Artesian Resources Corp 10-Q for FY2021 Q2
Artesian Resources Corp (ARTNA)
10-Q
2021-08-06
For: 2021-06-30
View Original
Added on
April 06, 2026
About this 10-Q
Artesian Resources Corp filed this 10-Q on August 6, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $22.56M
- up 3.7% from $21.75M a year earlier
- Net income
- $4.51M
- down 1.3% from net income of $4.57M a year earlier
- Diluted EPS
- $0.48
- down 2.0% from $0.49 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-18516
Title of each class |
Trading Symbol (s) |
Name of each exchange on which registered |
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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Address of principal executive offices
(302 ) 453 – 6900
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
Trading Symbol (s) |
Name of each exchange on which registered |
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.
☑ |
□ |
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).
☑ |
□ |
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 ☐ |
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 3, 2021, 8,519,681 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
ARTESIAN RESOURCES CORPORATION
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Signatures |
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
ASSETS |
June 30, 2021 |
December 31, 2020 |
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Utility plant, at original cost (less accumulated depreciation 2021 - $ |
$ |
$ |
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Current assets |
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Cash and cash equivalents |
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Accounts receivable (less allowance for doubtful accounts 2021 - $ |
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Income tax receivable |
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Unbilled operating revenues |
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Materials and supplies |
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Prepaid property taxes |
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Prepaid expenses and other |
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Total current assets |
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Other assets |
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Non-utility property (less accumulated depreciation - 2021 - $ |
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Other deferred assets |
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Operating lease right of use assets |
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Total other assets |
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Regulatory assets, net |
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Total Assets |
$ |
$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Stockholders' equity |
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Common stock |
$ |
$ |
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Preferred stock |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders' equity |
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Long-term debt, net of current portion |
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Current liabilities |
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Lines of credit |
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Current portion of long-term debt |
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Accounts payable |
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Accrued expenses |
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Dividends payable |
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Overdraft payable |
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Accrued interest |
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Income taxes payable |
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Customer and other deposits |
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Other |
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Total current liabilities |
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Commitments and contingencies |
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Deferred credits and other liabilities |
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Net advances for construction |
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Operating lease liabilities |
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Regulatory liabilities |
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Deferred investment tax credits |
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Deferred income taxes |
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Total deferred credits and other liabilities |
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Net contributions in aid of construction |
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Total Liabilities and Stockholders’ Equity |
$ |
$ |
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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, |
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2021 |
2020 |
2021 |
2020 |
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Operating revenues |
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Water sales |
$ |
$ |
$ |
$ |
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Other utility operating revenue |
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Non-utility operating revenue |
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Total Operating Revenues |
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Operating expenses |
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Utility operating expenses |
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Non-utility operating expenses |
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Depreciation and amortization |
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State and federal income taxes |
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Property and other taxes |
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Total Operating Expenses |
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Operating income |
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Other income, net |
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Allowance for funds used during construction (AFUDC) |
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Miscellaneous (expense) income |
( |
) |
( |
) |
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Income before interest charges |
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Interest charges |
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Net income applicable to common stock |
$ |
$ |
$ |
$ |
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Income per common share: |
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Basic |
$ |
$ |
$ |
$ |
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Diluted |
$ |
$ |
$ |
$ |
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Weighted average common shares outstanding: |
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Basic |
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Diluted |
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Cash dividends per share of common stock |
$ |
$ |
$ |
$ |
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See notes to the condensed consolidated financial statements.
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
For the Six Months Ended June 30, |
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2021 |
2020 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
$ |
$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Deferred income taxes, net |
( |
) |
( |
) |
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Stock compensation |
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AFUDC, equity portion |
( |
) |
( |
) |
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Changes in assets and liabilities: |
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Accounts receivable, net of allowance for doubtful accounts |
( |
) |
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Income tax receivable |
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Unbilled operating revenues |
( |
) |
( |
) |
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Materials and supplies |
( |
) |
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Prepaid property taxes |
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Prepaid expenses and other |
( |
) |
( |
) |
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Other deferred assets |
( |
) |
( |
) |
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Regulatory assets |
( |
) |
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Regulatory liabilities |
( |
) |
( |
) |
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Income tax payable |
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Accounts payable |
( |
) |
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Accrued expenses |
( |
) |
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Accrued interest |
( |
) |
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Deposits and other |
( |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures (net of AFUDC, equity portion) |
( |
) |
( |
) |
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Investment in acquisitions |
( |
) |
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Proceeds from sale of assets |
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NET CASH USED IN INVESTING ACTIVITIES |
( |
) |
( |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net (repayments) borrowings under lines of credit agreements |
( |
) |
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Increase in overdraft payable |
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Net advances and contributions in aid of construction |
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Net proceeds from issuance of common stock |
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Issuance of long-term debt |
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Dividends paid |
( |
) |
( |
) |
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Principal repayments of long-term debt |
( |
) |
( |
) |
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NET CASH PROVIDED BY FINANCING ACTIVITIES |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ |
$ |
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Non-cash Investing and Financing Activity: |
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Utility plant received as construction advances and contributions |
$ |
$ |
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Dividends declared but not paid |
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Supplemental Disclosures of Cash Flow Information: |
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Interest paid |
$ |
$ |
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Income taxes paid |
$ |
$ |
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Purchase price of allocation of investment in acquisitions: |
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Utility plant |
$ |
$ |
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Other deferred assets/goodwill |
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Total investment in acquisitions |
$ |
$ |
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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) |
$ |
$ |
Additional Paid-in Capital |
Retained Earnings |
Total |
||||||||||||||||||||||
Balance as of December 31, 2019 |
$ |
$ |
$ |
$ |
$ |
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Net income |
— |
— |
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Cash dividends declared |
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Common stock |
— |
— |
( |
) |
( |
) |
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Issuance of common stock |
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Dividend reinvestment plan |
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Employee stock options and awards(4) |
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Employee Retirement Plan(3) |
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Balance as of March 31, 2020 |
$ |
$ |
$ |
$ |
$ |
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Net income |
— |
— |
||||||||||||||||||||||||||
Cash dividends declared |
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Common stock |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||
Issuance of common stock |
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Dividend reinvestment plan |
||||||||||||||||||||||||||||
Employee stock options and awards(4) |
||||||||||||||||||||||||||||
Employee Retirement Plan(3) |
||||||||||||||||||||||||||||
Balance as of June 30, 2020 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
Common Shares Outstanding Class A Non-Voting (1) (3) (4) |
Common Shares Outstanding Class B Voting (2) |
$ |
$ |
Additional Paid-in Capital |
Retained Earnings |
Total |
||||||||||||||||||||||
Balance as of December 31, 2020 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
Net income |
— |
— |
||||||||||||||||||||||||||
Cash dividends declared |
||||||||||||||||||||||||||||
Common stock |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||
Issuance of common stock |
||||||||||||||||||||||||||||
Dividend reinvestment plan |
||||||||||||||||||||||||||||
Employee stock options and awards(4) |
||||||||||||||||||||||||||||
Employee Retirement Plan(3) |
||||||||||||||||||||||||||||
Balance as of March 31, 2021 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
Net income |
— |
— |
||||||||||||||||||||||||||
Cash dividends declared |
||||||||||||||||||||||||||||
Common stock |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||
Issuance of common stock |
||||||||||||||||||||||||||||
Dividend reinvestment plan |
||||||||||||||||||||||||||||
Employee stock options and awards(4) |
||||||||||||||||||||||||||||
Employee Retirement Plan(3) |
||||||||||||||||||||||||||||
Balance as of June 30, 2021 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
| (1) |
| (2) |
| (3) |
| (4) |
See notes to the condensed consolidated financial statements
NOTE 1 – GENERAL
Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of our eight 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, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers. Artesian Water also provides water for public and private fire protection to customers in our service territories.
Artesian Wastewater Management, Inc., or 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. Artesian Wastewater owns and operates four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day. Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being 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. Artesian Wastewater received an operations permit in March 2020 for a disposal facility that includes a 90 million gallon storage lagoon and spray irrigation to agricultural land. This facility will be used to provide treated process wastewater disposal services for an industrial customer at a rate of approximately 1.5 million gallons per day. We began operating this facility in late June 2021, shortly after the industrial customer received its process wastewater treatment operating permit.
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 in Maryland.
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 within 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. The Company has been operating these facilities, which currently include two wastewater treatment stations with a combined capacity of up to approximately 2.8 million gallons per day, or mgd, and the related wastewater disposal facilities, since 1998. 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.
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 on January 17, 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.
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 2020 as filed with the SEC on March 12, 2021.
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, 2021, the results of its operations for the three and six months periods ended June 30, 2021 and June 30, 2020, its cash flows for the six month periods ended June 30, 2021 and June 30, 2020 and the changes in stockholders’ equity for the three and six months periods ended June 30, 2021 and June 30, 2020. The December 31, 2020 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2020 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
Management has made certain estimates and assumptions regarding credit losses and reserves for bad debt related to the executive orders issued by state government agencies in 2020 that required utility companies to temporarily prohibit late fees and service disconnections for non-payment. Management will continue to review these estimates and assumptions for credit losses and reserve for bad debt, and will make adjustments as applicable.
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 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 contracts.
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, for the calendar year 2021 only, the minimum required volume will be prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021.
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 in advance at tariff rates on a monthly, quarterly or semi-annual 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. 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, in March 2020, state government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees. In July 2020, the State of Delaware lifted its executive orders placing a moratorium on service disconnections for non-payment, with a provision requiring utilities to offer payment arrangements extending at least four months to customers. After properly notifying customers, Artesian reinstated its late fee process in September 2020 and began administering service disconnections in October 2020 for its Delaware customers. The State of Maryland and the Commonwealth of Pennsylvania lifted their executive orders placing moratoriums on service disconnections for non-payment effective November 2020. The State of Maryland requires utilities to offer payment arrangements extending twelve months. The Company experienced longer receivable cycles throughout 2020 and made an adjustment to increase the reserve for bad debt $0.5 million in 2020. During the three months ended June 30, 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. 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 these revenues. 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, 2021, 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, 2021 |
Three months ended June 30, 2020 |
Six months ended June 30, 2021 |
Six months ended June 30, 2020 |
||||||||||||
Tariff Revenue |
||||||||||||||||
Consumption charges |
$ |
$ |
$ |
$ |
||||||||||||
Fixed fees |
||||||||||||||||
Service charges |
||||||||||||||||
DSIC |
||||||||||||||||
Industrial wastewater services |
( |
) |
( |
) |
||||||||||||
Total Tariff Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Non-Tariff Revenue |
||||||||||||||||
Service line protection plans |
$ |
$ |
$ |
$ |
||||||||||||
Contract operations |
||||||||||||||||
Design and installation |
||||||||||||||||
Inspection fees |
||||||||||||||||
Total Non-Tariff Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Other Operating Revenue not in scope of ASC 606 |
$ |
$ |
$ |
$ |
||||||||||||
Total Operating Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Contract Assets and Contract Liabilities
Our contract assets and liabilities consist of the following:
(in thousands) |
June 30, 2021 |
December 31, 2020 |
||||||
Contract Assets – Tariff |
$ |
$ |
||||||
Deferred Revenue |
||||||||
Deferred Revenue – Tariff |
$ |
$ |
||||||
Deferred Revenue – Non-Tariff |
||||||||
Total Deferred Revenue |
$ |
$ |
||||||
For the six months ended June 30, 2021, 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 increases of Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments.
Remaining Performance Obligations
As of June 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months and one year for the SLP Plan revenue and inspection fee 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 1 years to 75 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, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Minimum rentals |
$ |
$ |
$ |
$ |
||||||||||||
Contingent rentals |
||||||||||||||||
$ |
$ |
$ |
$ |
|||||||||||||
Supplemental cash flow information related to leases is as follows:
(in thousands) |
||||||||
Six Months Ended |
Six Months Ended |
|||||||
June 30, 2021 |
June 30, 2020 |
|||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
Operating cash flows from operating leases |
$ |
$ |
||||||
Right-of-use assets obtained in exchange for lease obligations: |
||||||||
Operating leases |
$ |
$ |
||||||
Supplemental balance sheet information related to leases is as follows:
(in thousands, except lease term and discount rate) |
||||||||
June 30, 2021 |
December 31, 2020 |
|||||||
Operating Leases: |
||||||||
Operating lease right-of-use assets |
$ |
$ |
||||||
Other current liabilities |
$ |
|||||||
Operating lease liabilities |
||||||||
Total operating lease liabilities |
$ |
$ |
||||||
Weighted Average Remaining Lease Term |
||||||||
Operating leases |
||||||||
Weighted Average Discount Rate |
||||||||
Operating leases |
% |
% |
||||||
Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2021 are as follows:
(in thousands) |
||||
Operating Leases |
||||
Year |
||||
2022 |
$ |
|||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
Thereafter |
||||
Total undiscounted lease payments |
$ |
|||
Less effects of discounting |
( |
) |
||
Total lease liabilities recognized |
$ |
|||
As of June 30, 2021, 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, 2021 of approximately $49,000 and $92,000 , respectively, was recorded for restricted stock awards issued in May 2020 and May 2021. Compensation expense, for the three and six months ended June 30, 2020 of approximately $45,000 and $90,000 , respectively, was recorded for restricted stock awards issued in May 2019 and May 2020. 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 4, 2021, 5,000 shares of 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.
On May 6, 2020, 5,000 shares of Class A Stock, were granted as restricted stock awards. The fair value per share was 35.01 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020. 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, 2021:
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 Fair Value |
|||||||||||||||||||
Plan options/restricted stock awards |
||||||||||||||||||||||||
Outstanding at January 1, 2021 |
$ |
$ |
$ |
|||||||||||||||||||||
Granted |
||||||||||||||||||||||||
Exercised/vested and released |
( |
) |
( |
) |
||||||||||||||||||||
Expired/cancelled |
||||||||||||||||||||||||
Outstanding at June 30, 2021 |
$ |
$ |
$ |
|||||||||||||||||||||
Exercisable/vested at June 30, 2021 |
$ |
$ |
— |
— |
||||||||||||||||||||
The total intrinsic value of options exercised during the six months ended June 30, 2021 was approximately $624,000 .
There were no unvested option shares outstanding under the 2015 Plan during the six months ended June 30, 2021.
As of June 30, 2021, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of June 30, 2021, there was $169,000 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. Goodwill is a result of the acquisition of water assets from the Town of Frankford in April 2020 based on the purchase price allocation. The DEPSC will evaluate this amount in Artesian Water’s next base rate case to determine the appropriate ratemaking treatment of the acquisition price and the assets acquired. A large portion of the remaining other deferred assets, approximately $0.2 million, is in relation to the Mountain Hill acquisition.
In thousands |
June 30, 2021 |
December 31, 2020 |
||||||
Investment in CoBank |
$ |
$ |
||||||
Goodwill |
||||||||
Other |
||||||||
$ |
$ |
|||||||
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 Series V First Mortgage bond in December 2019 that paid down outstanding lines of credit and a loan payable to Artesian Resources. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations. For the Series V First Mortgage bond, cash was paid for the issuance costs and $30 million of cash was received from the proceeds of the bond.
Regulatory expenses amortized on a straight-line basis are noted below:
Expense |
Years Amortized |
Deferred contract costs and other |
|
Rate case studies |
|
Delaware rate proceedings |
|
Maryland rate proceedings |
|
Debt related costs |
|
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008) |
|
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010) |
|
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011) |
Regulatory assets, net of amortization, comprise: |
||||||||
(in thousands) |
||||||||
June 30, 2021 |
December 31, 2020 |
|||||||
Deferred income taxes |
$ |
$ |
||||||
Deferred contract costs and other |
||||||||
Debt related costs |
||||||||
Goodwill |
||||||||
Deferred acquisition and franchise costs |
||||||||
$ |
$ |
|||||||
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. 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, 2021 |
December 31, 2020 |
|||||||
Utility plant retirement cost obligation |
$ |
$ |
||||||
Deferred income taxes (related to TCJA) |
||||||||
$ |
$ |
|||||||
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, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
(in thousands) |
||||||||||||||||
Weighted average common shares outstanding during the period for Basic computation |
||||||||||||||||
Dilutive effect of employee stock options and awards |
||||||||||||||||
Weighted average common shares outstanding during the period for Diluted computation |
||||||||||||||||
For the three and six months ended June 30, 2021 and 2020, no
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, 2021, 8,519,129 881,452 8,451,910 881,452 1.00
Equity per common share was $18.32 and $18.16 at June 30, 2021 and December 31, 2020, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on June 30, 2021 and December 31, 2020, 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 requested level of rates by the Company.
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 |
11/15/2019 |
05/29/2020 |
11/20/2020 |
DEPSC Approval Date |
12/12/2019 |
06/17/2020 |
12/14/2020 |
Effective Date |
01/01/2020 |
07/01/2020 |
01/01/2021 |
Cumulative DSIC Rate |
|||
Net Eligible Plant Improvements – Cumulative Dollars (in millions) |
$ |
$ |
$ |
Eligible Plant Improvements – Installed Beginning Date |
10/01/2014 |
10/01/2014 |
10/01/2014 |
Eligible Plant Improvements – Installed Ending Date |
04/30/2019 |
04/30/2019 |
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, 2021, we earned approximately $1.3 million and $2.5 million in DSIC revenue, respectively. For the three and six months ended June 30, 2020, we earned approximately $1.3 million and $2.4 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 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 $10,600 in penalties and interest for the six months ended June 30, 2021. 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, 2021 and December 31, 2020 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, 2021 |
December 31, 2020 |
|||||||
Carrying amount |
$ |
$ |
||||||
Estimated fair value |
$ |
$ |
||||||
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. Mr. Houghton is a Partner in the law firm of Morris Nichols Arsht & Tunnell, or MNAT, in Wilmington, Delaware. In the normal course of business, the Company utilizes the services of MNAT 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. Approximately $109,000 and $228,000 was paid to MNAT during the three and six months ended June 30, 2020, respectively, for legal and director related services. As of June 30, 2021, the Company had a $73,000 accounts payable balance due to MNAT.
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 April 2, 2020, Artesian Water purchased substantially all of the water system operating assets from the Town of Frankford, or Frankford, a Delaware municipality located in Sussex County, Delaware, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System. The Frankford Water System serves approximately 360 customers. The total purchase price was 3.6 million. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations”. The purchase price allocation is primarily attributed to utility plant assets. The Company utilized a combination of three methods to determine the reasonableness of the purchase price: the cost approach, market approach and income approach. Given the majority of the assets acquired were tangible utility plant, the Company utilized the cost approach to record the fair value of the assets. The cost approach values the underlying assets to derive market value based on the estimated current new replacement cost, less the loss in value caused by physical deterioration, and functional and economic obsolescence of the assets. Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure.
Additionally, as part of the Company’s growth strategy, on August 3, 2020, Artesian Water completed its purchase of substantially all of the water system operating assets from the City of Delaware City, or Delaware City, a Delaware municipality located in New Castle County, Delaware, including the right to provide water service to Delaware City’s existing customers, or the Delaware City Water System. The Delaware City Water System currently serves approximately 800 customers. The total purchase price was $2.1 million. The acquisition was accounted for as a business combination under ASC Topic 805. The purchase price allocation is primarily attributed to utility plant assets. The Company utilized similar valuation methodologies to those described above.
A summary of the allocation of purchase price to the assets acquired is presented in the table below and is recorded in the accompanying Condensed Consolidated Balance Sheet.
(In thousands) |
||||
Utility plant |
||||
Source of supply plant |
$ |
|||
Pumping and water treatment plant |
||||
Transmission and distribution plant |
||||
Other deferred assets |
||||
Goodwill |
||||
Purchase Price |
$ |
|||
The Frankford Water System acquisition and the Delaware City Water System acquisition were approved by the DEPSC on March 18, 2020 and July 15, 2020, respectively, subject to the DEPSC determining 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 businesses acquired, individually and in the aggregate, are not material to the Company’s financial position or results of operations.
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, 2021, Artesian Water was serving approximately 90,900 customers, Artesian Water Maryland was serving approximately 2,500 customers and Artesian Water Pennsylvania was serving approximately 40 customers.
Artesian Wastewater provides wastewater utility service to customers within its established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. As of June 30, 2021, Artesian Wastewater was serving approximately 3,000 customers, including one large industrial customer. All wastewater customers are located in Sussex County, Delaware.
NOTE 16 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 2020, the FASB issued new guidance that provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from reference rates that are expected to be discontinued, such as the London Inter-bank Offered Rate, or LIBOR. The guidance was effective upon issuance and may be applied prospectively to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected. LIBOR is expected to be phased out completely by June 30, 2023. The guidance is optional and may be elected over time as reference rate reform activities occur. The Company has not yet modified any agreements as a result of reference rate reform and is evaluating the impact of the new guidance on our financial position, results of operations and cash flows.
NOTE 17 - SUBSEQUENT EVENT
On July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. Under the Financing Agreement, the Department has agreed to advance to Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankford water system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project. In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project. Artesian Water will request an initial draw of approximately $1.5 million for the acquisition of the Town of Frankford water system. Upon receipt of the initial draw, an amount equal to approximately $1.5 million will be automatically forgiven by the Department and shall no longer be considered outstanding or unpaid principal under the Financing Agreement. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0 % per annum and an administrative fee at the rate of 1.0 % per annum.
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, 2020, and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, 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, 2021
OVERVIEW
Our profitability is primarily attributable to the sale of water. Gross water sales composed 87.5% of total operating revenues for the six months ended June 30, 2021. Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans 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 contract operations 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, 2021, 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. 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.
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, 2021, the number of metered water customers in Delaware increased approximately 2.3% compared to June 30, 2020. The number of metered water customers in Maryland increased approximately 1.5% compared to June 30, 2020. The number of metered water customers in Pennsylvania remained consistent compared to June 30, 2020. For the six months ended June 30, 2021, approximately 4.0 billion gallons of water were distributed in our Delaware systems and approximately 63.6 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 Delaware wastewater customers increased approximately 14.1% compared to June 30, 2020. In addition, Artesian Wastewater entered into wastewater services agreements with a large industrial customer. The wastewater services agreements with this customer are 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, 2021, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.0%, 3.2% and 21.1%, respectively, compared to June 30, 2020. The non-utility customers enrolled in one of our three protections plans increased 5.0%.
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. Some recent acquisitions are noted below.
On August 3, 2020, Artesian Water completed the purchase of substantially all of the water system operating assets from the City of Delaware City, a Delaware municipality, or Delaware City, including the right to provide water service to Delaware City’s existing customers. The total purchase price was $2.1 million. Artesian Water had previously acquired the water assets of an area annexed by Delaware City, known as Fort DuPont, which was earmarked for growth and expansion of Delaware City.
On April 2, 2020, Artesian Water completed its purchase of substantially all of the operating assets of the water system of the Town of Frankford, a Delaware municipality, or Frankford, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System. Pursuant to the terms of the agreement, Frankford transferred to Artesian Water all of Frankford’s right, title and interest in and to all of the plant and equipment, associated real property, contracts, easements and permits possessed by Frankford at closing related to the Frankford Water System. The total purchase price was $3.6 million.
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.
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. 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.
On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with a large industrial customer for Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from this customer’s properties located in Sussex County, Delaware upon completion of a pipeline to transfer the sanitary wastewater. The pipeline was completed in the second quarter of 2017. The transfer of sanitary wastewater began in the second quarter of 2019. On January 27, 2017, Artesian Wastewater entered into a second wastewater agreement with this customer for Artesian Wastewater to provide disposal services for approximately 1.5 mgd of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from this customer’s properties to a 90 million gallon storage lagoon at Artesian’s Sussex Regional Recharge Facility. We will use the reclaimed wastewater for spray irrigation on agricultural land in the area. We received an operations permit in March 2020. We began operating this facility in late June 2021, shortly after the industrial customer received its process wastewater treatment operating permit. This agreement includes a required minimum wastewater flow. Pursuant to a settlement agreement, for the calendar year 2021 only, the minimum required volume of wastewater will be 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 and aging infrastructure. Our planned and budgeted capital improvements over the next three years includes 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.
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 costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.
Results of Operations – Analysis of the Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020.
Operating Revenues
Revenues totaled $22.6 million for the three months ended June 30, 2021, $0.8 million, or 3.7%, more than revenues for the three months ended June 30, 2020. Water sales revenue increased $0.7 million, or 3.4%, for the three months ended June 30, 2021 from the corresponding period in 2020, primarily due to an increase in non-residential consumption revenue, partially offset by a decrease in residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. We realized 89.0% and 89.3% of our total operating revenue for the three months ended June 30, 2021 and June 30, 2020, respectively, from the sale of water.
Other utility operating revenue increased slightly for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase in wastewater revenue from customer growth was offset by a decrease in industrial wastewater service revenue resulting from an adjustment, pursuant to a settlement agreement, of approximately $0.4 million related to the minimum required volume of wastewater under contract.
Non-utility operating revenue increased approximately $0.1 million, or 10.6%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The 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.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $0.6 million, or 4.9%, for the three months ended June 30, 2021, compared to the same period in 2020, primarily related to an increase in utility operating expenses and non-utility operating expenses of $0.4 million and $0.1 million, respectively.
Utility operating expenses increased $0.4 million, or 4.2%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase is primarily related to the following.
Payroll and employee benefit costs increased $0.2 million, primarily related to an increase in overall compensation and an increase in the number of employees. |
Purchased water costs increased $0.2 million, related to the timing of water purchased under contract. |
Repair and maintenance costs increased $0.2 million, related to an increase in maintenance costs primarily associated with water and wastewater treatment facilities and equipment and an increase in fuel costs. |
Water treatment costs increased $0.1 million, primarily related to the timing of water treatment chemical usage. |
Administrative costs decreased $0.3 million, primarily due to a decrease in bad debt reserve related to non-payment of water customer receivable balances resulting from the COVID-19 pandemic partially offset by an increase in overall employee related costs and professional service fees as well as an increase in legal expenses related to a settlement agreement concerning the payment of fees by an industrial wastewater customer. |
Non-utility operating expenses increased $0.1 million, or 17.6%, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to an increase in payroll and employee benefit costs, 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.
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.0% for the three months ended June 30, 2021, compared to 52.4% for the three months ended June 30, 2020.
Depreciation and amortization expense increased $0.3 million, or 10.5%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Net Income
Our net income applicable to common stock decreased $0.1 million, or 1.3%, primarily due to a decrease in net operating income.
Results of Operations – Analysis of the Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020.
Operating Revenues
Revenues totaled $43.3 million for the six months ended June 30, 2021, $1.6 million, or 3.9%, more than revenues for the six months ended June 30, 2020. Water sales revenue increased $1.1 million, or 3.0%, for the six months ended June 30, 2021 from the corresponding period in 2020, primarily due to an increase in residential and non-residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. We realized 87.6% and 88.4% of our total operating revenue for the six months ended June 30, 2021 and June 30, 2020, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.2 million, or 10.2%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in industrial wastewater service revenue resulting from an adjustment, pursuant to a settlement agreement, of approximately $0.4 million related to the minimum required volume of wastewater under contract.
Non-utility operating revenue increased approximately $0.3 million, or 12.6%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The 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.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $1.2 million, or 5.1%, for the six months ended June 30, 2021, compared to the same period in 2020, primarily related to an increase in utility operating expenses and non-utility operating expenses of $0.8 million and $0.3 million, respectively.
Utility operating expenses increased $0.8 million, or 4.1%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase is primarily related to the following.
Payroll and employee benefit costs increased $0.2 million, primarily related to an increase in overall compensation and an increase in the number of employees. |
Purchased water costs increased $0.2 million, related to the timing of water purchased under contract. |
Repair and maintenance costs increased $0.2 million, related to an increase in maintenance costs primarily associated with water and wastewater treatment facilities and equipment and an increase in fuel costs. |
Water treatment costs increased $0.1 million, primarily related to the timing of water treatment chemical usage. |
Administrative costs decreased $0.3 million, primarily due to a decrease in bad debt reserve related to non-payment of water customer receivable balances resulting from the COVID-19 pandemic partially offset by an increase in overall employee related costs and professional service fees as well as an increase in legal expenses related to a settlement agreement concerning the payment of fees by an industrial wastewater customer. |
Water treatment costs increased $0.1 million, primarily related to the timing of water treatment chemical usage. |
Non-utility operating expenses increased $0.3 million, or 21.5%, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract, an increase in payroll and employee benefit costs and an increase in plumbing services related to Service Line Protection Plan repairs.
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 55.2% for the six months ended June 30, 2021, compared to 54.6% for the six months ended June 30, 2020.
Depreciation and amortization expense increased $0.5 million, or 10.0%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Other Income, Net
Other income, net increased $0.1 million, primarily due to an increase in miscellaneous income of $0.3 million related to an increase in the annual patronage refund from CoBank, ACB. The primary refund calculation for both 2021 and 2020 was based on 0.8% of the average loan balance outstanding. In addition, a special patronage distribution based on 0.165% and 0.1% of the average loan balance outstanding was refunded in March 2021 and March 2020, respectively. Allowance for funds used during construction, or AFUDC, decreased $0.1 million as a result of lower long-term construction activity subject to AFUDC for the six months ended June 30, 2021 compared to the same period in 2020.
Net Income
Our net income applicable to common stock increased $0.1 million, or 0.8%, primarily related to an increase in other income, net.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the six months ended June 30, 2021 were $16.5 million of cash provided by operating activities, $9.8 million in net contributions and advances from developers, $1.7 million from the issuance of long-term debt 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 2021 were $22.1 million compared to $20.6 million during the same period in 2020. During the first six months of 2021, we invested approximately $11.2 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains. We invested $4.5 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $0.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $2.9 million for the installation of water mains and hydrants in 2021 compared to $2.2 million in 2020. We invested $0.5 million to upgrade and automate our meter reading equipment. We invested approximately $1.4 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades. We invested $0.9 million in wastewater projects in Delaware.
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, 2021, 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, 2021, there was $32.3 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. It is expected that the LIBOR rate will no longer be published for most currencies as of December 31, 2021, however, publication for USD currency should continue through June 30, 2023. As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans. In light of this eventuality, Citizens currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate. 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 22, 2022 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At June 30, 2021, 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, 2021, there was $2.0 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 July 30, 2022. Artesian Water expects to renew this line of credit.
Line of Credit Commitments |
Commitment Due by Period |
|||||||||||||||
In thousands |
Less than 1 Year |
1-3 Years |
4-5 Years |
Over 5 Years |
||||||||||||
Lines of Credit |
$ |
25,693 |
$ |
-- |
$ |
-- |
$ |
-- |
||||||||
Contractual Obligations |
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) |
$ |
6,623 |
$ |
13,169 |
$ |
13,056 |
$ |
188,219 |
$ |
221,067 |
||||||||||
State revolving fund loans (principal and interest) |
933 |
1,486 |
1,125 |
3,828 |
7,372 |
|||||||||||||||
Promissory note (principal and interest) |
960 |
1,920 |
1,923 |
12,056 |
16,859 |
|||||||||||||||
Operating leases |
37 |
46 |
47 |
1,303 |
1,433 |
|||||||||||||||
Operating agreements |
70 |
76 |
80 |
846 |
1,072 |
|||||||||||||||
Unconditional purchase obligations |
3,073 |
1,476 |
1,371 |
345 |
6,265 |
|||||||||||||||
Tank painting contractual obligation |
392 |
784 |
--- |
--- |
1,176 |
|||||||||||||||
Total contractual cash obligations |
$ |
12,088 |
$ |
18,957 |
$ |
17,602 |
$ |
206,597 |
$ |
255,244 |
||||||||||
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, 2021, 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 has an amortizing mortgage payment payable over a 20-year period. The promissory note obligation has an amortizing 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 July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. Under the Financing Agreement, the Department has agreed to advance to Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankford water system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project. In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project. Artesian Water will request an initial draw of approximately $1.5 million for the acquisition of the Town of Frankford water system. Upon receipt of the initial draw, an amount equal to approximately $1.5 million will be automatically forgiven by the Department and shall no longer be considered outstanding or unpaid principal under the Financing Agreement. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0% per annum and an administrative fee at the rate of 1.0% per annum.
On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects. In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum. As of June 30, 2021, approximately $1.7 million was borrowed under the Loans.
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 will be lowered 5.6% starting in May 2021. In August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy. The fixed rate for Constellation NewEnergy was lowered 4.9% starting in May 2019. The current fixed price contract is effective from May 2019 through May 2022.
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 is currently in effect has a “take or pay” clause requiring us to purchase 3 million gallons per day, which expires on December 31, 2021. The other agreement is effective from January 1, 2022 through December 31, 2026, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase 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 3-year agreement, the total expenditure for the three years is $1.2 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.
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 2020 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, 2020. 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 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, 2020. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2020 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2020.
Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2020 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2020 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 2021 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, 2021 were approximately $25.7 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 LIBOR 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.
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, 2020, 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 |
Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.* |
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Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.* |
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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).** |
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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, 2021, formatted in Inline iXBRL (contained in exhibit 101).* |
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 6, 2021 |
By: |
/s/ DIAN C. TAYLOR |
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Dian C. Taylor (Principal Executive Officer) |
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Date: August 6, 2021 |
By: |
/s/ DAVID B. SPACHT |
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David B. Spacht (Principal Financial Officer) |
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* Filed herewith
** Furnished herewith
34
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Exhibit 31.1
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Certification of Chief Executive Officer of Artesian Resources Corporation
required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended
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I, Dian C. Taylor, certify that:
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1.
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I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2021 of Artesian Resources Corporation;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5.
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The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
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Date: August 6, 2021
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/s/ DIAN C. TAYLOR
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Dian C. Taylor
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Chief Executive Officer (Principal Executive Officer)
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Exhibit 31.2
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Certification of Chief Financial Officer of Artesian Resources Corporation
required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended
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I, David B. Spacht, certify that:
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1.
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I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2021 of Artesian Resources Corporation;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
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5.
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The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control
over financial reporting.
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Date: August 6, 2021
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/s/ DAVID B. SPACHT
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David B. Spacht
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Chief Financial Officer (Principal Financial and Accounting Officer)
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Exhibit 32
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Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
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I, Dian C. Taylor, Chief Executive Officer, and David B. Spacht, Chief Financial Officer, of Artesian Resources Corporation, a Delaware
corporation (the "Company"), hereby certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on our knowledge:
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(1)
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The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2021 (the " Report") fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 USC Section 78m(a) or Section 78o(d)), as amended; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period
covered by the Report and results of operations of the Company for the period covered by the Report.
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Date: August 6, 2021
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CHIEF EXECUTIVE OFFICER:
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CHIEF FINANCIAL OFFICER:
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/s/ DIAN C. TAYLOR
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/s/ DAVID B. SPACHT
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Dian C. Taylor
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David B. Spacht
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These certifications accompany the Report to which they relate, are not deemed filed with the Securities and Exchange Commission and are
not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any
general incorporation language contained in such filing.
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