Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management'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," "objective" and similar expressions are intended to identify forward-looking statements. These forward-looking statements include certain information relating to the Company's business strategy and future prospects; including, but not limited to:

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 and you should not place undue reliance upon such statements, which are based only on information currently available to the Company and speak only as of the date hereof. 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:

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 thirteen wastewater collection and treatment systems. The Company operates within its franchised water and wastewater territory, which covers portions of 58 municipalities within four counties in south-central Pennsylvania. The Company is regulated by the Pennsylvania Public Utility Commission, or PPUC, for both water and wastewater in the areas of billing, payment procedures, dispute processing, terminations, service territory, debt and equity financing and rate setting. The Company must obtain PPUC approval before changing any practices associated with the aforementioned areas.

Water service is supplied through the Company's own distribution system. The Company obtains the bulk of its water supply for its primary system for York and Adams Counties from both the South Branch and East Branch of the Codorus Creek, which together have an average daily flow of approximately 73.0 million gallons from a combined watershed area of approximately 117 square miles. The Company has two reservoirs on this primary system, Lake Williams and Lake Redman, which together hold up to approximately 2.5 billion gallons of water. The Company supplements these reservoirs with a 15-mile pipeline from the Susquehanna River to Lake Redman which provides access to an additional supply of 12.0 million gallons of untreated water per day. The Company obtains its water supply for its system for Franklin County from the Roxbury Dam on the Conodoguinet Creek, which has an average daily flow of approximately 26.0 million gallons from a watershed area of approximately 33 square miles. The Company has a reservoir on this system which holds up to approximately 330 million gallons of water. The Company also owns fifteen wells which are capable of providing a safe yield of approximately 923,000 gallons per day to supply water to the customers of its groundwater satellite systems in York, Adams, and Lancaster Counties. As of March 31, 2026, the Company's average daily availability was 41.1 million gallons, and average daily consumption was approximately 23.1 million gallons. The Company's service territory had an estimated population of 214,000 as of December 31, 2025. Industry within the Company's service territory is diversified, manufacturing such items as fixtures and furniture, electrical machinery, food products, paper, ordnance units, textile products, air conditioning systems, laundry detergent, barbells, and motorcycles.

The Company's water business is somewhat dependent on weather conditions, particularly the amount and timing of precipitation. Revenues are particularly vulnerable to weather conditions in the summer months. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping golf courses and sports fields irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions from governmental authorities. Despite the Company's adequate water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact revenues. The Company has addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.

The Company's business does not require large amounts of working capital and is not dependent on any single customer or a very few customers for a material portion of its business. Increases in revenues are generally dependent on the Company's ability to obtain rate increases from the PPUC in a timely manner and in adequate amounts and to increase volumes of water sold through increased consumption and increases in the number of customers served. The Company continuously looks for water and wastewater acquisition and expansion opportunities both within and outside its current service territory as well as additional opportunities to enter into bulk water contracts with municipalities and other entities to supply water.

The Company has agreements with several municipalities to provide billing and collection services. The Company continues to review and consider opportunities to expand this initiative to further diversify the business.

Results of Operations

Three Months Ended March 31, 2026 Compared

With Three Months Ended March 31, 2025

Net income for the first quarter of 2026 was $4,814, an increase of $1,176, or 32.3%, from net income of $3,638 for the same period of 2025. The primary contributing factors to the increase were higher operating revenues and lower income taxes, which were partially offset by higher operating expenses and higher interest on debt.

Operating revenues for the first quarter of 2026 increased $1,618, or 8.8%, from $18,456 for the three months ended March 31, 2025 to $20,074 for the corresponding 2026 period. The primary reason for the increase was a rate increase effective March 1, 2026. Growth in the customer base also added to revenues. The average number of water customers served in 2026 increased as compared to 2025 by 998 customers, from 73,186 to 74,184 customers. The average number of wastewater customers served in 2026 increased as compared to 2025 by 620 customers, from 6,712 to 7,332 customers, primarily due to acquisitions. The increased revenues were partially offset by a $107 decrease from a lower distribution system improvement charge, or DSIC, allowed by the PPUC. The DSIC reset to zero on March 1, 2026 when the rate order took effect. Total per capita consumption for 2026 was approximately 2.2% lower 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. Other regulatory actions, weather patterns, and economic conditions could impact results.

Operating expenses for the first quarter of 2026 increased $1,548, or 12.7%, from $12,173 for the first quarter of 2025 to $13,721 for the corresponding 2026 period. The increase was primarily due to higher expenses of approximately $398 for distribution system maintenance, $322 for wages and benefits, $198 for insurance, $185 for purchased power, $110 for the provision for uncollectible accounts, $95 for depreciation and amortization, $70 for technology upgrades, $52 for water treatment, and $50 for wastewater treatment. Other operating expenses increased by a net of $68. For the remainder of the year, 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 the first quarter of 2026 increased $296, or 12.2%, from $2,419 for the first quarter of 2025 to $2,715 for the corresponding 2026 period. The increase was primarily due to an increase in short-term and long-term debt outstanding. The average debt outstanding under the line of credit and short-term borrowings was $46,725 for the first quarter of 2026 and $19,163 for the first quarter of 2025. The weighted average interest rate on the line of credit and short-term borrowings was 4.89% for the quarter ended March 31, 2026 and 5.49% for the quarter ended March 31, 2025. Interest expense for the remainder of the year is expected to decrease after the line of credit was substantially repaid upon the completion of the underwritten common stock offering in April 2026.

Allowance for funds used during construction increased $88, from $185 in the first quarter of 2025 to $273 in the corresponding 2026 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.

Other income (expenses), net for the first quarter of 2026 was unchanged as compared to the same period of 2025. Higher charitable contributions of approximately $12 were offset by higher earnings on life insurance policies of approximately $12. 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 tax expense for the first quarter of 2026 decreased $1,317 as compared to the same period of 2025 due to higher deductions for the Internal Revenue Service, or IRS, tangible property regulations, or TPR. The Company's effective tax rate was (21.3)% for the first quarter of 2026 and 11.5% for the first quarter of 2025. The Company's effective tax rate for the remainder of 2026 will largely be determined by the level of eligible asset improvements expensed for tax purposes under TPR. The Company expects the level to be lower in the remainder of the year than the first quarter, increasing the effective tax rate.

Rate Matters

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

The Company does not expect to collect a DSIC or file a rate increase request in 2026.

Acquisitions and Growth

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.

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

For the three months ended March 31, 2026, the Company invested $9,821 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 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.

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 March 31, 2026.

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. 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.