ARTESIAN RESOURCES CORP
10-Ks and 10-Qs
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
□
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-18516
ARTESIAN RESOURCES CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
|
Delaware
|
51-0002090
|
|
--------------------------------------------------------------------
|
-------------------------------------------------
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
664 Churchmans Road, Newark, Delaware 19702
------------------------------------------------------------------
Address of principal executive offices
(302) 453 – 6900
-----------------------------------------------------------
Registrant's telephone number, including area code
|
Securities registered pursuant to Section 12(b) of the Act:
|
||
|
Title of each class
|
Trading Symbol (s)
|
Name of each exchange on which registered
|
|
Common Stock
|
ARTNA
|
NASDAQ
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|
☑
|
Yes
|
□
|
No
|
Indicate by check mark whether the registrant has submitted electronically,
every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T
(
§
232.405 of this chapter)
during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files).
|
☑
|
Yes
|
□
|
No
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
|
Large Accelerated Filer
□
|
Accelerated Filer
☑
|
Non-Accelerated Filer
□
|
Smaller Reporting Company
□
|
Emerging Growth Company
☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).
|
□
|
Yes
|
☑
|
No
|
As of November 5, 2019, 8,403,873 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
ARTESIAN RESOURCES CORPORATION
FORM 10-Q
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Page(s)
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3
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4
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5 - 6
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9 - 23
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24 - 31
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31
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32
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32
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32
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32
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32
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33
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Signatures
|
2
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
ASSETS
|
September 30, 2019
|
December 31, 2018
|
||||||
|
Utility plant, at original cost (less accumulated depreciation 2019
- $134,310; 2018 - $126,114)
|
$
|
518,636
|
$
|
498,678
|
||||
|
Current assets
|
||||||||
|
Cash and cash equivalents
|
458
|
293
|
||||||
|
Accounts receivable (less allowance for doubtful accounts - 2019 - $254; 2018 - $232)
|
6,647
|
8,159
|
||||||
|
Income tax receivable
|
182
|
772
|
||||||
|
Unbilled operating revenues
|
1,424
|
1,441
|
||||||
|
Materials and supplies
|
1,275
|
1,459
|
||||||
|
Prepaid property taxes
|
2,672
|
1,870
|
||||||
|
Prepaid expenses and other
|
2,197
|
2,124
|
||||||
|
Total current assets
|
14,855
|
16,118
|
||||||
|
Other assets
|
||||||||
|
Non-utility property (less accumulated depreciation - 2019 - $780; 2018 - $734)
|
3,819
|
3,849
|
||||||
|
Other deferred assets
|
4,205
|
3,931
|
||||||
|
Operating lease right of use assets
|
489
|
–
|
||||||
|
Total other assets
|
8,513
|
7,780
|
||||||
|
Regulatory assets, net
|
6,933
|
7,254
|
||||||
|
Total Assets
|
$
|
548,937
|
$
|
529,830
|
||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Stockholders' equity
|
||||||||
|
Common stock
|
$
|
9,284
|
$
|
9,250
|
||||
|
Preferred stock
|
–
|
–
|
||||||
|
Additional paid-in capital
|
101,552
|
100,639
|
||||||
|
Retained earnings
|
46,067
|
43,362
|
||||||
|
Total stockholders' equity
|
156,903
|
153,251
|
||||||
|
Long-term debt, net of current portion
|
114,558
|
115,862
|
||||||
|
271,461
|
269,113
|
|||||||
|
Current liabilities
|
||||||||
|
Lines of credit
|
31,693
|
15,942
|
||||||
|
Current portion of long-term debt
|
1,671
|
1,725
|
||||||
|
Dividends payable
|
2,317
|
–
|
||||||
|
Accounts payable
|
4,950
|
8,187
|
||||||
|
Accrued expenses
|
2,561
|
3,902
|
||||||
|
Overdraft payable
|
51
|
117
|
||||||
|
Accrued interest
|
1,229
|
784
|
||||||
|
Income taxes payable
|
732
|
–
|
||||||
|
Customer deposits
|
1,074
|
1,044
|
||||||
|
Revenue reserve for refund
|
–
|
3,298
|
||||||
|
Other
|
3,969
|
2,732
|
||||||
|
Total current liabilities
|
50,247
|
37,731
|
||||||
|
Commitments and contingencies
|
|
|
||||||
|
Deferred credits and other liabilities
|
||||||||
|
Net advances for construction
|
5,814
|
6,596
|
||||||
|
Operating lease liabilities
|
459
|
–
|
||||||
|
Regulatory liabilities
|
22,452
|
22,813
|
||||||
|
Deferred investment tax credits
|
495
|
508
|
||||||
|
Deferred income taxes
|
53,224
|
55,054
|
||||||
|
Total deferred credits and other liabilities
|
82,444
|
84,971
|
||||||
|
Net contributions in aid of construction
|
144,785
|
138,015
|
||||||
|
Total Liabilities and Stockholders' Equity
|
$
|
548,937
|
$
|
529,830
|
||||
See notes to the condensed consolidated financial statements.
3
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands, except per share amounts)
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||
|
2019
|
2018
|
2019
|
2018
|
|||||||||||||
|
Operating revenues
|
||||||||||||||||
|
Water sales
|
$
|
20,102
|
$
|
19,469
|
$
|
55,227
|
$
|
53,983
|
||||||||
|
Other utility operating revenue
|
1,245
|
1,189
|
3,515
|
3,273
|
||||||||||||
|
Non-utility operating revenue
|
1,202
|
1,266
|
3,844
|
3,812
|
||||||||||||
|
Total Operating Revenues
|
22,549
|
21,924
|
62,586
|
61,068
|
||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Utility operating expenses
|
10,495
|
10,333
|
28,865
|
28,454
|
||||||||||||
|
Non-utility operating expenses
|
838
|
735
|
2,385
|
2,069
|
||||||||||||
|
Depreciation and amortization
|
2,679
|
2,513
|
8,117
|
7,623
|
||||||||||||
|
State and federal income taxes
|
1,498
|
1,834
|
4,002
|
4,737
|
||||||||||||
|
Property and other taxes
|
1,309
|
1,265
|
3,884
|
3,731
|
||||||||||||
|
Total Operating Expenses
|
16,819
|
16,680
|
47,253
|
46,614
|
||||||||||||
|
Operating income
|
5,730
|
5,244
|
15,333
|
14,454
|
||||||||||||
|
Other income, net
|
||||||||||||||||
|
Allowance for funds used during construction (AFUDC) construction (AFUDC)
|
566
|
146
|
1,058
|
413
|
||||||||||||
|
Miscellaneous (expense) income
|
(73
|
)
|
87
|
670
|
1,014
|
|||||||||||
|
Income before interest charges
|
6,223
|
5,477
|
17,061
|
15,881
|
||||||||||||
|
Interest charges
|
1,765
|
1,548
|
5,235
|
4,548
|
||||||||||||
|
Net income applicable to common stock
|
$
|
4,458
|
$
|
3,929
|
$
|
11,826
|
$
|
11,333
|
||||||||
|
Income per common share:
|
||||||||||||||||
|
Basic
|
$
|
0.48
|
$
|
0.43
|
$
|
1.28
|
$
|
1.23
|
||||||||
|
Diluted
|
$
|
0.48
|
$
|
0.42
|
$
|
1.27
|
$
|
1.22
|
||||||||
|
Weighted average common shares outstanding:
|
||||||||||||||||
|
Basic
|
9,283
|
9,244
|
9,272
|
9,235
|
||||||||||||
|
Diluted
|
9,329
|
9,299
|
9,322
|
9,290
|
||||||||||||
|
Cash dividends per share of common stock
|
$
|
0.2459
|
$
|
0.2387
|
$
|
0.7341
|
$
|
0.7126
|
||||||||
See notes to the condensed consolidated financial statements.
4
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
For the Nine Months Ended September 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net income
|
$
|
11,826
|
$
|
11,333
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
8,117
|
7,623
|
||||||
|
Deferred income taxes, net
|
(1,843
|
)
|
1,314
|
|||||
|
Stock compensation
|
136
|
144
|
||||||
|
AFUDC, equity portion
|
(649
|
)
|
(287
|
)
|
||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable, net of allowance for doubtful accounts
|
1,512
|
207
|
||||||
|
Income tax receivable
|
590
|
180
|
||||||
|
Unbilled operating revenues
|
17
|
101
|
||||||
|
Materials and supplies
|
184
|
230
|
||||||
|
Income taxes payable
|
732
|
–
|
||||||
|
Prepaid property taxes
|
(802
|
)
|
(692
|
)
|
||||
|
Prepaid expenses and other
|
(73
|
)
|
(124
|
)
|
||||
|
Other deferred assets
|
(300
|
)
|
(199
|
)
|
||||
|
Regulatory assets
|
272
|
168
|
||||||
|
Regulatory liabilities
|
(361
|
)
|
726
|
|||||
|
Accounts payable
|
(3,237
|
)
|
(3,680
|
)
|
||||
|
Accrued expenses
|
(1,341
|
)
|
599
|
|||||
|
Accrued interest
|
445
|
(635
|
)
|
|||||
|
Revenue reserved for refund
|
(3,298
|
)
|
–
|
|||||
|
Customer deposits and other, net
|
1,237
|
4,060
|
||||||
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
13,164
|
21,068
|
||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Capital expenditures (net of AFUDC, equity portion)
|
(27,344
|
)
|
(34,962
|
)
|
||||
|
Proceeds from sale of assets
|
43
|
44
|
||||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(27,301
|
)
|
(34,918
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Net borrowings under lines of credit agreements
|
15,751
|
5,748
|
||||||
|
(Decrease) increase in overdraft payable
|
(66
|
)
|
191
|
|||||
|
Net advances and contributions in aid of construction
|
5,968
|
6,634
|
||||||
|
Net proceeds from issuance of common stock
|
811
|
783
|
||||||
|
Issuance of long-term debt
|
–
|
7,500
|
||||||
|
Dividends paid
|
(6,804
|
)
|
(6,579
|
)
|
||||
|
Debt issuance costs
|
–
|
(75
|
)
|
|||||
|
Principal repayments of long-term debt
|
(1,358
|
)
|
(1,071
|
)
|
||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
14,302
|
13,131
|
||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
165
|
(719
|
)
|
|||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
293
|
952
|
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
458
|
$
|
233
|
||||
|
Non-cash Investing and Financing Activity:
|
||||||||
|
Utility plant received as construction advances and contributions
|
$
|
1,819
|
$
|
623
|
||||
|
Dividends declared but not paid
|
2,317
|
2,206
|
||||||
|
Supplemental Disclosures of Cash Flow Information:
|
||||||||
|
Interest paid
|
$
|
4,790
|
$
|
5,183
|
||||
|
Income taxes paid
|
$
|
4,850
|
$
|
2,417
|
||||
See notes to the condensed consolidated financial statements.
5
ARTESIAN RESOURCES CORPORATION
Unaudited
(In thousands)
|
|
Common Shares Outstanding Class A Non-Voting
(1) (3) (4)
|
Common Shares Outstanding Class B Voting
(2)
|
$1 Par Value Class A Non-Voting
|
$1 Par Value Class B Voting
|
Additional Paid-in Capital
|
Retained Earnings
|
Total
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of December 31, 2017
|
8,333
|
882
|
$
|
8,333
|
$
|
882
|
$
|
99,526
|
$
|
37,903
|
$
|
146,644
|
||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
3,478
|
3,478
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(2,168
|
)
|
(2,168
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
3
|
–
|
3
|
–
|
88
|
–
|
91
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
–
|
–
|
–
|
–
|
47
|
–
|
47
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
12
|
–
|
12
|
–
|
290
|
–
|
302
|
|||||||||||||||||||||
|
Balance as of March 31, 2018
|
8,348
|
882
|
8,348
|
882
|
99,951
|
39,213
|
148,394
|
|||||||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
3,926
|
3,926
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(4,411
|
)
|
(4,411
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
2
|
–
|
2
|
–
|
91
|
–
|
93
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
6
|
–
|
6
|
–
|
67
|
–
|
73
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
3
|
–
|
3
|
–
|
99
|
–
|
102
|
|||||||||||||||||||||
|
Balance as of June 30, 2018
|
8,359
|
882
|
8,359
|
882
|
100,208
|
38,728
|
148,177
|
|||||||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
3,929
|
3,929
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(2,240
|
)
|
(2,240
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
2
|
–
|
2
|
–
|
87
|
–
|
89
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
–
|
–
|
–
|
–
|
48
|
–
|
48
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
3
|
–
|
3
|
–
|
79
|
–
|
82
|
|||||||||||||||||||||
|
Balance as of September 30, 2018
|
8,364
|
882
|
$
|
8,364
|
$
|
882
|
$
|
100,422
|
$
|
40,417
|
$
|
150,085
|
||||||||||||||||
|
|
Common Shares Outstanding Class A Non-Voting
(1) (3) (4)
|
Common Shares Outstanding Class B Voting
(2)
|
$1 Par Value Class A Non-Voting
|
$1 Par Value Class B Voting
|
Additional Paid-in Capital
|
Retained Earnings
|
Total
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of December 31, 2018
|
8,368
|
882
|
$
|
8,368
|
$
|
882
|
$
|
100,639
|
$
|
43,362
|
$
|
153,251
|
||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
3,590
|
3,590
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(2,241
|
)
|
(2,241
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
2
|
–
|
2
|
–
|
85
|
–
|
87
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
14
|
–
|
14
|
–
|
263
|
–
|
277
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
2
|
–
|
2
|
–
|
76
|
–
|
78
|
|||||||||||||||||||||
|
Balance as of March 31, 2019
|
8,386
|
882
|
8,386
|
882
|
101,063
|
44,711
|
155,042
|
|||||||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
3,778
|
3,778
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(4,563
|
)
|
(4,563
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
3
|
–
|
3
|
–
|
87
|
–
|
90
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
5
|
–
|
5
|
–
|
38
|
–
|
43
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
3
|
–
|
3
|
–
|
110
|
–
|
113
|
|||||||||||||||||||||
|
Balance as of June 30, 2019
|
8,397
|
882
|
8,397
|
882
|
101,298
|
43,926
|
154,503
|
|||||||||||||||||||||
|
Net income
|
–
|
–
|
–
|
–
|
–
|
4,458
|
4,458
|
|||||||||||||||||||||
|
Cash dividends declared
|
||||||||||||||||||||||||||||
|
Common stock
|
–
|
–
|
–
|
–
|
–
|
(2,317
|
)
|
(2,317
|
)
|
|||||||||||||||||||
|
Issuance of common stock
|
||||||||||||||||||||||||||||
|
Dividend reinvestment plan
|
3
|
–
|
3
|
–
|
115
|
–
|
118
|
|||||||||||||||||||||
|
Employee stock options and awards
(4)
|
–
|
–
|
–
|
–
|
45
|
–
|
45
|
|||||||||||||||||||||
|
Employee Retirement Plan
(3)
|
2
|
–
|
2
|
–
|
94
|
–
|
96
|
|||||||||||||||||||||
|
Balance as of September 30, 2019
|
8,402
|
882
|
$
|
8,402
|
$
|
882
|
$
|
101,552
|
$
|
46,067
|
$
|
156,903
|
||||||||||||||||
| (1) |
At September 30, 2019 and September 30, 2018, Class A Common Stock had 15,000,000 shares authorized. For the same periods, shares issued,
inclusive of treasury shares, were 8,432,220 and 8,393,208, respectively.
|
| (2) |
At September 30, 2019 and September 30, 2018, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued.
|
| (3) |
Artesian Resources Corporation registered 500,000 shares of Class A Common Stock available for purchase through the Artesian Retirement Plan and
the Artesian Supplemental Retirement Plan.
|
| (4) |
Under the Equity Compensation Plan, effective December 9, 2015, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common
Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for
September 30, 2019 and September 30, 2018, see Note 5-Stock Compensation Plans.
|
See notes to the condensed consolidated financial statements
6
NOTE
1
– GENERAL
Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of our nine 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. We also provide 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.
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 Water Maryland owns and operates 8 public water systems
including one in Port Deposit that has the ability to supply up to 1 million gallons per day, or mgd, of water through an intake in the Susquehanna River.
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 four other subsidiaries, none of which are regulated, are Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or
Artesian Development, Artesian Storm Water Services, Inc., or Artesian Storm Water, and Artesian Consulting Engineers, Inc., or Artesian Consulting Engineers.
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.
7
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 facilities include two wastewater treatment stations with capacities of up to
approximately 2.5 mgd and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 mgd wastewater facility. One
of the wastewater treatment facilities in Middletown now provides 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 zoned 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.
Artesian Consulting Engineers ceased offering services in 2011. In September 2019, the Board of Directors of Artesian Consulting Engineers unanimously
approved its dissolution. Also, in September 2019, the Board of Directors of Artesian Resources Corporation, the sole shareholder of Artesian Consulting Engineers, unanimously approved the dissolution of Artesian Consulting Engineers. The Company
filed a Certificate of Dissolution with the Delaware Secretary of State in October 2019.
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 2018 as filed with the SEC on March 15, 2019.
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, 2019, the results of its operations for the three and nine months periods ended September 30, 2019 and September 30, 2018, its cash flows for the nine month
periods ended September 30, 2019 and September 30, 2018 and the changes in stockholders’ equity for the three and nine months period ended September 30, 2019 and 2018. The December 31, 2018 Condensed Consolidated Balance Sheet was derived from the
Company’s December 31, 2018 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.
In the first quarter of 2019, the Company adopted the new standard on leases that was issued by the Financial Accounting Standards Board, or FASB. The
FASB issued new guidance on leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard
establishes a right-of-use, or ROU, model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement.
8
The Company adopted this new standard using the modified retrospective method and did not apply the standard to the comparative periods presented in this
Form 10-Q. The Company elected the practical expedient not to evaluate land easements that existed prior to implementation and were not previously accounted for as leases. The Company also elected not to recognize ROU assets and lease liabilities
for short-term leases that have a lease term of 12 months or less.
The Company has agreements for land easements and office equipment under
operating leases. The Company evaluated each lease agreement to determine whether the lease was to be accounted for as an operating or financing lease. It was determined that all leases subject to this new standard are operating leases and are
recognized on a straight line basis.
The amount of ROU assets and related liabilities recognized on the Condensed Consolidated Balance Sheet as of September 30,
2019 are approximately $489,000 and reported as “Operating Lease Right of Use Assets” and “Operating Lease Liabilities.” The adoption of this new standard impacted our consolidated balance sheets, but did not have a material effect on our
consolidated results of operations or cash flows.
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.
NOTE 3 – REVENUE RECOGNITION
Background
On January 1, 2018 the Company adopted Accounting Standards Codification 606, or ASC 606, Revenue from Contracts with Customers, using the modified
retrospective approach. The Company identified its sources of revenue streams that fall within the scope of this guidance and applied the five-step model to all qualifying revenue streams to determine when to recognize revenue. The Company concluded
there is not a material change to how revenue was recognized before and after the adoption of ASC 606; therefore, no cumulative retained earnings adjustment was required.
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.
9
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 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 of 2017, 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. 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.
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 customers’ 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.
10
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:
As a result of the reduced tariff rates approved by the DEPSC on January 31, 2019, the tariff revenues presented below for the three months ended September
30, 2018 and the nine months ended September 30, 2018 were reallocated to the appropriate line items for comparison purposes.
|
(in thousands)
|
Three months ended September 30, 2019
|
Three months ended September 30, 2018
|
Nine months ended September 30, 2019
|
Nine months ended September 30, 2018
|
||||||||||||
|
Tariff Revenue
|
||||||||||||||||
|
Consumption charges
|
$
|
12,844
|
$
|
13,672
|
$
|
34,320
|
$
|
36,459
|
||||||||
|
Fixed fees
|
6,529
|
6,305
|
19,525
|
19,009
|
||||||||||||
|
Service charges
|
133
|
183
|
467
|
508
|
||||||||||||
|
DSIC
|
1,334
|
655
|
3,129
|
2,203
|
||||||||||||
|
Industrial wastewater services
|
10
|
–
|
14
|
–
|
||||||||||||
|
Revenue reserved for refund –
TCJA impact
|
–
|
(655
|
)
|
–
|
(2,203
|
)
|
||||||||||
|
Total Tariff Revenue
|
$
|
20,850
|
$
|
20,160
|
$
|
57,455
|
$
|
55,976
|
||||||||
|
Non-Tariff Revenue
|
||||||||||||||||
|
Service line protection plans
|
$
|
1,039
|
$
|
982
|
$
|
3,117
|
$
|
2,960
|
||||||||
|
Contract operations
|
210
|
329
|
866
|
1,025
|
||||||||||||
|
Inspection fees
|
69
|
115
|
155
|
171
|
||||||||||||
|
Total Non-Tariff Revenue
|
$
|
1,318
|
$
|
1,426
|
$
|
4,138
|
$
|
4,156
|
||||||||
|
Other Operating Revenue
not in scope of ASC 606
|
$
|
381
|
$
|
338
|
$
|
993
|
$
|
936
|
||||||||
|
Total Operating Revenue
|
$
|
22,549
|
$
|
21,924
|
$
|
62,586
|
$
|
61,068
|
||||||||
Contract Assets and Contract Liabilities
Our contract assets and liabilities consist of the following:
|
(in thousands)
|
September 30, 2019
|
December 31, 2018
|
||||||
|
Contract Assets –
Tariff
|
$
|
2,367
|
$
|
2,367
|
||||
|
Deferred Revenue
|
||||||||
|
Deferred Revenue – Tariff
|
$
|
1,058
|
$
|
1,025
|
||||
|
Deferred Revenue – Non-Tariff
|
239
|
227
|
||||||
|
Total Deferred Revenue
|
$
|
1,297
|
$
|
1,252
|
||||
|
Refund Liability -
Tariff
|
$
|
–
|
$
|
3,298
|
||||
For the nine months ended September 30, 2019, the Company recognized revenue of $1.0 million from amounts that were included in Deferred Revenue – Tariff
at the beginning of the year and revenue of $207,000 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. The Refund Liability as of December 31, 2018 is based on the calculated amount approved by the DEPSC on January 31, 2019 related to the TCJA. This amount was refunded to customers during the second quarter of 2019.
11
Remaining Performance Obligations
As of September 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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 3 years to 78
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 lease agreements. Periodically, the annual lease payment for one
operating land lease is determined based on the fair market value of the applicable parcel of land. None of the operating leases contain contingent rent provisions. The commencement date of all the operating leases is the earlier of the date we
become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment. The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.
Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of
use asset and liability amounts for the operating leases. As our leases do not provide an implicit rate, we use our incremental borrowing rates for long term and short term agreements and apply the rates accordingly based on the term of the lease
agreements to determine the present value of lease payments.
Rent expense for all operating leases except those with terms of 12 months or less comprises:
|
|
(in thousands)
|
|||||||
|
|
Three Months Ended
September 30, 2019
|
Nine Months Ended
September 30, 2019
|
||||||
|
|
||||||||
|
Minimum rentals
|
$
|
7
|
$
|
16
|
||||
|
Contingent rentals
|
--
|
-
|
||||||
|
$
|
7
|
$
|
16
|
|||||
Supplemental cash flow information related to leases is as follows:
|
|
(in thousands)
|
|||
|
|
Nine Months Ended
September 30, 2019
|
|||
|
|
||||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
||||
|
Operating cash flows from operating leases
|
$
|
33
|
||
|
Right-of-use assets obtained in exchange for lease obligations:
|
||||
|
Operating leases
|
$
|
489
|
||
12
Supplemental balance sheet information related to leases is as follows:
|
|
(in thousands,
except lease term and discount rate)
|
|||
|
|
September 30, 2019
|
|||
|
|
||||
|
Operating Leases:
|
||||
|
Operating lease right-of-use assets
|
$
|
489
|
||
|
Other current liabilities
|
$
|
19
|
||
|
Operating lease liabilities
|
459
|
|||
|
Total operating lease liabilities
|
$
|
478
|
||
|
Weighted Average Remaining Lease Term
|
||||
|
Operating leases
|
57 years
|
|||
|
Weighted Average Discount Rate
|
||||
|
Operating leases
|
4.9
|
%
|
||
Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2019 are as
follows:
|
|
(in thousands)
|
|||
|
|
Operating Leases
|
|||
|
Year
|
||||
|
2019
|
$
|
42
|
||
|
2020
|
42
|
|||
|
2021
|
33
|
|||
|
2022
|
23
|
|||
|
2023
|
23
|
|||
|
Thereafter
|
1,338
|
|||
|
Total undiscounted lease payments
|
$
|
1,501
|
||
|
Less effects of discounting
|
(1,023
|
)
|
||
|
Total lease liabilities recognized
|
478
|
|||
The change in accounting due to the adoption of the new lease guidance did not result in a material change to the future minimum rental payments when compared
to December 31, 2018. As of September 30, 2019, 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, 2019, of approximately $45,000 and $136,000, respectively, was recorded for
restricted stock awards issued in May 2018 and May 2019. For the three and nine months ended September 30, 2018, compensation expense of approximately $49,000 and $144,000, respectively, was recorded for restricted stock awards issued in May 2017 and
May 2018. 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.
13
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. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.
On May 2, 2018, 5,000 shares of Class A Stock were granted as restricted stock awards. The fair value per share was $38.51, the closing price of the Class
A Stock as recorded on the NASDAQ Global Select Market on May 2, 2018.
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, 2019:
|
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, 2019
|
168,750
|
$
|
20.11
|
$
|
2,491
|
5,000
|
$
|
38.51
|
||||||||||||||||
|
Granted
|
–
|
–
|
–
|
5,000
|
$
|
36.11
|
||||||||||||||||||
|
Exercised/vested and released
|
(13,500
|
)
|
16.94
|
297
|
(5,000
|
)
|
$
|
38.51
|
||||||||||||||||
|
Expired/cancelled
|
–
|
–
|
–
|
–
|
–
|
|||||||||||||||||||
|
Outstanding at September 30, 2019
|
155,250
|
$
|
20.38
|
2.787
|
$
|
2,580
|
5,000
|
$
|
36.11
|
|||||||||||||||
|
Exercisable/vested at September 30, 2019
|
155,250
|
$
|
20.38
|
2.787
|
$
|
2,580
|
–
|
–
|
||||||||||||||||
The total intrinsic value of options exercised during the nine months ended September 30, 2019 was approximately $297,000.
There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2019.
As of September 30, 2019, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of September 30, 2019, there was $109,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan.
The cost will be recognized over 0.60 years, the remaining vesting period for the restricted stock awards.
N
OTE 6 - REGULATORY ASSETS
The FASB, ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a
third-party regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and
PAPUC.
The 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 $17,000 to its postretirement benefit plan in the first nine months of 2019. These contributions consist of insurance
premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.
Certain 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.
14
Debt related costs include debt issuance costs and other debt related expense. The DEPSC has allowed rate recovery on unamortized issuance costs and
make-whole premiums associated with the early retirement of Series O and Q First Mortgage bonds as the replacement of that debt in January 2017 with Series T First Mortgage bonds was deemed more favorable for the ratepayers. The DEPSC has also
allowed rate recovery on issuance costs associated with the Series U First Mortgage bond purchase in January 2018 that paid the full indebtedness of the Series P First Mortgage bond. These amounts are recovered over the term of the new long-term
debt issued. For both the Series T First Mortgage bond purchase and the Series U First Mortgage bond purchase, no cash, other than the issue costs, was paid or received as the trustee facilitated direct exchanges of the bonds issued.
Regulatory expenses amortized on a straight-line basis are noted below:
|
Expense
|
Years Amortized
|
|
Rate case studies
|
5
|
|
Debt related costs
|
15 to 25 (based on term of related debt)
|
|
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008)
|
50
|
|
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland
in 2010)
|
20
|
|
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011)
|
80
|
|
Regulatory assets, net of amortization, comprise:
|
||||||||
|
(in thousands)
|
||||||||
|
September 30, 2019
|
December 31, 2018
|
|||||||
|
Postretirement benefit obligation
|
$
|
74
|
$
|
74
|
||||
|
Deferred income taxes
|
389
|
401
|
||||||
|
Expense of rate case studies
|
30
|
46
|
||||||
|
Debt issuance costs
|
5,557
|
5,815
|
||||||
|
Goodwill
|
290
|
295
|
||||||
|
Deferred acquisition and franchise costs
|
593
|
623
|
||||||
|
$
|
6,933
|
$
|
7,254
|
|||||
NOTE
7
– REGULATORY
LIABILITIES
The FASB, ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a
third-party regulatory agency. Certain 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.
The postretirement benefit obligation is the recognition of an offsetting regulatory asset as it relates to the accrual of the expected cost of providing
postretirement health care and life insurance benefits to retired employees when they render the services necessary to earn the benefits. Artesian Water contributed approximately $17,000 to its postretirement benefit plan in the first nine months of
2019. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.
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 10). 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.
15
|
Regulatory liabilities comprise:
|
||||||||
|
|
(in thousands)
|
|||||||
|
|
September 30, 2019
|
December 31, 2018
|
||||||
|
|
||||||||
|
Postretirement benefit obligation
|
$
|
52
|
$
|
52
|
||||
|
Utility plant retirement cost obligation
|
291
|
319
|
||||||
|
Deferred income taxes (related to TCJA)
|
22,109
|
22,442
|
||||||
|
$
|
22,452
|
$
|
22,813
|
|||||
NOTE
8
- 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,
|
||||||||||||||
|
2019
|
2018
|
2019
|
2018
|
|||||||||||||
|
(in thousands)
|
(in thousands)
|
|||||||||||||||
|
Weighted average common shares outstanding during the period for Basic computation
|
9,283
|
9,244
|
9,272
|
9,235
|
||||||||||||
|
Dilutive effect of employee stock options and awards
|
46
|
55
|
50
|
55
|
||||||||||||
|
Weighted average common shares outstanding during the period for Diluted computation
|
9,329
|
9,299
|
9,322
|
9,290
|
||||||||||||
For both the three and nine months ended September 30, 2019, 5,000 shares of restricted stock awards were excluded from the calculations of diluted net
income per share. For the three and nine months ended September 30, 2018, no shares of restricted stock awards were excluded from the calculations of diluted net income per share.
Due to unrecognized compensation costs, the hypothetical repurchase of shares exceeded the number of restricted shares expected to vest during the period, creating an anti-dilutive effect. For the three and nine months ended September 30,
2019 and September 30, 2018, no shares of stock options were excluded from the calculations of diluted net income per share, as the calculated proceeds from the options’ exercise were lower than the average market price of the Company’s common
stock during the period.
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, 2019
,
8,403,243 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of
September 30, 2018
, 8,364,231 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both
classes is
$1.00 per
share. During the three months ended September 30, 2019 and September 30, 2018, the Company issued 5,929 and 4,493
shares of Class A Stock, respectively. For
the nine months ended September 30, 2019 and September 30, 2018, the
Company issued 34,215 and
30,777 shares of Class A Stock, respectively.
Equity per common share was
$16.92 and $16.53 at
September 30, 2019 and December 31, 2018, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on September 30, 2019 and December 31, 2018, respectively.
16
N
OTE 9 - REGULATO
RY
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. Th
e first t
emporary increase may be up to the les
ser 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.
On January 16, 2018, the DEPSC approved the opening of Docket No. 17-1240
requiring 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 (refund liability) 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
|
11/29/2016
|
05/31/2018
|
11/28/2018
|
05/29/2019
|
||||||||||||
|
DEPSC Approval Date
|
12/20/2016
|
06/19/2018
|
12/20/2018
|
06/18/2019
|
||||||||||||
|
Effective Date
|
01/01/2017
|
07/01/2018
|
01/01/2019
|
07/1/2019
|
||||||||||||
|
Cumulative DSIC Rate
|
4.71
|
%
|
3.63
|
%
|
5.55
|
%
|
7.41
|
%
|
||||||||
|
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
|
$
|
16.6
|
$
|
24.7
|
$
|
30.4
|
$
|
43.1
|
||||||||
|
Eligible Plant Improvements – Installed Beginning Date
|
10/01/2014
|
10/01/2014
|
10/01/2014
|
10/01/2014
|
||||||||||||
|
Eligible Plant Improvements – Installed Ending Date
|
10/31/2016
|
04/30/2018
|
10/31/2018
|
04/30/2019
|
||||||||||||
The DSIC rate effective July 1, 2019 replaces the DSIC rate effective January 1, 2019. This increased rate reflects the eligible plant improvements
installed through April 30, 2019. The DSIC rates effective January 1, 2019 and July 1, 2019 are still subject to audit at a later date by the DEPSC. For the three and nine months ended September 30, 2019, we earned approximately $1.3 million and
$3.1 million in DSIC revenue, respectively. For the three and nine months ended September 30, 2018, we earned approximately $0.7 million and $2.2 million in DSIC revenue, respectively.
17
NOTE 10 – INCOME TAXES
The TCJA made many significant changes to the Internal Revenue Code, including, but not limited to (1) reducing the federal corporate tax rate to a flat
21%; (2) creating a 30% limitation on deductible interest expense (not applicable to regulated utilities); (3) eliminating future bonus depreciation deductions on utility plant capital projects that began after December 31, 2017; (4) eliminating the
domestic production activities deduction; (5) eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized; (6) changing the rules related to uses and limitations of net operating loss
carryforwards created in tax years beginning after December 31, 2017 and (7) repealing the exclusion from gross income contributions in aid of construction (CIAC) for water utilities. The most significant change that impacted Artesian Resources was
the reduction of the corporate federal income tax rate from our previous effective rate of 34% to the new flat tax rate of 21% beginning January 1, 2018. The SEC Staff issued Accounting Bulletin No. 118, Income Tax Accounting of the TCJA, allowing
provisional amounts to be reported based on reasonable estimates, subject to adjustment during a one year measurement period. In 2018 the Company finalized making such adjustments. However, since many provisions of the 2017 Tax Act still do not
have final guidance issued, it may be necessary for the Company to make future adjustments based on such new guidance.
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 had
previously recorded a provision for the possible disallowance of a portion of the repair deduction for the tax return year of 2015. The statute of limitations lapsed during the third quarter of 2019, which resulted in the reversal of the reserve in
the amount of approximately $73,000. The Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense. The Company has accrued approximately
$17,000 in penalties and interest for the nine months ended September 30, 2019. The Company remains subject to examination by federal and state authorities for the tax years 2016 through 2018.
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.
N
OTE 11 – FAIR VALUE OF FINANC
IAL
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.
18
Long-term Financial Liabilities
All of Artesian Resources’ outstanding lo
ng-term
debt as of
September 30, 2019
and
December 31, 2018
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, 2019
|
December 31, 2018
|
|||||||
|
Carrying amount
|
$
|
116,229
|
$
|
117,587
|
||||
|
Estimated fair value
|
$
|
129,783
|
$
|
116,818
|
||||
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 12 – RELATED PARTY TRANSACTIONS
On September 23, 2018, the Board elected Mr. Michael Houghton to serve as a director for 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 $45,000 and $168,000 was paid to MNAT during the three and nine months ended September 30, 2019,
respectively, for legal services. Approximately $65,000 and $182,000 was paid to MNAT during the three and nine months ended September 30, 2018, respectively, for legal services. As of September 30, 2019, the Company did not have an 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 director election of Mr. Houghton; 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 13 – BUSINESS COMBINATIONS
On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, which serves the community of Slaughter Beach located in
Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The total purchase price was $450,000 in cash, which approximates the fair value of the net identifiable assets received. The acquisition was accounted for as a business
combination under ASC Topic 805, “Business Combinations”. The purchase price was allocated to the acquired utility assets, including land, based on the utility assets’ estimated fair values as of the acquisition date. This acquisition was approved
by the DEPSC on March 27, 2018 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 effect of the business acquired is not
material to the Company’s financial position or results of operations.
19
NOTE 14 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There was no new guidance issued by the FASB during the nine months ended September 30, 2019 that is applicable to the Company.
NOTE 15 - SUBSEQUENT EVENT
On October 8, 2019, Artesian Water Company entered into an interest rate lock agreement, or the Agreement, with CoBank, ACB, or CoBank. The Company is
seeking to finance a $30 million principal amount First Mortgage Bond, or the Bond. The Agreement allows for a maturity period of 30 years and a fixed interest rate of 4.42% per annum, or the Fixed Rate, for the Bond. The Agreement is effective
through December 31, 2019, or the Settlement Date. Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization; interest on the outstanding principal balance will be payable quarterly on the 30th day of
January, April, July and October each year. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, any additional proceeds shall be used to fund future capital investments in Artesian Water.
Closing on the debt financing is subject to approval by the DEPSC. Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30
million principal amount on or before the Settlement Date. The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt,
obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate.
20
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q
that
express our "belief", "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of
1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated
subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding 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 Form10-K for the year ended December 31, 2018,
such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other
matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any
forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this
Quarterly Report
on Form 10-Q.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2019
OVERVIEW
Our profitability is primarily attributable to the sale of water. Gross water sales composed 88.2% of total
operating revenues for the nine months ended September 30, 2019. 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.
21
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, 2019, we had approximately 87,000 metered water customers in Delaware, an increase of approximately 1,400 compared to September 30, 2018.
The number of metered water customers in Maryland totaled
approximately 2,470 as of September 30, 2019, an increase of approximately 110 compared to September 30, 2018. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2018. For the nine months ended
September 30, 2019, approximately 6.3 billion gallons of water were distributed in our Delaware systems and approximately 90.3 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
the State of 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 2,350 as of September 30, 2019, an increase of approximately 310, or 15.3%,
compared to September 30, 2018. In addition, Artesian Wastewater entered into wastewater services agreements with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer. The wastewater services agreements with Allen Harim 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, 2019, approximately 19,300, or 23.1%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,600, or 18.7%, of our eligible customers enrolled in the SSLP Plan, and
approximately 6,800, or 8.2%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,800 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. 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
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 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.
On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, or SBWC, for
$450,000. The public water system currently serves the community of Slaughter Beach located in Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The SBWC was founded in 1951 as a public water system in Delaware.
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 consisting of approximately 400 customers.
22
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 Allen Harim for
Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from Allen Harim’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 Allen Harim 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 Allen Harim’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. The completion of the industrial process wastewater pipeline and storage lagoon should occur
during 2019. Construction of the facility is substantially complete and nearing commencement of operation pending permit approval.
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 recently 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, 2019 Compared to the Three Months Ended September 30, 2018.
Operating Revenues
Revenues totaled $22.5 million for the three months ended September 30, 2019, $0.6 million, or 2.9%, more than revenues for the three months ended
September 30, 2018
.
Water sales revenue increased $0.6 million, or 3.3%, for the three months ended September 30, 2019 from the
corresponding period in 2018, primarily due to an increase in DSIC revenue related to a rate increase from 3.63% to 7.41% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. We realized 89.1% and
88.8% of our total operating revenue for the three months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.
23
Other utility operating revenue increased approximately $0.1 million, or 4.7%, for the three months ended September 30, 2019 compared to the three months
ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.
Non-utility operating revenue decreased approximately $0.1 million, or 5.1%, for the three months ended September 30, 2019 compared to the three months
ended September 30, 2018. The decrease is primarily due to a decrease in contract service revenue related to a reduction in treatment plant operation services.
Operating Expenses
Operating expenses, excluding depreciation and
income taxes,
increased $0.3 million, or 2.5%, fo
r the three months ended September 30, 2019, compared to the same period in 2018. The
components of the change in operating expenses primarily include an increase in utility operating expenses of $0.2 million and an increase in non-utility operating expenses of $0.1 million.
Utility operating expenses
increased $0.2 million, or 1.6%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018
primarily related to an increase in administration, water treatment, and purchased water costs.
Non-utility expenses increased approximately $0.1 million, or 14.1%, primarily due to an increase in payroll and
benefit costs as well as an increase in plumbing services related to the SLP Plans.
The ratio of operating expense, excluding
depreciation and income taxes, to total revenue was 56.1% for the three months ended September 30, 2019, compared to 56.3%
fo
r the three
months ended September 30, 2018.
Depreciation and amortization expense increased $0.2 million, or 6.6%, primarily due to continued investment in
utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense decreased $0.3 million, or 18.3%, primarily due to a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that
was disallowed by the TCJA as well as the amortization of the deferred tax regulatory liability in 2019 related to the reduction in the federal corporate income tax rate by the TCJA.
Other Income, Net
Other income
increased $0.3 million, primarily due
to
an increase in AFUDC of $0.4 million, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased $0.2 million,
primarily due to a one-time additional patronage payment from CoBank, ACB, in 2018 related predominately to savings generated from the TCJA.
Interest Charges
Interest expense increased $0.2 million, primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018
and the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.
Net Income
Our net income applicable to common stock increased $0.5 million, primarily due to an increase in operating income.
Results of Operations – Analysis of the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018.
Operating Revenues
Revenues totaled $62.6 million for the nine months ended September 30, 2019,
$1.5 million, or 2.5%, more than revenues for the nine months ended September 30, 2018
.
Water sales revenue increased $1.2 million, or 2.3%, for the nine months ended September 30, 2019 from the corresponding period in 2018, primarily due to an increase in DSIC revenue and an increase
from customer growth. The DSIC rates during the first nine months of 2018 were 4.71% for six months and 3.63% for three months. The DSIC rates during the first nine months of 2019 were 5.55% for six months and 7.41% for three months. As a result
of the reduced tariff rates approved by the DEPSC on January 31, 2019 related to the impact of the TCJA, a
pproximately $3.8 million was refunded to customers during the second quarter of 2019, the majority of which was issued as a credit to
customer bills. This amount was previously held in reserve and was not included in water sales revenue or net income.
We realized 88.2% and 88.4% of our total operating
revenue for the nine months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.
24
Other utility operating revenue increased approximately $0.2 million, or 7.4%, for the nine months ended September 30, 2019 compared to the nine months
ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.
Operating Expenses
Operating expenses, excluding depreciation and
income taxes,
increased $0.9 million, or 2.6%, fo
r the nine months ended September 30, 2019, compared to the same period in 2018. The
components of the change in operating expenses primarily include an increase in utility operating expenses of $0.4 million, an increase in non-utility operating expenses of $0.3 million and an increase in property and other taxes of $0.2 million.
Utility operating expenses increased $0.4 million, or 1.4%, for the nine months ended September 30, 2019 compared
to the nine months ended September 30, 2018. The net increase is primarily related to the following.
|
|
Payroll, employee benefit costs and related expenses increased $0.4 million, primarily due to an
increase in overall compensation.
|
|
|
Administration costs increased $0.2 million, primarily due to an increase in regulatory application
costs to expand our service territory in Delaware and contract services related to wastewater facilities.
|
|
|
Repair and maintenance expense decreased $0.2 million, primarily due to the painting of an elevated
water storage tank in 2018 in our Cecil County, Maryland system as well as timing of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, in our Delaware water system.
|
Non-utility expenses increased approximately $0.3 million, or 15.3%, primarily due to an increase in payroll and
benefit costs as well as an increase in plumbing services related to the SLP Plans.
Property and other taxes increased $0.2 million, or 4.1%, 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. In addition, payroll taxes increased due to increased payroll related expenses.
The ratio of operating expense, excluding
depreciation and income taxes, to total revenue was 56.1% for both the nine months ended September 30, 2019 and
September 30, 2018.
Depreciation and amortization expense increased $0.5 million, or 6.5%, primarily due to continued investment in
utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense decreased $0.7 million, or 15.5%, primarily due to the amortization of the
deferred tax regulatory liability related to the reduction in the federal corporate income tax rate by the TCJA and a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that was disallowed by the
TCJA.
Other Income, Net
Other income
increased $0.3 million, or 21.1%,
primarily due to
an increase in AFUDC of $0.6 million as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased
$0.3 million, primarily due to a one-time additional patronage payment in 2018 related predominately to savings generated from the TCJA as well as a decrease in the amount of the annual patronage refund, both paid by CoBank, ACB. The annual
patronage refund rate was reduced in 2019 to 0.80% from 1.00% of the average line of credit and loan volume outstanding.
Interest Charges
Interest expense increased $0.7 million primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018 and
the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.
Net Income
Our net income applicable to common stock increased $0.5 million. Operating revenues increased $1.5 million and other income, net increased $0.3
million, while operating expenses increased $0.6 million and interest expense increased $0.6 million.
25
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sourc
es of liquidity for the
nine months ended September 30, 2019 were $13.2 million of cash provided by operating activities, $15.8 million from lines of credit borrowings, $6.0 million in net contributions and advances from developers and $0.8 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.
Investment in Plant and Systems
The primary focus of Artesian Water’s investment is to continue to provide high quality reliable service to our growing service territory. We invested
approximately $27.3 million in capital expenditures during the first nine months of 2019 compared to $35.0 million invested during the same period in 2018. During the first nine months of 2019, we invested approximately $6.0 million for our
rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities. We invested $8.7 million to enhance or improve existing treatment facilities and
replace aging wells and pumping equipment to better serve our customers. We invested $1.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $3.4 million for the installation
of water mains and hydrants in 2019 compared to $3.3 million in 2018. We invested $1.5 million to upgrade and automate our meter reading equipment. We invested approximately $1.9 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. An additional $4.1 million was invested in wastewater projects in Delaware, of which $2.1 million was invested in the
construction of an eight mile pipeline and a 90 million gallon storage lagoon for spray irrigation to dispose of treated wastewater from a new industrial customer that is scheduled to be completed in 2019.
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 a combination of capital investment and debt financing. We expect to fund our activities for the next
twelve months using our available cash balances, bank credit lines, projected cash generated from operations and financing in the debt markets. 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
At September 30, 2019, 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, 2019,
there was $26.3 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. 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 23, 2020 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At
September
30, 2019
, 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, 2019,
there was $2.0 million of available funds under this line of credit. The interest rate for
borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on July 20,
2020. Artesian Water expects to renew this line of credit.
26
|
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
|
$
|
31,693
|
$
|
--
|
$
|
--
|
$
|
--
|
||||||||
Long-Term Debt
Artesian’s long-term debt agreements 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, 2019, we were in compliance with these covenants.
|
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)
|
$
|
5,356
|
$
|
10,620
|
$
|
10,517
|
$
|
138,162
|
$
|
164,655
|
||||||||||
|
State revolving fund loans (principal and interest)
|
1,002
|
1,677
|
1,244
|
3,135
|
7,058
|
|||||||||||||||
|
Promissory note (principal and interest)
|
958
|
1,921
|
1,921
|
13,740
|
18,540
|
|||||||||||||||
|
Operating leases
|
42
|
75
|
46
|
1,338
|
1,501
|
|||||||||||||||
|
Operating agreements
|
72
|
95
|
76
|
911
|
1,154
|
|||||||||||||||
|
Unconditional purchase obligations
|
3,892
|
4,902
|
81
|
---
|
8,875
|
|||||||||||||||
|
Tank painting contractual obligation
|
106
|
---
|
---
|
---
|
106
|
|||||||||||||||
|
Total contractual cash obligations
|
$
|
11,428
|
$
|
19,290
|
$
|
13,885
|
$
|
157,286
|
$
|
201,889
|
||||||||||
Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced
earlier. One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter. The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period. The
promissory note obligation has an amortizing payment payable over a 20-year period. The first mortgage bonds, the state revolving fund loan and the promissory note have certain financial covenant provisions, the violation of which could result in
default and require the obligation to be immediately repaid, including all interest. We have not experienced conditions that would result in our default under these agreements.
On October 8, 2019, Artesian Water Company entered into an interest rate lock agreement, or the Agreement, with CoBank, ACB, or CoBank. The Company is
seeking to finance a $30 million principal amount First Mortgage Bond, or the Bond. The Agreement allows for a maturity period of 30 years and a fixed interest rate of 4.42% per annum, or the Fixed Rate, for the Bond. The Agreement is effective
through December 31, 2019, or the Settlement Date. Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization; interest on the outstanding principal balance will be payable quarterly on the 30th day of
January, April, July and October each year. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, any additional proceeds shall be used to fund future capital investments in Artesian Water.
Closing on the debt financing is subject to approval by the DEPSC. Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30
million principal amount on or before the Settlement Date. The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt,
obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate.
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.
27
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 2018
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, 2018. 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, 2018. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2018 consolidated financial statements included
in our annual report on Form 10-K for the year ended December 31, 2018.
Information concerning our implementation and the
impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2018 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018 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 2019 that had a material impact on our financial condition, liquidity
or results of operations.
The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to
manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First
Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 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,
2019 were approximately $31.7 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.
(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.
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Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate
resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense
and may have significant diversion of management attention.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2018, 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.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
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Exhibit No.
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Description
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Interest Rate Lock Agreement, dated as of October 8, 2019, by and between Artesian Water
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Company, Inc. and CoBank, ACB. Incorporated by reference to Exhibit 4.1 filed with the Company’s
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Form 8-K filed on October 11, 2019.
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Amended and Restated Revolving Credit Agreement between Artesian Water Company, Inc. and CoBank, ACB dated September 20, 2019*
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Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
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Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
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Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).**
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101
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The following financial statements from Artesian Resources Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2019 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the
Notes to the Condensed Consolidated Financial Statements.*
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* Filed herewith
** Furnished herewith
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TABLE OF CONTENTS
Part I Financial InformationItem 1 Financial StatementsNote 1 GeneralNote 2 Basis Of PresentationNote 3 Revenue RecognitionNote 4 LeasesNote 5 Stock Compensation PlansNote 6 - Regulatory AssetsNote 7 Regulatory LiabilitiesNote 8 - Net Income Per Common Share and Equity Per Common ShareNote 9 - Regulatory ProceedingsNote 10 Income TaxesNote 11 Fair Value Of Financial InstrumentsNote 12 Related Party TransactionsNote 13 Business CombinationsNote 14 - Impact Of Recent Accounting PronouncementsNote 15 - Subsequent EventItem 3 - Quantitative and Qualitative Disclosures About Market RiskItem 4 Controls and ProceduresPart II - Other InformationItem 1 Legal ProceedingsItem 1A Risk FactorsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3 Defaults Upon Senior SecuritiesItem 4 Mine Safety DisclosuresItem 5 Other InformationItem 6 - Exhibits