ARTESIAN RESOURCES CORP - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-18516
 |
ARTESIAN RESOURCES CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
|
Delaware
|
51-0002090
|
|
--------------------------------------------------------------------
|
-------------------------------------------------
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
664 Churchmans Road, Newark, Delaware 19702
------------------------------------------------------------------
Address of principal executive offices
(302) 453 – 6900
-----------------------------------------------------------
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
|
|
Common Stock
|
ARTNA
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|
☑
|
Yes
|
□
|
No
|
Indicate by check mark whether the registrant has submitted electronically,
every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
|
☑
|
Yes
|
□
|
No
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
|
Large Accelerated Filer □
|
Accelerated Filer ☐
|
Non-accelerated Filer ☑
|
Smaller Reporting Company ☒
|
Emerging Growth Company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).
|
☐
|
Yes
|
☑
|
No
|
As of August 2, 2022, 8,557,647 shares of Class A Non-Voting Common Stock and 881,452
shares of Class B Common Stock were outstanding.
ARTESIAN RESOURCES CORPORATION
FORM 10-Q
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5
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6
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7 - 21
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22 - 30
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30
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31
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32
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33
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Signatures
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ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
ASSETS
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Utility plant, at original cost (less accumulated depreciation - 2022 - $172,261; 2021 - $159,385)
|
$
|
639,513
|
$
|
590,431
|
||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
220
|
92
|
||||||
|
Accounts receivable (less allowance for doubtful accounts - 2022 - $466; 2021 - $429)
|
8,114
|
8,367
|
||||||
|
Income tax receivable
|
766
|
2,234
|
||||||
|
Unbilled operating revenues
|
2,149
|
1,080
|
||||||
|
Materials and supplies
|
2,869
|
1,933
|
||||||
|
Prepaid property taxes
|
21
|
2,306
|
||||||
|
Prepaid expenses and other
|
2,792
|
2,652
|
||||||
|
Total current assets
|
16,931
|
18,664
|
||||||
|
Other assets
|
||||||||
|
Non-utility property (less accumulated depreciation - 2022 - $956; 2021 - $919)
|
3,759
|
3,751
|
||||||
|
Other deferred assets
|
7,116
|
5,097
|
||||||
|
Operating lease right of use
assets
|
445
|
451
|
||||||
|
Total other assets
|
11,320
|
9,299
|
||||||
|
Regulatory assets, net
|
6,314
|
6,321
|
||||||
|
Total Assets
|
$
|
674,078
|
$
|
624,715
|
||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Stockholders' equity
|
||||||||
|
Common stock
|
$
|
9,459
|
$
|
9,414
|
||||
|
Preferred stock
|
—
|
—
|
||||||
|
Additional paid-in capital
|
105,984
|
104,989
|
||||||
|
Retained earnings
|
65,459
|
63,607
|
||||||
|
Total stockholders' equity
|
180,902
|
178,010
|
||||||
|
Long-term debt, net of current portion
|
173,597
|
143,259
|
||||||
|
354,499
|
321,269
|
|||||||
|
Current liabilities
|
||||||||
|
Lines of credit
|
9,580
|
26,703
|
||||||
|
Current portion of long-term debt
|
1,996
|
1,591
|
||||||
|
Dividends payable
|
2,581
|
—
|
||||||
|
Accounts payable
|
8,576
|
10,206
|
||||||
|
Accrued expenses
|
3,748
|
4,038
|
||||||
|
Overdraft payable
|
334
|
30
|
||||||
|
Accrued interest
|
896
|
917
|
||||||
|
Income taxes payable
|
792
|
-
|
||||||
|
Customer and other deposits
|
2,394
|
2,273
|
||||||
|
Other
|
2,593
|
1,448
|
||||||
|
Total current liabilities
|
33,490
|
47,206
|
||||||
|
Commitments and contingencies
|
||||||||
|
Deferred credits and other liabilities
|
||||||||
|
Net advances for construction
|
4,174
|
4,295
|
||||||
|
Operating lease liabilities
|
440
|
440
|
||||||
|
Regulatory liabilities
|
21,632
|
21,260
|
||||||
|
Deferred investment tax credits
|
447
|
456
|
||||||
|
Deferred income taxes
|
52,701
|
53,133
|
||||||
|
Total deferred credits and other liabilities
|
79,394
|
79,584
|
||||||
|
Net contributions in aid of construction
|
206,695
|
176,656
|
||||||
|
Total Liabilities and Stockholders’ Equity
|
$
|
674,078
|
$
|
624,715
|
||||
See notes to the condensed consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands, except per share amounts)
|
For the Three Months Ended June 30,
|
For the Six Months Ended June 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Operating revenues
|
||||||||||||||||
|
Water sales
|
$
|
19,722
|
$
|
20,078
|
$
|
37,865
|
$
|
37,908
|
||||||||
|
Other utility operating revenue
|
2,914
|
1,014
|
5,440
|
2,390
|
||||||||||||
|
Non-utility operating revenue
|
2,375
|
1,377
|
3,893
|
2,815
|
||||||||||||
|
Total Operating Revenues
|
25,011
|
22,469
|
47,198
|
43,113
|
||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Utility operating expenses
|
10,070
|
9,661
|
20,566
|
19,166
|
||||||||||||
|
Non-utility operating expenses
|
1,905
|
862
|
2,847
|
1,777
|
||||||||||||
|
Depreciation and amortization
|
3,055
|
2,976
|
6,140
|
5,988
|
||||||||||||
|
State and federal income taxes
|
1,725
|
1,542
|
3,144
|
2,893
|
||||||||||||
|
Property and other taxes
|
1,413
|
1,341
|
2,914
|
2,761
|
||||||||||||
|
Total Operating Expenses
|
18,168
|
16,382
|
35,611
|
32,585
|
||||||||||||
|
Operating income
|
6,843
|
6,087
|
11,587
|
10,528
|
||||||||||||
|
Other income, net
|
||||||||||||||||
|
Allowance for funds used during construction (AFUDC)
|
324
|
371
|
505
|
615
|
||||||||||||
|
Miscellaneous (expense) income
|
(33
|
)
|
(59
|
)
|
1,412
|
1,343
|
||||||||||
|
Income before interest charges
|
7,134
|
6,399
|
13,504
|
12,486
|
||||||||||||
|
Interest charges
|
2,088
|
1,894
|
3,975
|
3,775
|
||||||||||||
|
Net income applicable to common stock
|
$
|
5,046
|
$
|
4,505
|
$
|
9,529
|
$
|
8,711
|
||||||||
|
Income per common share:
|
||||||||||||||||
|
Basic
|
$
|
0.53
|
$
|
0.48
|
$
|
1.01
|
$
|
0.93
|
||||||||
|
Diluted
|
$
|
0.53
|
$
|
0.48
|
$
|
1.01
|
$
|
0.93
|
||||||||
|
Weighted average common shares outstanding:
|
||||||||||||||||
|
Basic
|
9,452
|
9,395
|
9,438
|
9,381
|
||||||||||||
|
Diluted
|
9,470
|
9,425
|
9,464
|
9,416
|
||||||||||||
|
Cash dividends per share of common stock
|
$
|
0.2729
|
$
|
0.2610
|
$
|
0.5404
|
$
|
0.5181
|
||||||||
See notes to the condensed consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
For the Six Months
Ended June 30,
|
||||||||
|
2022
|
2021
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net income
|
$
|
9,529
|
$
|
8,711
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
6,140
|
5,988
|
||||||
|
Deferred income taxes, net
|
(640
|
)
|
(3,073
|
)
|
||||
|
Stock compensation
|
104
|
92
|
||||||
|
AFUDC, equity portion
|
(349
|
)
|
(415
|
)
|
||||
|
Changes in assets and liabilities, net of acquisitions:
|
||||||||
|
Accounts receivable, net of allowance for doubtful accounts
|
204
|
434
|
||||||
|
Income tax receivable
|
1,468
|
559
|
||||||
|
Unbilled operating revenues
|
(704
|
)
|
(599
|
)
|
||||
|
Materials and supplies
|
(936
|
)
|
68
|
|||||
|
Prepaid property taxes
|
2,862
|
1,891
|
||||||
|
Prepaid expenses and other
|
(130
|
)
|
(754
|
)
|
||||
|
Other deferred assets
|
511
|
(467
|
)
|
|||||
|
Regulatory assets
|
185
|
(71
|
)
|
|||||
|
Regulatory liabilities
|
(254
|
)
|
(297
|
)
|
||||
|
Income tax payable
|
792
|
2,362
|
||||||
|
Accounts payable
|
(4,680
|
)
|
(1,071
|
)
|
||||
|
Accrued expenses
|
(934
|
)
|
(124
|
)
|
||||
|
Accrued interest
|
(21
|
)
|
(25
|
)
|
||||
|
Deposits and other
|
441
|
567
|
||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
13,588
|
13,776
|
||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Capital expenditures (net of AFUDC, equity portion)
|
(23,266
|
)
|
(19,418
|
)
|
||||
|
Investment in acquisitions, net of cash acquired
|
(6,341
|
)
|
—
|
|||||
|
Proceeds from sale of assets
|
41
|
15
|
||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(29,566
|
)
|
(19,403
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Net (repayments) under lines of credit agreements
|
(17,123
|
)
|
(1,120
|
)
|
||||
|
Deferred debt issuance cost
|
(102
|
)
|
—
|
|||||
|
Increase in overdraft payable
|
304
|
403
|
||||||
|
Net advances and contributions in aid of construction
|
8,013
|
9,786
|
||||||
|
Net proceeds from issuance of common stock
|
936
|
941
|
||||||
|
Issuance of long-term debt
|
30,000
|
1,720
|
||||||
|
Dividends paid
|
(5,096
|
)
|
(4,856
|
)
|
||||
|
Principal repayments of long-term debt
|
(826
|
)
|
(906
|
)
|
||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
16,106
|
5,968
|
||||||
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
128
|
341
|
||||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
92
|
28
|
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
220
|
$
|
369
|
||||
|
Non-cash Investing and Financing Activity:
|
||||||||
|
Utility plant received as construction advances and contributions
|
$
|
3,243
|
$
|
2,334
|
||||
|
Dividends declared but not paid
|
2,581
|
2,454
|
||||||
|
Amounts included in accounts payable and accrued payables related to capital expenditures
|
1,761
|
2,723
|
||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||
|
Interest paid
|
$
|
3,996
|
$
|
3,800
|
||||
|
Income taxes paid
|
$
|
743
|
$
|
3,248
|
||||
|
Preliminary purchase price of allocation of investment in acquisitions:
|
||||||||
|
Utility plant
|
$
|
28,335
|
$
|
—
|
||||
|
Cash
|
280
|
—
|
||||||
|
Other assets
|
3,580
|
—
|
||||||
|
Total assets
|
32,195
|
—
|
||||||
|
Less:
|
||||||||
|
Liabilities
|
3,536
|
—
|
||||||
|
Future contractual obligation payable to seller
|
1,569
|
—
|
||||||
|
Contributions in aid of construction
|
20,469
|
—
|
||||||
|
Cash paid for acquisition
|
6,621
|
—
|
||||||
|
Cash received from acquisition
|
280
|
—
|
||||||
|
Net cash paid for acquisition
|
$
|
6,341
|
$
|
—
|
||||
See notes to the condensed consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
|
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
|
Common Shares Outstanding Class B Voting (2)
|
$1 Par Value Class A Non-Voting
|
$1 Par Value Class B Voting
|
Additional Paid-in Capital
|
Retained Earnings
|
Total
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of December 31, 2020
|
8,475
|
882
|
$
|
8,475
|
$
|
882
|
$
|
103,463
|
$
|
56,606
|
$
|
169,426
|
||||||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
4,206
|
4,206
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
—
|
—
|
—
|
—
|
—
|
(2,406
|
)
|
(2,406
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
3
|
—
|
3
|
—
|
95
|
—
|
98
|
|||||||||||||||||||||
|
Employee stock options and awards(4)
|
22
|
—
|
22
|
—
|
438
|
—
|
460
|
|||||||||||||||||||||
|
Employee Retirement Plan(3)
|
2
|
—
|
2
|
—
|
84
|
—
|
86
|
|||||||||||||||||||||
|
Balance as of March 31, 2021
|
8,502
|
882
|
8,502
|
882
|
104,080
|
58,406
|
171,870
|
|||||||||||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
4,505
|
4,505
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
—
|
—
|
—
|
—
|
—
|
(4,904
|
)
|
(4,904
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
2
|
—
|
2
|
—
|
103
|
—
|
105
|
|||||||||||||||||||||
|
Employee stock options and awards(4)
|
11
|
—
|
11
|
—
|
165
|
—
|
176
|
|||||||||||||||||||||
|
Employee Retirement Plan(3)
|
3
|
—
|
3
|
—
|
105
|
—
|
108
|
|||||||||||||||||||||
|
Balance as of June 30, 2021
|
8,518
|
882
|
8,518
|
882
|
104,453
|
58,007
|
171,860
|
|||||||||||||||||||||
|
|
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
|
|
Common Shares Outstanding Class B Voting (2)
|
|
$1 Par Value Class A Non-Voting
|
|
$1 Par Value Class B Voting
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Total
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Balance as of December 31, 2021
|
8,532
|
|
|
882
|
|
$
|
8,532
|
|
$
|
882
|
|
$
|
104,989
|
|
$
|
63,607
|
|
$
|
178,010
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,483
|
|
|
4,483
|
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,518)
|
|
(2,518)
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend reinvestment plan
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
87
|
|
|
—
|
|
|
89
|
|
Employee stock options and awards(4)
|
|
22
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
475
|
|
|
—
|
|
|
497
|
|
Employee Retirement Plan(3)
|
|
0
|
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
Balance as of March 31, 2022
|
8,556
|
882
|
8,556
|
882
|
105,551
|
65,572
|
180,561
|
|||||||||||||
|
Net income
|
—
|
—
|
—
|
—
|
—
|
5,046
|
5,046
|
|||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||
|
Common stock
|
—
|
—
|
—
|
—
|
—
|
(5,159)
|
(5,159)
|
|||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||
|
Dividend reinvestment plan
|
2
|
—
|
2
|
—
|
97
|
—
|
99
|
|||||||||||||
|
Employee stock options and awards(4)
|
19
|
—
|
19
|
—
|
336
|
—
|
355
|
|||||||||||||
|
Employee Retirement Plan(3)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Balance as of June 30, 2022
|
|
8,577
|
|
|
882
|
|
8,577
|
|
882
|
|
105,984
|
|
65,459
|
|
180,902
|
|||||
| (1) |
At June 30, 2022 and June 30, 2021, Class A Common Stock had 15,000,000 shares authorized. For the same periods,
shares issued, inclusive of treasury shares, were 8,606,597 and 8,548,106, respectively.
|
| (2) |
At June 30, 2022 and June 30, 2021, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued.
|
| (3) |
Artesian Resources Corporation registered 200,000 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 331,500 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 June 30, 2022, and June 30, 2021, see Note 5-Stock Compensation Plans.
|
See notes to the condensed consolidated financial statements
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.
DELAWARE REGULATED SUBSIDIARIES
Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, 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.
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.
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 $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’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton.
MARYLAND REGULATED SUBSIDIARIES
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 able to provide regulated wastewater services to customers in the State of Maryland. It is currently not providing these services.
PENNSYLVANIA REGULATED 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.
OTHER SUBSIDIARIES
Our three 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. In addition, as further discussed below, Artesian Utility operates 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.
Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under
a 20-year contract that expires in July 2039. Artesian
Utility currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 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 three protection
plans to customers, the WSLP Plan, the SSLP Plan and the ISLP Plan. 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 facility consists of approximately 10,000 square feet of office space along with nearly 10,000 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.
NOTE 2 – BASIS OF PRESENTATION
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 2021 as filed with the SEC on March 11, 2022.
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 June 30, 2022, the results of its operations for the three and six-month periods ended June 30, 2022 and June 30, 2021, its cash flows for the six-month periods ended June 30, 2022 and June 30, 2021 and the
changes in stockholders’ equity for the three and six-month periods ended June 30, 2022 and June 30, 2021. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2021 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.
Use of Estimates
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 and contingent assets and
liabilities at the date of the condensed 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 June 30, 2022, the accounting for these transactions was preliminary. Management’s preliminary determination of fair value of the tangible assets acquired using the cost method requires management to make significant
estimates and assumptions related to economic lives of the assets, replacement costs, and physical characteristics of the tangible assets acquired. Third-party valuation specialists are assisting with the valuation of the assets acquired. The
purchase price allocations are expected to be finalized once the valuations of assets acquired have been completed, no later than one year after the acquisition date in each case.
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.
NOTE 3 – REVENUE RECOGNITION
Background
Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or
DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC. 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 consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, design and installation contract services, and wastewater inspection fees. Other 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.
Tariff Contract Revenues
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. Pursuant to a settlement agreement, the minimum required volume was prorated on
a seven month basis beginning June 1, 2021 and ending December 31, 2021.
Artesian generates revenue from metered wastewater services provided to 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 monthly 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 25 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. However, due to the
COVID-19 pandemic causing hardships for many utility customers, the Company experienced longer receivable cycles throughout 2020 and into 2021 and made an adjustment to increase the reserve for bad debt by $0.5 million in 2020. In June 2021 we made an adjustment to reduce the reserve by $0.3
million. We will continue to monitor factors that affect the reserve for bad debt.
Non-tariff Contract Revenues
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 25
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 30 days, and therefore there is no contract asset or liability associated with most of these revenues. We have one
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 June 30, 2022, 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
The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location:
|
(in thousands)
|
Three months ended
June 30, 2022
|
Three months ended
June 30, 2021
|
Six months ended
June 30, 2022
|
Six months ended
June 30, 2021
|
||||||||||||
|
Tariff Revenue
|
||||||||||||||||
|
Consumption charges
|
$
|
12,182
|
$
|
12,660
|
$
|
22,749
|
$
|
23,078
|
||||||||
|
Fixed fees
|
7,751
|
6,872
|
15,529
|
13,871
|
||||||||||||
|
Service charges
|
137
|
119
|
293
|
320
|
||||||||||||
|
DSIC
|
1,282
|
1,316
|
2,464
|
2,488
|
||||||||||||
|
Metered wastewater services
|
129
|
—
|
269
|
—
|
||||||||||||
|
Industrial wastewater services
|
422
|
(384
|
)
|
828
|
(379
|
)
|
||||||||||
|
Total Tariff Revenue
|
$
|
21,903
|
$
|
20,583
|
$
|
42,132
|
$
|
39,378
|
||||||||
|
Non-Tariff Revenue
|
||||||||||||||||
|
Service line protection plans
|
$
|
1,217
|
$
|
1,134
|
$
|
2,439
|
$
|
2,230
|
||||||||
|
Contract operations
|
242
|
217
|
453
|
447
|
||||||||||||
|
Design and installation
|
978
|
62
|
1,101
|
212
|
||||||||||||
|
Inspection fees
|
66
|
52
|
106
|
136
|
||||||||||||
|
Total Non-Tariff Revenue
|
$
|
2,503
|
$
|
1,465
|
$
|
4,099
|
$
|
3,025
|
||||||||
|
Other Operating Revenue
|
$
|
605
|
$
|
421
|
$
|
967
|
$
|
710
|
||||||||
|
Total Operating Revenue
|
$
|
25,011
|
$
|
22,469
|
$
|
47,198
|
$
|
43,113
|
||||||||
Contract Assets and Contract Liabilities
Our contract assets and liabilities consist of the following:
|
(in thousands)
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Contract Assets – Tariff
|
$
|
3,156
|
$
|
2,144
|
||||
|
Deferred Revenue
|
||||||||
|
Deferred Revenue – Tariff
|
$
|
1,179
|
$
|
1,227
|
||||
|
Deferred Revenue – Non-Tariff
|
404
|
287
|
||||||
|
Total Deferred Revenue
|
$
|
1,583
|
$
|
1,514
|
||||
For the six months ended June 30, 2022, the Company recognized revenue of $1.2
million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.3 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 June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our
SLP Plan services, wastewater inspections and one operation contract, which are expected to be satisfied and associated revenue recognized within the next three months, one year and seven years for the SLP Plan revenue, inspection fee revenue and
contract operations revenue, respectively.
NOTE 4 – LEASES
The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 20 years to 74 years, some of which include
options to automatically extend the leases for up to 66 years. 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 3%, 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.
Rent expense for all operating leases except those with terms of 12 months or less comprises:
|
(in thousands)
|
||||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30,
|
June 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
Minimum rentals
|
$
|
2
|
$
|
7
|
$
|
9
|
$
|
14
|
||||||||
|
Contingent rentals
|
—
|
—
|
—
|
—
|
||||||||||||
|
$
|
2
|
$
|
7
|
$
|
9
|
$
|
14
|
|||||||||
Supplemental cash flow information related to leases is as follows:
|
|
(in thousands)
|
|||||||
|
|
Six Months Ended
|
Six Months Ended
|
||||||
|
June 30, 2022
|
June 30, 2021
|
|||||||
|
|
||||||||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
||||||||
|
Operating cash flows from operating leases
|
$
|
9
|
$
|
14
|
||||
|
Right-of-use assets obtained in exchange for lease obligations:
|
||||||||
|
Operating leases
|
$
|
445
|
$
|
450
|
||||
Supplemental balance sheet information related to leases is as follows:
|
|
(in thousands,
except lease term and discount rate)
|
|||||||
|
|
June 30, 2022
|
December 31, 2021
|
||||||
|
|
||||||||
|
Operating Leases:
|
||||||||
|
Operating lease right-of-use assets
|
$
|
445
|
$
|
451
|
||||
|
Other current liabilities
|
$
|
2
|
6
|
|||||
|
Operating lease liabilities
|
440
|
440
|
||||||
|
Total operating lease liabilities
|
$
|
442
|
$
|
446
|
||||
|
Weighted Average Remaining Lease Term
|
||||||||
|
Operating leases
|
61 years
|
61 years
|
||||||
|
Weighted Average Discount Rate
|
||||||||
|
Operating leases
|
5.0
|
%
|
5.0
|
%
|
||||
Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2022 are as follows:
|
|
(in thousands)
|
|||
|
|
Operating Leases
|
|||
|
Year
|
||||
|
2023
|
$
|
24
|
||
|
2024
|
24
|
|||
|
2025
|
24
|
|||
|
2026
|
24
|
|||
|
2027
|
25
|
|||
|
Thereafter
|
1,330
|
|||
|
Total undiscounted lease payments
|
$
|
1,451
|
||
|
Less effects of discounting
|
(1,009
|
)
|
||
|
Total lease liabilities recognized
|
$
|
442
|
||
As of June 30, 2022, we have not entered into
operating or finance leases that will commence at a future date.
NOTE 5 – STOCK COMPENSATION PLANS
On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan. 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, or the
Committee, of the Board of Directors of the Company, or the Board. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, the type, size and terms of the grants, 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 of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries and non-employee directors of the Company are
eligible for grants under the 2015 Plan.
Compensation expense, for the three and six months ended June 30, 2022 of approximately $55,000 and $104,000, respectively, was recorded for restricted stock
awards issued in May 2021 and May 2022. Compensation expense, for the three and six months ended June 30, 2021 of approximately $49,000 and $91,000, respectively, was recorded for restricted stock awards issued in May 2020 and 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, 5,000 shares of Class A Common
Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $45.58, 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.
On May 4, 2021, 5,000 shares of Class A Common
Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $40.11, the closing price of the Class A Stock as
recorded on the Nasdaq Global Select Market on May 4, 2021. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.
The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for
the six months ended June 30, 2022:
|
Options
|
Restricted Awards
|
|||||||||||||||||||||||
|
Option Shares
|
Weighted Average Exercise Price
|
Weighted Average Remaining Life (Yrs.)
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding Restricted Stock Awards
|
Weighted Average
Grant Date
FairValue
|
|||||||||||||||||||
|
Plan options/restricted stock awards
|
||||||||||||||||||||||||
|
Outstanding at January 1, 2022
|
83,000
|
$
|
21.65
|
$
|
2,048
|
5,000
|
$
|
40.11
|
||||||||||||||||
|
Granted
|
—
|
—
|
—
|
5,000
|
45.58
|
|||||||||||||||||||
|
Exercised/vested and released
|
(35,750
|
)
|
20.93
|
905
|
(5,000
|
)
|
40.11
|
|||||||||||||||||
|
Expired/cancelled
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Outstanding at June 30, 2022
|
47,250
|
$
|
22.20
|
1.425
|
$
|
1,274
|
5,000
|
$
|
40.11
|
|||||||||||||||
|
Exercisable/vested at June 30, 2022
|
47,250
|
$
|
22.20
|
1.425
|
$
|
1,274
|
—
|
—
|
||||||||||||||||
The total intrinsic value of options exercised during the six months ended June 30, 2022 was approximately $905,000.
There were no unvested option shares outstanding under the 2015 Plan during the six months ended June 30, 2022.
As of June 30, 2022, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of June 30, 2022, there was $191,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.84 years, the remaining vesting period for the restricted stock awards.
NOTE 6 – OTHER DEFERRED ASSETS
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. Other deferred assets is primarily associated with the acquisition of TESI in January 2022 based on the preliminary purchase price allocation. The purchase price allocation will be finalized once the valuation of assets acquired has been
completed, no later than one year after the acquisition date. In addition, other deferred assets includes the Mountain Hill Water Company acquisition.
|
In thousands
|
June 30, 2022
|
December 31, 2021
|
|
|
|
|
|
|
|
Investment in CoBank
|
$5,351
|
|
$4,850
|
|
Other deferred assets
|
1,765
|
|
247
|
|
|
$7,116
|
|
$5,097
|
NOTE 7 - REGULATORY ASSETS
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.
Regulatory expenses amortized on a straight-line basis are noted below:
|
Expense
|
Years Amortized
|
|
Deferred contract costs and other
|
5
|
|
Rate case studies
|
5
|
|
Delaware rate proceedings
|
2.5
|
|
Maryland rate proceedings
|
5
|
|
Debt related costs
|
15 to 30 (based on term of related debt)
|
|
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008)
|
50
|
|
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in
2010)
|
20
|
|
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011)
|
80
|
|
Regulatory assets, net of amortization, comprise:
|
||||||||
|
(in thousands)
|
||||||||
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Deferred income taxes
|
$
|
475
|
$
|
355
|
||||
|
Deferred contract costs and other
|
258
|
288
|
||||||
|
Debt related costs
|
4,829
|
4,902
|
||||||
|
Goodwill
|
269
|
273
|
||||||
|
Deferred acquisition and franchise costs
|
483
|
503
|
||||||
|
$
|
6,314
|
$
|
6,321
|
|||||
NOTE 8 – REGULATORY LIABILITIES
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.
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 34% to 21% (see Note 11) resulting in a decrease in the net deferred income tax liability of $24.3
million, of which $22.8 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 $22.2 million over a period of 49.5 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 49.5 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 $0.6 million regarding the effects of the TCJA on Maryland customers.
|
Regulatory liabilities comprise:
|
||||||||
|
|
(in thousands)
|
|||||||
|
|
June 30, 2022
|
December 31, 2021
|
||||||
|
|
||||||||
|
Utility plant retirement cost obligation
|
$
|
169
|
$
|
149
|
||||
|
Deferred income taxes (related to TCJA)
|
21,463
|
21,111
|
||||||
|
$
|
21,632
|
$
|
21,260
|
|||||
NOTE 9 - 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.
The following table summarizes the shares used in computing basic and diluted net income per share:
|
For the Three Months Ended
June 30,
|
For the Six Months Ended
June 30,
|
|||||||||||||||
|
2022
|
2021
|
2022
|
2021
|
|||||||||||||
|
(in thousands)
|
||||||||||||||||
|
Weighted average common shares outstanding during the period for Basic computation
|
9,452
|
9,395
|
9,438
|
9,381
|
||||||||||||
|
Dilutive effect of employee stock options and awards
|
18
|
30
|
26
|
35
|
||||||||||||
|
Weighted average common shares outstanding during the period for Diluted computation
|
9,470
|
9,425
|
9,464
|
9,416
|
||||||||||||
For the three and six months ended June 30, 2022
and 2021, no shares of
restricted stock awards were excluded from the calculations of diluted net income per share.
The Company has 15,000,000 authorized shares of
Class A Stock and 1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of June 30, 2022, 8,577,620 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of June 30, 2021, 8,519,129
shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $1.00 per share.
Equity per common share was $19.17 and $18.94 at June 30, 2022 and December 31, 2021, respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares
of common stock outstanding on June 30, 2022 and December 31, 2021, respectively.
NOTE 10 - REGULATORY PROCEEDINGS
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 both Artesian Water and Artesian Wastewater.
|
|
•
|
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 utilities 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. 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. The first temporary increase may
be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales. Should the rate case not be
completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% 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.
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 7.50% of the amount billed to
customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed 5.0% within any 12-month period.
The following table summarizes (1) Artesian Water’s applications with the DEPSC to collect DSIC rates and (2) the rates 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
|
7.50%
|
|
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
|
$43.1
|
|
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 DSIC rate effective January 1, 2021 is still subject to audit by the DEPSC at a later date. For the three and six months ended June 30, 2022, we earned approximately $1.3 million and $2.5 million in DSIC revenue, respectively. For the
three and six months ended June 30, 2021, we earned approximately $1.3 million and $2.5 million in DSIC revenue, respectively.
NOTE 11 – INCOME TAXES
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 utilities 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 2017 tax returns lapsed during the fourth quarter of 2021, which resulted in the reversal
of the reserve in the amount of approximately $26,000. 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. The Company has accrued approximately $10,000 in penalties and interest for the six months ended June 30, 2022. The Company remains subject to examination by federal and state authorities for the
tax years .
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.
NOTE 12 – 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
All of Artesian Resources’ outstanding long-term debt as of June 30, 2022 and December 31, 2021 was 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:
|
In thousands
|
||||||||
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Carrying amount
|
$
|
175,593
|
$
|
144,850
|
||||
|
Estimated fair value
|
$
|
168,490
|
$
|
163,182
|
||||
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.
NOTE 13 – RELATED PARTY TRANSACTIONS
Mr. Michael Houghton currently serves as a director. During 2021, Mr. Houghton was a Partner in the law firm of Morris, Nichols, Arsht & Tunnell LLP, or
MNAT, in Wilmington, Delaware. Mr. Houghton retired from MNAT as a Partner, effective January 1, 2022, however, Mr. Houghton continues to perform legal services for MNAT as an independent contractor and non-partner. In the normal course of business,
the Company utilized the services of MNAT in 2021 for various regulatory, real estate and public policy matters. Approximately $58,000 and $71,000 was paid to MNAT during the three and six months ended June 30, 2021, respectively, for legal services and director related services.
As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related
party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5% of any class of the
Company's voting securities or any other related person that would potentially require disclosure. In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in
the transactions; the satisfactory performance of work contracted with the related party prior to the election of Mr. Houghton as a director; and the material terms of the transactions, including, without limitation, the amount and type of
transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company. The
Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders.
NOTE 14 – BUSINESS COMBINATIONS
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 $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex,
consisting of $3.1 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,” in accordance with the acquisition
method whereby the total purchase price consideration will be allocated 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 process for estimating the fair values of identifiable intangible assets and
certain tangible assets requires the use of significant estimates and assumptions. The Company is still gathering detailed records for valuing utility plant assets and related contributions in aid of construction at replacement cost adjusted for
depreciation and valuing real property using a comparative sales approach in order to complete the purchase price allocation for the items as well as some of the assumed liabilities. The purchase price allocation will be finalized once the valuation
of assets acquired has been completed, no later than one year after the acquisition date. 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 Company reflected revenue of $0.7 million and $1.4 million for the three and six months ended June 30, 2022 , respectively, in its condensed consolidated statement of operations related to the acquisition. The pro forma revenue for the three and six months ended June
30, 2022 is estimated to be approximately $0.7 million and $1.4 million, respectively. The Company anticipates the pro forma effects of revenue for the three and six months ended June 30, 2021 to be approximately the same given there has not been any changes in the rates. The
pro forma information is not necessarily indicative of the Company’s future results. Any pro forma effects of earnings is not practicable, as we continue to integrate TESI operations and adjust the operating cost structure as it relates to operating
expenses reflective of synergies of the combined operations, and therefore would not present an accurate comparison.
The table below sets forth the preliminary purchase price allocation of this acquisition as of June 30, 2022. The preliminary purchase price allocation is provisional and there could be material changes to the estimates below.
|
(In thousands)
|
||||
|
TESI
|
||||
|
Utility plant
|
$
|
19,455
|
||
|
Cash
|
280
|
|||
|
Other assets
|
3,580
|
|||
|
Total assets
|
23,315
|
|||
|
Less: Liabilities and contributions in aid of construction (CIAC)
|
||||
|
Liabilities
|
3,536
|
|||
|
CIAC
|
16,657
|
|||
|
Net cash purchase price
|
$
|
3,122
|
||
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 $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. At closing, Artesian Water paid approximately $3.4 million of the total purchase price. 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%. The
acquisition was accounted for as a business combination under ASC Topic 805. The preliminary purchase price allocation is $8.9
million of utility plant assets offset by $3.8 million of CIAC. This preliminary purchase price allocation will be finalized once the
valuation of assets acquired has been completed, no later than one year after the acquisition date.
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 related to customers acquired.
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 three 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 June 30, 2022, Artesian Water was serving approximately 94,000 customers, Artesian Water Maryland was serving
approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 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. The number of wastewater customers served more than doubled following the acquisition of TESI in January 2022. As of June 30, 2022, Artesian Wastewater combined with TESI were serving approximately 7,300 customers, including one large industrial
customer.
NOTE 16 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There was no new guidance issued by the FASB during the six months ended June 30, 2022 that is applicable to the
Company.
NOTE 17 – SUBSEQUENT EVENT
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 $10.0 million, with approximately $2.5 million due
by August 18, 2022, within 30 days after the Court’s July 19, 2022 approval of the Consent Decree. The remaining $7.5 million will be payable in three 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. 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.
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 specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations, 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 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, 2021, and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, 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. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. 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 JUNE 30, 2022
OVERVIEW
Our profitability is primarily attributable to the sale of water. Gross water sales composed 80.2% of total operating revenues for the six months ended June
30, 2022. Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans, wastewater services and other services we provide. 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 the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our wastewater services, contract operations, SLP Plans and other services provide a revenue stream that is not
affected by changes in weather patterns.
While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the
surrounding areas. 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-regulated division due to our water, sewer, and internal SLP
Plans.
COVID-19 Pandemic
As of June 30, 2022, the Company’s financial results and business operations have not been materially adversely
affected by the coronavirus, or COVID-19, outbreak, which was declared a pandemic in March 2020. However, we have experienced delays in procuring some materials and supplies. While we have been successful in managing these delays, there is no
assurance that our future financial results or business operations will not be negatively affected. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation and
impacts on its operations, suppliers, industry, and workforce.
Inflation
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. We have been successful in minimizing these delays and cost increases with thorough planning and pre-ordering, however there is no assurance that our future financial results or business operations will not
be negatively affected.
Water Division
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 June
30, 2022, the number of metered water customers in Delaware increased approximately 3.3% compared to June 30, 2021. The number of metered water customers in Maryland
increased approximately 2.0% compared to June 30, 2021. The number of metered water customers in Pennsylvania remained consistent compared to June 30, 2021. For the six months ended June 30, 2022, approximately 4.0 billion gallons of water
were distributed in our Delaware systems and approximately 65.1 million gallons of water were distributed in our Maryland systems.
Wastewater Division
Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in Delaware in
July 2005. Artesian Wastewater Maryland was incorporated on June 3, 2008 and 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. The number of Artesian’s Delaware wastewater customers more than doubled compared to June 30, 2021, following the acquisition of Tidewater Environmental Services, Inc., or TESI. This acquisition agreement is discussed further in the “Strategic Direction” section below.
Non-Regulated Division
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 June 30, 2022, the eligible customers
enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.4%, 1.3% and 14.6%, respectively, compared to June 30, 2021. The non-utility customers enrolled in one of our three protections plans increased 1.8%.
Strategic Direction
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 division, 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, availability of development sites in relatively close proximity to the Atlantic
Ocean in Sussex County, and attractive financing rates for construction and mortgages 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 division, 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.
Artesian Wastewater began operating its Sussex Regional Recharge Facility in
late June 2021, shortly after our large industrial customer received its process wastewater treatment operating permit. The associated customer agreement includes a required minimum wastewater flow. Pursuant to a settlement agreement, for
the calendar year 2021 only, the minimum required volume of wastewater was prorated on a seven-month basis beginning June 1, 2021 and ending December 31, 2021.
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-regulated division, 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 June 30, 2022 Compared to the Three Months Ended June 30, 2021.
Operating Revenues
Revenues totaled $25.0 million for the three months ended June 30, 2022, $2.5 million, or 11.3%, more than revenues for the three months ended June 30, 2021. Other utility operating revenue increased approximately $1.9 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This
increase is primarily due to an increase in wastewater revenue associated with industrial wastewater services that started in June 2021, residential customer growth resulting from the acquisition of TESI in January 2022 and organic residential customer
growth.
Non-utility operating revenue increased approximately $1.0 million for the three months ended June 30, 2022 compared to the three months ended June 30,
2021. This increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue.
Water sales revenue decreased $0.4 million, or 1.8%, for the three months ended June 30, 2022 from the corresponding period in 2021, primarily due to a
decrease in overall water consumption, partially offset by an increase in fixed fee revenue related to added customers. We realized 78.9% and 89.4% of our total operating revenue for the three months ended June 30, 2022 and June 30, 2021,
respectively, from the sale of water.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $1.5
million, or 12.8%, for the three months ended June 30, 2022, compared to the same period in 2021. Non-utility operating expenses increased $1.0 million, utility
operating expenses increased $0.4 million and property and other taxes increased $0.1 million.
Non-utility operating expenses increased $1.0 million primarily due to an increase in costs associated with the wastewater infrastructure design and
construction contract and an increase in plumbing services related to Service Line Protection Plan repairs.
Utility operating expenses increased $0.4 million,
or 4.2%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The net increase is primarily related to the following.
|
Repair and maintenance costs increased $0.4 million, primarily related to an increase in tank painting
costs under contract, an increase in water and wastewater treatment costs, an increase in overall maintenance costs associated with the TESI acquisition and an increase in fuel costs.
|
|
Administrative costs
increased $0.3 million, primarily due to an adjustment made in June 2021 to reduce the additional bad debt reserve from 2020 associated with the COVID-19 pandemic.
|
|
Payroll and employee benefit costs increased $0.2 million, primarily related to an increase in overall
compensation.
|
|
Purchased power costs increased $0.1 million, primarily due to an increase in usage related to the
additional operational costs associated with the TESI acquisition and upgraded wastewater treatment facilities, in addition to an increase in overall water operations.
|
|
Purchased water costs decreased $0.6 million, related to a decrease of water purchased under a new contract, effective January 2022, in which the
minimum amount of water required to be purchased was reduced.
|
Property and other taxes increased $0.1 million, or 5.4%, primarily due to an increase in payroll taxes, related to increased payroll related expenses. In
addition, utility plant subject to taxation increased. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 53.5% for the three months ended June 30, 2022, compared to 52.8% for the three months ended June 30, 2021.
Depreciation and amortization expense increased $0.1 million, or 2.7%, 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 increased $0.2 million, or 11.9%, primarily due to higher pre-tax income in 2022 compared to 2021.
Interest Charges
Long-term debt interest increased $0.2 million, primarily related to an
increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022.
Net Income
Our net income applicable to common stock increased $0.5 million, or 12.0%. Total operating revenues increased $2.5 million, mostly offset by a $1.9 million
increase in total operating expenses and $0.2 million increase in interest charges.
Results of Operations – Analysis of the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021.
Operating Revenues
Revenues totaled $47.2 million for the six months ended June 30, 2022, $4.1 million, or 9.5%, more than revenues for the six months ended June 30, 2021. Other utility operating revenue increased approximately $3.0 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This
increase is primarily due to an increase in wastewater revenue associated with residential customer growth resulting from the acquisition of TESI in January 2022, industrial wastewater services that started in June 2021, as well as organic residential
customer growth.
Non-utility operating revenue increased approximately $1.1 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.
This increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue.
Water sales revenue remained consistent for the six months ended June 30, 2022 from the corresponding period in 2021. Overall water consumption decreased,
partially offset by an increase in fixed fee revenue related to added customers. We realized 80.2% and 87.9% of our total operating revenue for the six months ended June 30, 2022 and June 30, 2021, respectively, from the sale of water.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $2.6
million, or 11.1%, for the six months ended June 30, 2022, compared to the same period in 2021. Utility operating expenses increased $1.4 million, non-utility
expenses increased $1.1 million and property and other taxes increased $0.1 million.
Utility operating expenses increased $1.4 million,
or 7.3%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The net increase is primarily related to the following.
|
Repair and maintenance costs increased $1.0 million, related to an increase in maintenance costs primarily
associated with water treatment facilities and equipment, including an increase in water treatment filter replacements, an increase in tank painting costs under contract, an increase in wastewater treatment costs and an increase in fuel
costs. In addition, overall maintenance costs increased related to the TESI acquisition.
|
|
Administrative costs
increased $0.5 million, primarily due to an adjustment made in June 2021 to reduce the additional bad debt reserve from 2020 associated with the COVID-19 pandemic. In addition, outside contract services for wastewater treatment associated
with the TESI acquisition increased.
|
|
Payroll and employee benefit costs increased $0.5 million, primarily related to an increase in overall
compensation.
|
|
Purchased power costs increased $0.2 million, primarily due to an increase in usage related to the
additional operational costs associated with the TESI acquisition and upgraded wastewater treatment facilities, in addition to an increase in overall water operations.
|
|
Purchased water costs decreased $0.8 million, related to a decrease of water purchased under a new
contract, effective January 2022, in which the minimum amount of water required to be purchased was reduced.
|
Non-utility operating expenses increased $1.1 million primarily due to an increase in costs associated with the wastewater infrastructure design and
construction contract and an increase in plumbing services related to Service Line Protection Plan repairs.
Property and other taxes increased $0.1 million, or 5.5%, primarily due to an increase in payroll taxes, related to increased payroll related expenses. In
addition, utility plant subject to taxation increased. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.
The ratio of operating expense, excluding depreciation and income taxes, to
total revenue was 55.8% for the six months ended June 30, 2022, compared to 55.0% for the six months ended June 30, 2021.
Depreciation and amortization expense increased $0.1 million, or 2.5%, 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 increased $0.3 million, or 8.7%, primarily due to higher pre-tax income in 2022 compared to 2021.
Interest Charges
Long-term debt interest increased $0.2 million, primarily related to an
increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022.
Net Income
Our net income applicable to common stock increased $0.8 million, or 9.4%. Total operating revenues increased $4.1 million, mostly offset by a $3.1 million
increase in total operating expenses and $0.2 million increase in interest charges.
Our primary sources of liquidity for the six months ended June 30, 2022
were $13.6 million of cash provided by operating activities, $30.0 million principal amount from a new First Mortgage Series Bond issued in April 2022, $8.0 million in
net contributions and advances from developers, and $0.9 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. 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 six months of 2022 were $29.6 million compared to $19.4 million during the same period in 2021. During the first six months of 2022, we continue to focus our
investment through our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains, installation of new main, enhancing or improving existing treatment facilities and replacing aging wells and pumping
equipment to better serve our customers. In May 2022, we completed the purchase of substantially all of the water operating assets from the Town of Clayton. We also continue to invest in wastewater projects, including the acquisition of TESI in
January 2022. Developers contributed $3.0 million of the total investment during the first six months of 2022.
We depend on the availability of capital for expansion, construction and maintenance. We have several sources of liquidity to finance our investment in
utility plant and other fixed assets. 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.
Lines of Credit and Long-Term Debt
At June 30, 2022, 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 June 30, 2022, there was $34.0 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 May 21, 2023 or any date
on which Citizens demands payment. The Company expects to renew this line of credit.
At June 30, 2022, 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 June 30, 2022, there was $16.4 million of available funds under this
line of credit. The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on October 30, 2022. 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:
|
Material Cash Requirements
|
Payments Due by Period
|
|||||||||||||
|
In thousands
|
Less than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After 5
Years
|
|
Total
|
|||||
|
First mortgage bonds (principal and interest)
|
$
|
7,924
|
|
$
|
15,773
|
|
$
|
15,569
|
|
$
|
240,933
|
$
|
280,289
|
|
|
State revolving fund loans (principal and interest)
|
|
820
|
|
1,483
|
|
|
1,116
|
|
|
4,057
|
|
|
7,476
|
|
|
Promissory note (principal and interest)
|
961
|
1,921
|
1,924
|
11,094
|
15,900
|
|||||||||
|
Asset purchase contractual obligation (principal and interest)
|
345
|
672
|
647
|
---
|
1,664
|
|||||||||
|
Lines of credit
|
9,580
|
---
|
---
|
---
|
9,580
|
|||||||||
|
Operating leases
|
|
24
|
|
|
48
|
|
49
|
|
|
1,330
|
|
|
1,451
|
|
|
Operating agreements
|
59
|
78
|
83
|
804
|
1,024
|
|||||||||
|
Unconditional purchase obligations
|
774
|
1,525
|
1,103
|
---
|
3,402
|
|||||||||
|
Tank painting contractual obligation
|
|
392
|
|
|
392
|
|
|
---
|
|
|
---
|
|
784
|
|
|
Total contractual cash obligations
|
$
|
20,879
|
$
|
21,892
|
|
$
|
20,581
|
$
|
258,218
|
|
$
|
321,570
|
||
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 June 30, 2022, 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.
On April 29, 2022, Artesian Water and CoBank entered into a Bond Purchase Agreement, or the Agreement, relating to
the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series W, or the Bond, due April 30, 2047, or the Maturity Date. The Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of
July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fifth Supplemental Indenture dated as of April 29, 2022, or the Supplemental Indenture, from Artesian Water to Wilmington Trust Company, as Trustee. The
Supplemental Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian
Resources, with any additional proceeds used to fund capital investments in Artesian Water. The Delaware Public Service Commission approved the issuance of the Bond on April 20, 2022. The Bond carries an annual interest rate of 4.43% through but
excluding the Maturity Date. Interest is payable on June 30th, September 30th, December 30th and March 30th in each year and on the Maturity Date, beginning June 30, 2022, until Artesian Water’s obligation with respect to the payment of principal,
premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Supplemental Indenture. The term of the Bond also includes certain limitations on Artesian Water’s indebtedness.
On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or
Clayton. The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the water operating assets. At closing, Artesian Water paid approximately $3.4 million of the total purchase price. 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 an annual rate of 2.0%.
In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican
effective from September 2018 through May 2022. In February 2021, Artesian Water entered into a new 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
August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2019 through May 2022. 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.
Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under two
interconnection agreements with the Chester Water Authority. One agreement, that expired on December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day. The other 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
June 26, 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 is $1.2 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 2021
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 December
31, 2021. 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, 2021. There have been no changes in our critical accounting assumptions, estimates and policies. Our significant accounting policies are described in our notes to
the 2021 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2021.
Information concerning our implementation and the impact of recent accounting
pronouncements issued by the FASB is included in the notes to our 2021 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2021 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 six months of 2022 that had a material impact on our financial condition, liquidity or results of operations.
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 June 30, 2022 were
approximately $9.6 million. An increase in the variable interest rates will 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.
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 $10.0 million, with
approximately $2.5 million due by August 18, 2022, within 30 days after the Court’s July 19, 2022 approval of the Consent Decree. The remaining $7.5 million will be payable in three 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. 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.
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, 2021, 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.
None.
None.
Not applicable.
None.
|
Exhibit No.
|
Description
|
|
Twenty-Fifth Supplemental Indenture dated as of April 29, 2022, between Artesian Water Company, Inc. and Wilmington Trust Company, as trustee.
|
|
|
Bond Purchase Agreement, dated April 29, 2022, by and between Artesian Water Company, Inc., and CoBank, ACB.
|
|
|
Amendment to Asset Purchase Agreement, dated May 11, 2022, by and among Artesian Water Company, Inc. a Delaware corporation, and the Town of Clayton, a
Delaware municipality.*
|
|
|
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 Delaware Sand and Gravel Remedial Trust, on one hand, and Artesian Water Company, Inc., on the other hand, have agreed to resolve certain of Artesian
Water’s claims and issues relating to releases of contaminants from the Delaware Sand & Gravel Landfill Superfund Site.*
|
|
|
Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
|
|
|
|
|
|
Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
|
|
|
|
|
|
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).**
|
|
|
|
|
|
101.BAL
|
Inline XBRL Condensed Consolidated Balance Sheets (unaudited)*
|
|
101.OPS
|
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 June 30, 2022, formatted in Inline
XBRL (contained in exhibit 101).*
|
* Filed herewith
** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
ARTESIAN RESOURCES CORPORATION
|
Date: August 5, 2022
|
By:
|
/s/ DIAN C. TAYLOR
|
|
|
|
|
Dian C. Taylor (Principal Executive Officer)
|
|
|
Date: August 5, 2022
|
By:
|
/s/ DAVID B. SPACHT
|
|
|
|
|
David B. Spacht (Principal Financial Officer)
|
|
* Filed herewith
** Furnished herewith