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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.02pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-
Not scored
Net-tone change vs last year's 10-K.
MD&A
-0.02pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
No section text extracted for this filing. The 10-K may use a non-standard template that the parser doesn't recognize - the original doc is still linked in the Stats tab.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
closing+2
warning+2
drought+1
Positive rising
gain+3
gains+1
MD&A (Item 7)
5,392 words
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(All dollar amounts are stated in thousands of dollars.)
The York Water Company (the “Company”) is the oldest investor-owned water utility in the United States, operated continuously since 1816. The Company also owns and operates three wastewater collection systems and twelve 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 2025 compared to 2024 primarily due to an increase in the number of customers and higher revenues from the distribution system improvement charge, or DSIC. The DSIC allows the Company to add a charge to customers’ bills for qualified replacement costs of certain infrastructure without submitting a rate filing.
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 2025, 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 agreements with several municipalities to provide billing and collection services. The Company continues to review and consider opportunities to expand this initiative 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 2025 was strong under the above measures. Operating revenues increased in 2025 compared to 2024 primarily due to 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 income taxes and a gain on life insurance. The overall effect was a decrease in net income in 2025 over 2024 of 1.3% and a return on year end common equity of 8.3%. The return on year end common equity was lower than the 2024 result and the five year historical average return on year end common equity of 10.3%. The Company’s recently implemented rate increase should 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 31.0%. In 2025, the ratio was lower than the average at 25.9% 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.
2025 Compared with 2024
Net income for 2025 was $20,058, a decrease of $267, or 1.3%, from net income of $20,325 for 2024. The primary contributing factors to the decrease were higher operating expenses, higher interest on debt, and a lower allowance for funds used during construction, which were partially offset by higher operating revenues, lower income taxes, and a gain on life insurance.
Operating revenues for 2025 increased $2,529, or 3.4%, from $74,959 for 2024 to $77,488 for 2025. The increase was primarily due to growth in the customer base and revenues from the DSIC of $1,986. The average number of water customers served in 2025 increased as compared to 2024 by 1,165 customers, from 72,415 to 73,580 customers. The average number of wastewater customers served in 2025 increased as compared to 2024 by 490 customers, from 6,521 to 7,011 customers, primarily due to acquisitions. Total per capita consumption for 2025 was approximately 1.6% lower than 2024. The Company expects revenues for 2026 to increase due to an increase in rates effective March 1, 2026, and the continued 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 2025 increased $2,865, or 6.1%, from $46,918 for 2024 to $49,783 for 2025. The increase was primarily due to higher expenses of approximately $1,279 for depreciation and amortization, $931 for wages and benefits, $424 for distribution system maintenance, $161 for technology upgrades, $93 for reduced capitalized overhead, $89 for water treatment, and $59 for purchased power. Other operating expenses increased by a net of $358. The increase was partially offset by reduced expenses of $339 for the provision for uncollectible accounts, $118 for outside services, and $72 for wastewater treatment. In 2026, 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 and collection systems, continue to rise. Weather patterns could further increase operating expenses.
Interest on debt for 2025 increased $1,358, or 15.3%, from $8,904 for 2024 to $10,262 for 2025. The increase was primarily due to an increase in long-term debt outstanding and higher interest rates. The average debt outstanding under the line of credit and short-term borrowings was $29,857 for 2025 and $10,087 for 2024. The weighted average interest rate on the line of credit and short-term borrowings was 5.41% during 2025 and 5.23% during 2024. Interest expense for 2026 is expected to increase due to an increase in long-term debt outstanding. A potential equity offering to pay down the line of credit and short-term borrowings may offset the expected increase.
Allowance for funds used during construction decreased $1,232, from $2,052 in 2024 to $820 in 2025 due to a lower volume of eligible construction. Allowance for funds used during construction in 2026 is expected to remain consistent based on the projected amount of eligible construction.
A non-recurring gain on life insurance of $831 was recorded in 2025 as a result of death benefits from life insurance policies. No similar gains are anticipated in 2026.
Other income (expenses), net for 2025 reflects increased expenses of $344 as compared to 2024. The increase was primarily due to higher retirement expenses of approximately $310 and higher charitable contributions of $114. Other expenses decreased by a net of $80. In 2026, 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 2025 decreased $2,166 as compared to 2024 due to higher deductions for the Internal Revenue Service, or IRS, tangible property regulations, or TPR. The Company’s effective tax rate was (4.2)% for 2025 and 6.2% for 2024. The Company’s effective tax rate for 2026 will be largely determined by the level of eligible asset improvements expensed for tax purposes under IRS TPR. The Company expects the level to be lower in 2026, increasing the effective tax rate as compared to 2025.
Rate Matters
See Note 10 to the Company’s financial statements included herein for a discussion of its rate matters.
Effective January 1, 2026, the Company’s tariff included a DSIC on revenues of 4.89%. The DSIC reset to zero when new rates took effect on March 1, 2026.
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 December 23, 2025, the Company signed an agreement to purchase the water assets of Lenwood Management, LLC in Southampton Township, Franklin County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the fourth quarter of 2026 at which time the Company will add approximately 90 water customers.
On December 11, 2025, the Company signed an agreement to purchase the water assets of Mt. Rock Manor Management, LLC in Southampton Township, Franklin County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the fourth quarter of 2026 at which time the Company will add approximately 140 water customers.
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On June 13, 2025, the Company signed an agreement to purchase the wastewater collection and treatment assets of Pine Run Retirement Community in Hamilton Township, Adams County, Pennsylvania. Completion of the acquisition is contingent upon receiving approval from all required regulatory authorities. Closing is expected in the second quarter of 2026 at which time the Company will add approximately 100 wastewater customers.
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 quarter of 2026 at which time the Company will add approximately 140 water 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 fourth quarter of 2026 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 2025, the Company invested $48,725 in construction expenditures for main extensions and an upgrade to the enterprise software system, as well as various replacements and improvements to infrastructure and routine items. The Company replaced approximately 54,100 feet of water main and 1,800 feet of wastewater main in 2025. 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 2026 and 2027 of approximately $48,000 in each year, exclusive of any acquisitions not yet approved. In addition to routine transmission and distribution projects, a portion of the anticipated 2026 and 2027 expenditures will be for additional main extensions, an upgrade to the enterprise software system, water treatment plant construction, water tank replacement, wastewater treatment plant construction, and various replacements of infrastructure. The Company intends to use primarily internally-generated funds for its anticipated 2026 and 2027 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 2026 and 2027. The Company believes it will have adequate credit facilities and access to the capital markets, if necessary, during 2026 and 2027, 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, 2025, the Company borrowed $32,290 under its line of credit and incurred a cash overdraft on its cash management account of $1,836, 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 2025, higher revenue levels as compared to 2024 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 2025, the Company generated $29,860 internally as compared to $30,559 in 2024. The decrease from 2024 was primarily due to higher interest paid partially offset by increased cash receipts from customers and the timing of payments to vendors.
Common Stock
Common stockholders’ equity as a percent of the total capitalization was 51.7% as of December 31, 2025, compared with 52.6% as of December 31, 2024. The ratio decreased in 2025 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, 2025, 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 $32,290 in outstanding borrowings under its line of credit as of December 31, 2025. The interest rate on line of credit borrowings as of December 31, 2025 was 5.04%. In the third quarter of 2025, the Company renewed its committed line of credit and extended the maturity date to September 2027. No other terms or conditions of the line of credit agreement were modified. 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 2026.
Term Loan
In December 2025, the Company entered into a $10,000 unsecured, committed term loan agreement. Interest is payable monthly at an interest rate of SOFR plus 1.35% as established on the first day of each calendar month. The principal balance can be repaid in whole or part at any time without premium. The term loan matures in December 2026. The interest rate on the term loan was 5.18% as of December 31, 2025. The Company expects to secure permanent financing in 2026 to repay this term loan.
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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 Company’s financial statements included herein for additional information regarding these restrictions.
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 48.3% as of December 31, 2025, compared with 47.4% as of December 31, 2024. 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, 2025.
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, 2025 and 2024, 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, 2025 and 2024. 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, 2025. See Note 14 to the Company’s financial statements included herein for additional details regarding income taxes.
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Credit Rating
On July 30, 2025, 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 2026, 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 $2,087 and $1,961 through December 31, 2025 and 2024, respectively, and is included as a regulatory asset. Based on its experience, the Company estimates that lead customer-owned service lines replacements will cost $2,100. This estimate is subject to adjustment as more facts become available. This tariff modification will expire on March 8, 2026 unless extended by the PPUC.
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Drought
As of February 18, 2026, Pennsylvania state officials declared a drought watch for 34 counties in Pennsylvania, including York County within the Company’s service territory, and a droughtwarning for 17 counties in Pennsylvania, including Adams, Franklin, and Lancaster Counties within the Company’s service territory. The watch calls for a voluntary reduction in nonessential water use of 5 to 10 percent and the warning calls for a voluntary reduction in nonessential water use of 10 to 15 percent. These measures could potentially impact future revenues, operating expenses, and net income depending on the length and severity of the dry conditions.
Dividends
During 2025, the Company’s dividend payout ratios relative to net income and net cash provided by operating activities were 63.7% and 42.3%, respectively. 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 the fourth quarter of 2025, the Board increased the dividend by 4.0% from $0.2192 per share to $0.2280 per share per quarter.
The Company’s Board declared a dividend in the amount of $0.2280 per share at its January 2026 meeting. The dividend is payable on April 15, 2026 to shareholders of record as of February 27, 2026. While the Company expects to maintain this dividend amount in 2026, 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 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 2024 and 2025.
The Company adopted the Pri-2012 mortality table, 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, 2025 and 2024 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 5.30% at December 31, 2025 and 5.45% at December 31, 2024.
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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.
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 2024 and 2025. 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.
