Artesian Resources Corp 10-Q for FY2020 Q3
Artesian Resources Corp (ARTNA)
10-Q
2020-11-06
For: 2020-09-30
View Original
Added on
April 06, 2026
About this 10-Q
Artesian Resources Corp filed this 10-Q on November 6, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $24.74M
- up 9.7% from $22.55M a year earlier
- Net income
- $5.06M
- up 13.6% from net income of $4.46M a year earlier
- Diluted EPS
- $0.54
- up 12.5% from $0.48 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 September 30, 2020
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 □ |
Non-Accelerated Filer □ |
Smaller Reporting Company |
Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).
Yes |
☑ |
No |
As of November 3, 2020, 8,459,518 shares of Class A Non-Voting Common Stock and 881,442 shares of Class B Common Stock were outstanding.
ARTESIAN RESOURCES CORPORATION
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Signatures |
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
ASSETS |
September 30, 2020 |
December 31, 2019 |
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Utility plant, at original cost (less accumulated depreciation 2020 - $ |
$ |
$ |
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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 2020 - $ |
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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 - 2020 - $ |
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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 September 30, |
For the Nine Months Ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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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) 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 Nine Months Ended September 30, |
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2020 |
2019 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
$ |
$ |
||||||
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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State and federal income taxes payable |
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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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Revenue reserved for refund |
( |
) |
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Customer 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 borrowings under lines of credit agreements |
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Increase (decrease) 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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Dividends paid |
( |
) |
( |
) |
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Debt issuance costs |
( |
) |
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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 (DECREASE) INCREASE 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 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, 2018 |
$ |
$ |
$ |
$ |
$ |
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Net income |
— |
— |
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Cash dividends declared |
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Common stock |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||
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, 2019 |
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Net income |
— |
— |
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Cash dividends declared |
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Common stock |
— |
— |
( |
) |
( |
) |
||||||||||||||||||||||
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 June 30, 2019 |
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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 September 30, 2019 |
||||||||||||||||||||||||||||
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 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||||
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, 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 June 30, 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 September 30, 2020 |
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| (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 will begin operating this facility once the industrial customer receives their 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 organizations. Artesian Utility also contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility. 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 2019 as filed with the SEC on March 13, 2020.
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 September 30, 2020, the results of its operations for the three and nine months ended September 30, 2020 and September 30, 2019, its cash flows for the nine months ended September 30, 2020 and September 30, 2019 and the changes in stockholders’ equity for the three and nine months ended September 30, 2020 and September 30, 2019. The December 31, 2019 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2019 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 makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used. Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components.
The ultimate impact from the coronavirus pandemic, or COVID-19, on the Company’s operations and financial results during 2020 will depend on, among other things, the severity and scope of the pandemic and full impact of governmental restrictions and executive orders previously issued. We are not able to fully quantify the impact that these factors will have on our financial results during 2020 and beyond. 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 requiring utility companies to temporarily prohibit late fees and service disconnections for non-payment. 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.
Reclassification
Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. These reclassifications had no effect on net income or stockholders' equity.
NOTE 3 – REVENUE RECOGNITION
Background
Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC. Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices. Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations 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 judgements described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption. The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis. As a result, we record unbilled operating revenue (contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle.
Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware. We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred. These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue. The contract also provides for a minimum required volume of wastewater flow to our facility. At each year end, any shortfall of the actual volume from the required minimum volume is billed to the industrial customer and recorded as revenue. Additionally, if during the course of the year it is probable that the actual volume will not meet the minimum required volume, estimated revenue amounts would be recorded for the pro rata minimum volume, constrained for potential flow capacity that could occur in the remainder of the year.
Artesian generates 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.
The DEPSC required Delaware utilities to determine the impact that the Tax Cuts and Jobs Act, or TCJA, had on its customers and potential rate relief due to customers. The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019. Approximately $3.8 million was refunded to customers during the second quarter of 2019. This amount was previously held in reserve (refund liability) and was not reflected in income.
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, state government agencies previously 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. The Company anticipates a longer receivable cycle and the need for increased reserves for bad debt compared to 2019. Effective September 30, 2020 an adjustment was made to increase the reserve for bad debt in the amount of $0.5 million. 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 DEPSC and MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19. As of September 30, 2020, we have not recorded a deferred regulatory asset for incremental costs related to COVID-19, but will continue to evaluate the on-going impact of the pandemic and whether incremental costs incurred are sufficient to warrant treatment as a deferred regulatory asset in accordance with the orders issued by the DEPSC and MDPSC.
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 residences, 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 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 September 30, 2020 |
Three months ended September 30, 2019 |
Nine months ended September 30, 2020 |
Nine months ended September 30, 2019 |
||||||||||||
Tariff Revenue |
||||||||||||||||
Consumption charges |
$ |
$ |
$ |
$ |
||||||||||||
Fixed fees |
||||||||||||||||
Service charges |
||||||||||||||||
DSIC |
||||||||||||||||
Industrial wastewater services |
||||||||||||||||
Total Tariff Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Non-Tariff Revenue |
||||||||||||||||
Service line protection plans |
$ |
$ |
$ |
$ |
||||||||||||
Contract operations |
||||||||||||||||
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) |
September 30, 2020 |
December 31, 2019 |
||||||
Contract Assets – Tariff |
$ |
$ |
||||||
Deferred Revenue |
||||||||
Deferred Revenue – Tariff |
$ |
$ |
||||||
Deferred Revenue – Non-Tariff |
||||||||
Total Deferred Revenue |
$ |
$ |
||||||
For the nine months ended September 30, 2020, the Company recognized revenue of $1.1 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.2 million from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year.
The increases (decreases) of Accounts Receivable, Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments.
Remaining Performance Obligations
As of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, 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 2 years to 76 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 Condensed 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 terms of the lease agreements. Periodically, the annual lease payment for one land operating 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 |
Nine Months Ended |
|||||||||||||||
September 30, |
September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Minimum rentals |
$ |
$ |
$ |
$ |
||||||||||||
Contingent rentals |
||||||||||||||||
$ |
$ |
$ |
$ |
|||||||||||||
Supplemental cash flow information related to leases is as follows:
(in thousands) |
||||||||
Nine Months Ended |
Nine Months Ended |
|||||||
September 30, 2020 |
September 30, 2019 |
|||||||
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) |
||||||||
September 30, 2020 |
December 31, 2019 |
|||||||
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 September 30, 2020 are as follows:
(in thousands) |
||||
Operating Leases |
||||
Year |
||||
2021 |
$ |
|||
2022 |
||||
2023 |
||||
2024 |
||||
2025 |
||||
Thereafter |
||||
Total undiscounted lease payments |
$ |
|||
Less effects of discounting |
( |
) |
||
Total lease liabilities recognized |
$ |
|||
As of September 30, 2020, 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, which replaced the 2005 Equity Compensation Plan that expired on May 24, 2015. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee, 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 nine months ended September 30, 2020 of approximately $44,000 and $134,000 , respectively, was recorded for restricted stock awards issued in May 2019 and May 2020. Compensation expense, for the three and nine months ended September 30, 2019 of approximately $45,000 and $136,000 , respectively, was recorded for restricted stock awards issued in May 2018 and May 2019. 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 8, 2019, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $36.11 , the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 8, 2019.
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 nine months ended September 30, 2020:
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, 2020 |
$ |
$ |
$ |
|||||||||||||||||||||
Granted |
||||||||||||||||||||||||
Exercised/vested and released |
( |
) |
( |
) |
||||||||||||||||||||
Expired/cancelled |
||||||||||||||||||||||||
Outstanding at September 30, 2020 |
$ |
$ |
$ |
|||||||||||||||||||||
Exercisable/vested at September 30, 2020 |
$ |
$ |
— |
— |
||||||||||||||||||||
The total intrinsic value of options exercised during the nine months ended September 30, 2020 was approximately $391,000 .
There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2020.
As of September 30, 2020, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of September 30, 2020, there was $104,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.059 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 |
September 30, 2020 |
December 31, 2019 |
||||||
Investment in CoBank |
$ |
$ |
||||||
Goodwill |
||||||||
Other |
||||||||
$ |
$ |
|||||||
NOTE 7 - REGULATORY ASSETS
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 postretirement benefit obligation is the recognition of an offsetting regulatory liability as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees. Artesian Water contributed approximately $17,400 to its postretirement benefit plan in the first nine months of 2020. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.
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 allowed rate recovery on 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. These amounts are recovered over the term of the new long-term debt issued. 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 bonds.
Regulatory expenses amortized on a straight-line basis are noted below:
Expense |
Years Amortized |
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) |
||||||||
September 30, 2020 |
December 31, 2019 |
|||||||
Postretirement benefit obligation |
$ |
$ |
||||||
Deferred income taxes |
||||||||
Expense of rate case studies |
||||||||
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, the MDPSC, and the 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 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). This resulted in a decrease in the net deferred income tax liability of approximately $24.3 million, of which $22.8 million was reclassed to a regulatory liability. 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) |
||||||||
September 30, 2020 |
December 31, 2019 |
|||||||
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 September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
(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 nine months ended September 30, 2020, no 5,000 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 September 30, 2020, 8,458,627 881,452 8,403,243 881,452 1.00
Equity per common share was $17.79 and $17.28 at September 30, 2020 and December 31, 2019, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on September 30, 2020 and December 31, 2019, 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. |
Rate Proceedings
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.
The DEPSC required Delaware utilities to determine the impact that the TCJA had on their customers and potential rate relief due to customers. The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019. Approximately $3.8 million was refunded to customers during the second quarter of 2019. This amount was previously held in reserve and was not reflected in income..
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 |
11/28/2018 |
05/29/2019 |
11/15/2019 |
05/29/2020 |
DEPSC Approval Date |
12/20/2018 |
06/18/2019 |
12/12/2019 |
06/17/2020 |
Effective Date |
01/01/2019 |
07/01/2019 |
01/01/2020 |
07/01/2020 |
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 |
10/01/2014 |
Eligible Plant Improvements – Installed Ending Date |
10/31/2018 |
04/30/2019 |
04/30/2019 |
04/30/2019 |
The DSIC rate effective January 1, 2020 replaced the DSIC rate effective July 1, 2019. The DSIC rate effective July 1, 2020 replaced the DSIC rate effective January 1, 2020. The rate reflects the eligible plant improvements installed through April 30, 2019. The DSIC rates effective January 1, 2020 and July 1, 2020 are still subject to audit at a later date by the DEPSC. For the three and nine months ended September 30, 2020, we earned approximately $1.4 million and $3.8 million in DSIC revenue, respectively. For the three and nine months ended September 30, 2019, we earned approximately $1.3 million and $3.1 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 $15,300 in penalties and interest for the nine months ended September 30, 2020. The Company remains subject to examination by federal and state authorities for the tax years .
The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income. The 1996 Tax Act provided an exclusion from taxable income for CIAC and Advances received after June 12, 1996 except for certain contributions for large services that are not included in rate base for rate-making purposes. On December 22, 2017, the TCJA repealed the 1996 exclusion from gross income effective on the enactment date.
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 September 30, 2020 and December 31, 2019 was fixed-rate. The fair value of the Company’s long-term debt is determined by discounting its 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 |
||||||||
September 30, 2020 |
December 31, 2019 |
|||||||
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 through the remainder of the three year term class that expires at the Annual Meeting of the Class B Stock shareholders to be held in 2021 and until his respective successor shall be elected and qualified. 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 $63,000 and $291,000 was paid to MNAT during the three and nine months ended September 30, 2020, respectively, for legal services and director related services. Approximately $45,000 and $168,000 was paid to MNAT during the three and nine months ended September 30, 2019, respectively, for legal and director related services. As of September 30, 2020, the Company had a $27,000 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. Artesian Water utilized a cost approach to determine that the purchase price was reasonable. 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 preliminary purchase price allocation is expected to be primarily attributed to utility plant assets and will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date.
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) |
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Utility plant, at original cost |
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Source of supply plant |
$ |
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Pumping and water treatment plant |
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Transmission and distribution plant |
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Other deferred assets |
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Goodwill |
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Purchase Price |
$ |
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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 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments, to provide financial statement users with more information about expected credit losses on financial instruments. The guidance revises the incurred loss impairment methodology to reflect current expected credit losses and requires consideration of a broader range of information to estimate credit losses. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. For the Company, this standard is primarily applicable to accounts receivable balances. The Company’s credit losses on accounts receivable is minimal since we mitigate our exposure by discontinuing services in the event of non-payment. However, due to the COVID-19 pandemic causing hardships for many utility customers, state government agencies previously 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. The Company anticipates a longer receivable cycle and the need for increased reserves for bad debt compared to 2019. Effective September 30, 2020 an adjustment was made to increase the reserve for bad debt in the amount of $0.5 million. 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 DEPSC and MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19, which includes increased bad debt expense. As of September 30, 2020, we have not recorded a deferred regulatory asset for incremental costs related to COVID-19, but will continue to evaluate the on-going impact of the pandemic and whether incremental costs incurred are sufficient to warrant treatment as a deferred regulatory asset in accordance with the orders issued by the DEPSC and MDPSC.
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, 2019, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, 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 SEPTEMBER 30, 2020
OVERVIEW
Our profitability is primarily attributable to the sale of water. Gross water sales composed 87.6% of total operating revenues for the nine months ended September 30, 2020. 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
In March 2020, the World Health Organization classified the coronavirus, or COVID-19, outbreak as a pandemic. Subsequently on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The emergence of COVID-19 around the world presents risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. While the COVID-19 pandemic did not materially adversely affect the Company’s financial results and business operations for the nine months ended September 30, 2020, economic and health conditions in the United States and across most of the globe have continued to change rapidly. 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.
The COVID-19 pandemic may affect the Company’s operations in future quarters. The Company maintains essential utility services and is following social distancing and remote work directives, however prolonged workforce disruptions may negatively impact performance of services or require use of emergency personnel. Due to the COVID-19 pandemic causing hardships for many utility customers, state government agencies previously 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. As a result, the Company anticipates a longer receivable cycle and the need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential. 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 DEPSC and the MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19.
Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. Given the changing nature of the COVID-19 outbreak and the responses to curb its spread, management cannot predict the full impact of the COVID-19 pandemic on the Company’s results of operations. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends.
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 September 30, 2020, we had approximately 90,000 metered water customers in Delaware, an increase of approximately 3,100 compared to September 30, 2019. The number of metered water customers in Maryland totaled approximately 2,490 as of September 30, 2020, an increase of approximately 20 compared to September 30, 2019. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2019. For the nine months ended September 30, 2020, approximately 6.3 billion gallons of water were distributed in our Delaware systems and approximately 100.7 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 totaled approximately 2,730 as of September 30, 2020, an increase of approximately 380, or 16.2%, compared to September 30, 2019. 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 September 30, 2020, approximately 21,100, or 24.7%, of our eligible water customers enrolled in the WSLP Plan, approximately 16,300, or 19.1%, of our eligible customers enrolled in the SSLP Plan, and approximately 7,600, or 8.9%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,930 non-utility customers enrolled in one of our three protection plans.
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 three years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems. Some recent acquisitions are noted below.
On October 1, 2019, Artesian Water purchased utility assets from High Point Associates, L.P. and connected these assets to our public water system to serve the residents of High Point Park located in Kent County, Delaware.
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.
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.
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 will begin operating this facility once this customer receives their process wastewater treatment operating permit.
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 capital investment plan for the next three years includes projects for water treatment plant improvements and additions in both Delaware and Maryland and wastewater treatment plant improvements and expansion in Delaware. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. 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 September 30, 2020 Compared to the Three Months Ended September 30, 2019.
Operating Revenues
Revenues totaled $24.7 million for the three months ended September 30, 2020, $2.2 million, or 9.7%, more than revenues for the three months ended September 30, 2019. Water sales revenue increased $1.3 million, or 6.3%, for the three months ended September 30, 2020 from the corresponding period in 2019, primarily due to an increase in residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. We realized 86.4% and 89.1% of our total operating revenue for the three months ended September 30, 2020 and September 30, 2019, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.8 million, or 67.0%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase is primarily due to an increase in industrial wastewater service revenue, related to the minimum required volume of wastewater under contract. In addition, there was an increase in wastewater revenue from customer growth. This increase is partially offset by a decrease in service and finance charges, related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment.
Non-utility operating revenue increased approximately $0.1 million, or 7.7%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase is primarily due to an increase in SLP Plan revenue. In addition, contract service revenue increased related to a contract for the design and construction of wastewater infrastructure.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $0.6 million, or 4.8%, for the three months ended September 30, 2020, compared to the same period in 2019, primarily related to an increase in utility operating expenses of $0.5 million.
Utility operating expenses increased $0.5 million, or 4.3%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The net increase is primarily related to the following.
Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall wages. |
Bad debt expense increased $0.3 million, related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment resulting in a longer receivable cycle and the need for increased reserves for bad debt. |
Wastewater treatment costs increased $0.1 million, related to an agreement to provide reciprocal services for certain service areas within Sussex County. |
General administration expenses decreased $0.2 million, primarily related to reduced in person group activity costs, such as meetings, training and conferences, as well as a decrease in consulting services. |
Tank maintenance expenses decreased $0.1 million, due to the timing of tank painting. |
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.6% for the three months ended September 30, 2020, compared to 56.1% for the three months ended September 30, 2019.
Depreciation and amortization expense increased $0.2 million, or 5.8%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense increased $0.3 million, or 19.1%, primarily due to increased pre-tax book income in 2020 compared to 2019.
Other Income, Net
Other income decreased $0.4 million, primarily due to a decrease in Allowance for funds used during construction, or AFUDC, as a result of lower long-term construction activity subject to AFUDC for the three months ended September 30, 2020 compared to the same period in 2019.
Interest Charges
Interest expense increased $0.1 million, primarily due to an increase in long-term debt interest related to the Series V First Mortgage Bond issued on December 17, 2019. This increase is partially offset by a decrease in short-term debt interest, primarily related to lower interest rates and short-term borrowing levels in 2020.
Net Income
Our net income applicable to common stock increased $0.6 million. Operating revenues increased $2.2 million, while operating expenses increased $1.1 million, other income, net decreased $0.4 million, and interest expense increased $0.1 million.
Results of Operations – Analysis of the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
Operating Revenues
Revenues totaled $66.4 million for the nine months ended September 30, 2020, $3.8 million, or 6.1%, more than revenues for the nine months ended September 30, 2019. Water sales revenue increased $3.0 million, or 5.3%, for the nine months ended September 30, 2020 from the corresponding period in 2019, primarily due to an increase in residential consumption revenue, partially offset by a decrease in non-residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. Water sales revenue also increased due to an increase in DSIC revenue. The DSIC rate effective January 1, 2019 and July 1, 2019 was 5.55% and 7.41%, respectively. The DSIC rate effective January 1, 2020 and July 1, 2020 was 7.50% and 7.41%, respectively. We realized 87.6% and 88.2% of our total operating revenue for the nine months ended September 30, 2020 and September 30, 2019, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.9 million, or 25.6%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase in industrial wastewater service revenue, related to the minimum required volume of wastewater under contract. In addition, there was an increase in wastewater revenue from customer growth. This increase is partially offset by a decrease in service and finance charges, related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment.
Operating Expenses
Operating expenses, excluding depreciation and income taxes, increased $0.8 million, or 2.4%, for the nine months ended September 30, 2020, compared to the same period in 2019. The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.7 million and an increase in property and other taxes of $0.2 million.
Utility operating expenses increased $0.7 million, or 2.3%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The net increase is primarily related to the following.
Bad debt expense increased $0.6 million, primarily related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment resulting in a longer receivable cycle and the need for increased reserves for bad debt. |
Payroll and employee benefit costs increased $0.6 million, primarily related to an increase in overall wages. |
Wastewater treatment costs increased $0.3 million, related to an agreement to provide reciprocal services for certain service areas within Sussex County. |
Purchased power expenses increased $0.1 million, primarily due to higher operational usage. |
General administration expenses decreased $0.4 million, primarily related to reduced in person group activity costs, such as meetings, training and conferences, as well as a decrease in consulting services. |
Tank maintenance expenses decreased $0.3 million, due to the timing of tank painting. |
Purchased water expenses decreased $0.2 million, primarily related to the timing of purchases under contract. |
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 54.2% for the nine months ended September 30, 2020, compared to 56.1% for the nine months ended September 30, 2019.
Federal and state income tax expense increased $0.7 million, or 16.9%, primarily due to increased pre-tax book income in 2020 compared to 2019.
Property and other taxes increased $0.2 million, or 4.2%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.
Other Income, Net
Other income increased $0.2 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 refund is calculated based on 0.8% of the average loan balance outstanding. In addition, in 2020, CoBank, ACB issued a one-time additional patronage distribution based on 0.1% of the average loan balance outstanding. 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 nine months ended September 30, 2020 compared to the same period in 2019.
Interest Charges
Interest expense increased $0.5 million, primarily due to an increase in long-term debt interest related to the Series V First Mortgage Bond issued on December 17, 2019. This increase is partially offset by a decrease in short-term debt interest, primarily related to lower interest rates and short-term borrowing levels in 2020. Customer deposit interest decreased $0.1 million from the 2019 customer refund amount held in reserve related to the Tax Cuts and Jobs Act.
Net Income
Our net income applicable to common stock increased $1.9 million. Operating revenues increased $3.8 million and miscellaneous income increased $0.3 million, while operating expenses increased $1.7 million and interest expense increased $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the nine months ended September 30, 2020 were $14.3 million of cash provided by operating activities, $8.1 million in net contributions and advances from developers, $12.6 million from lines of credit borrowings and $1.1 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.
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 nine months of 2020 were $31.7 million compared to $27.3 million during the same period in 2019. During the first nine months of 2020, we invested approximately $8.6 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains. We invested $5.5 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $2.3 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $3.2 million for the installation of water mains and hydrants in 2020 compared to $3.4 million in 2019. We invested $1.0 million to upgrade and automate our meter reading equipment. We invested approximately $3.0 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 $2.4 million in wastewater projects in Delaware. In addition, Artesian Water invested $5.7 million to purchase water system operating assets from the Town of Frankford and the City of Delaware City.
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 potential capital market financing if necessary. 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 September 30, 2020, 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 September 30, 2020, there was $32.9 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 1.25%. 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 31, 2021 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At September 30, 2020, 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 September 30, 2020, there was $7.0 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, 2021. 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 |
$ |
20,078 |
$ |
-- |
$ |
-- |
$ |
-- |
||||||||
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) |
$ |
6,650 |
$ |
13,218 |
$ |
13,115 |
$ |
194,734 |
$ |
227,717 |
||||||||||
State revolving fund loans (principal and interest) |
1,002 |
674 |
674 |
3,705 |
6,055 |
|||||||||||||||
Promissory note (principal and interest) |
960 |
1,921 |
1,921 |
12,778 |
17,580 |
|||||||||||||||
Operating leases |
42 |
55 |
47 |
1,315 |
1,459 |
|||||||||||||||
Operating agreements |
73 |
82 |
79 |
876 |
1,110 |
|||||||||||||||
Unconditional purchase obligations |
3,881 |
1,078 |
43 |
--- |
5,002 |
|||||||||||||||
Tank painting contractual obligation |
138 |
--- |
--- |
--- |
138 |
|||||||||||||||
Total contractual cash obligations |
$ |
12,746 |
$ |
17,028 |
$ |
15,879 |
$ |
213,408 |
$ |
259,061 |
||||||||||
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. In addition, we are required to abide by certain financial covenants and ratios. As of September 30, 2020, 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 loans 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 December 17, 2019, Artesian Water entered into a Bond Purchase Agreement relating to the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series V, or the Series V Bond, due October 31, 2049, or the Maturity Date. The Series V Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fourth Supplemental Indenture dated as of December 17, 2019 from Artesian Water to Wilmington Trust Company, as Trustee. The Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Series V Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources. The DEPSC approved the issuance of the Series V Bond on November 14, 2019.
The Series V Bond carries an annual interest rate of 4.42% through but excluding the Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Maturity Date, beginning January 30, 2020 until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Twenty-Fourth Supplemental Indenture. The term of the Series V Bond also includes certain limitations on Artesian Water’s indebtedness.
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 September 30, 2020, no funds were borrowed under the Loans.
In order to control purchased power costs, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican. The fixed rate for MidAmerican was lowered 10.8% starting in September 2018. The previous contract term was in effect since October 2015. The current fixed price contract is effective from September 2018 through May 2022. 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 previous contract term was in effect since December 2015. 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 our interconnection agreement with the Chester Water Authority, which expires December 31, 2021 and minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.
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 2019 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, 2019. 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, 2019. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019.
Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019 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 nine months of 2020 that had a material impact on our financial condition, liquidity or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 2038, 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 September 30, 2020 were approximately $20.1 million. An increase in interest rates will result in an increase in the cost of borrowing on this variable rate line. 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.
ITEM 4 – CONTROLS AND PROCEDURES
(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 of the end of the period covered by this report. Based upon that 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 designed to provide 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.
(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. The COVID-19 pandemic has had no material impact on the Company’s internal controls over financial reporting. The Company continues to follow the same processes that were in place prior to the pandemic, in addition to implementing additional monitoring procedures related to potential impacts from the pandemic.
PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have significant diversion of management attention.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, 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, except as follows:
Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of the coronavirus, or COVID-19.
Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.
We are considered an essential utility service company, as defined by the U.S. Department of Homeland Security. Although we have continued to operate our business to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have an adverse effect on our operations. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken to contain or mitigate its effects. Any resulting financial impact cannot be estimated reasonably at this time, but results of operations, financial condition and cash flows could be adversely impacted. State government agencies previously issued executive orders requiring utility companies to take a number of steps to support their customers and communities, which included prohibiting service disconnections for non-payment and prohibiting late fees. As a result, the Company anticipates a longer receivable cycle, the need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential. 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. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which may adversely impact our stock price. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our 2019 Annual Report on Form 10-K, such as those relating to our financial performance.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
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.* |
|
Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.* |
|
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).** |
|
101 |
The following financial statements from Artesian Resources Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets (unaudited); (ii) the Condensed Consolidated Statements of Operations (unaudited); (iii) the Condensed Consolidated Statements of Cash Flows (unaudited); and (iv) the Notes to the Condensed Consolidated Financial Statements (unaudited) that have been detail tagged.* |
104 |
The cover page from Artesian Resources Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in iXBRL (contained in exhibit 101).* |
* Filed herewith
** Furnished herewith
34
|
Exhibit 31.1
|
|||||
|
Certification of Chief Executive Officer of Artesian Resources Corporation
required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended
|
|||||
|
|
|||||
|
I, Dian C. Taylor, certify that:
|
|
|
|||
|
|
|||||
|
1.
|
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2020 of Artesian Resources Corporation;
|
||||
|
|
|
||||
|
2.
|
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;
|
||||
|
|
|
||||
|
3.
|
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;
|
||||
|
|
|
||||
|
4.
|
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:
|
||||
|
|
|||||
|
a)
|
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;
|
||||
|
b)
|
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;
|
||||
|
c)
|
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
|
||||
|
d)
|
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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|||||
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5.
|
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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|
|
|||||
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a)
|
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)
|
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: November 6, 2020
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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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||
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1.
|
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2020 of Artesian Resources Corporation;
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||
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2.
|
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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|
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||
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3.
|
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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|
|
||
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4.
|
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:
|
||
|
|
|||
|
a)
|
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;
|
||
|
b)
|
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)
|
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)
|
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
|
||
|
|
|||
|
5.
|
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):
|
||
|
|
|||
|
a)
|
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
|
||
|
b)
|
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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|
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Date: November 6, 2020
|
/s/ DAVID B. SPACHT
|
||
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David B. Spacht
|
||
|
|
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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|
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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)
|
The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2020 (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
|
|
|
|
|
(2)
|
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: November 6, 2020
|
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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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||
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||
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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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