ARTNA 10-Q

Artesian Resources Corp (ARTNA)

10-Q 2022-11-04 For: 2022-09-30

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Delaware	51-0002090
--------------------------------------------------------------------	-------------------------------------------------
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

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	The Nasdaq Stock Market

Part I	-	Financial Information:

Item 1	-	Financial Statements	Page(s)

		Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	3

		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)	5 - 6

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	7

		Notes to the Condensed Consolidated Financial Statements	8 - 23

Item 2	-	Management's Discussion and Analysis of Financial Condition and Results of Operations	24 - 33

Item 3	-	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4	-	Controls and Procedures	34

Part II	-	Other Information	35

Item 1	-	Legal Proceedings	35

Item 1A	-	Risk Factors	35

Item 2	-	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3		Defaults Upon Senior Securities	36

Item 4		Mine Safety Disclosures	36

Item 5		Other Information	36

Item 6	-	Exhibits	37
-
Signatures

ASSETS	September 30, 2022		December 31, 2021
Utility plant, at original cost (less accumulated depreciation - 2022 - $169,474; 2021 - $159,385)	$	655,960	$	590,431
Current assets
Cash and cash equivalents		108		92
Accounts receivable (less allowance for doubtful accounts - 2022 - $486; 2021 - $429)		11,720		8,367
Income tax receivable		833		2,234
Unbilled operating revenues		1,992		1,080
Materials and supplies		2,505		1,933
Prepaid property taxes		3,021		2,306
Prepaid expenses and other		2,724		2,652
Total current assets		22,903		18,664
Other assets
Non-utility property (less accumulated depreciation - 2022 - $973; 2021 - $919)		3,756		3,751
Other deferred assets		10,548		5,097
Goodwill		2,983		—
Operating lease right of use assets		444		451
Total other assets		17,731		9,299
Regulatory assets, net		6,210		6,321
Total Assets	$	702,804	$	624,715

LIABILITIES AND STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock	$	9,491	$	9,414
Preferred stock		—		—
Additional paid-in capital		106,779		104,989
Retained earnings		71,603		63,607
Total stockholders' equity		187,873		178,010
Long-term debt, net of current portion		174,035		143,259
		361,908		321,269
Current liabilities
Lines of credit		9,400		26,703
Current portion of long-term debt		2,023		1,591
Accounts payable		9,083		10,206
Accrued expenses		4,140		4,038
Overdraft payable		129		30
Accrued interest		1,362		917
Income taxes payable		1,096		-
Customer and other deposits		2,478		2,273
Other		3,165		1,448
Total current liabilities		32,876		47,206

Commitments and contingencies

Deferred credits and other liabilities
Net advances for construction		3,963		4,295
Operating lease liabilities		439		440
Regulatory liabilities		31,550		21,260
Deferred investment tax credits		443		456
Deferred income taxes		54,894		53,133
Total deferred credits and other liabilities		91,289		79,584

Net contributions in aid of construction		216,731		176,656
Total Liabilities and Stockholders’ Equity	$	702,804	$	624,715

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022		2021
Operating revenues
Water sales	$	21,702		$	21,279		$	59,567	$	59,187
Other utility operating revenue		2,841			2,177			8,281		4,566
Non-utility operating revenue		2,039			1,463			5,932		4,279
Total Operating Revenues		26,582			24,919			73,780		68,032

Operating expenses
Utility operating expenses		10,428			10,889			30,994		30,055
Non-utility operating expenses		1,570			979			4,418		2,756
Depreciation and amortization		3,210			2,969			9,350		8,958
State and federal income taxes		1,834			1,784			4,978		4,677
Property and other taxes		1,458			1,400			4,371		4,160
Total Operating Expenses		18,500			18,021			54,111		50,606

Operating income		8,082			6,898			19,669		17,426

Other income, net
Allowance for funds used during construction (AFUDC)		393			112			898		727
Miscellaneous (expense) income		(101	)		(44	)		1,311		1,299

Income before interest charges		8,374			6,966			21,878		19,452

Interest charges		2,230			1,910			6,205		5,685

Net income applicable to common stock	$	6,144		$	5,056		$	15,673	$	13,767

Income per common share:
Basic	$	0.65		$	0.54		$	1.66	$	1.47
Diluted	$	0.65		$	0.54		$	1.65	$	1.46

Weighted average common shares outstanding:
Basic		9,477			9,404			9,451		9,389
Diluted		9,492			9,432			9,473		9,421

Cash dividends per share of common stock	$	0.2729		$	0.2610		$	0.8133	$	0.7791

	For the Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	15,673		$	13,767
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,350			8,958
Deferred income taxes, net		1,582			(2,426	)
Stock compensation		162			142
AFUDC, equity portion		(612	)		(491	)

Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net of allowance for doubtful accounts		(3,402	)		570
Income tax receivable		1,401			569
Unbilled operating revenues		(547	)		(493	)
Materials and supplies		(572	)		(131	)
Income tax payable		1,096			1,660
Prepaid property taxes		(138	)		(1,303	)
Prepaid expenses and other		(62	)		(213	)
Other deferred assets		(5,477	)		(393	)
Regulatory assets		280			14
Regulatory liabilities		9,651			(426	)
Accounts payable		(4,086	)		(826	)
Accrued expenses		(791	)		(178	)
Accrued interest		445			422
Deposits and other		1,097			459
NET CASH PROVIDED BY OPERATING ACTIVITIES		25,050			19,681

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (net of AFUDC, equity portion)		(36,660	)		(30,373	)
Investment in acquisitions, net of cash acquired		(6,341	)		—
Proceeds from sale of assets		49			88
NET CASH USED IN INVESTING ACTIVITIES		(42,952	)		(30,285	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under lines of credit agreements		(17,303	)		794
Increase in overdraft payable		99			328
Net advances and contributions in aid of construction		11,576			13,946
Net proceeds from issuance of common stock		1,705			1,133
Issuance of long-term debt		30,828			3,753
Dividends paid		(7,677	)		(7,310	)
Deferred debt issuance costs		(120	)		(19	)
Principal repayments of long-term debt		(1,190	)		(1,439	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		17,918			11,186

NET INCREASE IN CASH AND CASH EQUIVALENTS		16			582

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		92			28

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	108		$	610

Non-cash Investing and Financing Activity:
Utility plant received as construction advances and contributions	$	4,407	$	2,799
Dividends declared but not paid		—		2,516
Change in amounts included in accounts payable and accrued payables related to capital expenditures		1,574		(670)

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	5,760	$	5,263
Income taxes paid	$	1,431	$	5,179


Preliminary purchase price allocation of investment in acquisitions:
Utility plant	$	34,234	$	—
Cash		280		—
Goodwill		2,983		—
Other assets		1,033		—
Total assets		38,530		—
Less:
Liabilities		3,852		—
Future contractual obligation payable to seller		1,569		—
Contributions in aid of construction		26,488		—
Cash paid for acquisitions		6,621		—
Cash received from acquisitions		280		—
Net cash paid for acquisitions	$	6,341	$	—

	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
Net income		—		—		—		—		—		5,056			5,056
Cash dividends declared
Common stock		—		—		—		—		—		(2,516	)		(2,516	)
Issuance of common stock
Dividend reinvestment plan		3		—		3		—		94		—			97
Employee stock options and awards(4)		1		—		1		—		49		—			50
Employee Retirement Plan(3)		2		—		2		—		93		—			95
Balance as of September 30, 2021		8,524		882		8,524		882		104,689		60,547			174,642

(in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Tariff Revenue
Consumption charges	$	13,927	$	13,595	$	36,676	$	36,672
Fixed fees		7,924		7,112		23,452		20,983
Service charges		156		130		449		450
DSIC		1,406		1,387		3,870		3,876
Metered wastewater services		193		—		462		—
Industrial wastewater services		467		497		1,295		118
Total Tariff Revenue	$	24,073	$	22,721	$	66,204	$	62,099

Non-Tariff Revenue
Service line protection plans	$	1,224	$	1,181	$	3,662	$	3,411
Contract operations		238		210		691		658
Design and installation		621		139		1,723		351
Inspection fees		127		108		234		244
Total Non-Tariff Revenue	$	2,210	$	1,638	$	6,310	$	4,664
Other Operating Revenue	$	299	$	560	$	1,266	$	1,269
Total Operating Revenue	$	26,582	$	24,919	$	73,780	$	68,032

	September 30,		December 31,
In thousands	2022		2021

Customer accounts receivable – water	$	7,110	$	5,986
Customer accounts receivable – wastewater		470		1,326
Settlement agreement receivable		7,510		—
Miscellaneous accounts receivable		329		202
Developer receivable		1,778		1,282
		17,197		8,796
Less: Long-term portion of settlement agreement receivable (included in other deferred assets)		4,991		—
Less allowance for doubtful accounts		486		429
Net accounts receivable	$	11,720	$	8,367

	(in thousands)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

Minimum rentals	$	21	$	24	$	30	$	38
Contingent rentals		—		—		—		—

	$	21	$	24	$	30	$	38

	(in thousands, except lease term and discount rate)
	September 30, 2022			December 31, 2021

Operating Leases:
Operating lease right-of-use assets	$	444		$	451

Other current liabilities	$	2			6
Operating lease liabilities		439			440
Total operating lease liabilities	$	441		$	446


Weighted Average Remaining Lease Term
Operating leases	61 years			61 years
Weighted Average Discount Rate
Operating leases		5.0	%		5.0	%

	(in thousands)
	Operating Leases
Year
2023	$	24
2024		24
2025		24
2026		24
2027		25
Thereafter		1,328
Total undiscounted lease payments	$	1,449
Less effects of discounting		(1,008	)
Total lease liabilities recognized	$	441

	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		(66,104	)		21.65				1,894		(5,000	)		40.11
Expired/cancelled		—			—				—		—			—
Outstanding at September 30, 2022		16,896		$	21.86		1.602	$	444		5,000		$	45.58

Exercisable/vested at September 30, 2022		16,896		$	21.86		1.602	$	444		—			—

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

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

In thousands
	September 30, 2022		December 31, 2021
Carrying amount	$	176,058	$	144,850
Estimated fair value	$	153,174	$	163,182

Regulatory assets, net of amortization, comprise:
	(in thousands)
	September 30, 2022		December 31, 2021

Deferred income taxes	$	470	$	355
Deferred contract costs and other		243		288
Debt related costs		4,757		4,902
Goodwill		268		273
Deferred acquisition and franchise costs		472		503
	$	6,210	$	6,321

Regulatory liabilities comprise:
	(in thousands)
	September 30, 2022		December 31, 2021

Utility plant retirement cost obligation	$	156	$	149
Deferred settlement refunds		10,042		—
Deferred income taxes (related to TCJA)		21,352		21,111
	$	31,550	$	21,260

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands)
Weighted average common shares outstanding during the period for Basic computation		9,477		9,404		9,451		9,389
Dilutive effect of employee stock options and awards		15		28		22		32

Weighted average common shares outstanding during the period for Diluted computation		9,492		9,432		9,473		9,421

(In thousands)
		TESI
	Utility plant	$	25,354
	Cash		280
	Goodwill		2,983
	Other assets		1,033
	Total assets		29,650
	Less: Liabilities and contributions in aid of construction (CIAC)
	Liabilities		3,852
	CIAC		22,676
	Net cash purchase price	$	3,122

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	$	15,659	$	240,933	$	280,289
State revolving fund loans (principal and interest)		845		1,534		1,219		4,649		8,247
Promissory note (principal and interest)		961		1,921		1,924		10,854		15,660
Asset purchase contractual obligation (principal and interest)		345		672		647		---		1,664
Lines of credit		9,400		---		---		---		9,400
Operating leases		24		48		49		1,328		1,449
Operating agreements		60		78		83		796		1,017
Unconditional purchase obligations		791		1,510		919		---		3,220
Tank painting contractual obligation		626		1,096		---		---		1,722
Total contractual cash obligations	$	20,976	$	22,632	$	20,500	$	258,560	$	322,668

Exhibit No.	Description


4.1	First Amendment to Second Amended and Restated Revolving Credit Agreement between Artesian Water Company, Inc. and CoBank, ACB dated October 25, 2022.*

10.1	Financing Agreement, Loan No. 22000030, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on August 15, 2022.

10.2	General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022A-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on August 15, 2022.

10.3	Financing Agreement, Loan No. 22000029, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.3 filed with the Company’s Form 8-K filed on August 15, 2022.

10.4	General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022B-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.4 filed with the Company’s Form 8-K filed on August 15, 2022.

10.5	Financing Agreement, Loan No. 22000028, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.5 filed with the Company’s Form 8-K filed on August 15, 2022.

10.6	General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022C-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.6 filed with the Company’s Form 8-K filed on August 15, 2022.

10.7	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, incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q filed on August 5, 2022.

31.1	Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*

31.2	Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*

32	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 September 30, 2022, formatted in Inline XBRL (contained in exhibit 101).*

Date: November 4, 2022	By:	/s/ DIAN C. TAYLOR
		Dian C. Taylor (Principal Executive Officer)

Date: November 4, 2022	By:	/s/ DAVID B. SPACHT
		David B. Spacht (Principal Financial Officer)