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 December 31, 2024, the Company borrowed $15,808 under its line of credit and incurred a cash
overdraft on its cash management account of $2,428, which was recorded in accounts payable.  The cash management facility connected to the line of credit is expected to provide the necessary liquidity and funding for the Company’s operations,
capital expenditures, and acquisitions for the foreseeable future.

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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 2024, higher revenue levels as compared to 2023 resulted in an increase in accounts receivable – customers.  A reserve is maintained at a level considered adequate to provide for expected credit losses. 
Expected credit losses are based on historical write-offs combined with an evaluation of current conditions and reasonable and supportable forecasts including inactive accounts with outstanding balances, the aging of balances in payment agreements,
adverse situations that may affect a customer’s ability to pay, economic conditions, and other relevant factors applied to the current aging of receivables.  Customer accounts are written off when collection efforts have been exhausted.  If the
status of the evaluated factors deteriorate, the Company may incur additional expenses for uncollectible accounts and experience a reduction in its internally-generated funds.

Internally-generated Funds

The amount of internally-generated funds available for operations and construction depends on the Company’s ability to obtain timely and adequate rate
relief, changes in regulations, customers’ water usage, weather conditions, customer growth and controlled expenses.  In 2024, the Company generated $30,559 internally as compared to $31,908 in 2023.  The decrease from 2023 was primarily due to
higher interest and income taxes paid.

Common Stock

Common stockholders’ equity as a percent of the total capitalization was 52.6% as of December 31, 2024, compared with 54.8% as of December 31, 2023.  The
ratio decreased in 2024 due to higher debt primarily from capital expenditures.  The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward until it approaches fifty percent before
considering additional equity.  It is the Company’s general intent to target equity between fifty and fifty-five percent of total capitalization.

The Company has an effective “shelf” Registration Statement on Form S-3 on file with the Securities and Exchange Commission, pursuant to which the
Company may offer an aggregate remaining amount of up to $60,000 of its common stock or debt securities subject to market conditions at the time of any such offering.

Credit Line

Historically, the Company has borrowed under its lines of credit before refinancing with long-term debt or equity capital.  As of December 31, 2024, the
Company maintained a $50,000, unsecured, committed line of credit at an interest rate of the Secured Overnight Financing Rate, or SOFR, plus 1.17% with an unused commitment fee and an interest rate floor.  The Company had $15,808 in outstanding
borrowings under its line of credit as of December 31, 2024.  The interest rate on line of credit borrowings as of December 31, 2024 was 5.72%.  In the third quarter of 2024, the Company renewed its committed line of credit and extended the
maturity date to September 2026.  No other terms or conditions of the line of credit agreement were modified.  On January 1, 2023, the interest rate changed from LIBOR plus 1.05% to a successor rate of the SOFR plus 1.17% in advance of the
discontinuation of LIBOR in 2023.  The Company expects to renew this line of credit as it matures under similar terms and conditions.

The Company has taken steps to manage the risk of reduced credit availability.  It has established a committed line of credit with a 2-year revolving
maturity that cannot be called on demand.  There is no guarantee that the Company will be able to obtain sufficient lines of credit with favorable terms in the future.  If the Company is unable to obtain sufficient lines of credit or to refinance
its line of credit borrowings with long-term debt or equity, when necessary, it may have to eliminate or postpone capital expenditures.  Management believes the Company will have adequate capacity under its current line of credit to meet financing
needs throughout 2025.

Long-term Debt

The Company’s loan agreements contain various covenants and restrictions.  Management believes it is currently in compliance with all of these
restrictions.  See Note 6 to the Company’s financial statements included herein for additional information regarding these restrictions.

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On February 27, 2024, 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 5.67% per annum payable semiannually and mature on February 27, 2054.  The senior notes are unsecured and unsubordinated obligations of the
Company.  The Company received net proceeds, after deducting issuance costs, of approximately $39,833.  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 47.4% as of December 31, 2024, compared with 45.2% as of December 31, 2023.  The Company expects to use long-term debt for its future financing needs and allow the debt percentage to trend upward.  A debt to total capitalization ratio between
forty-five and fifty percent has historically been acceptable to the PPUC in rate filings.  See Note 6 to the Company’s financial statements included herein for the details of its long-term debt outstanding as of December 31, 2024.

Income Taxes, Deferred Income Taxes and Uncertain Tax Positions

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

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

On July 8, 2022, the Pennsylvania budget for the fiscal year ending June 30, 2023 was signed into law.  A provision within the tax code bill included
with the budget provides for an annual phase-down of the Pennsylvania corporate net income tax rate of one percentage point in the first year beginning January 1, 2023 from 9.99% to 8.99%, and a one-half percentage point each year thereafter until
it reaches 4.99% beginning January 1, 2031.  The Company has remeasured the state portion of the Company’s deferred income taxes.  The effect, net of the federal benefit recognized in income for the years ended December 31, 2024 and 2023, was
immaterial.  Deferred income taxes for differences that are recognized for ratemaking purposes on a cash or flow-through basis were remeasured with offsetting changes to regulatory assets and liabilities on the balance sheet as of December 31, 2024
and 2023.  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 Tax Cuts and Jobs Act of 2017 and the differences between the book and tax balances of the customers’ advances for construction and contributions in aid of construction, and deferred compensation plans.  The Company does not believe a valuation
allowance is required due to the expected generation of future taxable income during the periods in which those temporary differences become deductible.

The Company has seen an increase in its deferred income tax liability amounts primarily as a result of the accelerated depreciation deduction available
for federal tax purposes which creates differences between book and tax depreciation expense.  The Company expects this trend to continue as it makes significant investments in capital expenditures subject to accelerated depreciation or TPR.

The Company has determined there are no uncertain tax positions that require recognition as of December 31, 2024.  See Note 14 to the Company’s financial
statements included herein for additional details regarding income taxes.

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Credit Rating

On August 6, 2024, Standard & Poor’s affirmed the Company’s credit rating at A-, with a stable outlook and adequate liquidity.  The Company’s ability
to maintain its credit rating depends, among other things, on adequate and timely rate relief, which it has been successful in obtaining, its ability to fund capital expenditures in a balanced manner using both debt and equity and its ability to
generate cash flow.  In 2025, 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 the Company’s compliance with regulatory and environmental laws and regulation, including standards for drinking water, litigation, and reputational
damage.

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

Environmental Matters

The Company was granted approval by the PPUC to modify its tariff to include the cost of the annual replacement of up to 400 lead customer-owned service
lines over nine years from the date of the agreement.  The tariff modification allows the Company to replace customer-owned service lines at its own initial cost.  The Company will record the costs as a regulatory asset to be recovered in future
base rates to customers, over a four-year period.  The cost for the customer-owned lead service line replacements was approximately $1,961 and $1,762 through December 31, 2024 and 2023, respectively, and is included as a regulatory asset.  Based on
its experience, the Company estimates that lead customer-owned service lines replacements will cost $2,000.  This estimate is subject to adjustment as more facts become available.

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Drought

On November 1, 2024, Pennsylvania state officials declared a drought watch for 33 counties in Pennsylvania, including all four counties in the Company’s
service territory.  The watch calls for a voluntary reduction in nonessential water use of 5 to 10 percent.  The watch conditions could potentially impact future revenues and net income depending on the length and severity of the dry conditions.

Dividends

During 2024, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 60.2% and 39.6%,
respectively.  During 2023, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 49.3% and 36.3%, respectively.  During the fourth quarter of 2024, the Board increased the dividend by 4.00%
from $0.2108 per share to $0.2192 per share per quarter.

The Company’s Board declared a dividend in the amount of $0.2192 per share at its January 2025 meeting.  The dividend is payable on April 15, 2025 to
shareholders of record as of February 28, 2025.  While the Company expects to maintain this dividend amount in 2025, future dividends will be dependent upon the Company’s earnings, financial condition, capital demands and other factors and will be
determined by the Company’s Board.  See Note 6 to the Company’s financial statements included herein for restrictions on dividend payments.

Inflation

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

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:
revenue recognition and accounting for its pension plans.

Pension Accounting

Accounting for defined benefit pension plans requires estimates of future compensation increases, mortality, the discount rate, and expected return on
plan assets as well as other variables.  These variables are reviewed annually with the Company’s pension actuary.  The Company used compensation increases of 2.5% to 3.0% in 2023 and 2024.

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

The Company selected its December 31, 2024 and 2023 discount rates based on the FTSE Pension Liability Index.  This index uses spot rates for durations out
to 30 years and matches them to expected disbursements from the plan over the long term.  The Company believes this index most appropriately matches its pension obligations.  The present values of the Company’s future pension obligations were
determined using a discount rate of 5.45% at December 31, 2024 and 4.75% at December 31, 2023.

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

In 2023, the Company modified its investment policy statements.  The Company’s estimate of the expected return on plan assets is primarily based on the
historic returns and projected future returns of the asset classes represented in its plans.  The target allocation of pension assets is 70% to 90% fixed income securities, 10% to 30% equity securities, and 0% to 10% cash reserves.  The Company
used 5.00% as its expected rate of return in 2023 and 2024, a decrease from the 6.50% used in 2022 based on the modified investment policy statements.  A decrease in the expected pension return would normally cause an increase in pension expense;
however due to the aforementioned rate settlement, the Company’s expense would continue to be equal to its contributions to the plans.  The change would instead be recorded in regulatory assets.

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

Off-Balance Sheet Transactions

The Company does not use off-balance sheet transactions, arrangements or obligations that may have a material current or future effect on financial
condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.  The Company does not use securitization of receivables or unconsolidated entities. For risk management
purposes, the Company uses a derivative financial instrument, an interest rate swap agreement discussed in Note 7 to the financial statements included herein.  The Company does not engage in trading or other risk management activities, does not use
other derivative financial instruments for any purpose, has no material lease obligations, no guarantees and does not have material transactions involving related parties.

Impact of Recent Accounting Pronouncements

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