Document/ExhibitDescriptionPagesSize 1: 10-Q Artesian Resources Corp File 10-Q HTML 1.12M
5: EX-4 Amended and Restated Demand Line of Credit HTML 256K
Agreement Between Artesian Resources Corporation,
and Citizens Bank, N.A. Dated May 20, 2022
2: EX-31.1 Certification -- §302 - SOA'02 -- exhibit31-1 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 -- exhibit31-2 HTML 24K
4: EX-32 Certification -- §906 - SOA'02 -- exhibit32 HTML 22K
11: R1 Document and Entity Information HTML 75K
12: R2 Condensed Consolidated Balance Sheets HTML 156K
13: R3 Condensed Consolidated Balance Sheets HTML 28K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 104K
15: R5 Condensed Consolidated Statements of Cash Flows HTML 155K
16: R6 Condensed Consolidated Statements of Changes in HTML 72K
Stockholders' Equity
17: R7 Condensed Consolidated Statements of Changes in HTML 33K
Stockholders' Equity (Parenthetical)
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19: R9 Basis of Presentation HTML 29K
20: R10 Revenue Recognition HTML 74K
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22: R12 Leases HTML 63K
23: R13 Stock Compensation Plans HTML 52K
24: R14 Other Deferred Assets HTML 26K
25: R15 Regulatory Assets HTML 40K
26: R16 Regulatory Liabilities HTML 32K
27: R17 Net Income Per Common Share and Equity Per Common HTML 32K
Share
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29: R19 Income Taxes HTML 26K
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol (s)
Name of each exchange on which registered
iCommon Stock
iARTNA
iThe Nasdaq Stock Market
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.
☑
iYes
□
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).
☑
iYes
□
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 12(b)-2 of the Exchange Act.
Large Accelerated Filer □
Accelerated Filer☐
iNon-accelerated Filer ☑
Smaller Reporting Company i☒
Emerging Growth Companyi☐
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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).
i☐
Yes
☑
No
As of May 8, 2023, i8,628,221 shares of Class A Non-Voting Common Stock and i881,452
shares of Class B Common Stock were outstanding.
At March 31, 2023, and March 31, 2022, Class A Common Stock had ii15,000,000/
shares authorized. For the same periods,
shares issued, inclusive of treasury shares, were i8,651,976 and i8,585,947,
respectively.
(2)
At March 31, 2023, and March 31, 2022, Class B Common Stock had ii1,040,000/
shares authorized and ii881,452/
shares issued.
(3)
Artesian Resources Corporation registered i200,000 shares of Class A Common Stock, subsequently adjusted
for stock splits, available for purchase through the Company’s 401(k) retirement plan.
(4)
Under the Equity Compensation Plan, effective December 9, 2015, or the 2015 Plan, Artesian Resources Corporation authorized up to i331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in
certain circumstances as
discussed in the 2015 Plan. Includes stock compensation expense for March 31, 2023 and March 31, 2022, see Note 6-Stock Compensation Plans.
See notes to the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
NOTE 1 – GENERAL
Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our wholly owned subsidiaries. The terms "we", "our",
"Artesian" and the "Company" as used herein refer to Artesian Resources and its subsidiaries.
Artesian Water Company, Inc., or Artesian Water, distributes and sells water to residential, commercial, industrial, governmental, municipal and utility
customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private, municipal and state water providers.
Artesian Water also provides water for public and private fire protection to customers in our service territories.
In May 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware
municipality located in Kent County, Delaware. This purchase agreement is discussed further in the “Strategic Direction and Recent Developments” section.
Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in Sussex County, Delaware in July 2005. Artesian
Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company.
In January 2022, Artesian Wastewater acquired Tidewater Environmental Services,
Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. TESI was incorporated in 2004 and is a regulated entity that owns wastewater collection and treatment
infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company, or Middlesex, for $i6.4 million in cash and other consideration, including forgiveness of a $i2.1
million note due from Middlesex. This acquisition more than doubled the
number of wastewater customers served by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton, Delaware.
Artesian Water Maryland, Inc., or Artesian Water Maryland, began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland.
Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, was incorporated on June 3, 2008 and is authorized and able to provide regulated wastewater services to customers in the State of Maryland. It is currently not providing these services.
PENNSYLVANIA REGULATED UTILITY SUBSIDIARY
Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, began operations in 2002. It provides water service to a residential community in Chester County, Pennsylvania.
Our ithree other subsidiaries, none of which are
regulated, are Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water.
Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services
on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be
used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies. Artesian Utility also contracts with developers and government agencies for design and construction of wastewater
infrastructure throughout the Delmarva Peninsula.
Artesian Utility currently operates wastewater treatment facilities for the Town of Middletown, in southern New Castle County, Delaware, or Middletown, under
a i20-year contract that expires in July 2039. Artesian
Utility currently operates ithree wastewater treatment systems with a combined capacity of up to approximately i3.8
million gallons per day. The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and
agricultural lands in the area.
Artesian Utility also offers ithree protection
plans to customers, the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan (collectively, SLP Plans). The WSLP Plan covers all parts,
material and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking or clogged
sewer lines up to an annual limit. The ISLP Plan enhances available coverage to include water and wastewater lines within customers' residences up to an annual limit.
Artesian Development is a real estate holding company that owns properties, including land approved for office buildings, a water treatment plant and
wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware. The office facility consists of approximately i10,000 square feet of office space along with nearly i10,000
square feet of warehouse space.
Artesian Storm Water, incorporated in 2017, was formed to provide design, installation, maintenance and repair
services related to existing or proposed storm water management systems in Delaware and the surrounding areas. The ability to offer storm water services will complement the primary water and wastewater services that we provide. Artesian Storm Water
is not actively seeking new opportunities.
i
NOTE2 – BASIS OF PRESENTATION
i
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission, or SEC, for Form 10-Q. Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with
the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2022 as filed with the SEC on March 10, 2023.
The condensed consolidated financial statements include the accounts of Artesian
Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring
adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of March 31, 2023, the results of its operations for the three-month periods ended March 31, 2023 and March 31, 2022, its cash flows for the three-month periods ended March 31, 2023 and March 31, 2022 and the changes in stockholders’ equity for the three-month periods ended March 31, 2023
and March 31, 2022. The December 31, 2022 Condensed Consolidated Balance
Sheet was derived from the Company’s December 31, 2022 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.
The results of operations for the interim periods presented are not necessarily indicative of the results for the full year or for future periods.
i
Regulated Utility Accounting
The accounting records of Artesian Water, Artesian Wastewater, and, effective January 14, 2022, TESI are maintained in accordance with the uniform system of
accounts as prescribed by the Delaware Public Service Commission, or the DEPSC. The accounting records of Artesian Water Pennsylvania are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility
Commission, or the PAPUC. The accounting records of Artesian Water Maryland and Artesian Wastewater Maryland are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC. Each
of these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provide guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue.
See Note 16 to our Condensed Consolidated Financial Statements for a full description of our segment information.
The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require
management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements, goodwill and contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates.
All additions to utility plant are recorded at cost. Business combinations pursuant to ASC Topic 805 may result in a purchase price
allocation and the acquired assets are required to be evaluated by the applicable regulatory agency. Artesian Wastewater acquired TESI in January 2022 and Artesian Water purchased substantially all of the water operating assets from the Town of
Clayton in May 2022. As of December 31, 2022, the fair value determination for TESI and the town of Clayton is finalized. A third-party valuation specialist assisted with the valuation of the assets acquired.
i
Reclassification
Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications had no effect on net income or stockholders' equity.
i
NOTE 3 – REVENUE RECOGNITION
Background
Artesian’s operating revenues are primarily attributable to contract services based upon regulated tariff rates approved by the DEPSC, the MDPSC, and the
PAPUC. Regulated tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System
Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices. Our non-tariff contract revenues, which are primarily non-utility revenues, consist of SLP Plan fees, water and wastewater
contract operations, design and installation contract services, and wastewater inspection fees. Other regulated operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna agreements, which
are not considered in the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers.
Artesian generates revenue from the sale of water to customers in Delaware, Cecil County, Maryland, and Southern
Chester County, Pennsylvania once a customer requests service in our territory. We recognize water consumption revenue at tariff rates on a cycle basis for the volume of water transferred to customers based upon meter readings for actual gallons of
water consumed as well as unbilled amounts for estimated usage from the date of the last meter reading to the end of the accounting period. As actual usage amounts are known based on recurring meter readings, adjustments are made to the unbilled
estimates in the next billing cycle based on the actual results. Estimates are made on an individual customer basis, based on one of three methods: the previous year’s consumption in the same period, the previous billing period’s consumption, or
averaging. While actual usage for individual customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ
materially from actual billed consumption. The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis. As a result, we record unbilled operating revenue
(contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle.
Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware.
We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred. These
services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue. The contract also provides for a minimum required volume of
wastewater flow to our facility. At each year end, any shortfall of the actual volume from the required minimum volume is billed to the industrial customer and recorded as revenue. Additionally, if during the course of the year it is probable that
the actual volume will not meet the minimum required volume, estimated revenue amounts would be recorded for the pro rata minimum volume, constrained for potential flow capacity that could occur in the remainder of the year.
Artesian generates revenue from metered wastewater services provided to certain customers in Sussex County,
Delaware. We recognize metered wastewater services at tariff rates on a cycle basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of water transferred, as well as unbilled
amounts for estimated volume from the date of the last meter reading to the end of the accounting period. As actual volume amounts are known based on recurring meter readings, adjustments are made to the unbilled estimates in the next billing cycle
based on the actual results. Estimates are made on an individual customer basis, based on one of three methods: the previous year’s volume in the same period, the previous billing period’s volume, or averaging. While actual usage for individual
customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of volume and revenue for the fiscal period will not differ materially from actual billed consumption. The majority
of these wastewater customers are billed for the volume of water transferred on a quarterly basis. As a result, we record unbilled operating revenue (contract asset) for any estimated volume through the end of the accounting period that will be billed
in the next quarterly cycle.
Artesian generates fixed-fee revenue for water and wastewater services provided to customers once a customer
requests service in our territory. Our wastewater territory is located in Sussex County, Delaware. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the
Company remaining ready to provide them water and wastewater service. These contract services are billed either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis. For contract services billed in arrears, we record
unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle. For contract services billed in advance, we record deferred revenue (contract liability)
and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided. This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet.
Artesian generates service charges primarily from non-payment fees, such as water shut-off and reconnection fees and
finance charges. These fees are billed and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed. There is
no contract asset or liability associated with these fees.
Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware
related to specific types of water distribution system improvements. This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period. This rate is adjusted up or down at the next
DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement. Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending
on whether the surcharge was applied to consumption revenue or fixed-fee revenue.
Accounts receivable related to tariff contract revenues are typically due within i25 days of invoicing. An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current
conditions. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.
Artesian generates SLP Plan revenue once a customer requests service to cover all parts, materials and labor required to repair or replace leaking water
service lines, leaking or clogged sewer lines, or water and wastewater lines within the customer’s residence, up to an annual limit. We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and
consumes all the benefits of having service line protection services. These contract services are billed in advance on a monthly or quarterly basis. As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts
for which we have a right to invoice but for which services have not been provided. Accounts receivable from SLP Plan customers are typically due within i25
days of invoicing. An allowance for doubtful accounts is calculated as a percentage of total SLP Plan contract revenue. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related
allowance for doubtful accounts and associated bad debt expense has not been significant.
Artesian generates contract operation revenue from water and wastewater operation services provided to customers. We recognize revenue from these operation
contracts, which consist primarily of monthly operation and maintenance services, over time as customers receive and consume the benefits of such services performed. The majority of these services are invoiced in advance at the beginning of every month
and are typically due within i30 days, and therefore there is no contract asset or liability associated with most of these revenues. We have ione
operation contract that was paid in advance resulting in a contract liability for services that have not yet been provided. An allowance for doubtful
accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness. The related allowance for
doubtful accounts and associated bad debt expense has not been significant.
Artesian generates design and installation revenue for services related to the design and construction of wastewater infrastructure for a state agency under
contract. We recognize revenue from these services over time as services are performed using the percentage-of-completion method based on an input method of incurred costs (cost-to-cost). These services are invoiced at the end of every month based on
incurred costs to date. As of March 31, 2023, there is no associated contract asset or liability. There is no allowance for doubtful accounts or bad debt expense associated with this revenue.
Artesian generates inspection fee revenue for inspection services related to onsite wastewater collection systems installed by developers of new
communities. These fees are paid by developers in advance when a service is requested for a new phase of a development. Inspection fee revenue is recognized on a per lot basis once the inspection of the infrastructure that serves each lot is
completed. As a result, we record deferred revenue (contract liability) for any amounts related to infrastructure not yet inspected. There are no accounts receivable, allowance for doubtful accounts or bad debt expense associated with inspection fee
contracts.
Sales Tax
The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax. Revenues earned in the State of Maryland and the
Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax. Therefore, no sales tax is collected on revenues.
Disaggregated Revenues
i
The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location:
For the three months ended March 31, 2023, the Company recognized revenue of $i1.2
million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $i0.3 million from amounts that
were included in Deferred Revenue – Non- Tariff at the beginning of the year.
The changes in Contract Assets and Deferred Revenue are primarily due to normal timing differences between our performance and customer payments.
Remaining Performance Obligations
As of March 31, 2023 and December 31, 2022, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining
performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months.
As of March 31, 2023 and December 31, 2022, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our
SLP Plan services, contract water operation services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months for the SLP revenue, approximately seven years for the contract service
revenue and one year for the inspection fee revenue.
i
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the
Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $i10.0 million,
related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply. Approximately $i2.5 million was paid in August 2022. The remaining $i7.5
million is due in ithree equal installments no later than August of each year from 2023 through 2025.
An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current
conditions. We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant. iThe following table summarizes the
changes in the Company’s accounts receivable balance:
The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of i5 years to i74 years, some of which include
options to automatically extend the leases for up to i66 years and are included as part of the lease liability and right of use assets as we
expect to exercise the options. Payments made under operating leases are recognized in the consolidated statement of operations on a straight-line basis over the period of the lease. The annual lease payments for the land operating leases increase
each year either by the most recent increase in the Consumer Price Index or by i3%, as applicable based on the lease agreements. Periodically,
the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land. None of the operating leases contain contingent rent provisions. The commencement date of all the operating leases is
the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment. The Company currently does not have any financing leases and does not have any lessor leases that
require disclosure.
Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of
use asset and liability amounts for the operating leases. As our leases do not provide an implicit rate, we use our incremental borrowing rates for long term and short term agreements and apply the rates accordingly based on the term of the lease
agreements to determine the present value of lease payments.
i
Rent expense for all operating leases, except those with terms of 12 months or less comprises:
Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2023 are as follows:
(in thousands)
Operating Leases
Year
2024
$
i34
2025
i34
2026
i34
2029
i34
2030
i34
Thereafter
i1,405
Total undiscounted lease payments
$
i1,575
Less effects of discounting
(i1,071
)
Total lease liabilities recognized
$
i504
As of March 31, 2023, we have not entered into
operating or finance leases that will commence at a future date.
i
NOTE 6 – STOCK COMPENSATION PLANS
On December 9, 2015, the Company’s stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, that replaced the 2005 Equity Compensation
Plan, or the 2005 Plan, which expired on May 24, 2015. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based
awards. The 2015 Plan is administered and interpreted by the Compensation Committee of the Board of Directors, or the Committee. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, determine
the type, size and terms of the grants, determine the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan) and deal with any other matters arising under the 2015
Plan. The Committee presently consists ofithree directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries are eligible for grants under the 2015
Plan. Non-employee directors of the Company are also eligible to receive grants under the 2015 Plan.
Compensation expense of $i56,000, related to the
May 2022 issue of restricted stock awards, was recorded for the three months ended March 31, 2023. Compensation expense of $i49,000 was recorded
for the three months ended March 31, 2022 for restricted stock awards issued in May 2021. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the
awards.
There was no stock compensation cost capitalized as part of an asset.
On May 3, 2022, i5,000 shares of Class A Common
Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $i45.58, the closing price of the Class A Stock as
recorded on the Nasdaq Global Select Market on May 3, 2022. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.
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The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for
the three months ended March 31, 2023:
There were ino options exercised during the three months ended March 31, 2023.
There were ino unvested option shares outstanding under the 2015 Plan during the three months ended March 31, 2023.
As of March 31, 2023, there were ino unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of March 31, 2023, there was $i20,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over i0.09
years, the remaining vesting period for the restricted stock awards.
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NOTE 7 – OTHER DEFERRED ASSETS
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The investment in CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt
agreements. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 4-Accounts Receivable.
The FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party
regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and PAPUC.
The deferred income taxes will be amortized over future years as the tax effects of temporary differences that previously flowed through to our customers are
reversed.
Debt related costs include debt issuance costs and other debt related expense. The DEPSC has approved deferred regulatory accounting treatment for issuance
costs associated with Artesian Water’s First Mortgage bonds. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations.
Affiliated interest agreement deferred costs relate to the regulatory and administrative costs resulting from
efforts necessary to secure water allocations in Artesian Water Pennsylvania’s territory for the provision of service to the surrounding area and interconnection to Artesian Water Pennsylvania’s affiliate regulated water utility Artesian Water. These
costs were specifically included for cost recovery pursuant to an Affiliated Interest Agreement between Artesian Water and Artesian Water Pennsylvania and were approved for recovery by the PAPUC and were reclassed from deferred costs to a regulatory
asset in 2022.
FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party
regulatory agency. Certain obligations are deferred and/or amortized as determined by the DEPSC, MDPSC, and PAPUC. Regulatory liabilities represent excess recovery of cost or other items that have been deferred because it is probable such amounts
will be returned to customers through future regulated rates.
Utility plant retirement cost obligation consists of estimated costs related to the potential removal and replacement of facilities and equipment on the
Company’s water and wastewater properties. Effective January 1, 2012, as authorized by the DEPSC, when depreciable units of utility plant are retired, any cost associated with retirement, less any salvage value or proceeds received, is charged to a
regulated retirement liability. Each year the liability is increased by an annual amount authorized by the DEPSC.
Deferred settlement refunds consist of reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s past capital and operating costs,
totaling approximately $i10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand &
Gravel Landfill Superfund Site in groundwater that Artesian Water uses for public potable water supply, pursuant to the Settlement Agreement. Approximately $i2.5
million was paid in August 2022. The remaining $i7.5 million is due in ithree equal installments no later than August of each year from 2023 through 2025. Artesian Water received approval from the DEPSC
in October 2022 to refund to its customers these
reimbursements for past capital and operating costs. The refund for the reimbursements will be applied to current and future customer bills in annual installments. The first refund occurred in October 2022, and future customer refunds will occur no
later than August of each year from 2023 through 2025. The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers. Beginning in 2022, Artesian Water will record 2022 and future recovery
of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any
future rate applications. For a full discussion of the Settlement Agreement, refer to Note 17 - Legal Proceedings.
Pursuant to the enactment of the Tax Cuts and Jobs Act, or TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to
reflect the decrease in the corporate income tax rate from i34% to i21%
(see Note 12) resulting in a decrease in the net deferred income tax liability of $i24.3
million, of which $i22.8 million was reclassified to a regulatory liability related to Artesian Water and Artesian Water Maryland. The regulatory
liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes. On
January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $i22.2 million over a period of i49.5 years beginning February
1, 2018, subject to audit at a later date. In May 2022, the Company received a rate order from the DEPSC instructing the
Company to continue amortizing the liability over a period of i49.5 years, subject to review in the Company’s next base rate filing. The MDPSC
has not issued a final order on the regulatory liability amount of $i0.6 million regarding the effects of the TCJA on Maryland customers.
NOTE 10 - NET INCOME PER COMMON
SHARE AND EQUITY PER COMMON SHARE
Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted
average number of common shares outstanding, the potentially dilutive effect of employee stock options and restricted stock awards.
i
The following table summarizes the shares used in computing basic and diluted net income per share:
Weighted average common shares outstanding during the period for Basic computation
i9,504
i9,423
Dilutive effect of employee stock options and awards
i6
i32
Weighted average common shares outstanding during the period for Diluted computation
i9,510
i9,455
For the three months ended March 31, 2023 and 2022, iino/
shares of restricted stock awards
were excluded from the calculations of diluted net income per share.
The Company has i15,000,000 authorized shares of
Class A Stock and i1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of March 31, 2023, ii8,622,999/
shares of Class A Stock and ii881,452/
shares of Class B Stock were issued and outstanding. As of March 31, 2022,ii8,556,970/
shares of Class A Stock and ii881,452/
shares of Class B Stock were issued and outstanding. The par value for both classes is $ii1.00/
per share.
Equity per common share was $i19.90 and $i19.16
at March 31, 2023 and December 31, 2022, respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on March 31, 2023
and December 31, 2022, respectively.
Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state public service
commissions through a rate-setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the Company’s requested level of rates.
We are subject to regulation by the following state regulatory commissions:
•The DEPSC, regulates Artesian Water, Artesian Wastewater, and TESI.
•The MDPSC, regulates both Artesian Water Maryland and Artesian Wastewater Maryland.
•The PAPUC, regulates Artesian Water Pennsylvania.
Our water and wastewater utility operations are also subject to regulation under the federal Safe Drinking Water Act of 1974, or Safe
Drinking Water Act, the Clean Water Act of 1972, or the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for
wastewater discharges. Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state regulatory commissions as appropriate for inclusion in
establishing rates.
Water and Wastewater Rates
Our regulated subsidiaries periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional
investments in utility plant and other costs of doing business. Artesian Water provided notice to the DEPSC of its intent to file a request in the second quarter of 2023 to implement new rates to support Artesian Water’s ongoing capital improvement
program and to cover increased costs of operations. In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. Any DSIC rate in effect will be reset to
zero upon implementation of a temporary increase in base rates charged to customers. The first temporary increase may be up to the lesser of $i2.5 million on an annual basis or i15%
of gross water sales. Should the rate case not be completed within iseven months, by law, the utility may put the entire requested rate relief, up
to i15% of gross water sales, in effect under bond until a
final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest. The timing of our rate
increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase. We can provide no assurances that rate increase requests
will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.
See Note 19 – Subsequent Events.
Other Proceedings
Delaware law permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements
through a DSIC. This charge may be implemented by water utilities between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the
approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at i7.50% of the amount billed to
customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed i5.0% within any 12-month period.
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The following table summarizes (1) Artesian Water’s application with the DEPSC to collect DSIC rates and (2) the rate upon which eligible plant improvements are based:
Application Date
11/20/20
DEPSC Approval Date
12/14/20
Effective Date
01/01/21
Cumulative DSIC Rate
i7.50%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
$i43.1
Eligible Plant Improvements – Installed Beginning Date
10/01/2014
Eligible Plant Improvements – Installed Ending Date
04/30/2019
The rate reflects the eligible plant improvements installed through April 30, 2019. The January 1, 2021 rate currently remains in effect and is subject to
periodic audit by the DEPSC. For each of the three months ended March 31, 2023 and March 31, 2022, we earned approximately $ii1.2/
million in DSIC revenue.
Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts
at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated subsidiaries recognize regulatory
liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate. Such tax-related regulatory
assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties.
Under FASB ASC Topic 740, an uncertain tax position represents our expected
treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes. The Company establishes reserves for uncertain tax positions based upon
management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical
merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company
would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known. The statute of limitations for the 2018 tax returns lapsed during the third quarter of 2022, which resulted in the reversal
of the reserve in the amount of approximately $i212,000. The
Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense. During the third quarter of 2022, the Company reversed approximately $i10,000 in penalties and interest leaving a izero
balance. The Company remains subject to examination by federal and state authorities for the tax years 2019 through 2022.
Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives
of the related assets.
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NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that
value.
Current Assets and Liabilities
For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity
of those instruments.
Long-term Financial Liabilities
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All of Artesian Resources’ outstanding long-term debt as of March 31, 2023 and December 31, 2022was fixed-rate. The fair value of the Company’s long-term debt is
determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825. Under the fair value hierarchy, the fair value of the long-term debt in the table
below is classified as Level 2 measurements. Level 2 is valued using observable inputs other than quoted prices. The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market
interest rates. The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below:
The fair value of Advances for Construction cannot be reasonably estimated due to the inability to estimate accurately the timing and amounts of future
refunds expected to be paid over the life of the contracts. Refund payments are based on the water sales to new customers in the particular development constructed. The fair value of Advances for Construction would be less than the carrying amount
because these financial instruments are non-interest bearing.
As part of the Company’s growth strategy, on January 14, 2022 Artesian Wastewater completed its agreement to
acquire TESI, which provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company for $i6.4 million in cash and other consideration, including forgiveness of a $i2.1
million note due from Middlesex,
consisting of $i3.1 million paid at closing. This acquisition more
than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware. The acquisition is being accounted for as a business combination under ASC Topic 805, “Business Combinations.” The purchase price allocation is
primarily attributed to intangible assets and utility plant assets acquired and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that assets acquired, and
liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date. The Company utilized a third-party valuation firm to assist with the fair value of the assets acquired. A combination of methods
was used to determine the reasonableness of the purchase price: the cost approach and the comparative sales (market) approach. Given the majority of the net assets acquired were tangible utility plant assets and related contributions in aid of
construction, the Company primarily utilized the cost approach to record the fair value of the assets as well as some of the assumed liabilities. This approach values the underlying assets to derive market value based on the estimated replacement
cost, adjusted for depreciation. Real property was valued using the comparative sales approach. Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure.
Any goodwill as a result of the transaction is not expected to be deductible for tax purposes.
The TESI acquisition was approved by the DEPSC on October 27, 2021, subject to the DEPSC determining the appropriate ratemaking
treatment of the acquisition price and the assets acquired in Artesian Wastewater’s next base rate case.
The results of operations for the three months ended March 31, 2023 and March 31, 2022 related to the business
acquired are included in the Company’s condensed consolidated statements of operations.
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The table below sets forth the final purchase price allocation of this acquisition as of December 31, 2022.
(in thousands)
TESI
Utility plant
$
i25,354
Cash
i280
Goodwill
i2,983
Other assets
i1,033
Total assets
i29,650
Less: Liabilities and contributions in aid of construction (CIAC)
Liabilities
i3,852
CIAC
i22,676
Net cash purchase price
$
i3,122
Additionally, as part of the Company’s growth strategy, on May 26, 2022,
Artesian Water completed its purchase of substantially all of the water system operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the
right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $i5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. At closing, Artesian Water paid approximately $i3.4
million of the total purchase price. The remaining $i1.6 million is payable in ifive
equal annual installments on the anniversary date of the closing. Each annual installment is
payable with interest at an annual rate of i2.0%. The
acquisition was accounted for as a business combination under ASC Topic 805. The purchase price allocation is $i7.9 million of utility
plant assets offset by $i2.9 million of CIAC. The Company utilized similar valuation methodologies to those described above.
This transfer of Clayton’s exclusive franchise territory was approved by the
DEPSC on April 20, 2022. The DEPSC will determine the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Water’s next base rate case. The pro forma effects of the business acquired are not material to
the Company’s financial position or results of operations based on estimated annual revenue of approximately $i0.5 million related to customers acquired.
As of December 31, 2022, the fair value determination for TESI and the town of Clayton is finalized.
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NOTE 15–GEOGRAPHIC CONCENTRATION OF CUSTOMERS
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water utility service to customers within their established service territory
in all ithree counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the
MDPSC and the PAPUC. As of March 31, 2023, Artesian Water was serving approximately i95,000 customers, Artesian Water Maryland was serving approximately i2,600
customers and Artesian Water Pennsylvania was serving approximately i40 customers.
Artesian Wastewater and TESI provide wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant
to rates filed with and approved by the DEPSC. As of March 31, 2023, the number of wastewater customers served was approximately i7,700, including ione
large industrial customer.
The Company’s operating segments are comprised of its businesses which generate revenues and incur expenses, for which separate operational financial
information is available and is regularly evaluated by management for the purpose of making operating decisions, assessing performance, and allocating resources. The Company operates its businesses primarily through ione reportable segment, the Regulated Utility segment. The Regulated Utility segment is the largest component of the Company’s business and includes an
aggregation of our ifive regulated utility subsidiaries that are in the business of providing regulated water and wastewater services on the
Delmarva Peninsula. Our regulated water utility services include treating, distributing, and selling water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware and in Cecil County,
Maryland and to a residential community in Chester County, Pennsylvania. Our regulated wastewater utility services include the treatment and disposal of wastewater for customers in Sussex County, Delaware. The Company is subject to regulations as to its rates, services, and other matters by the states of Delaware, Maryland and Pennsylvania with respect to utility service within these states.
The Company also operates other non-utility businesses, primarily comprised of: Service Line Protection Plan services for water, sewer and internal plumbing;
design, construction and engineering services; and contract services for the operation and maintenance of water and wastewater systems in Delaware and Maryland. These non-utility businesses do not individually or in the aggregate meet the criteria for
disclosure of a reportable segment in accordance with generally accepted accounting principles and are collectively presented throughout this Quarterly Report on Form 10-Q within “Other” or “Non-utility”, which is consistent with how management
assesses the results of these businesses.
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The accounting policies of the operating segments are the same as those described in Note 2 – Basis of Presentation. The Regulated Utility segment includes
inter-segment costs related to leased office space provided by ione non-utility business, calculated on the lower of cost or market method, which
are eliminated to reconcile to the Consolidated Statements of Operations. The Regulated Utility segment also allocates certain corporate costs to the non-utility businesses. The measurement of depreciation, interest, and capital expenditures are
predominately related to our Regulated Utility segment. These amounts in our non-utility business are negligible and account for approximately less than 1% of consolidated amounts as of March 31, 2023 and March 31, 2022.
Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution
of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have
significant diversion of management attention.
On July 19, 2022, final judgment was entered by the United States District Court, or Court, for a Consent Decree
between the Delaware Sand and Gravel Remedial Trust, or Trust, and the United States Environmental Protection Agency, or USEPA, that governs the implementation of Amendment No 2 to the USEPA’s 1988 Record of Decision for the Delaware Sand & Gravel
Landfill Superfund Site, or Site, located in New Castle County, Delaware, issued on December 12, 2017, or ROD Amendment No. 2, confirming, among other things, the terms and conditions set forth in a Settlement Agreement upon which The Chemours Company
FC, LLC, Hercules, LLC, Waste Management of Delaware, Inc., SC Holdings, Inc., Cytec Industries, Inc., Zeneca Inc., and Bayer CropScience Inc., collectively the Percentage Settlors, and the Trust, on one hand, and Artesian Water, on the other hand,
have agreed to resolve certain of Artesian Water’s claims and issues relating to releases of contaminants from the Site.
ROD Amendment No. 2 sets forth the remedy for the contamination existing at and emanating from the Site, or the
Remedy, to address a release of contaminants of concern and of emerging concern, or COC’s, from the Site into groundwater. Artesian Water has found in groundwater that Artesian Water uses for public potable water supply certain COC’s that the Remedy
is designed to address, as a result of which Artesian has incurred, and potentially will incur additional, capital and operating costs to treat the groundwater to meet applicable drinking water standards. The Remedy includes requirements that are
directly linked to Artesian’s continued operation of the treatment plant associated with groundwater around the Site.
As set forth in the Settlement Agreement, Artesian Water shall have access to financial assurances that the Percentage Settlors have provided, or will
provide, to the USEPA in connection with the Consent Decree governing the implementation of the Remedy. In addition, the Trust shall reimburse Artesian Water for past capital and operating costs, totaling approximately $i10.0 million. Approximately $i2.5
million was
paid in August 2022, and the remaining $i7.5 million will be payable in ithree equal installments annually on the anniversary date of the Court’s approval of the Consent Decree. In addition, the Trust
shall reimburse Artesian Water for documented
reasonable and necessary capital and operating costs after July 1, 2021 that Artesian Water incurs to treat Site-related COC’s. Any reimbursements Artesian Water receives from the Trust shall be subject to final determination by the DEPSC as to the
appropriate regulatory rate-making treatment. Artesian Water received approval from the DEPSC in October 2022 to refund the reimbursements for past capital and operating costs to its customers. The refund for the reimbursements will be applied to
current and future customer bills in annual installments. The first refund occurred in October 2022, and future customer refunds will occur no later than August of each year from 2023 through 2025. The amount of the credit is calculated by dividing
the amount of the reimbursement by the number of eligible customers. Artesian Water will record 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and
maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate applications. The Trust’s reimbursement of such costs shall end if and when, based upon testing information from
the Trust’s Remedy facilities and Artesian Water’s facilities, treatment of Site-related COC’s is no longer necessary for Artesian Water to meet the treatment levels that Artesian Water chooses to not exceed in water it distributes to the general
public throughout its service territory to provide a margin of safety in complying with applicable drinking water standards.
NOTE 18 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There was no new guidance issued by the FASB during the three months ended March 31, 2023 that is applicable to the Company.
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NOTE 19 – SUBSEQUENT EVENTS
On April 28, 2023, Artesian Water Company, Inc. (“Artesian Water”), the principal subsidiary of Artesian Resources
Corporation, filed a request with the Delaware Public Service Commission to implement new rates to meet a requested increase in revenue of i23.84%,
or approximately $i17.5 million, on an annualized basis. The actual effective increase is less than i23.84%
since Artesian Water has been permitted to recover specific investments made in infrastructure through the assessment of a i7.50% Distribution System Infrastructure Charge (“DSIC”). Since the DSIC rate is set to zero when temporary rates are placed into effect, customers would experience an incremental
increase of i16.34%, the net of the overall i23.84%
increase less the DSIC rate of i7.50% currently in effect, if the requested increase is granted in full by the Delaware Public Service
Commission. The new rates are designed to support Artesian Water’s ongoing capital improvement program and to cover increased costs of operations, including chemicals and electricity for water treatment, water quality testing, fuel, taxes, interest,
labor and benefits. In accordance with applicable Delaware law, Artesian Water is permitted to implement temporary rates of i15% or $i2.5
million, whichever is lower, i60 days after
the application is accepted. Since Artesian Water has DSIC surcharges in excess of the allowable temporary increase and imposing the temporary increase would require DSIC to be reset to zero, Artesian Water has elected not to request the initial
temporary rate increase. However, should the application not be resolved within the iseven-months statutory timeframe, Artesian Water would be
permitted to place into effect temporary rates of up to i15% of gross water sales on an annual basis, subject to refund, until permanent rates
are determined by the Delaware Public Service Commission. Artesian Water’s last comprehensive application for an increase in base rate charges was filed in April 2014.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that express our
"belief,""anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer
base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding the timing and results of our rate requests, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief
relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic
initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets,
adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due,
our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less
affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in
certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. Certain factors as discussed under Item 1A -Risk Factors, in our Annual Report
on Form 10-K for the year ended December 31, 2022, and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results
of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to
update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2023
OVERVIEW
Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business. Our regulated utility segment
comprised 92.4% of total operating revenues for the three months ended March 31, 2023 and 93.0% for the three months ended March 31, 2022. Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with
rainfall and temperature. In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe these
effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our wastewater services provide a revenue stream that is not affected by these changes in weather patterns. We continue to seek growth
opportunities to provide wastewater services in Delaware and the surrounding areas.
Our profitability is also attributed to other non-utility business, such as various contract operations, water, sewer and internal SLP Plans and other
services we provide. Our contract operations, SLP Plans and other services also provide a revenue stream that is not affected by changes in weather patterns. We also continue to explore and develop relationships with developers and municipalities
in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services
in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing
and economic market conditions. We anticipate continued growth in our non-utility subsidiaries due to our water, sewer, and internal SLP Plans.
We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The
cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows. Our ability to recover increases in investments in facilities is dependent upon future rate increases, which are
subject to approval by the applicable regulatory authority. We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will
be sufficient in amount to cover costs for which we initially sought the rate increase. The impact of inflation could adversely affect our results of operations, financial position or cash flows.
Materials and Supplies
We are highly dependent on the availability of essential materials and parts from our suppliers for expansion, construction and maintenance of our services.
The majority of the materials required for our water and wastewater utility business are typically under contract at fixed prices, however, supply chain issues associated with the COVID-19 pandemic resulted in price increases and delays in procuring
certain materials and equipment in 2021 and 2022. We have been successful in minimizing these delays with thorough planning and pre-ordering. However, there is no assurance that our future financial results or business operations will not be
negatively affected.
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal
and utility customers. Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue. As of March 31, 2023, the number of metered water customers in Delaware increased
approximately 3.2% compared to March 31, 2022. The number of metered water customers in Maryland increased approximately 1.0% compared to March 31, 2022. The number of metered water customers in Pennsylvania remained consistent compared to March 31,2022. For the three months ended March 31, 2023, approximately 1.9 billion gallons of water were distributed in our Delaware systems and approximately 22.3 million gallons of water were distributed in our Maryland systems.
Artesian Wastewater and TESI own wastewater collection and treatment infrastructure and provide regulated wastewater services to customers in Sussex County,
Delaware. Artesian Wastewater Maryland is able to provide regulated wastewater services to customers in Maryland. It is not currently providing these services in Maryland. Our residential and commercial wastewater customers are billed a flat monthly
fee, which contributes to providing a revenue stream unaffected by weather. As of March 31, 2023, the number of Delaware wastewater customers increased approximately 8.3% compared to March 31, 2022.
Artesian Utility provides contract water and wastewater operation services to private, municipal, and governmental institutions. Artesian Utility also
offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather. There has been
consistent customer growth over the years. As of March 31, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 1.6%, 0.5% and 5.1%, respectively, compared to March 31, 2022. The non-utility customers
enrolled in one of our three protections plans decreased 1.7%.
Strategic Direction and Recent Developments
Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and
SLP Plan services across the Delmarva Peninsula. We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance. Our strategy has included a focus on building strategic
partnerships with county governments, municipalities and developers. By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both
needs simultaneously. We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue. We believe this experience
presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.
In our regulated water subsidiaries, our strategy is to focus on a wide spectrum of activities, which include
strategic acquisitions of existing systems, expanding certificated service area, identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the
wise use of water. Our strategy includes focused efforts to expand through strategic acquisitions and in new regions added to our Delaware service territory over the last 10 years. We plan to expand our regulated water service area in the Cecil
County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems. The expansion of our exclusive franchise areas elsewhere in Maryland and the award of
contracts will similarly enhance our operations within the state.
Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities. In the last four
years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.
We believe that Delaware's generally lower cost of living in the region and availability of development sites in
relatively close proximity to the Atlantic Ocean in Sussex County have resulted, and will continue to result, in increases to our customer base. Delaware’s lower property and income tax rate make it an attractive region for new home development and
retirement communities. Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.
On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the
Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total
purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022.
In our regulated wastewater subsidiaries, we foresee significant growth opportunities and will continue to seek
strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. There are numerous locations in Sussex County where Artesian
Wastewater’s and Sussex County’s facilities are connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission,
treatment and disposal. In addition, Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to
gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations
to assist with transitioning the flow of wastewater from one regional facility to another. In addition, since closing the transaction with TESI noted below, Artesian’s Delaware wastewater subsidiaries are the sole regional regulated wastewater
utilities in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.
On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or
Middlesex, that provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million note due from
Middlesex. This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware and included all residents in the Town of Milton.
The general need for increased capital investment in our water and wastewater systems is due to a combination of
population growth, more protective water quality standards, aging infrastructure and acquisitions. Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in both
Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware. The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for
current customers and capacity charges for new customers.
In our non-utility subsidiaries, we continue pursuing opportunities to expand our contract operations. Through Artesian Utility, we will seek to expand our
contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities. We also anticipate continued growth due to our water, sewer and internal SLP Plans. Artesian Development
owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility. Artesian Storm Water was formed to expand contract work related to the design,
installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.
Results of Operations – Analysis of the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022.
Operating Revenues
Revenues totaled $22.5 million for the three months ended March 31, 2023, $0.3 million, or 1.4%, more than revenues for the three months ended March 31, 2022. Other utility operating revenue increased approximately $0.3 million, or 11.6%, for the three months ended March 31, 2023 compared to the three months ended March 31,2022. This increase is primarily due to an increase in wastewater revenue associated with customer growth.
Non-utility operating revenue increased approximately $0.1 million, or 9.4%, for the three months ended March 31, 2023 compared to the three months ended
March 31, 2022. This increase is primarily due to an increase in Service Line Protection Plan revenue.
Water sales revenue decreased $0.1 million, or 0.7%, for the three months ended March 31, 2023 from the corresponding period in 2022, primarily related to a
one-time customer refund to be issued to Town of Frankford customers for a rate change retroactive to February 2022, as approved by the DEPSC in the first quarter of 2023, in accordance with the agreement for the purchase of Frankford’s water assets.
We realized 80.1% and 81.8% of our total operating revenue for the three months ended March 31, 2023 and March 31, 2022, respectively, from the sale of water.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $0.9
million, or 7.4%, for the three months ended March 31, 2023, compared to the same period in 2022.
Utility operating expenses increased $0.8 million,
or 7.4%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The net increase is primarily related to the following.
Payroll and employee benefit costs increased $0.6 million, primarily related to an increase in overall compensation, an increase in the number of
employees and an increase in medical benefit costs.
Repair and maintenance costs increased $0.2 million, primarily associated with wastewater treatment and
disposal facilities and water treatment and distribution operations along with a one-time acquisition adjustment related to TESI in 2022. In addition, hardware and software maintenance costs and fuel costs increased. These increases are
partially offset by a decrease in water treatment filter replacements, due to the timing of scheduled replacements.
Water treatment costs
increased $0.2 million, primarily due to an increase in the cost of chemicals as well as an increase in water treatment testing costs.
Purchased power costs increased $0.1 million due to an increase in usage in wastewater and water
operations.
Administrative costs increased $0.1 million, primarily due to a one-time acquisition adjustment related to
TESI’s allowance for doubtful accounts in 2022.
Purchased water costs decreased $0.5 million, related to a decrease of water purchased under contract, in
which the minimum amount of water required to be purchased was reduced in July 2022.
Non-utility operating expenses increased $0.1 million primarily due to an increase in plumbing services related to Service Line Protection Plan repairs.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 61.8% for the three months ended March 31, 2023, compared to 58.3% for the three months ended March 31, 2022.
Depreciation and amortization expense increased $0.1 million, or 4.5%, primarily due to continued investment in utility plant providing supply, treatment,
storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense
decreased $0.1 million, or 7.5%, primarily due to lower pre-tax income in 2023 compared to 2022, partially offset by a decrease in 2022 income tax expense related to stock options exercised in the first quarter of 2022.
Other income increased $0.4 million, primarily due to a $0.3 million
increase in allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the three months ended March 31, 2023 compared to the same period in 2022. Miscellaneous income increased
$0.1 million related to an increase in the annual patronage refund from CoBank, ACB. The primary refund calculation for both 2023 and 2022 was based on the average loan balance outstanding.
Interest Charges
Long-term debt interest increased $0.3 million, primarily related to an
increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022. Short-term debt interest increased $0.2 million, primarily
related to higher interest rates. The average short-term interest rate for the three months ended March 31, 2023 was 5.71% compared to 1.48% for the same period in 2022.
Net Income
Our net income applicable to common stock decreased $0.8 million, or 17.4%. Total operating revenues increased $0.3 million and other income increased $0.4
million, offset by a $1.0 million increase in total operating expenses and $0.5 million increase in interest charges.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the three months ended March 31,2023 were $10.5 million of cash provided by operating activities, $5.3 million in net contributions and advances from developers, which includes $1.8 million of grant funds from the State of Delaware, $1.1 million from the issuance of long-term debt
and $0.1 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption
as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are
recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. See Note 19 – Subsequent Events. We will continue to
borrow on available lines of credit in order to satisfy current liquidity needs. In addition, the Company has a long history of paying regular quarterly dividends as
approved by our Board of Directors using net cash from operating activities.
Investment in Plant and Systems
The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory. Capital expenditures during
the first three months of 2023 were $16.8 million compared to $9.8 million during the same period in 2022. During the first three months of 2023, we continued to focus our
investment through our rehabilitation program for transmission and distribution facilities by replacing aging or
deteriorating mains, installation of new mains, enhancing or improving existing treatment facilities, construction of new water storage tanks, and replacing aging wells and pumping equipment to better serve our customers. Developers contributed $1.4
million of these total investments during the first three months of 2023.
We depend on the availability of capital for expansion, construction and maintenance. We rely on our sources of liquidity to finance our investments in
utility plant and to meet our various payment obligations. We estimate that future investments will be financed by our operations and external sources, including
short-term borrowings under our revolving credit agreements discussed below. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations, state revolving
fund loans and capital market financing. We believe that internally generated funds along with existing credit facilities will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements.
However, because part of our business strategy is to expand through strategic acquisitions, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes. There is no assurance that
we will be able to secure funding on terms acceptable to us, or at all. Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent
of increases in rates approved by state public service commissions.
At March 31, 2023, Artesian Resources had a $40 million line of credit with
Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of March 31, 2023, there was $27.5 million of available funds under this line of credit. The previous interest rate for borrowings under this line was the
London Interbank Offered Rate, or LIBOR, plus 1.00%. It is expected that the LIBOR rate for USD currency will be discontinued after June 30, 2023. As a result,effective
May 20, 2022, this line of credit agreement was amended to replace LIBOR with the Daily Secured Overnight Financing Rate, or SOFR. The interest rate is a one-month SOFR plus 10 basis points, or Term SOFR, plus an applicable margin of 0.85%. Term
SOFR cannot be less than 0.00%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of August 18, 2023 or any
date on which Citizens demands payment. The Company expects to renew this line of credit.
At March 31, 2023, Artesian Water had a $20 million line of credit with CoBank,
ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of March 31, 2023, there was $10.9 million of available funds under this
line of credit. The previous interest rate for borrowings under this line allowed the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company historically used the weekly variable interest rate. In October 2022, this line of credit was amended to replace the previous interest rate options with a daily SOFR rate plus 1.45% option or a term SOFR rate plus 1.45% option
that is locked in for either one or three months. The term of this line of credit expires on October 29, 2023. Artesian Water expects to renew this line of credit.
The Company’s material cash requirements include the following lines of credit commitments and contractual obligations:
State revolving fund loans (principal and interest)
1,011
1,838
1,602
7,277
11,728
Promissory note (principal and interest)
959
1,923
1,923
10,373
15,178
Asset purchase contractual obligation (principal and interest)
345
672
647
---
1,664
Lines of credit
21,609
---
---
---
21,609
Operating leases
34
68
68
1,405
1,575
Operating agreements
76
111
116
771
1,074
Unconditional purchase obligations
818
1,554
580
---
2,952
Tank painting contractual obligation
626
783
---
---
1,409
Total contractual cash obligations
$
33,380
$
22,663
$
45,546
$
224,390
$
325,979
Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are
in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions,
transfer certain assets or change our business. As of March 31, 2023, we were in compliance with these covenants.
Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced
earlier. One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter. The state revolving fund loan obligation and promissory note obligation have an amortizing mortgage payment
payable over a 20-year period. The first mortgage bonds, the state revolving fund loan and the promissory note have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately
repaid, including all interest. We have not experienced conditions that would result in our default under these agreements.
The asset purchase contractual obligation is related to the purchase of substantially all of the water operating
assets from the Town of Clayton, or Clayton, in May 2022, by Artesian Water. The total purchase price was $5.0 million. At closing, Artesian Water paid approximately $3.4 million. The remaining $1.6 million is payable in five equal annual
installments on the anniversary date of the closing date. Each annual installment is payable with interest at an annual rate of 2.0%.
In order to control purchased power cost, in February 2021, Artesian Water entered into an electric supply contract with MidAmerican
that is effective from May 2021 to May 2025. The fixed rate was lowered 5.6% starting in May 2021. In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022 through
November 2025. In January 2022, following the acquisition of Tidewater Environmental Services, Inc., TESI dba Artesian Wastewater assumed an electricity supply contract with WGL Energy that is effective through December 2024. These fixed rate electric
supply contracts are for normal purchases and are not derivative instruments.
Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under an interconnection agreement with the Chester Water Authority. The agreement is effective from January 1, 2022
through December 31, 2026, includes automatic five-year renewal terms, unless terminated by either party, and has a “take or pay” clause which required us to purchase water on a step-down schedule through July 5, 2022, and now requires us to purchase a
minimum of 0.5 million gallons per day. In addition, payments for unconditional purchase obligations reflect minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June26, 2024.
In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage
tanks. Pursuant to the agreement, the total expenditure for the three years was $1.2 million. In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional
year. Pursuant to the amended agreement, the total expenditure for the four years is $2.2 million.
Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements
This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2022
consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December31, 2022. The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those based on such assumptions and estimates.
Our critical accounting assumptions, estimates and policies are described in Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our annual report on Form 10-K for the year ended December 31, 2022. There have been no changes in our critical accounting assumptions, estimates and policies. Our significant accounting policies are described in our notes to
the 2022 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2022.
Information concerning our implementation and the impact of recent accounting
pronouncements issued by the FASB is included in the notes to our 2022 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2022 and also in the notes to our unaudited condensed consolidated
financial statements contained in this Quarterly Report on Form 10-Q. We did not adopt any accounting policy in the first three months of 2023 that had a material impact on our financial condition, liquidity or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to
manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First
Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 2049, and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing
fixed rate of the long-term debt prior to such debt’s maturity. In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit, with two banks, under which the interim bank loans payable at March 31, 2023 were
approximately $21.6 million. An increase in the variable interest rates has resulted and is expected to continue to result in an increase in the cost of borrowing on these variable rate lines of credit. Also, changes in SOFR could affect our
operating results and liquidity. We are also exposed to market risk associated with changes in commodity prices. Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our
costs through rate increases to our customers. We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at fixed prices.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in providing reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. In addition, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were
effective to achieve the foregoing objectives. A control system cannot provide absolute assurance, however, that the objectives of the control 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.
(b) Change in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution
of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have
significant diversion of management attention. For a full discussion of our current legal proceedings or litigation arising in the ordinary course of business, refer to Note 17 - Legal Proceedings.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended
and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).**
Inline XBRL Condensed Consolidated Statements of Operations (unaudited)*
101.CSH
Inline XBRL Condensed Consolidated Statements of Cash Flows (unaudited)*
101.NTS
Inline XBRL Notes to the Condensed Consolidated Financial Statements (unaudited)*
104
The cover page from Artesian Resources Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, formatted in Inline
XBRL (contained in exhibit 101).*
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.
