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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021
OR
☐          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-18516

graphic
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
The Nasdaq Stock Market


Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

□
Yes
☑
No
 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

□
Yes
☑
No
 

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. o

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial report under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

☐
Yes
☑
No
 

The aggregate market value of the Class A Non-Voting Common Stock and Class B Common Stock held by non-affiliates of the registrant at June 30, 2021 was $300,628,287 and $10,211,240, respectively.  The aggregate market value of Class A Non-Voting Common Stock was computed by reference to the closing price of such class as reported on the Nasdaq Global Select Market on June 30, 2021, which trade date was June 30, 2021.  The aggregate market value of Class B Common Stock was computed by reference to the last reported trade of such class as reported on the OTC Bulletin Board as of June 30, 2021, which trade date was June 18, 2021.

As of March 8, 2022, 8,534,673 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
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ARTESIAN RESOURCES CORPORATION
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
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FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K which express our “belief,” “anticipation” or “expectation,” as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and 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.  They include, but are not limited to, the statements below:
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the specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations;
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the impact of recent acquisitions on our ability to expand and foster relationships;
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strategic plans for goals, priorities, growth and expansion;
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expectations for our water and wastewater subsidiaries and non-regulated subsidiaries;
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customer base growth opportunities in Delaware and Cecil County, Maryland;
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our belief regarding our capacity to provide water services for the foreseeable future to our customers;
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our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations;
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our expectation of the timing of decisions by regulatory authorities;
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the impact of weather on our operations;
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the execution of our strategic initiatives;
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our expectation regarding the timing for construction on new projects;
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the adoption of recent accounting pronouncements;
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contract operations opportunities;
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legal proceedings;
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our properties;
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deferred tax assets;
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the adequacy of our available sources of financing;
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the expected recovery of expenses related to our long-term debt;
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our expectation to be in compliance with financial covenants in our debt instruments;
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our ability to refinance our debt as it comes due;
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our ability to adjust our debt level, interest rate, maturity schedule and structure;
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the timing and terms of renewals of our lines of credit;
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plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather;
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expected future contributions to our postretirement benefit plan;
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anticipated growth in our non-regulated division;
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anticipated investments in certain of our facilities and systems and the sources of funding for such investments; and sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs.

Certain factors, as discussed under Item 1A - Risk Factors, that could cause results to differ materially from those in the forward-looking statements include, but are not limited to:
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changes in weather;
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changes in our contractual obligations;
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changes in government policies;
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the timing and results of our rate requests;
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failure to receive regulatory approvals;
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changes in economic and market conditions generally;
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 unexpected events, restrictions and policies related to a public health crisis, including the COVID-19 pandemic; and
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other matters discussed elsewhere in this annual report.

While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so, except as may be required under applicable securities laws, 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 Annual Report on Form 10-K.
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PART I

ITEM 1. BUSINESS

General Information

Artesian Resources Corporation, or Artesian Resources, is a Delaware corporation incorporated in 1927, that is the holding company of eight wholly-owned subsidiaries offering water, wastewater and other services in Delaware, Maryland and Pennsylvania.  The Company’s principal executive offices are located at 664 Churchmans Road, Newark, Delaware 19702.  Our principal subsidiary, Artesian Water Company, Inc., is the oldest and largest investor-owned public water utility on the Delmarva Peninsula, and has been providing superior water service since 1905.  We distribute and sell water, including water for public and private fire protection, to residential, commercial, industrial, municipal and utility customers in the states of Delaware, Maryland and Pennsylvania.  We provide wastewater services to customers in Delaware. In addition, we provide contract water and wastewater operations, and water, sewer and internal Service Line Protection Plans. Our Class A Non-Voting Common Stock is listed on the Nasdaq Global Select Market and trades under the symbol "ARTNA."  Our Class B Common Stock trades on the Nasdaq's OTC Bulletin Board under the symbol “ARTNB.”

Artesian Resources is the holding company of five regulated public utilities: Artesian Water Company, Inc., or Artesian Water, Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, Artesian Water Maryland, Inc., or Artesian Water Maryland, Artesian Wastewater Management, Inc., or Artesian Wastewater, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland; and three non-regulated subsidiaries: Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water.  Effective January 14, 2022, Artesian Wastewater is the holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, a regulated public utility.  The terms "we," "our," “Artesian,” and the "Company" as used herein refer to Artesian Resources and its subsidiaries.  The business activity conducted by each of our subsidiaries is discussed below under separate headings.

Our Market

Our current market area is the Delmarva Peninsula.  Our largest service area is in the State of Delaware.  Substantial portions of Delaware, particularly outside of northern New Castle County, are not served by a public water or wastewater system and represent potential opportunities for Artesian Water and Artesian Wastewater to obtain new exclusive franchised service areas.  We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout Delaware.

We hold Certificates of Public Convenience and Necessity, or CPCNs, for approximately 300 square miles of exclusive water service territory, most of which is in Delaware and some in Maryland and Pennsylvania.  Our largest connected regional water system, consisting of approximately 141 square miles and 77,800 metered customers, is located in northern New Castle County and portions of southern New Castle County, Delaware.  We hold CPCN’s for approximately 34 square miles of wastewater service territory located in Sussex County, Delaware.  In January 2022, approximately 20 square miles of wastewater service territory, located in Sussex County, Delaware, was added upon the closing of the acquisition of TESI.  A significant portion of our exclusive service territory is in Sussex County, Delaware and remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by providing water and/or wastewater service to the newly developed areas and new customers.


Subsidiaries

Artesian Water

Artesian Water, our principal subsidiary, distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware.  In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers.  Artesian Water also provides water for public and private fire protection to customers in our service territories.  Artesian Water produced approximately 86% of our 2021 consolidated operating revenues.

We derive about 98% of our self-supplied groundwater from wells that pump groundwater from aquifers and other formations located in the Atlantic Coastal Plain.  The remaining 2% of our groundwater supply comes from wells in the Piedmont Province.  We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation, ultra violet oxidation, arsenic removal, nitrate removal, radium removal, iron removal, and carbon adsorption to meet federal, state and local water quality standards.  Additionally, a corrosion inhibitor is added to our self-supplied groundwater and to supply from interconnections.  We have 60 different water treatment facilities in our Delaware systems.  All water supplies that we purchase from neighboring utilities are potable.  
 
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To supplement our groundwater supply, we purchase treated surface water through interconnections only in the northern service area of our New Castle County, Delaware system.  The treated surface water is blended with our groundwater supply for distribution to our customers.  Nearly 86% of the overall 8.3 billion gallons of water we distributed in all of our Delaware systems during 2021 came from our groundwater wells, while the remaining 14% came from interconnections with other utilities and municipalities.  In Delaware in 2021, we pumped an average of 19.6 million gallons per day, or mgd, from our groundwater wells and obtained an average of approximately 3.3 mgd from interconnections.  Our peak water supply capacity currently is approximately 57.0 mgd.  We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

Most of our New Castle County, Delaware water system is interconnected.  In the remainder of the State of Delaware, we have several satellite systems that have not yet been connected by transmission and distribution facilities.  We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.

In Delaware, we have 24 interconnections with two neighboring water utilities and seven municipalities that provide us with the ability to purchase or sell water.  An interconnection agreement with Chester Water Authority, that expired December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day.  The current agreement with Chester Water Authority, which is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day.

As of December 31, 2021, we were serving customers through approximately 1,398 miles of transmission and distribution mains.  Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron or cast iron.

We have 32 storage tanks in Delaware, most of which are elevated, providing total system storage of 43 million gallons. We have developed and are using an Aquifer Storage and Recovery, or ASR, system in New Castle County, Delaware.  Our ASR system provides approximately 130 million gallons of storage capacity, which can be withdrawn at an average rate of approximately 1 mgd.  At some locations, we rely on hydro-pneumatic tanks to maintain adequate system pressures.  Where possible, we combine our smaller satellite systems with systems having elevated storage facilities.

Artesian Water Maryland

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 9 public water systems.

The majority of the 0.1 billion gallons of water we distributed in all of our Maryland systems during 2021 came from our groundwater wells, while a portion came from treated surface water.  We have nine separate water treatment facilities in our Maryland systems.  We have one water treatment facility that treats surface water through an intake in the Susquehanna River, located in Cecil County, Maryland, which has the ability to supply up to 1 mgd of water.  Our peak water supply capacity currently is approximately 2.0 mgd.  We have 7 storage tanks capable of storing approximately 2.4 million gallons.  We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

In Maryland, we have one interconnection with the Artesian Water system in Delaware, one interconnection with a neighboring utility, and four interconnections with municipalities.  These interconnections are capable of providing over 3.0 mgd of water to our Maryland systems.

Artesian Water Pennsylvania

Artesian Water Pennsylvania began operations in 2002.  It provides water service to a residential community in Chester County, Pennsylvania.
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Artesian Wastewater

Artesian Wastewater began providing wastewater services in Sussex County, Delaware in July 2005.  Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company.

Artesian Wastewater owns and operates three wastewater treatment facilities, which are permitted to treat approximately 650,000 gallons per day.  Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County.  Artesian Wastewater received an operations permit in March 2020 for a disposal facility that includes a 90 million gallon storage lagoon and spray irrigation to agricultural land.  This facility provides treated process wastewater disposal services for an industrial customer at a rate up to 1.5 million gallons per day.  We began operating this facility in late June 2021, shortly after the industrial customer received its process wastewater treatment operating permit.

TESI

In January 2022, Artesian Wastewater acquired Tidewater Environmental Services, Inc.  Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI.  TESI was incorporated in December 2004 and is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million intercompany note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware and included all residents within the Town of Milton.

Artesian Wastewater Maryland

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.

Artesian Utility

Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions.  Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental agencies.  Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure within the Delmarva Peninsula.  In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.

Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2039.  The Company currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 mgd.  The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area.

Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. The WSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking or clogged sewer lines up to an annual limit.  The ISLP Plan enhances available coverage to include water and wastewater lines within customers' residences.


Artesian Development

Artesian Development is a real estate holding company that owns properties, including land approved for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware.  The facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space.


Artesian Storm Water

Artesian Storm Water, incorporated in 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas.  The ability to offer storm water services will complement the primary water and wastewater services that we provide.  Artesian Storm Water is not actively seeking new opportunities.

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Government Regulations

Overview

The Company is subject to federal, state and local laws and regulations in all of the jurisdictions in which it operates.

These regulations include state commission orders, environmental protection, securities and exchange activities, including financial reporting and internal controls processes, data protection and privacy, tax compliance, health and safety, labor and employment practices, and other general business activities.

State Regulatory Commission Matters

Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and other matters.  The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of regulatory relief we are granted by the respective regulatory commissions or authorities in the states in which we operate.  See Note 13 to our Consolidated Financial Statements for a full description of recent regulatory proceedings.

Service Territory Expansion

In Delaware, CPCN grants a water or wastewater company the exclusive right to serve all existing and new customers within a designated area.  The Delaware Public Service Commission, or DEPSC, has the authority to issue and revoke these CPCNs.  In this Form 10-K, we may refer to CPCNs as "franchises" or "service territories."

For a water company, the DEPSC may grant a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Division of Public Health for human consumption or where the supply is insufficient to meet the projected demand.  For a wastewater company, the DEPSC has jurisdiction over non-governmental wastewater utilities having fifty or more customers in the aggregate.  A CPCN for water and wastewater utilities shall be granted by the DEPSC to applicants in possession of one of the following:

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a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government;

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a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or

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a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served.

A water or wastewater utility that has a CPCN must obtain the approval of the DEPSC to abandon a service territory.  Once a CPCN is granted to a water or wastewater utility, it may not be suspended or terminated unless the DEPSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination.  Although we have been granted an exclusive franchise for each of our existing water and wastewater systems in Delaware, our ability to expand service areas can be affected by the DEPSC awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.

In Maryland, the Company must obtain approval from the appropriate local government authority for the ability to serve a particular area and also ensure that the acquired area is in the county’s master water and sewer plan.  The authority to exercise a franchise must then be obtained from the Maryland Public Service Commission, or MDPSC.  Utilities that seek to develop a franchise by constructing new facilities must obtain appropriate approvals from the Maryland Department of the Environment, or MDE, the local government and the MDPSC.  The utility must also obtain approval for soil and erosion plans and easement agreements from appropriate parties.
Environmental Regulation

The United States Environmental Protection Agency, or the EPA, the Delaware Department of Natural Resources and Environmental Control, or DNREC, and the Delaware Division of Public Health, or DPH, regulate the water quality of our treatment and distribution systems in Delaware, as do the EPA and the MDE, with respect to our operations in Maryland.  The Chester Water Authority, which supplies water to Artesian Water through an interconnection in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection, as well as the EPA.  We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. However, if new water quality regulations are too costly, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition, results of operations and planned capital investments.
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The water industry is capital intensive, with one of the highest levels of capital investment in plant and equipment per dollar of revenue among all utilities.  Increasingly stringent drinking water regulations to meet the requirements of the Safe Drinking Water Act have required the water industry to invest in more advanced treatment systems and processes, which require a heightened level of expertise.  Significant enhancements were made to existing facilities to effectively treat and remove compounds as required by government agencies, such as ultra violet oxidation treatment, ceramic membrane filtration and carbon filtration.  We are currently in full compliance with the requirements of the Safe Drinking Water Act.  Even though our water utility was founded in 1905, the majority of our investment in infrastructure occurred in the last 40 years.

As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water to ensure that the water is safe for human consumption.  These limits are known as Maximum Contaminant Levels and Maximum Residual Disinfection Levels.  The EPA also regulates how often public water systems monitor their water for contaminants and report the monitoring results to the individual state agencies or the EPA.  Generally, the larger the population served by a water system, the more frequent the monitoring and reporting requirements.  The Safe Drinking Water Act applies to all 50 states.

The Lead and Copper Rule, or LCR, is a United States federal regulation that limits the concentration of lead and copper allowed in public drinking water at the consumer's tap, as well as limiting the permissible amount of pipe corrosion occurring due to the water itself.  The EPA first issued the rule in 1991 pursuant to the Safe Drinking Water Act.  The EPA promulgated the regulations following studies that concluded that copper and lead have an adverse effect on individuals.  The LCR sought to therefore limit the levels of these metals in water through improving water treatment centers, determining copper and lead levels for customers who use lead plumbing parts, and eliminating the water source as a source of lead and copper.  If the lead and copper levels exceed the "action levels", water suppliers are required to educate their consumers on how to reduce exposure to lead.  The EPA published a revised LCR in 2021, with a compliance deadline expected in 2024.  These revised requirements provide greater and more effective protection of public health by reducing exposure to lead and copper in drinking water. Implementation of the revised rule will better identify high levels of lead, improve the reliability of lead tap sampling results, strengthen corrosion control treatment requirements, expand consumer awareness and improve risk communication.  In addition, implementation of the revised rule will accelerate lead service line replacements by closing existing regulatory loopholes, propelling early action, and strengthening replacement requirements.  We are fully compliant with the current LCR and are actively examining the revised LCR to ensure we are fully compliant on or before the deadline date.

The DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA.  The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations.  Artesian Water is also subject to other laws regulating substances and contaminants in water, including rules for volatile organic compounds and the Total Coliform Rule.

A normal by-product of our iron removal treatment facilities is a solid consisting of the iron removed from untreated groundwater plus residue from chemicals used in the treatment process.  The solids produced at our facilities are either disposed directly into approved wastewater facilities or removed from our facilities by a licensed third-party vendor.  A normal by-product of our carbon adsorption filtration process is exhausted carbon media, which is disposed of by the contractor providing the media replacement.  Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of the Company, but there is no assurance that such compliance will continue to not have a material effect in the future.

Under Delaware state laws and regulations, we are required to file applications with DNREC for water allocation permits for each of our operating wells pumping greater than 50,000 gallons per day.  For any wells in the Delaware River Basin, we must also file allocation permits with the Delaware River Basin Commission, or DRBC.  We have 134 operating and 61 observation and monitoring wells in our Delaware systems.  At December 31, 2021, we had allocation permits for 115 wells and 24 wells that do not require a permit.

Our access to aquifers within our service territory is not exclusive.  Water allocation permits control the amount of water that can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits.  We are also subject to water allocation regulations that control the amount of water that we can draw from water sources.  As a result, if new or more restrictive water allocation regulations are imposed, they could have an adverse effect on our ability to supply the demands of our customers, and in turn, our water supply revenues and results of operations.  Our ability to supply the demands of our customers historically has not been affected by private usage of the aquifers by landowners or the limits imposed by the state of Delaware. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third-party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.

The MDE ensures that water quality and quantity at all public water systems in Maryland meet the needs of the public and are in compliance with federal and state regulations. The MDE also ensures that public drinking water systems provide safe and adequate water to all current and future users in Maryland, and that appropriate usage, planning, and conservation policies are implemented for Maryland’s water resources. The MDE oversees the development of Source Water Assessments for water supplies and issues water appropriation permits for public drinking water systems.  In order to appropriate water for municipal, commercial, industrial or other non-domestic uses, a Water Appropriation Permit must be obtained.  Issuance of the permit involves evaluating the needs of the user and the potential impact of the withdrawal on neighboring users and the water source in order to maximize beneficial use of the water.  Permits for large appropriations often involve conducting pump tests to measure adequacy of an aquifer and safe yield of a well, or reviewing stream flow records to determine the adequacy of a surface water source.  Regulations require all new community water systems to have sufficient technical, managerial and financial capacity to provide safe drinking water to their consumers prior to being issued a construction permit.  Also, capacity management guidance contains capacity limiting factors that can include, source capacity, treatment capacity and appropriation permit quantity.  The quantity of water withdrawn from the Port Deposit surface water intake is allocated by the Susquehanna River Basin Commission, or SRBC, and MDE.  We have 14 operating wells and one surface water in-take in our Maryland systems.

The Clean Water Act has established the foundation for wastewater discharge control in the United States.  The Clean Water Act established a control program for ensuring that communities have clean water by regulating the release of contaminants into waterways.  Permits that limit the amounts of pollutants discharged are required of all wastewater dischargers under the National Pollutant Discharge Elimination System, or the NPDES, permit program.  In accordance with the NPDES permit program, the implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under the NPDES permit program can lead to the imposition of penalties.  The Clean Water Act also requires that wastewater treatment plant discharges meet a minimum of secondary treatment.  The secondary treatment process can remove 90% to 99% of the organic matter in wastewater.  Our removal efficiency is generally 96% to 98%.

Under Delaware state laws and regulations, we are required to hold a permit from DNREC for the construction, operation, maintenance or repair of any on-site wastewater treatment and disposal systems with daily design flow rates of 2,500 gallons or greater.  A classification on the facility is performed in accordance with Regulations Licensing Operators of Wastewater Facilities.  The class of operator required for the facility is determined by the Board of Certification for Licensed Wastewater Operations in accordance with Regulations Licensing Operators of Wastewater Facilities.  We work to ensure that we operate environmentally friendly wastewater systems that meet federal, state, and local laws.
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Additional General Information

Seasonality

Substantially all of our water customers are metered, which allows us to measure and bill for our customers’ water consumption.  Demand for water during the warmer months is generally greater than during cooler months primarily due to additional customer requirements for water in connection with cooling systems, swimming pools, irrigation systems and other outside water use.  Throughout the year, and particularly during typically warmer months, demand for water will vary with temperature and rainfall.  In the event that temperatures during the typically warmer months are cooler than expected, or there is more rainfall than expected, the demand for water may decrease and our revenues may be adversely affected.

Competition

Our business in our franchised service areas is substantially free from direct competition with other public utilities, municipalities and other entities.  However, our ability to provide additional water and wastewater services is subject to competition from other public utilities, municipalities and other entities.  Even though our regulated utilities have been granted an exclusive franchise for each of our existing community water and wastewater systems, our ability to expand service areas can be affected by the DEPSC, the MDPSC or the Pennsylvania Public Utility Commission, or PAPUC, awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.
 
Materials and Supplies

We are highly dependent on the availability of essential materials and parts from our suppliers for expansion, construction and maintenance of our services.  The majority of the materials required for our water and wastewater utility business are typically under contract at fixed prices, however, supply chain issues associated with the COVID-19 pandemic resulted in price increases and  delays in procuring certain materials and equipment.  We have been successful in minimizing these delays and cost increases with thorough planning and pre-ordering, however there is no assurance that our future financial results or business operations will not be negatively affected.

Suppliers and Independent Contractors

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.  While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules.  The COVID-19 pandemic has delayed some of our construction projects and our lead time for material deliveries however, they have not impacted our ability to maintain our level of service to customers.  We are also dependent on the availability of electricity and purchased water at affordable prices.  Our electric costs and purchased water costs are at a fixed price under contract.

Employees and Human Capital Resources

As of December 31, 2021, we employed 245 full-time employees.  Of these employees, 56 were officers and managers; 116 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 37 were employed in accounting, budgeting, information systems, human resources, customer relations and public relations.  The remaining 36 employees were administrative personnel.  The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented.  We believe that our relations with our employees are good. Through ongoing employee development, competitive compensation and benefits, and a focus on health, safety and employee wellbeing, we strive to help our employees in all aspects of their lives.

We believe the Company’s success depends on its ability to attract, develop and retain key personnel.  We provide our employees with resources that contribute to their professional development, including technical training and performance reviews.  A core principle of our company is to promote from within and offer advancement opportunities at all levels of employment, which helps us retain talented employees.  We believe our management team has the experience, talent and dedication necessary to effectively execute our business goals and growth strategy.  We recognize that the skills, experience, diversity, industry knowledge and dedication of our employees significantly benefit our operations and performance.

We set pay ranges based on market data. When considering compensation, we consider factors such as an employee’s role, experience, and their performance.  We regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our compensation is fair and equitable.

Health and safety in the workplace for our employees is one of the Company’s core values.  Hazards in the workplace are proactively identified and actions are taken to maintain workplace safety.  We sponsor a wellness program designed to enhance physical, financial, and mental wellbeing for all our employees.  Throughout the year, we encourage healthy behaviors through regular communications, educational sessions and other incentives.  The COVID-19 pandemic further emphasized the importance of keeping our employees safe and healthy.  In response to the pandemic, the Company took actions to help protect our employees so that they could continue to perform their work in a safe and effective manner.

We use outside consultants and independent contractors on an as needed basis for various services.  We rely on our independent contractors to manage their respective employee relations so that the services they are contractually obligated to perform for us satisfy our requirements.  Management believes that through our own employees, coupled with the services provided by our independent contractors and outside consultants, we have sufficient human capital to continue to operate our business successfully.

Available Information

We are a Delaware corporation with our principal executive offices located at 664 Churchmans Road, Newark, Delaware, 19702. Our telephone number is (302) 453-6900 and our website address is www.artesianwater.com.  We make available free of charge through our website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, our Corporate Governance Guidelines, and our Board Committee Charters as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.  Information contained on our website shall not be deemed incorporated into, or to be a part of, this report.
9

ITEM 1A. RISK FACTORS

We are exposed to a variety of risks and uncertainties.  Most are general risks and uncertainties applicable to all water and wastewater utility companies.  We describe below some of the specific known risk factors that could negatively affect our business, financial condition or results of operations.  If one or more of these risks or uncertainties occur, actual results may vary materially from our projections.  

Risk Related to the COVID-19 Pandemic

Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the outbreak of the coronavirus and its variants, or COVID-19.

The COVID-19 pandemic continues to present business challenges.  Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19.  We are considered an essential utility service company, as defined by the U.S. Department of Homeland Security.  Although we have continued to operate our business to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have an adverse effect on our operations.  Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which may adversely impact our stock price.  To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this report, such as those relating to our financial performance.  The ultimate impact of COVID-19 on our operational and financial performance in future periods, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, or local vaccine mandates, all of which are uncertain and cannot be predicted.

In addition, we rely heavily on our suppliers to meet quality standards and delivery schedules at our anticipated costs.  Materials could become more expensive or unavailable, or deliveries could be subject to longer lead times, which could have a material adverse impact on our business and results of operations.

If executive orders are implemented mandating COVID-19 vaccines across our workforce, it is uncertain to what extent compliance with any such vaccine mandates may result in adverse impacts such as workforce loss for us or our suppliers or reduced morale or efficiency.  If the adverse impact is significant for us or our suppliers, our results of operations could be adversely affected.

Risks Related to Our Operations

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.

While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules and our results of operations and financial condition.  We have been affected and could continue to be affected by supplier delays and increased costs which are outside of our control and could affect our results of operations. We are also dependent on the availability of electricity and purchased water at affordable prices.  While our electricity costs and purchased water costs are at fixed prices under contracts, after the expiration of these contracts, we may be required to pay higher electricity costs and purchased water costs.

We are subject to risks associated with the collection, treatment and disposal of wastewater.

Wastewater collection, treatment and disposal involve various unique risks.  If collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in fees.  This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflow and system failure.  Liabilities resulting from such damages and injuries could materially and adversely affect our results of operations and financial condition.
10

General economic conditions may materially and adversely affect our financial condition and results of operations.

The effects of adverse U.S. economic conditions may lead to a number of impacts on our business that may materially and adversely affect our financial condition and results of operations.  Such impacts may include a reduction in discretionary and recreational water use by our residential water customers, particularly during the summer months; a decline in usage by industrial and commercial customers as a result of decreased business activity and commerce in our customers’ businesses; an increased incidence of customers’ inability, bankruptcy or delay in paying their bills which may lead to higher bad debt expense and reduced cash flow; and a lower natural customer growth rate may result as compared to what had been experienced before the economic downturn due to a decline in new housing starts and a possible slight decline in the number of active customers due to housing vacancies or abandonments.

Aging infrastructure may lead to service disruptions, property damage and increased capital expenditures and operation and management costs, all of which could negatively impact our financial results.

We have risks associated with aging infrastructure, including water and sewer mains, pumping stations and water and wastewater treatment facilities. Additionally, the nature of information available on buried and newly acquired assets may be limited, which may challenge our ability to conduct efficient asset management and maintenance practices. Assets that have aged beyond their expected useful lives may experience a higher rate of failure. Failure of aging infrastructure could result in increased capital expenditures and operation and management costs. In addition, failure of aging infrastructure may result in property damage, and in safety, environmental and public health impacts. To the extent that any increased costs or expenditures are not fully recovered in rates, our results of operations, liquidity and cash flows could be negatively impacted.

Potential terrorist attacks may disrupt our operations and adversely affect our business, operating results and financial condition.

We have security measures in place at our facilities, including for delivery and handling of certain chemicals, as well as programs in place to ensure employee awareness of potential threats.  We have and will continue to bear any increase in costs, most of which have been recoverable under state regulatory policies, for security precautions to protect our facilities, operations and supplies.  While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in water and wastewater rates.  Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our water systems, should they occur.

We depend on the availability of capital for expansion, construction and maintenance. Weaknesses in capital and credit markets may limit our access to capital.

Our ability to continue our expansion efforts and fund our utility construction and maintenance program depends on the availability of adequate capital.  There is no guarantee that we will be able to obtain sufficient capital in the future on favorable terms and conditions for expansion, construction and maintenance.  In the event our lines of credit are not extended or we are unable to refinance our first mortgage bonds when due and the borrowings are called for payment, we will have to seek alternative financing sources, although there can be no assurance that these alternative financing sources will be available on terms acceptable to us.  In the event we are unable to obtain sufficient capital, our expansion efforts could be curtailed, which may affect our growth and may affect our future results of operations.

Climate variability may cause weather volatility in the future and may impact water usage and related revenue, or may require additional expenditures to reduce risk associated with any increasing storm, flood, drought or other weather occurrences, all of which may not be fully recoverable in rates or otherwise.

Severe weather, climate variability patterns and natural or other events, such as increased precipitation and flooding, increased frequency and severity of storms and other weather events, may cause decreases in water supply, changes in water usage patterns, potential degradation of water quality, disruptions in water or wastewater services to our customers, and increases in expenditures to repair any damage.  Due to the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our financial condition, results of operations, cash flows and liquidity.  Although some or all potential expenditures and costs with respect to our regulated businesses could be recovered through rates we charge to our customers, there can be no assurance that the applicable regulatory authority would authorize recovery of such costs, in whole or in part, for any of these impacts.

Risks Related to Governmental Laws and Regulations

We rely on governmental approvals in the States of Delaware, Maryland and Pennsylvania, as well as from the Delaware River Basin Commission and Susquehanna River Basin Commission for applicable water allocation, water appropriation and water capacity permits.  In addition, we rely on governmental approvals in the State of Delaware for applicable wastewater collection, treatment and disposal permits for the operation of our wastewater facilities.

Our water and wastewater services are governed by various federal and state governmental agencies.  Pursuant to these regulations, we are required to obtain various permits for any additional systems and current systems to assist in our operations.  If any of those permit approvals are not received timely or at all, we may risk the loss of economic opportunity and our ability to create additional systems for the effective operation of our water business in the States of Delaware, Maryland and Pennsylvania or our wastewater business in the State of Delaware.  We can provide no assurances that we will receive all necessary permits to add systems or continue to operate facilities of our water or wastewater business.
11

Our operating revenue is primarily from water sales.  The rates that we charge our customers are subject to the regulations of the public service commissions in the states in which we operate.   If a public service commission disapproves or is unable to timely approve our requests for rate increases or approves rate increases that are inadequate to cover our investments, deferred regulatory assets or increased costs, our profitability may suffer.


We file rate increase requests, from time to time, to recover our investments in utility plant, deferred regulatory assets and expenses.  Once a rate increase petition is filed with a public service commission, the ensuing administrative and hearing process may be lengthy and costly.  We can provide no assurances that any future rate increase request will be approved by the DEPSC, MDPSC or PAPUC, and if approved, we cannot guarantee that these rate increases will be granted in a timely manner and/or will be sufficient in amount to cover the investments, deferred regulatory assets and expenses for which we initially sought the rate increase.  To the extent we are able to pass through such costs to customers and a state public service commission subsequently determines that such costs should not have been paid by customers, we may be required to refund such costs, with interest, to customers.  Any such costs not recovered through rates, or any such refund, could adversely affect our results of operations, financial position or cash flows.

Our operating costs could be significantly increased if new or stricter regulatory standards are imposed by federal and state environmental agencies.

Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws.  These federal and state regulations are issued by the EPA and state environmental regulatory agencies.  Pursuant to these laws and regulations, we are required to obtain various water allocation permits and environmental permits for our operations.  The water allocation permits control the amount of water that can be drawn from water resources.  New or stricter water allocation regulations can adversely affect our ability to meet the demands of our customers.  While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards would be imposed that will raise our operating costs.  Thus, we can provide no assurances that our costs of complying with, or discharging liability under current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Risks Related to Our Financial Statements and Operating Results

Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.

Demand for water during warmer months is generally greater than during cooler months primarily due to additional customer requirements in irrigation systems, swimming pools, cooling systems and other outside water use.  In the event that temperatures during typically warmer months are cooler than normal, or rainfall is more than normal, the demand for our water may decrease and adversely affect our revenues.

Drought conditions and government imposed water use restrictions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may adversely affect our financial condition and results of operations.

We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.  However, severe drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers.  This may adversely affect our revenues and earnings.  Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for water, which may adversely affect our revenue and earnings.

We could be adversely impacted by inflation.

If inflation increases significantly, we may seek to increase our rates charged to customers.  We can provide no assurances that any future rate increase request will be approved by the applicable regulatory authority, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.
12

Risks Related to Our Business Strategy

We face competition from other water and wastewater utilities for the acquisition of new exclusive service territories.

We face competition from other water and wastewater utilities as we pursue the right to exclusively serve territories in Delaware and Maryland by entering into agreements with landowners, developers or municipalities and, under current law, then applying to the DEPSC or the MDPSC for a CPCN.  If we are unable to enter into agreements with landowners, developers or municipalities and secure CPCNs for the right to exclusively serve territories in Delaware or Maryland, our ability to expand may be significantly impeded.

Any future acquisitions we undertake or other actions to further grow our water and wastewater business may involve risks.

An element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current service areas, and move into new ones.  It is our intent, when practical, to integrate any businesses we acquire with our existing operations.  The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources.  We may not be successful in the future in identifying businesses that meet our acquisition criteria. The failure to identify such businesses may limit the rate of our growth.  In addition, future acquisitions or expansion of our service areas by us could result in:

-
Dilutive issuance of our equity securities;
-
Incurrence of debt and contingent liabilities;
-
Difficulties in integrating the operations and personnel of the acquired businesses;
-
Diversion of our management’s attention from ongoing business concerns;
-
Failure to have effective internal control over financial reporting;
-
Overload of human resources; and
-
Other acquisition-related expense.

Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements.  The businesses we acquire in the future may not achieve sales and profitability that would justify our investment.

We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close.  Completion of certain acquisition transactions are conditioned upon, among other things, the receipt of approvals, including from certain state public utilities commissions.  Failure to complete a pending transaction would prevent us from realizing the anticipated benefits.  We would also remain liable for significant transaction costs, including legal and accounting fees, whether or not the transaction is completed.

Risks Related to Legal Uncertainty

Contamination of our water supply may result in disruption in our services and could lead to litigation that may adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination from naturally-occurring compounds as well as pollution resulting from man-made sources.  Even though we monitor the quality of our water on an on-going basis, any possible contamination due to factors beyond our control could interrupt the use of our water supply until we are able to substitute it from an uncontaminated water source.  Additionally, treating the contaminated water source could involve significant costs and could adversely affect our business.  We could also be held liable for consequences arising out of human or environmental exposure to hazardous substances, if found, in our water supply.  This could adversely affect our business, results of operations and financial condition.

We are subject to, and could be further subject to, governmental investigations or actions by other third parties.

We are subject to various federal and state laws, including environmental laws, violations of which can involve civil or criminal sanctions.

Our operations from time to time could be parties to or targets of lawsuits, claims, investigations and proceedings, including system failure, injury, contract, environmental, health and safety and employment matters, which are handled and defended in the ordinary course of business.  The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could also materially and adversely affect our business, financial position and results of operations.
13

Risk Related to Cybersecurity and Technology

We are dependent on the continuous and reliable operation of our information technology systems.

We rely on our information technology systems to manage operation of our business.  Specifically, our business relies on the following technology systems: customer information system, financial reporting system, asset tracking system, remote monitoring system for some of our treatment, storage and pumping facilities, human resources management system, inventory management system, and accounts receivable collection management system.  Such systems require periodic modifications, upgrades or replacement that subject us to inherent costs and risks, including substantial capital expenditures, additional administration and operating expenses, and other risks and costs of delays in transitioning to new systems or of integrating new systems into our current systems.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures or acts of war or terrorism or similar events or disruptions.  A loss of these systems or major problems with the operation of these systems could affect our operations and have a material adverse effect on our results of operations.

There have been an increasing number of cyber-attacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data.  These attacks have occurred over the internet, through malware, viruses or attachments to e-mails, or through persons inside the organization or with access to systems inside the organization. We have implemented security measures and will continue to devote resources to address any security vulnerabilities in an effort to prevent cyber-attacks.  Despite our efforts, a cyber-attack, if it occurred, could cause water or wastewater system problems, disrupt service to our customers, compromise important data or systems or result in an unintended release of customer information.  We feel we have adequate cyber-security insurance coverage to mitigate the cost of any such cyber-attack; however, a possible cyber-attack could affect our operations and have a material adverse effect on our results of operations.

Risk Associated with Management

Turnover in our management team could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.

Our success depends significantly on the continued contribution of our management team both individually and collectively. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results.  In addition, turnover in our management team could adversely affect the financial market’s perception of our ability to continue to grow.

Risks Related to Our Common Stock

There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

Dividends on our common stock will only be paid if and when declared by our Board of Directors. Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to pay dividends on common stock and the amount of the dividends declared by our Board of Directors. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

The price of our common stock may be volatile and may be affected by market conditions beyond our control.

The trading price of our common stock may fluctuate in the future based on a variety of factors, many of which are beyond our control and unrelated to our financial results. Factors that could cause fluctuations in the trading price of our common stock include but are not limited to volatility of the general stock market or the utility stock index, regulatory developments, general economic conditions and trends, actual or anticipated changes or fluctuations in our results of operations, actual or anticipated changes in the expectations of investors or securities analysts, actual or anticipated developments in our competitors’ businesses or the competitive landscape generally, litigation involving us or our industry, major catastrophic events or sales of large blocks of our stock. Furthermore, we believe that stockholders invest in public utility stocks in part because they seek reliable dividend payments. If there is an over supply of stock of public utilities in the market relative to demand by such investors, the trading price of our common stock may decrease. Additionally, if interest rates rise above the dividend yield offered by our common stock, demand for our stock and its trading price may also decrease.
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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and are owned by Artesian Water.

The Company owns approximately six acres of land in New Castle County, Delaware zoned for office development and two nine-acre parcels of land in Sussex County, Delaware for water and wastewater treatment facilities and elevated water storage.  The Company also owns an office facility located in Sussex County, Delaware.  The facility consists of approximately 10,000 square feet of office space along with approximately 10,000 square feet of warehouse space.

The Company owns land, rights-of-way, easements, transmission and distribution mains, collection mains, pump facilities, treatment plants, lift stations, treatment/disposal facilities, storage tanks, meters, vehicles and related equipment and facilities.  The following table indicates our utility plant as of December 31, 2021.



Utility plant comprises:
            
In thousands
            
 
  
Estimated Useful Life
(In Years)
    
December 31, 2021
  
Utility plant at original cost
            
Utility plant in service-Water
            
Intangible plant
    
---
    
$
140
  
Source of supply plant
    
45-85
      
25,045
  
Pumping and water treatment plant
    
8-62
      
109,087
  
Transmission and distribution plant
                
Mains
    
81
      
320,767
  
Services
    
39
      
53,210
  
Storage tanks
    
76
      
29,972
  
Meters
    
26
      
28,778
  
Hydrants
    
60
      
16,789
  
General plant
    
5-31
      
62,604
  
 
                
Utility plant in service-Wastewater
                
Intangible plant
    
---
      
116
  
Treatment and disposal plant
    
21-81
      
43,725
  
Collection mains and lift stations
    
81
      
33,901
  
General plant
    
5-31
      
1,665
  
 
                
Property held for future use
    
---
      
5,536
  
Construction work in progress
    
---
      
18,481
  
 
            
749,816
  
Less – accumulated depreciation
            
159,385
  
 
          
$
590,431
  

Substantially all of Artesian Water's utility plant, except the utility plant in the town of Townsend, Delaware, is pledged as security for our First Mortgage Bonds.  As of December 31, 2021, no other water utility plant has been pledged as security for loans.  Two parcels of land in Artesian Wastewater are pledged as security for a loan.

We believe that our properties are generally maintained in good condition and in accordance with current standards of good water and wastewater works industry practice.  We believe that all of our existing facilities adequately meet current necessary production capacities and current levels of utilization.

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ITEM 3. LEGAL PROCEEDINGS

For a discussion of our legal proceedings, refer to Note 17 to our Consolidated Financial Statements.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for the Company’s Common Equity

Artesian Resources' Class A Non-Voting Common Stock, or Class A Stock, is listed on the Nasdaq Global Select Market and trades under the symbol "ARTNA."  On March 8, 2022, the last closing sale price as reported by the Nasdaq Global Select Market was $49.45 per share.  As of March 8, 2022 there were 548 holders of record of the Class A Stock.

Our Class B Common Stock, or Class B Stock, is quoted on the OTC Bulletin Board under the symbol "ARTNB."  There has been a limited and sporadic public trading market for the Class B Stock.  As of March 8, 2022, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $44.65 per share on February 23, 2022.  As of March 8, 2022, there were 140 holders of record of the Class B Stock.  The Class B shares are paid the same dividend as the Class A shares.


Recent Sales of Unregistered Securities

During the year ended December 31, 2021, we did not issue any unregistered shares of our Class A or Class B Stock.
16

The following graph compares the percentage change in cumulative shareholder return on the Company’s Class A Stock with the Standard & Poor’s 500 Stock Index and a Peer Group of water utility companies.  The graph covers the period from December 2016 (assuming a $100 investment on December 31, 2016, and the reinvestment of any dividends) through December 2021:

graphic

 
 
 
INDEXED RETURNS
 
Base Period
Years Ending December 31
Company Name / Index
2016
2017
2018
2019
2020
2021
Artesian Resources Corporation
 
100
 
123.91
  
115.00
  
126.11
  
129.22
  
165.68
S&P 500 Index
 
100
 
121.83
  
116.49
  
153.17
  
181.35
  
233.41
Peer Group
 
100
 
128.23
  
128.58
  
173.45
  
200.03
  
247.99

The Peer Group includes American States Water Company, American Water Works Company, Inc., Essential Utilities, Inc., California Water Service Group, Connecticut Water Service, Inc. (included through October 9, 2019 when it was acquired by SJW Group), Middlesex Water Company, SJW Group and York Water Company.


17

ITEM 6.
RESERVED

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our profitability is primarily attributable to the sale of water.  Gross water sales comprised 85.7% of total operating revenues for the year ended December 31, 2021.  Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans and other services we provide.  Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature.  In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected.  We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our wastewater services, contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.

While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions.  We anticipate continued growth in our non-regulated division due to our water, sewer, and internal SLP Plans.

COVID-19 Pandemic

As of December 31, 2021, the Company’s financial results and business operations have not been materially adversely affected by the coronavirus, or COVID-19, outbreak, which was declared a pandemic in March 2020.  However, we have experienced delays in procuring some materials and supplies.  While we have been successful in managing these delays, there is no assurance that our future financial results or business operations will not be negatively affected.  The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.  Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce.

Inflation


We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.  The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows.  Our ability to recover increases in investments in facilities is dependent upon future rate increases, which are subject to approval by the applicable regulatory authority.  We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.

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 December 31, 2021, the number of metered water customers in Delaware increased approximately 1.5% compared to December 31, 2020.  The number of metered water customers in Maryland increased approximately 2.2% compared to December 31, 2020.  The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2020.  For the year ended December 31, 2021, approximately 8.3 billion gallons of water were distributed in our Delaware systems and approximately 134.7 million gallons of water were distributed in our Maryland systems.

Wastewater Division

Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in Delaware in July 2005.   Artesian Wastewater Maryland was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in Maryland.  It is not currently providing these services in Maryland.  Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather.  The number of Delaware wastewater customers increased approximately 14.8% compared  to December 31, 2020.  In January 2022, Artesian Wastewater completed its agreement to acquire Tidewater Environmental Services, Inc, or TESI, which more than doubled our current number of wastewater customers served in Sussex County, Delaware.  The acquisition agreement with TESI is discussed further in the “Strategic Direction and Recent Developments” section below.
18

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 December 30, 2021, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.9%, 2.1% and 28.6%, respectively, compared to December 31, 2020.  The non-utility customers enrolled in one of our three protections plans increased 3.7%.

Strategic Direction and Recent Developments

Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and SLP Plan services across the Delmarva Peninsula.  We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance.  Our strategy has included a focus on building strategic partnerships with county governments, municipalities and developers.  By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously.  We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue.  We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.

In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include strategic acquisitions of existing systems, expanding certificated service area, identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water.  Our strategy includes focused efforts to expand through strategic acquisitions and in new regions added to our Delaware service territory over the last 10 years.  We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems.  The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.

Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities.  In the last four years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.  Some recent acquisitions are noted below.

On August 3, 2020, Artesian Water completed the purchase of substantially all of the water system operating assets from the City of Delaware City, a Delaware municipality, or Delaware City, including the right to provide water service to Delaware City’s existing customers.  The total purchase price was $2.1 million.  Artesian Water had previously acquired the water assets of an area annexed by Delaware City, known as Fort DuPont, which was earmarked for growth and expansion of Delaware City.

On April 2, 2020, Artesian Water completed its purchase of substantially all of the operating assets of the water system of the Town of Frankford, a Delaware municipality, or Frankford, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System.  Pursuant to the terms of the agreement, Frankford transferred to Artesian Water all of Frankford’s right, title and interest in and to all of the plant and equipment, associated real property, contracts, easements and permits possessed by Frankford at closing related to the Frankford Water System.  The total purchase price was $3.6 million. The Delaware Drinking Water State Revolving Fund issued a $1.5 million appropriation in July 2021 to partially offset the purchase price.

On February 16, 2022, Artesian Water signed an agreement, or the Asset Purchase Agreement, to purchase from the Town of Clayton, a Delaware municipality, or Clayton, substantially all of the operating assets of Clayton’s water system, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Water System.  Pursuant to the terms of the Asset Purchase Agreement, Clayton shall transfer to Artesian Water all of Clayton’s right, title and interest in and to substantially all of the municipal water utility, plant and equipment, associated real property, contracts, easements and permits possessed by Clayton at closing related to the Water System.  The total purchase price is $5.0 million, less the current payoff amount of any secured debt or debt associated with the Water System.  Closing on this transaction is pending due diligence and approval by the Delaware Public Service Commission related to the transfer of exclusive franchise territory.

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.
19

In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.  In addition, Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.  In addition, since closing the transaction with TESI noted below, Artesian Wastewater will be the sole regional regulated wastewater utility in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.

On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or Middlesex, that provides regulated wastewater services in Delaware.  Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million intercompany note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware and included all residents in the Town of Milton.

Artesian Wastewater began operating its Sussex Regional Recharge Facility in late June 2021, shortly after our large industrial customer received its process wastewater treatment operating permit.  The associated customer agreement includes a required minimum wastewater flow.  Pursuant to a settlement agreement, for the calendar year 2021 only, the minimum required volume of wastewater was prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021.

The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards, aging infrastructure and acquisitions.  Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in both Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware.  The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.

In our non-regulated division, we continue pursuing opportunities to expand our contract operations.  Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities.  We also anticipate continued growth due to our water, sewer and internal SLP Plans.  Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility.  Artesian Storm Water was formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates, assumptions or other judgments by management.  The following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Company.  Changes in the estimates, assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period.  We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our Consolidated Financial Statements.  Senior management has discussed the selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

All additions to utility plant are recorded at cost.  Business combinations pursuant to ASC Topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency.  Cost includes direct labor, materials, AFUDC (see description in Note 1-Utility Plant) and indirect charges for items such as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities.  When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation.  Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability.  Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.
20

We record water service revenue, including amounts billed to customers, on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period.  As actual usage amounts are received, 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, using 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, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.

We record accounts receivable at the invoiced amounts.  An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.    However, the Company experienced longer receivable cycles throughout 2020, and into 2021, related to temporary executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment, resulting in an adjustment to increase the reserve for bad debt.  Account balances are written off against the allowance when it is probable the receivable will not be recovered.  

The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency.  Our regulated utilities record deferred regulatory assets under FASB ASC Topic 980, which are costs that may be recovered over various lengths of time as prescribed by the DEPSC, MDPSC and PAPUC.  As the utility incurs certain costs, such as expenses related to rate case applications, a deferred regulatory asset is created.  Adjustments to these deferred regulatory assets are made when the DEPSC, MDPSC or PAPUC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is recoverable in rates charged to customers.  In addition, our regulated utilities record deferred and/or amortized regulatory liabilities under FASB ASC Topic 980, 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.  Adjustments to reflect changes in recoverability of certain deferred regulatory assets or certain deferred regulatory liabilities may have a significant effect on our financial results.

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.

Our long-lived assets consist primarily of utility plant in service and regulatory assets.  We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360.  We review regulatory assets for the continued application of FASB ASC Topic 980.  Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets.  Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverable in rates charged to customers.  The Company believes there are no impairments in the carrying amounts of its long-lived assets or regulatory assets at December 31, 2021.
21

Results of Operations

2021 Compared to 2020

Operating Revenues

Revenues totaled $90.9 million for the year ended December 31, 2021, $2.7 million, or 3.1%, more than revenues for the year ended December 31, 2020.

Water sales revenue increased $1.3 million, or 1.8%, for the year ended December 31, 2021 from the corresponding period in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in non-residential consumption revenue.  We realized 85.7% and 86.8% of our total operating revenue for the years ended December 31, 2021 and December 31, 2020, respectively, from the sale of water.

Other utility operating revenue, predominately consisting of wastewater revenues, increased approximately $0.7 million, or 10.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  This increase is mainly due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue resulting from adjustments related to the amounts recorded for the minimum required volume of wastewater under contract, pursuant to a settlement agreement.  In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted.

Non-utility operating revenue increased approximately $0.7 million, or 13.7%, for the year ended December 31, 2021 compared to the same period in 2020.  The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue.


Percentage of Operating Revenues
                  
 
  
2021
    
2020
    
2019
  
Water Sales
                  
Residential
    
53.0
%
    
53.8
%
    
52.8
%
Commercial
    
19.4
      
19.5
      
21.0
  
Industrial
    
0.1
      
0.1
      
0.1
  
Government and Other
    
13.2
      
13.4
      
14.1
  
Other utility operating revenues
    
7.9
      
7.4
      
5.9
  
Non-utility operating revenues
    
6.4
      
5.8
      
6.1
  
Total
    
100.0
%
    
100.0
%
    
100.0
%

Residential

Residential water service revenues in 2021 amounted to $48.2 million, an increase of $0.8 million, or 1.7%, above the $47.4 million recorded in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in overall water consumption.  The volume of water sold to residential customers increased to 4,230 million gallons in 2021 compared to 4,209 million gallons in 2020, a 0.5% increase.  The number of residential customers served increased by approximately 1,400, or 1.6%, in 2021.

Commercial

Water service revenues from commercial customers in 2021 increased by 2.6%, to $17.6 million in 2021 from $17.2 million in 2020, primarily due to an increase in overall water consumption.  The volume of water sold to commercial customers increased to 2,237 million gallons in 2021 compared to 2,180 million gallons sold in 2020, an increase of 2.6%.

Industrial

Water service revenues from industrial customers decreased to $49,000 in 2021 from $71,000 in 2020.  The volume of water sold to industrial customers decreased to 5.3 million gallons in 2021 from 9.2 million gallons in 2020.

Government and Other

Government and other water service revenues in 2021 increased by 1.0%, to $12.0 million in 2021 from $11.8 million in 2020, primarily due to an increase in overall water consumption.  The volume of water sold to government and other customers increased to 1,155 million gallons in 2021 compared to 1,050 million gallons in 2020, an increase of 10.0%.

Other Utility Operating Revenue

Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges, wastewater customer service revenues and industrial wastewater service revenues, increased 10.3%, from $6.5 million in 2020 to $7.2 million in 2021.  This increase is primarily due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue.  In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased by 13.7%, to $5.8 million in 2021 from $5.1 million in 2020.  The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue.
22

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $1.9 million, or 4.0%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  The components of the change in operating expenses primarily include an increase in utility operating expenses of $1.1 million, an increase in non-utility operating expenses of $0.7 million and an increase in property and other taxes of $0.2 million.

Utility operating expenses increased $1.1 million, or 2.7%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  The net increase is primarily related to the following.
Repair and maintenance costs increased $1.0 million, related to an increase in maintenance costs primarily associated with water and wastewater treatment facilities and equipment, an increase in water treatment filter replacements, an increase in tank painting costs under contract, and an increase in fuel costs.
Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall compensation.
Water treatment costs increased $0.1 million, primarily related to an increase in chemicals and associated equipment during 2021 in both water and wastewater operations.
Administrative costs decreased $0.5 million, primarily due to a decrease in bad debt reserve related to non-payment of water customer receivable balances resulting from the COVID-19 pandemic, which was partially offset by increases in training and overall employee related costs, legal expenses associated with the transition of the 401(k) retirement plan to a new record keeper, and a settlement agreement concerning the payment of fees by an industrial wastewater customer.

Non-utility operating expenses increased 20.3%, primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract, an increase in plumbing services related to Service Line Protection Plan repairs, and an increase in payroll and employee benefit costs.

Property and other taxes increased $0.2 million, or 3.4%, 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.


Percentage of Operating and Maintenance Expenses
  
 
  
2021
    
2020
    
2019
  
Payroll and Associated Expenses
    
49.9
%
    
51.0
%
    
50.1
%
Administrative
    
12.3
      
14.1
      
13.6
  
Purchased Water
    
9.5
      
9.9
      
9.9
  
Repair and Maintenance
    
10.2
      
8.3
      
9.3
  
Purchased Power
    
5.4
      
5.5
      
5.5
  
Water Treatment
    
4.0
      
3.7
      
3.8
  
Non-utility Operating
    
8.7
      
7.5
      
7.8
  
 
                        
Total
    
100.0
%
    
100.0
%
    
100.0
%

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.1% for the year ended December 31, 2021, compared to 55.6% for the year ended December 31, 2020.

Depreciation and amortization expense increased $0.7 million, or 6.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Other Income, Net

Other income, net remained consistent.  Miscellaneous income increased $0.3 million related to an increase in the annual patronage refund from CoBank, ACB.  The primary refund calculation for both 2021 and 2020 was based on 0.8% of the average loan balance outstanding.  In addition, a special patronage distribution based on 0.2% and 0.1% of the average loan balance outstanding was refunded in March 2021 and March 2020, respectively.  Allowance for funds used during construction, or AFUDC, decreased $0.3 million as a result of lower long-term construction activity subject to AFUDC for the twelve months ended December 31, 2021 compared to the same period in 2020. 

Interest Charges

Long-term debt interest decreased $0.1 million, primarily related to amortizing debt.  Short-term debt interest increased $0.1 million, primarily related to higher short-term borrowing levels throughout 2021.

Net Income

Our net income applicable to common stock remained consistent.  Operating revenues increased $2.7 million, while operating expenses increased $2.7 million.

Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2020 and 2019 and is incorporated herein by reference.   
23

Liquidity and Capital Resources

Overview

The Company’s primary sources of liquidity for the year ended December 31, 2021 were $31.9 million of cash provided by operating activities, $15.8 million in net contributions and advances from developers, $4.1 million from the issuance of long-term debt and $1.4 million in net proceeds from the issuance of common stock.  These funds were used to invest $41.5 million in capital expenditures and to pay dividends of approximately $9.8 million.

We depend on the availability of capital for expansion, construction and maintenance.  We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations.  We expect that our net investments in utility plant in 2022 will be approximately $50.4 million.  Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2022 are anticipated to be approximately $10.4 million.  

Operating Activities

Our primary source of liquidity for the year ended December 31, 2021 was $31.9 million provided by cash flow from operating activities.  Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer.  A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers.  As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.  We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.  In addition, the Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating activities.

Investment Activities

The primary focus of our investment in 2021 was to continue to provide high quality reliable service to our growing service territory.  Capital expenditures during 2021 were $40.8 million compared to $40.0 million invested during the same period in 2020.  During 2021, we invested approximately $18.4 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains.  We invested $8.5 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 $6.4 million for the installation of water mains and hydrants in 2021 compared to $4.1 million in 2020.  We invested $1.2 million to upgrade and automate our meter reading equipment.  We invested approximately $2.5 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades.  We invested $2.1 million in wastewater projects in Delaware.

The following chart summarizes our investment in plant and systems over the past three fiscal years

In thousands
  
2021
    
2020
    
2019
  
   
Source of supply, treatment and pumping
  
$
9,681
    
$
14,999
    
$
13,000
  
Transmission and distribution
    
20,951
      
15,993
      
13,789
  
General plant and equipment
    
1,739
      
3,089
      
3,180
  
Developer financed utility plant
    
6,866
      
4,132
      
4,573
  
Wastewater facilities
    
2,133
      
2,586
      
7,021
  
Allowance for Funds Used During Construction, AFUDC
    
(556
)
    
(781
)
    
(886
)
Total
  
$
40,814
    
$
40,018
    
$
40,677
  
24

Of the $67.2 million gross investment expected in 2022, approximately $15.1 million will be invested in upgraded and improved booster stations, a new elevated storage tank, new water treatment facilities, water treatment facility upgrades, equipment and wells throughout Delaware, Maryland, and Pennsylvania to identify, develop, treat, and protect sources of water supply to assure uninterrupted service to our customers.  Approximately $12.5 million will be invested in renewals associated with the rehabilitation of aging infrastructure.  Approximately $12.3 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory.  Approximately $8.7 million will be invested in the construction of force mains used for the transmission of wastewater to plants.  Approximately $8.0 million will be invested into the ongoing construction of a regional wastewater treatment plant along with improvements to existing wastewater treatment plants and wastewater pumping stations.  Approximately $4.9 million will be invested in the relocations of facilities as a result of government mandates.  Approximately $4.8 million will be invested in general plant, which includes transportation and equipment upgrades, new corporate automation, and building renovations.  Additionally, we will refund $0.9 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties.

Our projected capital expenditures and other investments are subject to periodic review, and revision to reflect changes in economic conditions and other factors.  The Company's investment for 2022 is expected to be offset by developer contributions of $10.8 million and grant funds from the State of Delaware of $6.0 million, for a net investment of $50.4 million in 2022. The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers.

Financing Activities

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.  We expect to fund our activities for the next twelve months using our projected cash generated from operations, bank credit lines, a $30 million first mortgage bond, state revolving fund loans, government grants, and other capital market financing as needed to provide sufficient working capital to maintain normal operations, to meet our financing requirements and to expand through strategic acquisitions.  There is no assurance that we will be able to secure funding on terms acceptable to us, or at all.  Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state public service commissions.

Material Cash Requirements

Lines of Credit and Long Term Debt

At December 31, 2021, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources.  As of December 31, 2021, there was $31.3 million of available funds under this line of credit.  The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%.  It is expected that the LIBOR rate for USD currency after June 30, 2023.  As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans.  In light of this eventuality, Citizens currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate.  This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time.  The term of this line of credit expires on the earlier of May 22, 2022 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At December 31, 2021, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland.  As of December 31, 2021, there was $2.0 million of available funds under this line of credit.  The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate.  The patronage refunds earned by Artesian Water for 2021 and 2020 were $1.4 million and $1.0 million respectively.  The term of this line of credit expires on July 30, 2022. Artesian Water expects to renew this line of credit.

The Company’s material cash requirements include the following lines of credit commitments and contractual obligations:


Material Cash Requirements
  
Payments Due by Period
  
In thousands
  
Less than
1 Year
    
1-3
Years
    
4-5
Years
    
After 5
Years
    
Total
  
First mortgage bonds (principal and interest)
  
$
6,623
    
$
13,169
    
$
13,056
    
$
188,219
    
$
221,067
  
State revolving fund loans (principal and interest)
    
820
      
1,535
      
1,122
      
4,336
      
7,813
  
Lines of credit
    
26,703
      
---
      
---
      
---
      
26,703
  
Promissory note (principal and interest)
    
961
      
1,921
      
1,923
      
11,576
      
16,381
  
Operating leases
    
29
      
48
      
49
      
1,335
      
1,461
  
Operating agreements
    
63
      
77
      
81
      
825
      
1,046
  
Unconditional purchase obligations
    
1,518
      
1,489
      
1,403
      
---
      
4,410
  
Tank painting contractual obligation
    
392
      
588
      
---
      
---
      
980
  
Total contractual cash obligations
  
$
37,109
    
$
18,827
    
$
17,634
    
$
206,291
    
$
279,861
  
25

Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business.  As of December 31, 2021, we were in compliance with these covenants.

Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced earlier.  One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter.  The state revolving fund loan obligation and promissory note obligation have an amortizing mortgage payment payable over a 20-year period.  The first mortgage bonds, the state revolving fund loan and the promissory note have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately repaid, including all interest.  We have not experienced conditions that would result in our default under these agreements.

On February 7, 2022, Artesian Water entered into an interest rate lock agreement, or the Agreement, with 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 25 years and a fixed interest rate of 4.43% per annum, or the Fixed Rate, for the Bond.  The Agreement is effective through May 7, 2022, 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, with any additional proceeds 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.

On July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreement, the Department agreed to advance to Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankford water system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project.  In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project.  Artesian Water requested an initial draw of approximately $1.5 million for the acquisition of the Town of Frankford water system.  Upon receipt of the initial draw, an amount equal to approximately $1.5 million was forgiven by the Department and is no longer considered outstanding or unpaid principal under the Financing Agreement.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0% per annum and an administrative fee at the rate of 1.0% per annum.

On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreements, the Department agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum.  As of December 31, 2021, the full amount that will be borrowed under the Loans is approximately $2.6 million.

In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican effective from September 2018 through May 2022.  In February 2021, Artesian Water entered into a new electric supply contract with MidAmerican that is effective from May 2021 to May 2025.  The fixed rate was lowered 5.6% starting in May 2021.  In August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2019 through May 2022.  In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022 through November 2025.
26

Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under two interconnection agreements with the Chester Water Authority.  One agreement, that expired on December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day.  The other agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day.  In addition, payments for unconditional purchase obligations reflect minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.

In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks.  Pursuant to the agreement, the total expenditure for the three years is $1.2 million.





IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 18 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.


ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal course of business.  Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt.  The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 2049, and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing fixed rate of the long-term debt prior to such debt’s maturity.  In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit, with two banks, under which the interim bank loans payable at December 31, 2021 were approximately $26.7 million.  An increase in the variable interest rates will result in an increase in the cost of borrowing on these variable rate lines of credit.  Also, changes in LIBOR could affect our operating results and liquidity.  We are also exposed to market risk associated with changes in commodity prices.  Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our costs through rate increases to our customers.  We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at fixed prices.

27


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
In thousands

ASSETS
  
December 31, 2021
    
December 31, 2020
  
Utility plant, at original cost less accumulated depreciation
  
$
590,431
    
$
559,561
  
Current assets
                
Cash and cash equivalents
    
92
      
28
  
Accounts receivable (less allowance for doubtful accounts 2021 - $429; 2020-$862)
    
8,863
      
10,162
  
Income tax receivable
    
2,234
      
629
  
Unbilled operating revenues
    
1,080
      
1,166
  
Materials and supplies
    
1,933
      
1,535
  
Prepaid property taxes
    
2,306
      
1,891
  
Prepaid expenses and other
    
2,652
      
2,208
  
Total current assets
    
19,160
      
17,619
  
Other assets
                
Non-utility property (less accumulated depreciation 2021-$919; 2020-$865)
    
3,751
      
3,796
  
Other deferred assets
    
5,097
      
5,309
  
Operating lease right of use assets
    
451
      
460
  
Total other assets
    
9,299
      
9,565
  
Regulatory assets, net
    
6,321
      
6,473
  
Total Assets
  
$
625,211
    
$
593,218
  
 
                
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Stockholders' equity
                
Common stock
  
$
9,414
    
$
9,357
  
Preferred stock
    
—
      
—
  
Additional paid-in capital
    
104,989
      
103,463
  
Retained earnings
    
63,607
      
56,606
  
Total stockholders' equity
    
178,010
      
169,426
  
Long-term debt, net of current portion
    
143,259
      
142,333
  
 
    
321,269
      
311,759
  
Current liabilities
                
Lines of credit
    
26,703
      
26,813
  
Current portion of long-term debt
    
1,591
      
1,757
  
Accounts payable
    
10,206
      
6,341
  
Accrued expenses
    
4,534
      
3,414
  
Overdraft payable
    
30
      
105
  
Accrued interest
    
917
      
930
  
Income taxes payable
    
—
      
237
  
Customer and other deposits
    
2,273
      
2,060
  
Other
    
1,448
      
2,067
  
Total current liabilities
  
$
47,702
    
$
43,724
  
 
                
Commitments and contingencies (Note 11)
    
     
 
 
                
Deferred credits and other liabilities
                
Net advances for construction
  
$
4,295
    
$
4,578
  
Operating lease liabilities
    
440
      
432
  
Regulatory liabilities
    
21,260
      
21,681
  
Deferred investment tax credits
    
456
      
473
  
Deferred income taxes
    
53,133
      
50,313
  
Total deferred credits and other liabilities
  
$
79,584
    
$
77,477
  
 
                
Net contributions in aid of construction
    
176,656
      
160,258
  
Total Liabilities and Stockholders' Equity
  
$
625,211
    
$
593,218
  
 
The notes are an integral part of the consolidated financial statements.
28

CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts

 
  
For the Year Ended December 31,
  
 
  
2021
    
2020
    
2019
  
 
                  
Operating revenues
                  
Water sales
  
$
77,821
    
$
76,476
    
$
73,609
  
Other utility operating revenue
    
7,195
      
6,525
      
4,916
  
Non-utility operating revenue
    
5,843
      
5,140
      
5,070
  
Total Operating Revenues 
    
90,859
      
88,141
      
83,595
  
                         
Operating expenses
                        
Utility operating expenses
    
41,414
      
40,338
      
39,189
  
Non-utility operating expenses
    
3,942
      
3,277
      
3,315
  
Depreciation and amortization
    
11,885
      
11,143
      
10,803
  
Taxes
                        
State and federal income tax expense (benefit)
                        
Current
    
3,360
      
8,073
      
8,420
  
Deferred
    
2,377
      
(2,389
)
    
(3,239
)
Property and other taxes
    
5,587
      
5,404
      
5,182
  
  Total Operating Expenses
    
68,565
      
65,846
      
63,670
  
 
                        
Operating income
    
22,294
      
22,295
      
19,925
  
 
                        
Other income, net
                        
Allowance for funds used during construction (AFUDC)
    
823
      
1,170
      
1,410
  
Miscellaneous
    
1,302
      
971
      
614
  
 
    
2,125
      
2,141
      
2,024
  
 
                        
Income before interest charges
    
24,419
      
24,436
      
21,949
  
 
                        
Interest charges
    
7,592
      
7,619
      
7,024
  
 
                        
Net income applicable to common stock
  
$
16,827
    
$
16,817
    
$
14,925
  
 
                        
Income per common share:
                        
Basic
  
$
1.79
    
$
1.80
    
$
1.61
  
Diluted
  
$
1.79
    
$
1.79
    
$
1.60
  
 
                        
Weighted average common shares outstanding:
                        
Basic
    
9,394
      
9,327
      
9,277
  
Diluted
    
9,426
      
9,369
      
9,326
  
 
                        
Cash dividends per share of common stock
  
$
1.05
    
$
1.01
    
$
0.98
  

The notes are an integral part of the consolidated financial statements.
29

CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands

  
For the Year Ended December 31,
  
 
  
2021
    
2020
    
2019
  
CASH FLOWS FROM OPERATING ACTIVITIES
                  
Net income
  
$
16,827
    
$
16,817
    
$
14,925
  
Adjustments to reconcile net income to net cash provided by operating activities:
                        
Depreciation and amortization
    
11,885
      
11,143
      
10,803
  
Deferred income taxes, net
    
2,803
      
(1,963
)
    
(2,813
)
Stock compensation
    
193
      
178
      
181
  
AFUDC, equity portion
    
(556
)
    
(781
)
    
(886
)
 
                        
Changes in assets and liabilities:
                        
Accounts receivable, net of allowance for doubtful accounts
    
94
      
(2,324
)
    
(94
)
Income tax receivable
    
(1,605
)
    
(610
)
    
753
  
Unbilled operating revenues
    
86
      
45
      
230
  
Materials and supplies
    
(398
)
    
(271
)
    
195
  
Income taxes payable
    
(28
)
    
(106
)
    
343
  
Prepaid property taxes
    
(415
)
    
63
      
(84
)
Prepaid expenses and other
    
(444
)
    
42
      
(126
)
Other deferred assets
    
(445
)
    
(409
)
    
(361
)
Regulatory assets
    
115
      
390
      
388
  
Regulatory liabilities
    
(535
)
    
(635
)
    
(642
)
Accounts payable
    
3,547
      
(1,835
)
    
(11
)
Accrued expenses
    
(71
)
    
301
      
(789
)
Accrued interest
    
(13
)
    
100
      
46
  
Revenue reserved for refund
    
—
      
—
      
(3,298
)
Customer deposits and other
    
270
      
213
      
110
  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    
31,310
      
20,358
      
18,870
  
 
                        
CASH FLOWS USED IN INVESTING ACTIVITIES
                        
Capital expenditures (net of AFUDC, equity portion)
    
(40,814
)
    
(34,277
)
    
(40,677
)
Investment in acquisitions
    
—
      
(5,741
)
    
—
  
Proceeds from sale of assets
    
90
      
46
      
51
  
NET CASH USED IN INVESTING ACTIVITIES
    
(40,724
)
    
(39,972
)
    
(40,626
)
 
                        
CASH FLOWS FROM FINANCING ACTIVITIES
                        
Net (repayments) borrowings under lines of credit agreements
    
(110
)
    
19,313
      
(8,442
)
(Decrease) increase in overdraft payable
    
(75
)
    
90
      
(102
)
Net advances and contributions in aid of construction
    
15,817
      
9,280
      
10,507
  
Net proceeds from issuance of common stock
    
1,390
      
1,539
      
1,033
  
Issuance of long-term debt
    
4,126
      
—
      
30,000
  
Dividends paid
    
(9,826
)
    
(9,376
)
    
(9,122
)
Debt issuance costs
    
(19
)
    
(28
)
    
(90
)
Principal repayments of long-term debt
    
(1,825
)
    
(1,772
)
    
(1,725
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
    
9,478
      
19,046
      
22,059
  
 
                        
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
64
      
(568
)
    
303
  
 
                        
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
28
      
596
      
293
  
 
                        
CASH AND CASH EQUIVALENTS AT END OF YEAR
  
$
92
    
$
28
    
$
596
  
 
                        
Non-cash Investing and Financing Activity:
                        
Utility plant received as construction advances and contributions in aid of construction
  
$
3,538
    
$
2,403
    
$
3,716
  
Contractual amounts of contributions in aid of construction due from developers included in accounts receivable
  
$
545
    
$
1,705
    
$
710
  
Contractual amounts of contributions in aid of construction received from developers previously included in accounts receivable
  
$
1,749
    
$
781
    
$
2,050
  
  Amounts included in accounts payable and accrued payables related to capital expenditures
  
$
3,763
    
$
3,122
    
$
7,332
  
                         
Supplemental Cash Flow Information:
                        
Interest paid
  
$
7,605
    
$
7,519
    
$
6,978
  
Income taxes paid
  
$
5,181
    
$
8,792
    
$
7,332
  
                         
Purchase price allocation of investment in acquisitions:
                        
Utility plant
  
$
—
    
$
5,118
    
$
—
  
Other deferred assets/goodwill
    
—
      
623
      
—
  
Total investment in acquisitions
  
$
—
    
$
5,741
    
$
—
  

The notes are an integral part of the consolidated financial statements.
30

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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, 2018
    
8,368
      
882
    
$
8,368
    
$
882
    
$
100,639
    
$
43,362
    
$
153,251
  
 
                                                        
Net income
    
—
      
—
      
—
      
—
      
—
      
14,925
      
14,925
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(9,122
)
    
(9,122
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
11
      
—
      
11
      
—
      
389
      
—
      
400
  
Employee stock options and awards(4)
    
21
      
—
      
21
      
—
      
426
      
—
      
447
  
Employee Retirement Plan(3)
    
10
      
—
      
10
      
—
      
357
      
—
      
367
  
Balance as of December 31, 2019
    
8,410
      
882
    
$
8,410
    
$
882
    
$
101,811
    
$
49,165
    
$
160,268
  
 
                                                        
Net income
    
—
      
—
      
—
      
—
      
—
      
16,817
      
16,817
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(9,376
)
    
(9,376
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
11
      
—
      
11
      
—
      
377
      
—
      
388
  
Employee stock options and awards(4)
    
42
      
—
      
42
      
—
      
832
      
—
      
874
  
Employee Retirement Plan(3)
    
12
      
—
      
12
      
—
      
443
      
—
      
455
  
Balance as of December 31, 2020
    
8,475
      
882
    
$
8,475
    
$
882
    
$
103,463
    
$
56,606
    
$
169,426
  
 
                                                        
Net income
    
—
      
—
      
—
      
—
      
—
      
16,827
      
16,827
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(9,826
)
    
(9,826
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
10
      
—
      
10
      
—
      
382
      
—
      
392
  
Employee stock options and awards(4)
    
38
      
—
      
38
      
—
      
790
      
—
      
828
  
Employee Retirement Plan(3)
    
9
      
—
      
9
      
—
      
354
      
—
      
363
  
Balance as of December 31, 2021
    
8,532
      
882
    
$
8,532
    
$
882
    
$
104,989
    
$
63,607
    
$
178,010
  

(1)
At December 31, 2021, 2020, and 2019, Class A Common Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 8,561,772, 8,504,429 and 8,439,223, respectively.
(2)
At December 31, 2021, 2020, and 2019, Class B Common Stock had 1,040,000 shares authorized and 882,000 shares issued.
(3)
Artesian Resources Corporation registered 200,000 shares of Class A Common Stock, subsequently adjusted for stock splits, available for purchase through the 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 Plan. Includes stock compensation expense for the years ended December 31, 2021, 2020, and 2019, see Note 1-Stock Compensation Plans.

The notes are an integral part of the consolidated financial statements.
 
31

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The audited consolidated financial statements are presented in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States and consequently include all the disclosures required in the consolidated financial statements included in the Company's annual report on Form 10-K. The accompanying consolidated financial statements include the accounts of Artesian Resources Corporation and its subsidiaries and all intercompany balances and transactions between subsidiaries have been eliminated.
Utility Subsidiary Accounting

The accounting records of Artesian Water Company, Inc., or Artesian Water, Artesian Wastewater Management, Inc., or Artesian Wastewater, and, effective January 14, 2022, Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC.  The accounting records of Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC.  The accounting records of Artesian Water Maryland, Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC.  All these subsidiaries follow the provisions of Financial Accounting Standards Board, or FASB, ASC Topic 980, which provides guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. The operating revenues of our non-regulated division are presented in the Consolidated Statements of Operations.
Utility Plant

Utility plant is stated at original cost.  Cost includes direct labor, materials, AFUDC (see description below) and indirect charges for such capitalized items as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation.  Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability.  Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.

In accordance with a rate order issued by the DEPSC, Artesian Water and Artesian Wastewater accrue an Allowance for Funds Used during Construction, or AFUDC.  AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress.  The rate used for the AFUDC calculation is based on Artesian Water's and Artesian Wastewater’s weighted average cost of debt and the rate of return on equity authorized by the DEPSC.  The rate used to capitalize AFUDC for Artesian Water in 2021, 2020, and 2019 was 6.7%, 7.0%, and 7.1%, respectively.  The rate used to capitalize AFUDC for Artesian Wastewater in 2021, 2020, and 2019 was 6.4%, 6.3%, and 7.1%, respectively.
32

Utility plant comprises:
            
In thousands
            
 
        
December 31,
  
 
  
Estimated Useful Life
(In Years)
    
2021
    
2020
  
Utility plant at original cost
                  
Utility plant in service-Water
                  
Intangible plant
    
—
    
$
140
    
$
140
  
Source of supply plant
    
45-85
      
25,045
      
23,940
  
Pumping and water treatment plant
    
8-62
      
109,087
      
100,317
  
Transmission and distribution plant
                        
Mains
    
81
      
320,767
      
293,643
  
Services
    
39
      
53,210
      
49,937
  
Storage tanks
    
76
      
29,972
      
29,946
  
Meters
    
26
      
28,778
      
27,994
  
Hydrants
    
60
      
16,789
      
15,895
  
General plant
    
5-31
      
62,604
      
62,379
  
 
                        
Utility plant in service-Wastewater
                        
Intangible plant
    
—
      
116
      
116
  
Treatment and disposal plant
    
21-81
      
43,725
      
41,860
  
Collection mains & lift stations
    
81
      
33,901
      
32,133
  
General plant
    
5-31
      
1,665
      
1,545
  
 
                        
Property held for future use
    
—
      
5,536
      
5,711
  
Construction work in progress
    
—
      
18,481
      
21,474
  
 
            
749,816
      
707,030
  
Less – accumulated depreciation
            
159,385
      
147,469
  
 
          
$
590,431
    
$
559,561
  

Depreciation and Amortization

For financial reporting purposes, depreciation is recorded using the straight-line method at rates based on estimated economic useful lives, which range from 5 to 85 years. Composite depreciation rates for water utility plant were 2.17%, 2.23% and 2.27% for 2021, 2020 and 2019, respectively. In a rate order issued by the DEPSC, the Company was directed effective January 1, 1998 to begin using revised depreciation rates for utility plant. In rate orders issued by the DEPSC, Artesian Water was directed, effective May 28, 1991 and August 25, 1992, to offset depreciation recorded on utility plant by depreciation on utility property funded by Contributions in Aid of Construction, or CIAC, and Advances for Construction, or Advances, respectively.  This reduction in depreciation expense is also applied to outstanding CIAC and Advances.  Other deferred assets are amortized using the straight-line method over applicable lives, which range from 20 to 24 years.

Regulatory Assets

The FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Certain expenses are recoverable through rates charged to our customers, without a return on investment, and are deferred and amortized during future periods using various methods as permitted by the DEPSC, MDPSC, and PAPUC.

The deferred income taxes will be amortized over future years as the tax effects of temporary differences that previously flowed through to our customers are reversed.

Debt related costs include debt issuance costs and other debt related expense.  The DEPSC has approved deferred regulatory accounting treatment for issuance costs associated with Artesian Water’s Series V First Mortgage bond in December 2019 that paid down outstanding lines of credit and a loan payable to Artesian Resources.  Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations.  For the Series V First Mortgage bond, cash was paid for the issuance costs and $30 million of cash was received from the proceeds of the bond.
33

Regulatory expenses amortized on a straight-line basis are noted below:

Expense
Years Amortized
Deferred contract costs and other
5
Rate case studies
5
Delaware rate proceedings
2.5
Maryland rate proceedings
5
Debt related costs
15 to 30
(based on term of related debt)
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008)
50
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in 2010)
20
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011)
80

Regulatory assets, net of amortization, comprise:

(in thousands)
December 31, 2021
 
December 31, 2020
 
 
 
 
Deferred income taxes
 $
355
 
 $
370
Deferred contract costs and other
  
288
    
46
Debt related costs
  
4,902
    
5,233
Goodwill
 
273
 
 
281
Deferred acquisition and franchise costs
 
503
 
 
543
 
$
6,321
 
$
6,473

Impairment or Disposal of Long-Lived Assets

Our long-lived assets consist primarily of utility plant in service and regulatory assets.  A review of our long-lived assets is performed in accordance with the requirements of FASB ASC Topic 360. In addition, the regulatory assets are reviewed for the continued application of FASB ASC Topic 980.  The review determines whether there have been changes in circumstances or events that have occurred requiring adjustments to the carrying value of these assets.  FASB ASC Topic 980 stipulates that adjustments to the carrying value of these assets would be made in instances where the inclusion in the rate-making process is unlikely.  For the years ended December 31, 2021, 2020 and 2019, there was no impairment or regulatory disallowance identified in our review.
Other Deferred Assets

The investment in CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt agreements.  Goodwill recorded in 2020 was a result of the acquisition of water assets from the Town of Frankford in April 2020 based on the purchase price allocation.  A regulatory adjustment was made in 2021 to account for $1.5 million of Delaware Drinking Water State Revolving Fund loan proceeds automatically forgiven in July 2021 with the remainder recorded as contributions in aid of construction.  Other deferred assets is related to the Mountain Hill acquisition.

Other deferred assets at December 31, net of amortization, comprise:

In thousands
2021
  
2020
  
 
        
Investment in CoBank
  
$
4,850
    
$
4,374
  
Other deferred assets/goodwill
    
247
      
935
  
   
$
5,097
    
$
5,309
  

34

Advances for Construction

Cash advances to reimburse Artesian Water for its costs to construct water mains, services and hydrants are contributed to Artesian Water by real estate developers and builders in order to extend water service to their properties.  The value of these contributions is recorded as Advances for Construction. Artesian Water makes refunds on these advances over a specific period of time based on operating revenues generated by the specific plant or as new customers are connected to the mains. After all refunds are made within the contract period, any remaining balance is transferred to CIAC.

Contributions in Aid of Construction

CIAC includes the non-refundable portion of advances for construction and direct contributions of water mains, services and hydrants, and wastewater treatment facilities and collection systems, or cash to reimburse our water and wastewater divisions for costs to construct water mains, services and hydrants, and wastewater treatment and disposal plant.  Effective with the Tax Cuts and Jobs Act, or TCJA, in 2017 CIAC was taxable and the DEPSC, MDPSC and PAPUC allowed the Company to collect additional CIAC to pay the associated tax.  In 2021, legislation was issued to amend the TCJA, which now exempts CIAC from income taxes for regulated water and wastewater utilities, effective for all of 2021 and forward.  The Company will refund developers a total of $3.2 million for the additional CIAC collected in 2021 to pay the associated tax.  As of December 31, 2021, this refund amount is recorded in Current Liabilities – Accounts Payable on the Company’s Consolidated Balance Sheets.

Regulatory Liabilities

FASB ASC Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency.  Certain obligations are deferred and/or amortized as determined by the DEPSC, MDPSC, and PAPUC.  Regulatory liabilities represent excess recovery of cost or other items that have been deferred because it is probable such amounts will be returned to customers through future regulated rates.

Utility plant retirement cost obligation consists of estimated costs related to the potential removal and replacement of facilities and equipment on the Company’s water and wastewater properties. Effective January 1, 2012, as authorized by the DEPSC, when depreciable units of utility plant are retired, any cost associated with retirement, less any salvage value or proceeds received, is charged to a regulated retirement liability.  Each year the liability is increased by an annual amount authorized by the DEPSC.

Pursuant to the enactment of the 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 5) resulting in a decrease in the net deferred income tax liability of $24.3 million, of which $22.8 million was reclassified to a regulatory liability related to Artesian Water and Artesian Water Maryland. The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes.  On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date.  This audit is currently underway by the DEPSC, no final ruling has been made.  The MDPSC has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers.

Regulatory liabilities comprise:
  
 
  
(in thousands)
  
 
  
December 31, 2021
    
December 31, 2020
  
 
            
Utility plant retirement cost obligation
  
$
149
    
$
126
  
Deferred income taxes (related to TCJA)
    
21,111
      
21,555
  
                 
   
$
21,260
    
$
21,681
  

Income Taxes

Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated utilities recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate.  Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties. 
35

Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes.  The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known.  The statute of limitations for the 2017 Corporate tax returns lapsed during the fourth quarter of 2021, which resulted in the reversal of the reserve in the amount of approximately $26,000. The statute of limitations for the 2016 Corporate tax returns lapsed during the fourth quarter of 2020.  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 $19,000 in penalties and interest for the year ended December 31, 2021. The Company remains subject to examination by federal and state authorities for the tax years 2018 through 2021.

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.

Stock Compensation Plans

On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee, or the Committee, of the Board of Directors of the Company, or the Board. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, the type, size and terms of the grants, the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan), and deal with any other matters arising under the 2015 Plan. The Committee presently consists of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries and non-employee directors of the Company are eligible for grants under the 2015 Plan.  The Company accounts for stock options issued after January 1, 2006 under FASB ASC Topic 718.

Compensation expenses for restricted stock awards were $193,000, $178,000 and $181,000 in 2021, 2020 and 2019, respectively. 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. As of December 31, 2021, there was $68,000 of unrecognized expense related to non-vested awards of restricted shares granted under the 2015 Plan.

There was no stock compensation cost capitalized as part of an asset.

Stock Options

No options were granted in 2019, 2020 or 2021.

Shares of Class A Stock have been reserved for future issuance under the 2015 Plan.

Stock Awards

On May 4, 2021, 5,000 shares of Class A Stock were granted as restricted stock awards.  The fair value per share was $40.11, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 4, 2021.  Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.

On May 6, 2020, 5,000 shares of Class A Stock were granted as restricted stock awards.  The fair value per share was $35.01, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020.  These shares were fully vested and released one year after the grant date.

On May 8, 2019, 5,000 shares of 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. These shares were fully vested and released one year after the grant date.
Revenue Recognition and Unbilled Revenues

See Note 2 to our Consolidated Financial Statements for a full description of our revenue recognition.
36

Leases

The Company has agreements for land easements and office equipment under operating leases.  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.  See Note 3 to our Consolidated Financial Statements for a full description of our leases.

Accounts Receivable

Accounts receivable are recorded at the invoiced amounts.  An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.  However, due to the coronavirus pandemic, or COVID-19, causing hardships for many utility customers, state government agencies issued executive orders in March 2020 requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  The Company experienced longer receivable cycles throughout 2020 and into 2021 and made an adjustment to increase the reserve for bad debt by $0.5 million in 2020. In June 2021 we made an adjustment to reduce the reserve by $0.3 million.  Account balances are written off against the allowance when it is probable the receivable will not be recovered. The allowance for doubtful accounts was $0.4 million and $0.9 million at December 31, 2021 and December 31, 2020, respectively.  The corresponding expense, excluding the reserve adjustment noted above, for the years ended December 31, 2021 and 2020 was $0.1 million and $0.2 million, respectively. The following table summarizes the changes in the Company’s accounts receivable balance:
 
 
  
December 31,
  
In thousands
  
2021
    
2020
  
 
            
Customer accounts receivable – water
  
$
5,986
    
$
6,707
  
Customer accounts receivable – wastewater
    
1,326
      
1,717
  
Miscellaneous accounts receivable
    
698
      
699
  
Developer receivable
    
1,282
      
1,901
  
 
    
9,292
      
11,024
  
Less allowance for doubtful accounts
    
429
      
862
  
Net accounts receivable
  
$
8,863
    
$
10,162
  

The activities in the allowance for doubtful accounts are as follows:

 
  
December 31,
  
In thousands
  
2021
    
2020
  
 
            
Beginning balance
  
$
862
    
$
264
  
Allowance adjustments
    
(236
)
    
754
  
Recoveries
    
25
      
13
  
Write off of uncollectible accounts
    
(222
)
    
(169
)
Ending balance
  
$
429
    
$
862
  

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, Artesian Resources considers all temporary cash investments with an original maturity of three months or less to be cash equivalents.Artesian Resources and its subsidiaries utilize their bank's zero balance account disbursement service to reduce the use of their lines of credit by funding checks as they are presented to the bank for payment rather than at issuance. If the checks currently outstanding, but not yet funded, exceed the cash balance on our books, the net liability is recorded as a current liability on the Consolidated Balance Sheet in the Overdraft Payable account.

Use of Estimates in the Preparation of Consolidated Financial Statements

The consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make estimates about the reported amounts of assets and liabilities including unbilled revenues, reserve for a portion of revenues received under temporary rates and regulatory asset recovery and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from management's estimates.
37

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.

As of December 31, 2021, the Company’s financial results and business operations have not been materially adversely affected by the coronavirus, or COVID-19, outbreak, which was declared a pandemic in March 2020.  However, we have experienced delays in procuring some materials and supplies.  While we have been successful in managing these delays, there is no assurance that our future financial results or business operations will not be negatively affected.  The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.  Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce.



NOTE 2

REVENUE RECOGNITION

Background

Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC.  Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices.  Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, design and installation contract services, and wastewater inspection fees.  Other operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna agreements, which are not considered in the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Tariff Contract Revenues

Artesian generates revenue from the sale of water to customers in Delaware, Cecil County, Maryland, and Southern Chester County, Pennsylvania once a customer requests service in our territory.  We recognize water consumption revenue at tariff rates on a cycle basis for the volume of water transferred to customers based upon meter readings for actual gallons of water consumed as well as unbilled amounts for estimated usage from the date of the last meter reading to the end of the accounting period.  As actual usage amounts are known based on recurring meter readings, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results.  Estimates are made on an individual customer basis, based on one of three methods: the previous year’s consumption in the same period, the previous billing period’s consumption, or averaging. While actual usage for individual customers may differ materially from the estimate based on management judgments described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.  The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis.  As a result, we record unbilled operating revenue (contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle.

Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware.  We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred.  These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue.  The contract also provides for a minimum required volume of wastewater flow to our facility.  At each year end, any shortfall of the actual volume from the required minimum volume is billed to the industrial customer and recorded as revenue.  Additionally, if during the course of the year it is probable that the actual volume will not meet the minimum required volume, estimated revenue amounts would be recorded for the pro rata minimum volume, constrained for potential flow capacity that could occur in the remainder of the year.  Pursuant to a settlement agreement, for the calendar year 2021 only, the minimum required volume was prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021.

Artesian generates fixed fee revenue for water and wastewater services provided to customers once a customer requests service in our territory.  Our wastewater territory is located in Sussex County, Delaware.  We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of the Company remaining ready to provide them water and wastewater service.  These contract services are billed in advance at tariff rates on a monthly, quarterly or semi-annual basis.  As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided.  This deferred revenue is netted with unbilled operating revenue on the Consolidated Balance Sheet.
38

Artesian generates service charges primarily from non-payment fees, such as water shut off and reconnection fees and finance charges.  These fees are billed and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed.  There is no contract asset or liability associated with these fees.

Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution system improvements.  This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period.  This rate is adjusted up or down at the next DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement.  Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to consumption revenue or fixed fee revenue.

Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing.  An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.  However, due to the COVID-19 pandemic causing hardships for many utility customers, in March 2020, state government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  In July 2020, the State of Delaware lifted its executive orders placing a moratorium on service disconnections for non-payment, with a provision requiring utilities to offer payment arrangements extending at least four months to customers.  After properly notifying customers, Artesian reinstated its late fee process in September 2020 and began administering service disconnections in October 2020 for its Delaware customers.  The State of Maryland and the Commonwealth of Pennsylvania lifted their executive orders placing moratoriums on service disconnections for non-payment effective November 2020.  The State of Maryland required utilities to offer payment arrangements extending twelve months.  The Company experienced longer receivable cycles throughout 2020 and into 2021 and made an adjustment to increase the reserve for bad debt by $0.5 million in 2020.  In June 2021 we made an adjustment to reduce the reserve by $0.3 million.  We will continue to monitor factors that affect the reserve for bad debt.

Non-tariff Contract Revenues

Artesian generates SLP Plan revenue once a customer requests service to cover all parts, materials and labor required to repair or replace leaking water service lines, leaking or clogged sewer lines, or water and wastewater lines within the customer’s residence, up to an annual limit.  We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of having service line protection services.  These contract services are billed in advance on a monthly or quarterly basis.  As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided.  Accounts receivable from SLP Plan customers are typically due within 25 days of invoicing.  An allowance for doubtful accounts is calculated as a percentage of total SLP Plan contract revenue.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.

Artesian generates contract operation revenue from water and wastewater operation services provided to customers.  We recognize revenue from these operation contracts, which consist primarily of monthly operation and maintenance services over time as customers receive and consume the benefits of such services performed. These services are invoiced in advance at the beginning of every month and are typically due within 30 days, and therefore there is no contract asset or liability associated with these revenues.  An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers’ creditworthiness.  The related allowance for doubtful accounts and associated bad debt expense has not been significant.

Artesian generates design and installation revenue for services related to the design and construction of wastewater infrastructure for a state agency under contract.  We recognize revenue from these services over time as services are performed using the percentage-of-completion method based on an input method of incurred costs (cost-to-cost).  These services are invoiced at the end of every month based on incurred costs to date.  As of December 31, 2021, there is no associated contract asset or liability.  There is no allowance for doubtful accounts or bad debt expense associated with this revenue.

Artesian generates inspection fee revenue for inspection services related to onsite wastewater collection systems installed by developers of new communities.  These fees are paid by developers in advance when a service is requested for a new phase of a development.  Inspection fee revenue is recognized on a per lot basis once the inspection of the infrastructure that serves each lot is completed.  As a result, we record deferred revenue (contract liability) for any amounts related to infrastructure not yet inspected.  There are no accounts receivable, allowance for doubtful accounts or bad debt expense associated with inspection fee contracts.
39

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:

  
For the Year Ended December 31,
  
(in thousands)
  
2021
    
2020
    
2019
  
Tariff Revenue
                  
Consumption charges
  
$
47,924
    
$
47,145
    
$
45,451
  
Fixed fees
    
27,977
      
27,109
      
26,216
  
Service charges
    
579
      
351
      
617
  
DSIC
    
5,093
      
4,997
      
4,331
  
Industrial wastewater services
    
675
      
1,448
      
22
  
Total Tariff Revenue
  
$
82,248
    
$
81,050
    
$
76,637
  

Non-Tariff Revenue
                  
Service line protection plans
  
$
4,594
    
$
4,381
    
$
4,177
  
Contract operations
    
884
      
840
      
1,122
  
Design and installation
    
562
      
88
      
—
  
Inspection fees
    
341
      
266
      
246
  
Total Non-Tariff Revenue
  
$
6,381
    
$
5,575
      
5,545
  
                         
Other Operating Revenue
  
$
2,230
    
$
1,516
      
1,413
  
                         
Total Operating Revenue
  
$
90,859
    
$
88,141
    
$
83,595
  

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
  
December 31, 2021
    
December 31, 2020
  
Contract Assets – Tariff
  
$
2,144
    
$
2,175
  
                 
Deferred Revenue
                
Deferred Revenue – Tariff
  
$
1,227
    
$
1,150
  
Deferred Revenue – Non-Tariff
    
287
      
300
  
Total Deferred Revenue
  
$
1,514
    
$
1,450
  

For the year ended December 31, 2021, the Company recognized revenue of $1.2 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.3 million from amounts that were included in Deferred Revenue – Non-Tariff at the beginning of the year.

The increases of Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments.
40

Remaining Performance Obligations

As of December 31, 2021 and December 31, 2020, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months.

As of December 31, 2021 and December 31, 2020, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months and one year for the SLP Plan revenue and inspection fee revenue, respectively.

NOTE 3

LEASES

The Company leases land and office equipment under operating leases from non-related parties.  Our leases have remaining lease terms of 20 year to 74 years, some of which include options to automatically extend the leases for up to 66 years.  Payments made under operating leases are recognized in the consolidated statement of operations on a straight-line basis over the period of the lease.  The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3%, as applicable based on the lease agreements.  Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land.  None of the operating leases contain contingent rent provisions.  The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment.  The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.

Management made certain assumptions related to the separation of lease and nonlease components and to the discount rate used when calculating the right of use asset and liability amounts for the operating leases.  As our leases do not provide an implicit rate, we use our incremental borrowing rates for long-term and short-term agreements and apply the rates accordingly based on the term of the lease agreements to determine the present value of lease payments.

In October 1997, Artesian Water entered into a 33 year operating lease for a parcel of land with improvements located in South Bethany, a municipality in Sussex County, Delaware.  The annual lease payments increase each year by the most recent increase in the Consumer Price Index for Urban Workers, CPI-U, as published by the U.S. Department of Labor, Bureau of Labor Statistics.  At each eleventh year of the lease term, the annual lease payment shall be determined based on the fair market value of the parcel of land.  Rental payments for 2021, 2020 and 2019 were $17,000, $16,500, and $16,300, respectively.  The future minimum rental payment as disclosed in the following table is calculated using CPI-U from August 2021 as well as the adjustment for an appraisal conducted in 2019 to determine the fair market value of the parcel of land.

In March 2019, Artesian Water entered into a 3 year operating lease for office equipment.  The quarterly lease payments remain fixed throughout the term of the lease.  Payments for both 2021 and 2020 were $19,000.

Rent expense for all operating leases except those with terms of 12 months or less comprises:

 
  
For the Twelve Months
Ended December 31,
  
 (in thousands)
            
   
2020
    
2019
  
             
Minimum rentals
  
$
45
    
$
44
  
Contingent rentals
    
—
      
—
  
   
$
45
    
$
44
  

Supplemental cash flow information related to leases is as follows:

 
Twelve Months Ended
Twelve Months Ended
 
December 31,
December 31,
   
2020
    
2019
Cash paid for amounts included in the measurement of lease liabilities:
          
Operating cash flows from operating leases
$
45
  
$
44
Right-of-use assets obtained in exchange for lease obligations:
          
Operating leases
$
451
  
$
460
41
Supplemental balance sheet information related to leases is as follows:

(in thousands, except lease term and discount rate)
      
   
December 31, 2021
    
December 31, 2020
  
             
Operating Leases:
            
Operating lease right-of-use assets
  
$
451
    
$
460
  
                 
Other current liabilities
  
$
6
    
$
20
  
Operating lease liabilities
    
440
      
432
  
Total operating lease liabilities
  
$
446
    
$
452
  
                 
                 
Weighted Average Remaining Lease Term
                
Operating leases
  
61 years
    
59 years
  
Weighted Average Discount Rate
                
Operating leases
    
5.0
%
    
5.0
%

Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2021 are as follows:
42
 
 
  
(in thousands)
  
 
  
Operating Leases
  
Year
      
2022
  
$
29
  
2023
    
24
  
2024
    
24
  
2025
    
24
  
2026
    
25
  
Thereafter
    
1,334
  
Total undiscounted lease payments
  
$
1,460
  
Less effects of discounting
    
(1,014
)
Total lease liabilities recognized
    
446
  

As of December 31, 2021, we have not entered into operating or finance leases that will commence at a future date.

NOTE 4

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.

Current Assets and Liabilities

For those current assets and liabilities that are considered financial instruments, the carrying amounts approximate fair value because of the short maturity of those instruments.
43

Long-term Financial Liabilities

All of Artesian Resources’ outstanding long-term debt as of December 31, 2021 and December 31, 2020 was fixed-rate.  The fair value of the Company’s long-term debt is determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825.  Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements.  Level 2 is valued using observable inputs other than quoted prices.  The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates.  The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below:

In thousands
  
December 31,
  
 
  
2021
    
2020
  
Carrying amount
  
$
144,850
    
$
144,090
  
Estimated fair value
    
163,182
      
171,374
  

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 5

INCOME TAXES

Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting.  Pursuant to the enactment of the Tax Cuts and Jobs Act, or TCJA, in 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34% to 21% resulting in a decrease in the net deferred income tax liability of approximately $24.3 million, of which $22.8 million was reclassified 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. This audit is currently underway by the DEPSC, but no final ruling has been made.  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.

As of December 31, 2021, the Company fully utilized all of its federal net operating loss carrybacks and carry-forwards.  As of December 31, 2021, the Company has separate company state net operating loss carry-forwards aggregating approximately $11.9 million. Most of these net operating loss carry-forwards will expire if unused between 2022 and 2042. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of the state net operating loss carry-forwards. The valuation allowance increased to approximately $546,000 in 2021 from approximately $493,000 in 2020. Management believes that it is more likely than not that the Company will realize the benefit of these deferred tax assets, net of the valuation allowance.

Components of Income Tax Expense
      
In thousands
  
For the Year Ended December 31,
  
State income taxes
  
2021
    
2020
    
2019
  
Current
  
$
1,216
    
$
2,348
    
$
2,405
  
Deferred
    
776
      
(279
)
    
(610
)
Total state income tax expense
  
$
1,992
    
$
2,069
    
$
1,795
  

 
  
For the Year Ended December 31,
  
Federal income taxes
  
2021
    
2020
    
2019
  
Current
  
$
2,144
    
$
5,725
    
$
6,015
  
Deferred
    
1,601
      
(2,110
)
    
(2,629
)
Total federal income tax expense
  
$
3,745
    
$
3,615
    
$
3,386
  

44

Reconciliation of effective tax rate:
  
 
  
For the Year Ended December 31,
  
In thousands
  
2021
    
2021
    
2020
    
2020
    
2019
    
2019
  
 
  
Amount
    
Percent
    
Amount
    
Percent
    
Amount
    
Percent
  
Reconciliation of effective tax rate
                                    
Income before federal and state income taxes
  
$
22,564
      
100.0
%
  
$
22,501
      
100.0
%
  
$
20,106
      
100.0
%
 
                                                
Amount computed at statutory rate
    
4,738
      
21.0
%
    
4,725
      
21.0
%
    
4,222
      
21.0
%
Reconciling items
                                                
State income tax-net of federal tax benefit
    
1,600
      
7.1
%
    
1,704
      
7.6
%
    
1,414
      
7.0
%
Regulatory liability adjustment
    
(451
)
    
(2.0
)%
    
(451
)
    
(2.0
)%
    
(451
)
    
(2.2
)%
Other
    
(150
)
    
(0.7
)%
    
(294
)
    
(1.3
)%
    
(4
)
    
0.0
%
Total income tax expense and effective rate
  
$
5,737
      
25.4
%
  
$
5,684
      
25.3
%
  
$
5,181
      
25.8
%


Deferred income taxes at December 31, 2021 and 2020 were comprised of the following:

   
For the Year Ended
December 31,
  
In thousands
  
2021
    
2020
  
 
            
Deferred tax assets related to:
            
Federal and state operating loss carry-forwards
  
$
793
    
$
629
  
Less: valuation allowance
    
(546
)
    
(493
)
Bad debt allowance
    
120
      
240
  
Stock options
    
122
      
148
  
Other
    
(10
)
    
75
  
Total deferred tax assets
  
$
479
    
$
599
  
 
                
Deferred tax liabilities related to:
                
Property plant and equipment basis differences
  
$
(51,102
)
  
$
(48,536
)
Bond retirement costs
    
(1,134
)
    
(1,210
)
Property taxes
    
(593
)
    
(481
)
Other
    
(783
)
    
(685
)
Total deferred tax liabilities
  
$
(53,612
)
  
$
(50,912
)
 
                
Net deferred tax liability
  
$
(53,133
)
  
$
(50,313
)

Schedule of Valuation Allowance
  
 
Balance at
Beginning of
Period
  
Additions
Charged to
Costs and
Expenses
  
Deductions
  
Balance at
End of Period
  
In thousands
                
 
                
Classification
                
For the Year Ended December 31, 2021 Valuation allowance for deferred tax assets
  
$
493
    
$
53
      
—
    
$
546
  
For the Year Ended December 31, 2020 Valuation allowance for deferred tax assets
  
$
335
    
$
158
      
—
    
$
493
  
For the Year Ended December 31, 2019 Valuation allowance for deferred tax assets
  
$
396
    
$
41
      
(102
)
  
$
335
  
45
Under FASB ASC Topic 740, the Company establishes reserves for uncertain tax positions based upon management’s judgment as to the sustainability of these positions.  The Company reserved a liability related to the difference in the tax depreciation utilizing the half-year convention rather than the mid-quarter convention for 2018.

The following table provides the changes in the Company's uncertain tax position:

  
For the years ended December 31,
  
In thousands
  
2021
    
2020
  
Balance at beginning of year
  
$
209
    
$
271
  
Additions based on tax positions related to the current year 
    
—
      
—
  
Additions based on tax positions related to prior years
    
19
      
21
  
Reductions for tax positions of prior years
    
—
      
(83
)
Lapses in statutes of limitations
    
(26
)
    
—
  
Balance at end of year
  
$
202
    
$
209
  

NOTE 6

PREFERRED STOCK

As of December 31, 2021 and 2020, Artesian Resources had no preferred stock outstanding.  Artesian Resources has 100,000 shares of $1.00 par value Series Preferred stock authorized but unissued.

NOTE 7

COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

The Class A Non-Voting Common Stock, or Class A Stock, of Artesian Resources trades on the Nasdaq Global Select Market under the symbol ARTNA.  The Class B Common Stock, or Class B Stock, of Artesian Resources trades on the Nasdaq's OTC Bulletin Board under the symbol ARTNB.  The rights of the holders of the Class A Stock and the Class B Stock are identical, except with respect to voting.

Under Artesian Resources' dividend reinvestment plan, which allows for reinvestment of cash dividends and optional cash payments, stockholders were issued approximately 10,000, 11,000 and 11,000 shares at fair market value for the investment of $392,000 $388,000 and $400,000 of their monies in the years 2021, 2020, and 2019, respectively.

NOTE 8

DEBT

At December 31, 2021, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources.  As of December 31, 2021, there was $31.3 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. It is expected that the LIBOR rate will no longer be published for most currencies as of December 31, 2021, however, publication for USD currency should continue through June 30, 2023.  As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans.  In light of this eventuality, Citizens currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate.  This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time.  The term of this line of credit expires on the earlier of May 22, 2022 or any date on which Citizens demands payment.  The Company expects to renew this line of credit.

At December 31, 2021, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland.  As of December 31, 2021, there was $2.0 million of available funds under this line of credit.  The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate.  The term of this line of credit expires on July 30, 2022. Artesian Water expects to renew this line of credit.
46

On July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreement, the Department agreed to advance to Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankford water system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project.  In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project.  Artesian Water requested an initial draw of approximately $1.5 million for the acquisition of the Town of Frankford water system.  Upon receipt of the initial draw, an amount equal to approximately $1.5 million was forgiven by the Department and is no longer considered outstanding or unpaid principal under the Financing Agreement.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0% per annum and an administrative fee at the rate of 1.0% per annum.

On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreements, the Department agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum.  As of December 31, 2021, the full amount that will be borrowed under the Loans is approximately $2.6 million.

CoBank may make an annual patronage refund. The $20 million line of credit, the First Mortgage Bonds and the promissory note are with CoBank.  The patronage refunds earned by Artesian in 2021 and 2020 were $1.2 million and $1.0 million, respectively. In 2021, CoBank issued a one-time additional all-cash patronage distribution of $226,000, or 0.165%, of the average line of credit and loan volume outstanding in the prior year, which was in addition to the standard 0.80% patronage rate. In 2020, CoBank issued a one-time additional all-cash patronage distribution of $107,000, or 0.10%, of the average line of credit and loan volume outstanding in the prior year, which was in addition to the standard 0.80% patronage rate.

The weighted average interest rate on the lines of credit discussed above paid by the Company was 1.40% for the year ended December 31, 2021. These lines of credit, as well as the long-term debt obligations shown below, require us to abide by certain financial covenants and ratios.  As of December 31, 2021, we were in compliance with these  financial covenants.
47

Long-term debt consists of:

 
  
December 31,
  
In thousands
  
2021
    
2020
  
First mortgage bonds
            
 
            
Series R, 5.96%, due December 31, 2028
  
$
25,000
    
$
25,000
  
Series S, 4.45%, due December 31, 2033
    
7,200
      
7,800
  
Series T, 4.24%, due December 20, 2036
    
40,000
      
40,000
  
Series U, 4.71%, due January 31, 2038
    
25,000
      
25,000
  
Series V, 4.42%, due October 31, 2049
    
30,000
      
30,000
  
 
    
127,200
      
127,800
  
 
                
State revolving fund loans
                
 
                
4.48%, due August 1, 2021
    
—
      
318
  
3.57%, due September 1, 2023
    
200
      
294
  
3.64%, due May 1, 2025
    
513
      
648
  
3.41%, due February 1, 2031
    
1,735
      
1,887
  
3.40%, due July 1, 2032
    
1,729
      
1,864
  
1.187%, due November 1, 2041
    
2,585
      
—
  
 
    
6,762
      
5,011
  
Notes Payable
                
                 
Promissory Note, 5.12%, due December 30, 2028
    
10,888
      
11,279
  
                 
Sub-total
    
144,850
      
144,090
  
 
                
Less: current maturities (principal amount)
    
1,591
      
1,757
  
 
                
Total long-term debt
  
$
143,259
    
$
142,333
  

Payments of principal amounts due during the next five years and thereafter:
 
In thousands
  
2022
    
2023
    
2024
    
2025
    
2026
    
Thereafter
  
First Mortgage bonds
  
$
600
    
$
600
    
$
600
    
$
600
    
$
600
    
$
124,200
  
State revolving fund loans
    
580
      
668
      
584
      
523
      
458
      
3,949
  
Promissory note
    
411
      
433
      
454
      
480
      
505
      
8,605
  
Total payments
  
$
1,591
    
$
1,701
    
$
1,638
    
$
1,603
    
$
1,563
    
$
136,754
  

Substantially all of Artesian Water's utility plant is pledged as security for our First Mortgage Bonds.  As of December 31, 2021, no other water utility plant has been pledged as security for loans.  Two parcels of land in Artesian Wastewater are pledged as security for the promissory note.
NOTE 9

STOCK COMPENSATION PLANS

On December 9, 2015, the Company’s stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, that replaced the 2005 Equity Compensation Plan, or the 2005 Plan, which 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 of the Board of Directors, or the Committee.  The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, determine the type, size and terms of the grants, determine 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 are eligible for grants under the 2015 Plan. Non-employee directors of the Company are also eligible to receive grants under the 2015 Plan.
48
The following summary reflects changes in the shares of Class A Stock under option:

 
 
2021
Shares
 
2021
Weighted
Average
Exercise
Price
 
2020
Shares
 
2020
Weighted
Average
Exercise
Price
 
2019
Shares
 
2019
Weighted
Average
Exercise
Price
Plan options
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding at beginning of year
 
116,347
 
$
20.90
 
 
153,250
 
$
20.40
 
 
168,750
 
$
20.11
Granted
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
Exercised
 
(33,347)
 
 
19.04
 
 
(36,903)
 
 
18.83
 
 
(15,500)
 
 
17.15
Expired
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
—
Outstanding at end of year
 
83,000
 
$
21.65
 
 
116,347
 
$
20.90
 
 
153,250
 
$
20.40
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options exercisable at year end
 
83,000
 
$
21.65
 
 
116,347
 
$
20.90
 
 
153,250
 
$
20.40

The total intrinsic value of options exercised during 2021, 2020 and 2019 were $736,000, $620,000 and $334,000, respectively. During 2021, we received $635,000 in cash from the exercise of options, with a $941,000 tax benefit realized for those options.

The following table summarizes information about employee and director stock options outstanding and exercisable at December 31, 2021:

Options Outstanding and Exercisable
 
 
 
 
 
 
Range of Exercise
Price
 
Shares Outstanding at
December 31, 2021
 
Weighted Average
Remaining Life
 
Weighted Average
Exercise Price
 
Aggregate Intrinsic
Value
$
19.01 - 20.46
 
15,500
 
0.35 Years
 
$
19.01
 
$
423,460
$
20.47 - 22.66
 
67,500
 
1.85 Years
 
$
22.26
 
$
1,624,725

As of December 31, 2021, there was no unrecognized expense related to non-vested option shares granted under the 2015 Plan.  

The following summary reflects changes in the shares of Class A Stock Restricted Stock Awards (RSA):

  
2021
Shares
    
2021
Weighted
Average
Grant Date
Fair Value
    
2020
Shares
    
2020
Weighted
Average
Grant Date
Fair Value
    
2019
Shares
    
2019
Weighted
Average
Exercise
Price
  
Plan RSA’s
                                    
Outstanding at beginning of year
    
5,000
    
$
35.01
      
5,000
    
$
36.11
      
5,000
    
$
38.51
  
Granted
    
5,000
      
40.11
      
5,000
      
35.01
      
5,000
      
36.11
  
Vested/Released
    
(5,000
)
    
35.01
      
(5,000
)
    
36.11
      
(5,000
)
    
38.51
  
Cancelled
    
—
      
—
      
—
      
—
      
—
      
—
  
Unvested Outstanding at end of year
    
5,000
    
$
40.11
      
5,000
    
$
35.01
      
5,000
    
$
36.11
  

On May 4, 2021, 5,000 shares of Class A Stock were granted as restricted stock awards.  The fair value per share was $40.11, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 4, 2021.  Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.

On May 6, 2020, 5,000 shares of Class A Stock were granted as restricted stock awards.  The fair value per share was $35.01, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020.  These shares vested and were released one year after the grant date.

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. These shares vested and were released one year after the grant date.

As of December 31, 2021, there was $67,600 of total unrecognized expense related to non-vested awards of restricted shares awarded under the 2015 Plan.  The cost will be recognized over 0.34 years, the remaining vesting period for the restricted stock awards.

The total intrinsic value of awards released during 2021 was approximately $204,900.

49
NOTE 10

EMPLOYEE BENEFIT PLANS

401(k) Plan

Artesian Resources has a defined contribution 401(k) Salary Reduction Plan, or the 401(k) Plan, which covers substantially all employees.  Under the terms of the 401(k) Plan, Artesian Resources contributed 2% of eligible salaries and wages and matched employee contributions up to 6% of gross pay at a rate of 50%.  Artesian Resources may, at its option, make additional contributions of up to 3% of eligible salaries and wages. No such additional contributions were made in 2021 , 2020 or 2019.  The 401(k) Plan also provides additional retirement benefits to full-time employees hired prior to April 26, 1994, allowing them to save for future retiree medical costs that will be paid by employees by providing additional cash resources to those employees upon a termination of employment or retirement to meet the cost of future medical expenses.  These eligible employees receive an additional contribution of 6% of eligible salaries and wages. The 401(k) Plan expenses, which include Company contributions and administrative fees, for the years 2021, 2020 and 2019, were approximately $1.2 million, $1.1 million and $1.1 million, respectively.

NOTE 11

COMMITMENTS AND CONTINGENCIES

Leases

In the first quarter of 2019, the Company adopted the new standard on leases that was issued by the FASB and has applied this standard as disclosed in Note 3.

Easements

During 2003, Artesian Water Pennsylvania entered into a 40 year easement agreement to acquire an easement to access, operate, maintain, repair, improve, replace and connect Artesian’s water system to a well, including a parcel of land around the well. Management made certain estimates and assumptions regarding the separation of lease and nonlease components related to this easement agreement.  It was determined that the majority of this easement agreement contains non-lease components. Easement payments for 2021, 2020 and 2019 were $42,000, $41,000 and $40,000, respectively.

Artesian Wastewater entered into a perpetual agreement for the use of approximately 460 acres of land in Sussex County, Delaware for wastewater disposal.  Beginning November 2016, Artesian Wastewater was required to pay a minimum of $40,000 per year for the use of this land.  Once operations began in 2021, the monthly fee is based on the volume of wastewater disposed on the properties charged at a rate per one thousand gallons of wastewater, providing for a minimum monthly payment.  Payments for 2021, 2020 and 2019 were $65,000, $44,000, $44,000, respectively.  The agreement can be terminated by giving 180 day notice prior to the termination date.

Future minimum annual payments related to the easement agreements noted above for the years subsequent to 2021 are as follows:

In thousands
      
2022
  
$
59
  
2023
    
38
  
2024
    
39
  
2025
    
40
  
2026
    
41
  
2027 through 2043
    
825
  
 
  
$
1,042
  

50
Interconnections

Artesian Water has two water service interconnection agreements with a neighboring utility, Chester Water Authority.  One agreement, that expired on December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day.  The other agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day.  Rates charged under this agreement are subject to change.

Artesian Water Maryland has one interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day.  The agreement extends through June 2024.

The minimum annual purchase commitments for all interconnection agreements for 2022 through 2026, calculated at the noticed rates, are as follows:

In thousands
      
2022
  
$
1,518
  
2023
    
759
  
2024
    
730
  
2025
    
702
  
2026
    
701
  
   
$
4,410
  

Expenses for purchased water were $4.3 million, $4.3 million and $4.2 million for 2021, 2020 and 2019, respectively.

Other Commitments

In March 2017, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation to clean and paint tanks in 2017, 2018 and 2019.  Pursuant to the 3-year agreement, the expenditure committed in total for the years 2017 through 2019 was $1.3 million.  In 2020, Artesian Water entered into a short term agreement with Worldwide Industries Corporation to clean and paint a tank in 2020. Pursuant to the agreement, the expenditure in 2020 was $0.1 million. In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks.  Pursuant to the agreement, the total expenditure for the three years is $1.2 million. Tank painting expense for 2021, 2020 and 2019 was $222,000, $155,000, and $447,000, respectively.

Budgeted mandatory utility plant expenditures, due to planned governmental highway projects, which require the relocation of Artesian Water's water service mains, expected to be incurred in 2022 through 2024 are as follows:

In thousands
      
2022
  
$
4,820
  
2023
    
8,430
  
2024
    
2,420
  
   
$
15,670
  

The exact timing and extent of these relocation projects is controlled primarily by the Delaware Department of Transportation.

NOTE 12

GEOGRAPHIC CONCENTRATION OF CUSTOMERS

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water utility service to customers within their established service territory in all three counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the MDPSC and the PAPUC. As of December 31, 2021, Artesian Water was serving approximately 91,700 customers, Artesian Water Maryland was serving approximately 2,500 customers and Artesian Water Pennsylvania was serving approximately 40 customers.

Artesian Wastewater provides wastewater utility service to customers within its established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC.  As of December 31, 2021, Artesian Wastewater was serving approximately 3,200 customers, including one large industrial customer. Effective January 14, 2022, following the acquisition of TESI, the number of wastewater customers served more than doubled.  All wastewater customers are located in Sussex County, Delaware.

51
NOTE 13

REGULATORY PROCEEDINGS

Overview

Our water and wastewater utilities generate operating revenue from customers based on rates that are established by state Public Service Commissions through a rate setting process that may include public hearings, evidentiary hearings and the submission of evidence and testimony in support of the requested level of rates by the Company.

We are subject to regulation by the following state regulatory commissions:

• The DEPSC, regulates both Artesian Water and Artesian Wastewater.

• The MDPSC, regulates both Artesian Water Maryland and Artesian Wastewater Maryland.

• The PAPUC, regulates Artesian Water Pennsylvania.

Our water and wastewater utility operations are also subject to regulation under the federal Safe Drinking Water Act of 1974, or Safe Drinking Water Act, the Clean Water Act of 1972, or the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws.  These laws and regulations establish criteria and standards for drinking water and for wastewater discharges.  Capital expenditures and operating costs required as a result of water quality standards and environmental requirements have been traditionally recognized by state regulatory commissions as appropriate for inclusion in establishing rates.

Water and Wastewater Rates

Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business.  In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales.  Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect. If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest.  The timing of our rate increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase.  We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.

Other Proceedings

Delaware law permits water utilities to put into effect, on a semi-annual basis, increases related to specific types of distribution system improvements through a DSIC. This charge may be implemented by water utilities between general rate increase applications that normally recognize changes in a water utility's overall financial position. The DSIC approval process is less costly when compared to the approval process for general rate increase requests. The DSIC rate applied between base rate filings is capped at 7.50% of the amount billed to customers under otherwise applicable rates and charges, and the DSIC rate increase applied cannot exceed 5.0% within any 12-month period.

The following table summarizes (1) Artesian Water’s applications with the DEPSC to collect DSIC rates and (2) the rates upon which eligible plant improvements  are based:

Application Date
11/28/2018
05/29/2019
11/15/2019
5/29/2020
11/20/2020
DEPSC Approval Date
12/20/2018
06/18/2019
12/12/2019
6/17/2020
12/14/2020
Effective Date
01/01/2019
07/01/2019
01/01/2020
07/1/2020
01/1/2021
Cumulative DSIC Rate
5.55%
7.41%
7.50%
7.50%
7.50%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
30.4
43.1
43.1
43.1
43.1
Eligible Plant Improvements – Installed Beginning Date
10/01/2014
10/01/2014
10/01/2014
10/01/2014
10/01/2014
Eligible Plant Improvements – Installed Ending Date
10/31/2018
04/30/2019
04/30/2019
04/30/2019
04/30/2019

The rate reflects the eligible plant improvements installed through April 30, 2019.  The DSIC rate effective January 1, 2021 is still subject to audit by the DEPSC at a later date.  For the years ended December 31, 2021, December 31, 2020 and December 31, 2019, we earned approximately $5.1 million, $5.0 million and $4.3 million in DSIC revenue, respectively. 

52

NOTE 14

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 Year
  
 
Ended December 31,
  
 
  
2021
    
2020
    
2019
  
 
(in thousands)
  
 
                  
Weighted average common shares outstanding during the period for Basic computation
  
$
9,394
    
$
9,327
    
$
9,277
  
Dilutive effect of employee stock options
    
32
      
42
      
49
  
Weighted average common shares outstanding during the period for Diluted computation
  
$
9,426
    
$
9,369
    
$
9,326
  

For the years ended 2021 and 2020 no shares of restricted stock awards were excluded from the calculations of diluted net income per share. For the year ended 2019, 5,390 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 years ended 2021, 2020 and 2019, no stock options were excluded from the calculations of diluted net income per share.

The Company has 15,000,000 authorized shares of Class A Stock, and 1,040,000 authorized shares of Class B Stock. As of December 31, 2021, 8,532,795 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2020, 8,475,452 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of December 31, 2019, 8,410,246 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $1.00 per share.  

Equity per common share was $18.94, $18.16, and $17.28 at December 31, 2021, December 31, 2020, and December 31, 2019, respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on December 31, 2021, December 31, 2020, and December 31, 2019, respectively.


NOTE 15

RELATED PARTY TRANSACTIONS

Mr. Michael Houghton currently serves as a director.  During 2021, Mr. Houghton was a Partner in the law firm of Morris Nichols Arsht & Tunnell, 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 $191,000, $386,000 and $253,000 was paid to MNAT during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively, for legal and director related services.  As of December 31, 2021, the Company had a $16,000 accounts payable balance due to MNAT.

As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5% of any class of the Company's voting securities or any other related person that would potentially require disclosure.  In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in the transactions; the satisfactory performance of work contracted with the related party prior to the election of Mr. Houghton as a director; and the material terms of the transactions, including, without limitation, the amount and type of transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company. The Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders.

53
NOTE 16

BUSINESS COMBINATIONS

As part of the Company’s growth strategy, on April 2, 2020, Artesian Water purchased substantially all of the water system operating assets from the Town of Frankford, or Frankford, a Delaware municipality located in Sussex County, Delaware, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System.  The Frankford Water System serves approximately 360 customers.  The total purchase price was $3.6 million. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations”.  The purchase price allocation is primarily attributed to utility plant assets.  The Company utilized a combination of three methods to determine the reasonableness of the purchase price: the cost approach, market approach and income approach.  Given the majority of the assets acquired were tangible utility plant, the Company utilized the cost approach to record the fair value of the assets.  The cost approach values the underlying assets to derive market value based on the estimated current new replacement cost, less the loss in value caused by physical deterioration, and functional and economic obsolescence of the assets.  Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure.  In 2021, a regulatory adjustment was made to account for $1.5 million of Delaware Drinking Water State Revolving Fund loan proceeds automatically forgiven in July 2021.  A portion of the adjustment offset the purchase price and recognition of goodwill, with the remainder recorded as contributions in aid of construction.

Additionally, as part of the Company’s growth strategy, on August 3, 2020, Artesian Water completed its purchase of substantially all of the water system operating assets from the City of Delaware City, or Delaware City, a Delaware municipality located in New Castle County, Delaware, including the right to provide water service to Delaware City’s existing customers, or the Delaware City Water System.  The Delaware City Water System currently serves approximately 800 customers.  The total purchase price was $2.1 million.  The acquisition was accounted for as a business combination under ASC Topic 805.  The purchase price allocation was finalized in early 2021 and was primarily attributed to utility plant assets. The final purchase price allocation did not change materially compared to the preliminary allocation.   The Company utilized similar valuation methodologies to those described above.

A summary of the allocation of purchase price to the assets acquired is presented in the table below and is recorded in the accompanying Consolidated Balance Sheet.

(In thousands)
      
Utility plant
      
  Source of supply plant
  
$
201
  
  Pumping and water treatment plant
    
1,455
  
  Transmission and distribution plant
    
3,462
  
Other deferred assets
        
  Goodwill
    
623
  
Purchase Price
  
$
5,741
  

The Frankford Water System acquisition and the Delaware City Water System acquisition were approved by the DEPSC on March 18, 2020 and July 15, 2020, respectively, subject to the DEPSC determining the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Water’s next base rate case.  The pro forma effects of the businesses acquired, individually and in the aggregate, are not material to the Company’s financial position or results of operations.
NOTE 17

LEGAL PROCEEDINGS

Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot assure 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.

54
NOTE 18

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued new guidance that provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from reference rates that are expected to be discontinued, such as the London Inter-bank Offered Rate, or LIBOR.  The guidance was effective upon issuance and may be applied prospectively to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected.  It is expected that the LIBOR rate will no longer be published for most currencies as of December 31, 2021, however, publication for USD currency should continue through June 30, 2023.  As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans.  LIBOR is expected to be phased out completely by June 30, 2023.  As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans.  The guidance is optional and may be elected over time as reference rate reform activities occur.  In light of this eventuality, one of the banks with which we have a line of credit arrangement, currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate.  The Company is evaluating the impact of the new guidance on our financial position, results of operations and cash flows.

In November 2021, the FASB issued new guidance to increase transparency in financial reporting by requiring business entities to disclose, in notes to their financial statements, information about certain types of government assistance they receive.  The amendments are effective for financial statements issued for annual periods beginning after December 15, 2021.  Management does not anticipate a material impact on our notes to financial statements related to possible government assistance received in future reporting periods.

NOTE 19

SUBSEQUENT EVENTS

On January 14, 2022, Artesian Wastewater Management completed its agreement to acquire Tidewater Environmental Services, Inc., or TESI, a wholly-owned subsidiary of Middlesex Water Company, or Middlesex, that provides regulated wastewater services in Delaware.  Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million intercompany note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware.  The Delaware Public Service Commission approved this transaction with TESI on October 27, 2021. The Company is still gathering information related to this acquisition and will record the preliminary purchase price allocation in the first quarter of 2022 and finalize the allocation by the end of 2022, once the valuation of assets acquired has been completed..

On February 7, 2022, 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 25 years and a fixed interest rate of 4.43% per annum, or the Fixed Rate, for the Bond.  The Agreement is effective through May 7, 2022, 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, with any additional proceeds 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.

On February 16, 2022, Artesian Water Company signed an agreement, or the Asset Purchase Agreement, to purchase from the Town of Clayton, a Delaware municipality, or Clayton, substantially all of the operating assets of Clayton’s water system, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Water System.  Pursuant to the terms of the Asset Purchase Agreement, Clayton shall transfer to Artesian Water all of Clayton’s right, title and interest in and to substantially all of the municipal water utility, plant and equipment, associated real property, contracts, easements and permits possessed by Clayton at closing related to the Water System.  The total purchase price is $5.0 million, less the current payoff amount of any secured debt or debt associated with the Water System.  Closing on this transaction is pending due diligence and approval by the Delaware Public Service Commission related to the transfer of exclusive franchise territory.  The Asset Purchase Agreement contains customary representations, warranties, covenants and closing conditions for agreements of like type.
55

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Artesian Resources Corporation
Newark, Delaware

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Artesian Resources Corporation (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, cash flows and changes in stockholders’ equity, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of Tangible Assets in Business Combinations

As described in Notes 1 and 16 to the consolidated financial statements, the Company acquired the municipal water system of Delaware City.  As of December 31, 2020, the accounting for the transaction was preliminary. The Company finalized the purchase price accounting during 2021, allocating the total consideration of $2.1 million to identifiable tangible utility plant assets. Management estimated fair value of the tangible assets acquired using the cost method with assistance from third-party valuation specialists.

We identified the valuation of the tangible utility plant assets as a critical audit matter. Management’s determination of fair value of the tangible assets acquired using the cost method required management to make significant estimates and assumptions related to economic lives of the assets, replacement costs, and physical characteristics of the tangible assets acquired. Auditing these elements involved a high degree of subjectivity, auditor judgment and an increased extent of effort when performing audit procedures, including the use of our valuation specialists.

The primary procedures we performed to address this critical audit matter included:
•
Assessing the reasonableness of significant underlying assumptions used to calculate the fair value through (i) validating the existence of acquired assets and the reasonableness of attributes such as length and age based on external data, (ii) independently recalculating replacement costs using recent actual costs for similar assets and construction quotes, and (iii) performing procedures to evaluate the appropriateness of the useful lives assigned to the newly acquired assets.
•
Utilizing personnel with specialized knowledge and skill in valuation to assist in the evaluation of the assumptions and methodologies used in the preparation of the fair value measurements for the utility plant assets.


/s/ BDO USA, LLP

We have served as the Company's auditor since 2005.

Wilmington, Delaware
March 11, 2022
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in providing reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  In addition, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to achieve the foregoing objectives. A control system cannot provide absolute assurance, however, that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b)  Management’s Annual Report on Internal Control Over Financial Reporting

The Management of Artesian Resources Corporation is responsible for establishing and maintaining adequate internal control over its financial reporting.  Artesian Resources Corporation’s internal control over financial reporting is a process designed under the supervision of the Corporation’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Artesian Resources Corporation’s Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control Integrated Framework (2013).”  Based on this assessment, Management determined that at December 31, 2021, the Corporation’s internal control over financial reporting was effective.

(c)  Change in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting, occurred during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Date: March 11, 2022

CHIEF EXECUTIVE OFFICER:
 
CHIEF FINANCIAL OFFICER:
 
 
 
 
 
/s/ DIAN C. TAYLOR
 
/s/ DAVID B. SPACHT
 
Dian C. Taylor
 
David B. Spacht
 

ITEM 9B. OTHER INFORMATION

None.

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

57

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Name
Age
Position
 
 
 
Dian C. Taylor
76
Biography: Director since 1991 - Chair of the Board since July 1993, and Chief Executive Officer of Artesian Resources Corporation and its subsidiaries since September 1992. Ms. Taylor has been employed by the Company since August 1991. She was formerly a consultant to the Small Business Development Center at the University of Delaware from February 1991 to August 1991 and Owner and President of Achievement Resources Inc. from 1977 to 1991. Achievement Resources, Inc. specialized in strategic planning, marketing, entrepreneurial and human resources development consulting. Ms. Taylor was a marketing director for SMI, Inc. from 1982 to 1985. Ms. Taylor is the aunt of John R. Eisenbrey, Jr. and Nicholle R. Taylor. She serves on the Executive and Strategic Planning, Budget and Finance Committees.
 
Qualifications:  Ms. Dian Taylor has over 25 years of experience as Chief Executive Officer and President of the Company, during which the Company has continuously expanded its service area. Ms. Taylor has extensive knowledge of the complex issues facing smaller companies and prior strategic planning expertise. Ms. Taylor has served as President of the National Association of Water Companies, a trade organization of the investor-owned water utility industry. Ms. Taylor also has served on the Delaware Economic and Financial Advisory Council, on the Board of Governors of the Delaware State Chamber of Commerce, on the Executive Committee of the Delaware Business Round Table, the American Heart Association, the Committee of 100 and the Delaware Council on Economic Education, as a Regional Advisory Board Member for Citizens Bank, a Trustee of the Delaware Grand Opera and the Christiana Care Hospital and as a Commissioner for the Delaware River and Bay Authority. The Board views Ms. Taylor’s experience with various aspects of the utility industry and her demonstrated leadership roles in business and community activities as important qualifications, skills and experiences for the Board of Directors’ conclusion that Ms. Taylor should serve as a director of the Company.
 
Kenneth R. Biederman Ph. D.
78
Biography:  Director since 1991 - Currently retired and former Professor of Finance at the Lerner College of Business and Economics of the University of Delaware, from May 1996 to May 2011. Interim Dean of the College of Business and Economics of the University of Delaware from February 1999 to June 2000.  Dean of the College of Business and Economics of the University of Delaware from 1990 to 1996.  Former Director of the Mid-Atlantic Farm Credit Association from 2006 to 2010.  Director of Chase Manhattan Bank USA from 1993 to 1996.  Formerly a financial and banking consultant from 1989 to 1990 and President of Gibraltar Bank from 1987 to 1989.  Previously Chief Executive Officer and Chairman of the Board of West Chester Savings Bank; Economist and former Treasurer of the State of New Jersey and Staff Economist for the United States Senate Budget Committee. He serves on the Executive; Audit; Strategic Planning, Budget and Finance; Governance and Nominating; and Compensation Committees. 
 
Qualifications:  Mr. Biederman’s experience as a former State Treasurer of New Jersey and the former Dean of the Lerner College of Business and Economics at the University of Delaware gives him a substantial amount of business, economic and financial reporting knowledge.
 
 
 
John R. Eisenbrey, Jr.
66
Biography:  Director since 1993 – Small Business Executive.  For more than 40 years, Owner and President of Bear Industries, Inc., a contracting firm providing building fire sprinkler protection installations for businesses throughout the Delmarva Peninsula.  In 2021, Mr. Eisenbrey was appointed to the Board of Trustees of St. Andrews School.  Mr. Eisenbrey is the nephew of Dian C. Taylor and the cousin of Nicholle R. Taylor.  He serves on the Audit; Governance and Nominating; and Compensation Committees.
 
Qualifications:  The Board of Directors has determined that Mr. Eisenbrey’s hands-on experience as a business owner in one of our primary geographic regions qualifies him to be a member of the Board.  For more than 40 years, Mr. Eisenbrey has been the Owner and President of a privately held contracting firm providing fire sprinkler protection installations for businesses throughout the Delmarva Peninsula.  Mr. Eisenbrey is a past President of the Delaware Contractors Association.  Mr. Eisenbrey’s operating business background provides experience with operational, technical and regulatory matters also applicable to our water business.
 
58

Michael Houghton, Esq.
65
Biography:  Director appointed September 2018 – Mr. Houghton retired as of January 1, 2022 as Senior Partner in the law firm of Morris Nichols Arsht & Tunnell in Wilmington, Delaware. He was admitted to practice law in Delaware in 1982, before the U.S. District Court for the District of Delaware in 1983 and before the U.S. Court of Appeals for the Third Circuit in 1985. He served a clerkship with the Delaware Court of Chancery in 1982-1983.  Mr. Houghton’s legal expertise involved the representation of governmental entities, such as the Delaware River & Bay Authority.  He also represented banks, trust companies, insurance companies and public utilities in commercial transactions and before regulatory authorities and state, county and local governments and in legislative and public policy matters before Delaware government. Mr. Houghton has also advised numerous entities, including Fortune 500 companies, on unclaimed property issues and has represented numerous companies in connection with unclaimed property audits. He was selected for inclusion in The Best Lawyers in America from 2009-2020. Mr. Houghton is a member of the Board of Governors of the Delaware State Chamber of Commerce and the Boards of the Delaware Public Policy Institute, the Pete du Pont Freedom Foundation and the Rockefeller Trust Company of Delaware. He is a member of the Board of the Delaware Bar Foundation,  a Trustee of the Uniform Law Foundation,  a Past President of the Delaware State Bar Association and a Past President the National Conference of Commissioners on Uniform State Laws. He was appointed in 2017 by Delaware Governor John Carney to serve as Chair of the Delaware Economic and Financial Advisory Council.
 
Qualifications:  Mr. Houghton’s legal and regulatory experience and extensive involvement in Delaware legislative and public policy matters are attributes that provide valuable insight and benefit as the Company continues its growth in Delaware. The Board has determined that Mr. Houghton’s more than 35 years of experience makes him well qualified to serve on the Board.
     
Nicholle R. Taylor
54
Biography:  Director since 2007 – President of Artesian Water Company, Inc. since August 2021.  Senior Vice President of Artesian Resources Corporation and its subsidiaries since May 9, 2012 and Chief Operating Officer of Artesian Water Company from August 2019 through August 2021. She was Vice President of Artesian Resources Corporation and its subsidiaries from May 2004 to May 2012.  Ms. Taylor has been employed by the Company since 1991 and has held various management level and operational positions within the Company.  She serves on the Strategic Planning, Budget and Finance Committee. Ms. Taylor is the niece of Dian C. Taylor and the cousin of John R. Eisenbrey, Jr.
 
Qualifications:  Ms. Nicholle Taylor has over thirty years of experience with the Company in a variety of field, office and managerial positions.  The Board of Directors has determined that the range of her experience across various company functions gives her a clear perception of how the Company operates, thus enhancing the Board’s ability to know the Company’s current capabilities and limitations, and qualifies her to serve as a director.  Ms. Taylor serves as Chair on the Board of Directors of the National Association of Water Companies, a trade organization of the investor-owned water utility industry.  Ms. Taylor also currently serves on the Board of Directors of the Committee of 100, which is a business organization that promotes responsible economic development in the state of Delaware.  In 2019, Ms. Taylor was appointed to the Board of Directors of the Delaware Nature Society, a non- profit organization dedicated to connecting people with the natural world to improve the environment through education, advocacy and conservation.
 
 
 
William C. Wyer
75
Biography:  Director since 1991 - Business Consultant with Wyer Group, Inc. since September 2005.  Previously, Mr. Wyer served as Managing Director of Wilmington Renaissance Corporation (formerly Wilmington 2000) from January 1998 to August 2005.  Wilmington Renaissance Corporation was a private organization seeking to revitalize the City of Wilmington, Delaware.  Mr. Wyer served as a Director and member of the Audit Committee of GMAC Bank and its’ successor National Motors Bank, FBS from August 2001 through 2008, President of All Nation Life Insurance, Senior Vice President of Blue Cross/Blue Shield of Delaware from September 1995 to January 1998, Managing Director of Wilmington 2000 from May 1993 to September 1995 and President of Wyer Group, Inc. from 1991 to 1993 and Commerce Enterprise Group from 1989 to 1991, both of which are management-consulting firms specializing in operations reviews designed to increase productivity, cut overhead and increase competitiveness, and President of the Delaware State Chamber of Commerce from 1978 to 1989.  He serves on the Executive; Audit; Strategic Planning, Budget and Finance; Governance and Nominating; and Compensation Committees.
 
Qualifications:  Mr. Wyer has extensive management experience with both local and national organizations that facilitates the Company’s growth from a local to a regional provider of water and wastewater services.  Mr. Wyer’s extensive experience in economic development efforts and as President of the Delaware State Chamber of Commerce and his associated skills in public, media and governmental communications were determined by the Board of Directors to qualify him to serve as a director.
 
Pierre A. Anderson
 
43
Chief Information Officer and Senior Vice President of Artesian Resources Corporation and its subsidiaries since May 19, 2021.  Mr. Anderson previously served as Vice President of Information Technologies of Artesian Resources Corporation and its subsidiaries from May 2012 to May 2021, Director of Information Technologies from April 2008 to May 2012, and Manager of Information Technologies from December 2006 to April 2008. Prior to joining the Company, Mr. Anderson was employed by the Christina School District as Manager, Project & Support Services.  From 2000 to 2005, while with MBNA (now Bank of America), he served in several information technology roles. He received his Bachelors of Science degree in Computer Science from Delaware State University and both an MBA and Masters of Science in Information Systems & Technology Management from the University of Delaware’s Lerner College of Business & Economics.
 
Mr. Anderson serves on the Boards of Easterseals of Delaware & Maryland’s Eastern Shore (Treasurer), Delaware State Chamber of Commerce, University of Delaware’s Lerner College Alumni, Bancroft Construction Company, and by gubernatorial appointment to the Delaware Economic & Forecasting Advisory Council (DEFAC).
     
Joseph A. DiNunzio, CPA, CGMA
59
Executive Vice President and Secretary of Artesian Resources Corporation and Subsidiaries since May 2007 and President of Artesian Water Maryland, Inc. since May 2017.  Mr. DiNunzio previously served as Senior Vice President and Secretary since March 2000 and as Vice President and Secretary since January 1995.  He served as Secretary of Artesian Resources Corporation and Subsidiaries from July 1992 to January 1995.  Prior to joining Artesian in 1989, Mr. DiNunzio was employed by PriceWaterhouseCoopers LLP.  He earned a B.S. in Commerce, with concentration in accounting, from the McIntire School of Commerce at the University of Virginia.
Mr. DiNunzio is Past Chairman of the Board of the Cecil County Chamber of Commerce and a member of the Board of the Cecil Business Leaders.  He is Past Chairman of the Delaware Chapter of the National Association of Water Companies.   Mr. DiNunzio is a member of the Cecil County Maryland Economic Development Commission, Delaware Water Supply Coordinating Council, the Delaware Source Water Assessment and Protection Program’s Citizens and Technical Advisory Committee, the American Institute of Certified Public Accountants, the Pennsylvania Institute of Certified Public Accountants, and was a member of the 2003 Delaware Legislative Drinking Water Task Force.

 
 
 
Jennifer L. Finch, CPA
53
Senior Vice President of Finance & Corporate Treasurer of Artesian Resources Corporation & Subsidiaries since November 2020.  Prior to that, Ms. Finch was the Assistant Treasurer and Vice President of Finance.  Ms. Finch is responsible for the oversight of all aspects of accounting and tax‐related matters, corporate financing, and serves as the principal accounting officer. 
Prior to joining Artesian in 2008, Ms. Finch held various accounting positions for Handler Corporation, a homebuilder and developer located in Wilmington, Delaware, where she worked for 14 years.  She has more than 30 years of accounting, auditing and tax experience.
 
 
 
     
David B. Spacht
62
Chief Financial Officer of Artesian Resources Corporation and Subsidiaries since January 1995 and President of Artesian Wastewater Management, Inc. since August 2019.  Mr. Spacht joined the Company in 1980 and has held various executive and management level positions.  Mr. Spacht has worked closely with the Public Service Commission for over 35 years on developing rates and regulations in Delaware. He has also worked closely with the Maryland Public Service Commission developing rates and regulations as a result of filing for acquisitions. He was selected by the National Association of Regulatory Utility Commissioners Subcommittee on Water as an instructor for their semi-annual course on rate making. 
Mr. Spacht is a member of several national and local organizations, including the National Association of Water Companies, having served on their Finance Committee for 32 years, and most recently in 2015 joining the Rate and Regulatory Committee; the American Water Works Association; the National Association of Regulatory Utility Commissioners; the International Organization of Management Accountants; and Special Olympics Delaware.
 
 
 
John M. Thaeder
63
Senior Vice President of Operations.  Mr. Thaeder has served as an officer since February 1998.  He currently serves as an officer of Artesian Resources Corporation and Subsidiaries.   Prior to joining the company, Mr. Thaeder was with Hydro Group, Inc. from 1996 to 1998 as Southeastern District Manager of Sales and Operations from Maryland to Florida.  During 1995 and 1996, he was Sales Manager of the Northeast Division with sales responsibilities from Maine to Florida.  Previously, he served as District Manager of the Layne Well and Pump Division of Hydro Group.
 
 
 
59
Corporate Governance

The executive officers are elected or approved by our Board, or the Board of our appropriate subsidiary, to serve until his or her successor is appointed or shall have been qualified or until earlier death, resignation or removal.

In accordance with the provisions of the Company's By-laws, the Board is divided into three classes. Members of each class serve for three years and one class is elected each year to serve a term until his or her successor shall have been elected and qualified or until earlier resignation or removal.  Nicholle R. Taylor has been nominated for election to the Board of Directors at the shareholders Annual Meeting to be held May 4, 2022.

The Board, which met thirteen times in 2021, has established five standing committees: the Executive Committee, the Audit Committee, the Compensation Committee, the Strategic Planning, Budget and Finance Committee, and the Governance and Nominating Committee. Information with respect to these committees is set forth below. In addition, the charter for each of the five standing committees of the Board is available on our website, www.artesianwater.com.

Dian C. Taylor, the Company's Chief Executive Officer, also serves as Chair of the Board. The Board, after considering the size of the Company and the composition of the Board, has determined that the combined structure is appropriate. The Board has determined that having one person serving as Chair of the Board and Chief Executive Officer ensures a unified leadership of the Board and management and provides potential efficiency in the execution of the strategies and visions of the Board and management. The Board believes that Ms. Taylor's experience and operational knowledge of the business enables her to effectively perform both roles. Given the limited number of Board members and the practice of open communication with the entire Board, the Company does not have a lead independent director. The Board meets as often as needed and at least twice a year in executive session without any management or non-independent directors present. The Board believes this is an appropriate structure for the Company which provides the appropriate independent oversight. In addition, the Audit Committee and the Compensation Committee regularly consult with the Company's General Counsel to review the various types of risks that affect the Company and to consult on strategies to anticipate such risks. The Board believes this structure has been effective. The Board meets with management on a regular basis to review operational reports, financial updates, strategic development and other matters. Frequent meetings help to promote and ensure open communication with the management team. All Board members are engaged and remain actively involved in their oversight roles. The Board is responsible for oversight of the Company's risk management process. The senior management team is responsible for identifying risks, managing risks and reporting and communicating risks back to the Board.

Director Compensation

In May 2021, each independent director received an annual retainer fee of $37,250 paid in advance.  Dian C. Taylor and Nicholle R. Taylor received annual retainer fees of $34,600. The chair of the Audit Committee received an additional annual retainer of $9,000.  The chair of the Corporate Governance and Nominating Committee received an additional annual retainer of $9,000. The chair of the Compensation Committee received an additional annual retainer of $7,000. The members of the Strategic Planning, Budget and Finance Committee each received additional annual retainers of $3,000.  The members of the Executive Committee each received additional annual retainers of $1,000. Each director received $2,000 for each Board meeting attended, $1,500 for each committee meeting attended on the day of a regular board meeting and $2,000 for each committee meeting attended on any other day.  Each director received $500 per diem for workshops.

In 2021, our directors, other than Dian C. Taylor and Nicholle R. Taylor, whose fees as director are included in the Summary Compensation Table, received the following compensation::

60

Director Compensation Table

Name
 
  
Fees Earned or
Paid in
Cash
($)
    
Stock
Awards
($)(1)
    
All other Compensation
($)(2)
    
Total
($)
  
Kenneth R. Biederman
    
93,250
      
40,110
      
---
      
133,360
  
John R. Eisenbrey, Jr.
    
92,250
      
40,110
      
---
      
132,360
  
Michael Houghton
    
71,750
      
N/A
      
---
      
71,750
  
William C. Wyer
    
91,250
      
40,110
      
12,696
      
144,056
  
 
(1)
On May 4, 2021, each director, other than Mr. Houghton, received a restricted stock award of 1,000 shares of Class A Stock. The fair market value per share was $40.11, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 4, 2021.  The restricted shares vest one year from the date of grant.  The aggregate number of stock options and restricted shares outstanding at December 31, 2021 for each director is:

 
  
Option Shares Outstanding at December 31, 2021
    
Restricted Shares Outstanding at December 31, 2021
  
Kenneth R. Biederman
 
    
13,500
      
1,000
  
John R. Eisenbrey, Jr.
 
    
13,500
      
1,000
  
William C. Wyer
 
    
20,250
      
1,000
  

(2)
$9,678 was for medical insurance premiums for Mr. Wyer and his spouse, $3,000 was for a physical for Mr. Wyer and $18 was for life insurance premiums for Mr. Wyer.

Compensation Committee Interlocks and Insider Participation

During the year ended December 31, 2021, the members of our Compensation Committee were Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C. Wyer. None of our executive officers serves as a director or as a member of the compensation committee, or any other committee serving an equivalent function, of any entity that has one or more of its executive officers serving as members of our Compensation Committee or as a director of our Board.  No member of our Compensation Committee has ever been our employee. 
61

Independence

In 2021, the Board of Directors determined that Messrs. Biederman, Eisenbrey, Houghton and Wyer, a majority of the Board of Directors, met the independence requirements prescribed by the listing standards of the Nasdaq Global Select Market. 

Audit Committee

The Audit Committee reviews the procedures and policies relating to the internal accounting procedures and controls of the Company, and provides general oversight with respect to the accounting principles employed in the Company's financial reporting. As part of its activities, the Audit Committee meets with representatives of the Company's management and independent accountants. The Audit Committee has considered the extent and scope of non-audit services provided to the Company by its outside accountants and has determined that such services are compatible with maintaining the independence of the outside accountants. The Audit Committee appoints and retains the Company's independent accountants. The Audit Committee consists of Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C. Wyer. The Board of Directors has also determined that each member of the Audit Committee meets the independence requirements prescribed by the listing standards of the Nasdaq Global Select Market and the rules and regulations of the Securities and Exchange Commission. The Board of Directors has further determined that Mr. Biederman, a member of the Audit Committee, is an "audit committee financial expert" as such term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the Securities and Exchange Commission. During 2021, the Audit Committee met five times.

Compensation Committee

The Compensation Committee reviews the compensation and benefits provided to key management employees, officers and directors and makes recommendations as appropriate to the Board. The Compensation Committee also determines whether and what amounts should be granted under the 2015 Equity Compensation Plan, or the 2015 Plan, and may make recommendations for amendments to the 2015 Plan. The Compensation Committee is comprised of Kenneth R. Biederman, John R. Eisenbrey, Jr. and William C. Wyer, three independent directors. The Board of Directors has also determined that each member of the Compensation Committee meets the independence requirements prescribed by the listing standards of the Nasdaq Global Select Market and the rules and regulations of the Securities and Exchange Commission. During 2021, the Compensation Committee met two times.

Consideration of Director Candidates

The Governance and Nominating Committee is comprised of four independent directors, Kenneth R. Biederman, John R. Eisenbrey, Jr., Michael Houghton and William C. Wyer. As part of the formalized nominating procedures, the committee makes recommendations for director nominations to the full Board. Director candidates nominated by stockholders are considered in the same manner, provided the nominations are submitted to the Secretary and copied to the Chairman of the committee on a timely basis and in accordance with the Company's By-laws. Nominations for the election of directors for the 2022 Annual Stockholders' Meeting were approved by the Governance and Nominating Committee on January 25, 2022.

The Governance and Nominating Committee has determined that no one single criterion should be given more weight than any other criteria when it considers the qualifications of a potential nominee to the Board. Instead, it believes that it should consider the total "skills set" of an individual. In evaluating an individual's skills set, the Governance and Nominating Committee considers a variety of factors, including, but not limited to, the potential nominee's background and education, his or her general business experience, and whether or not he or she has any experience in positions with a high degree of responsibility. In addition, although the Governance and Nominating Committee does not have a policy with regard to the consideration of diversity in identifying director nominees, its charter includes in the Governance and Nominating Committee's duties and responsibilities that it seek members from diverse backgrounds so that the Board consists of members with a broad spectrum of experience and expertise.

Code of Ethics

The Company has adopted a code of ethics applicable to its chief executive officer, chief financial officer, controller or principal accounting officer, and any person who performs a similar function, which is a "code of ethics" as defined by applicable rules of the Securities and Exchange Commission. This code is publicly available on the Company's website at www.artesianwater.com. If the Company makes any amendments to this code other than technical, administrative, or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of this code to the Company's chief executive officer, chief financial officer, controller or principal accounting officer, and any person who performs a similar function, the Company will disclose the nature of the amendment or waiver, its effective date and to whom it applies on its website. The information on the website listed above is not and should not be considered part of this Annual Report on Form 10-K and is intended to be an inactive textual reference only.
62
Board Diversity

We believe it is important that our Board is composed of individuals reflecting the diversity represented by our employees, our customers, and our communities. We provide below enhanced disclosure regarding the diversity of our Board as required by the listing standards of the NASDAQ Capital Market.
 
Board Diversity Matrix (As of March 1, 2022)
Total Number of Directors
6
 
Female
Male
Non-
Binary
Did Not
Disclose
Gender
Part I: Gender Identify
 
Directors
2
4
    
Part II: Demographic Background
 
African American or Black
        
Alaskan Native or Native American
        
Asian
        
Hispanic or Latinx
        
Native Hawaiian or Pacific Islander
        
White
2
4
    
Two or More Races or Ethnicities
        
LGBTQ+
  
Did Not Disclose Demographic Background
  


ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

This discussion describes the Company's compensation program for its named executive officers listed in the Summary Compensation Table that immediately follows this discussion.  The named executive officers are: Dian C. Taylor, Chair, President & Chief Executive Officer; David B. Spacht, Chief Financial Officer; Joseph A. DiNunzio, Executive Vice President & Secretary; Nicholle R. Taylor, Senior Vice President and Jennifer L. Finch, Corporate Treasurer and Senior Vice President of Finance & Treasurer.

Objectives of the Company’s Compensation Program

The Compensation Committee believes that the compensation for the Company’s executives should serve to attract, motivate and retain seasoned and talented executives responsible for successfully guiding and implementing the Company's strategy.  Our strategy is to increase our customer base, revenues, earnings and dividends by expanding our services across the Delmarva Peninsula, thereby providing our shareholders with a long-term, satisfactory return on their investment.

To implement our strategy, it is critical that our executives remain focused on:

• ensuring superior customer service;
• continuously improving our efficiency and performance;
• managing risk appropriately;
• expanding our franchised service territory and customer base at a consistent and sustainable rate - including by acquisitions - where growth is strong and demand is increasing;
• identifying and developing dependable sources of supply;
• constructing and maintaining reliable treatment facilities and water delivery and wastewater collection systems;
• developing and continuing positive relationships with regulators, municipalities, developers and customers in both existing and prospective service areas; and
• developing a skilled and motivated work force that is adaptive to change.
63

To accomplish our strategy, our compensation program's objectives are to:

• provide compensation levels that are competitive with those provided by other companies with which we may compete for executive talent;
• motivate and reward contributions and performance aligned with the Company's objectives;
• attract and retain qualified, seasoned executives; and
• ensure the Company maintains a pay-for-performance executive compensation program.

The compensation program rewards overall qualitative contributions and performance of each individual towards the Company's strategy.  In reviewing the Company's overall compensation program in the context of the risks identified in the Company's risk management processes, the Compensation Committee does not believe that the risks the Company faces are correlated with the Company's compensation programs. Therefore, the Compensation Committee believes that there is an appropriate level of risk in the Company’s compensation program design and does not believe that its approach to the design and administration of its incentive programs needs to change in order to mitigate compensation risk.

Elements of the Company’s Compensation Program

The elements of the Company’s compensation program include:

• Base Salary
• Cash Bonus Award
• Equity Compensation as may be awarded under the 2015 Equity Compensation Plan
• Employee Benefits

The Company's executive compensation program does not provide for:

• Severance or post-termination agreements
• Post-retirement benefits
• Defined benefit pension benefits or any supplemental executive retirement plan benefits
• Non-qualified deferred compensation
• Change-in-Control agreements

Compensation Process

The Compensation Committee relies on various factors in determining executive compensation, including the overall financial performance of the Company, combined with an executive officer's individual performance, progress in meeting strategic corporate objectives, and changes in responsibilities, as well as the consideration of elements of compensation not provided for by the Company in comparison to its peers.  The Compensation Committee generally exercises broad discretion in setting the compensation of the Chief Executive Officer and other executives and primarily considers the performance of the management team as a group, the Chief Executive Officer's assessment of other executives' performance and compensation recommendations with respect to the other executive officers as part of its process.

The Compensation Committee engaged Pearl Meyer & Partners as a compensation consultant in 2013 to provide it with independent advice on executive compensation matters.  They did not develop a public company peer group as part of their compensation benchmarking exercise, as they found few similarly sized, publicly traded water utilities.  They used data available from a peer group of water utility companies to review incentive plan market practices and to establish industry practices, but did not use the pay data from these organizations given that the size of many are substantially larger than the Company.  This peer group includes American States Water Company; American Water Works Company, Inc.; Essential Utilities, Inc.; California Water Service Group; Middlesex Water Company; SJW Group and York Water Company.  This peer group has been used since 2013, and the Company believes it is appropriate to continue the use of this peer group for comparing the percentage change in cumulative shareholder returns and for consideration of elements of compensation not provided for by the Company.
64
Base Salary

Base salaries for Company executives are set at levels considered appropriate to attract and retain seasoned and talented personnel.  In 2021, the Compensation Committee increased the base salary of each of the named executive officers by 3%.

The Compensation Committee determines actual base salaries for each executive other than the Chief Executive Officer based upon:

• recommendations provided by the Chief Executive Officer;
• internal equity with other executives and Company personnel;
• individual executive performance; and
• individual contributions to the Company's strategic objectives.

The Compensation Committee considers the same factors in determining the base salary of the Chief Executive Officer, without any recommendation by the Chief Executive Officer.  The Chief Executive Officer was not present during deliberations on her compensation.

Cash Bonus and Equity Compensation Awards

Annually, the Compensation Committee determines whether any Cash Bonus and/or Equity Compensation Awards should be granted to any of the executives.  The Cash Bonus and Equity Compensation Awards are intended to reward executives for their contributions towards meeting the Company's strategic objectives.  Cash Bonus and Equity Compensation Awards are entirely discretionary and are based upon a qualitative assessment conducted by the Compensation Committee in the case of the Chief Executive Officer and by the Compensation Committee and the Chief Executive Officer in the case of other executives.  Recognizing both the executive team's and each individual named executive officer’s contributions toward meeting the Company's strategic objectives, cash bonuses were awarded to the Chief Executive Officer and named executive officers in 2021, 2020, and 2019.


Other Compensation

Both Dian C. Taylor and Nicholle R. Taylor received compensation for their services as Directors, which compensation was equivalent to that provided to all other directors for Board and Committee meeting fees and less for retainers.  See "Director Compensation."

The Company’s named executive officers are eligible to participate in the same employee benefit plans and on the same basis as other Company employees, with the exception that executive officers are reimbursed for eligible medical expenses not otherwise covered by the Company's medical insurance plan under the Officer's Medical Reimbursement Plan.  Amounts reimbursed are included in the "All Other Compensation" column in the Summary Compensation Table that follows this discussion.

The Role of Management in the Executive Compensation Process

Our Director of Human Resources typically assists the Compensation Committee by preparing and providing information showing:

• current executive compensation levels;
• executive compensation recommendations made by the Chief Executive Officer;
• salary grade minimum, midpoint and maximums for each executive, based on information provided by the Company's compensation consultant retained in 2013, adjusted annually; and
• actual base salary, cash bonus and equity compensation for each of the prior three years for each executive.

Our Chief Executive Officer meets with the Compensation Committee and provides input regarding the contributions of each executive towards the Company's strategic objectives and each executive's overall performance that formed the basis for her recommendations to the Compensation Committee.  The final decisions regarding compensation for each executive are made by the Compensation Committee. Please refer to Compensation Committee Interlocks and Insider Participation section for more information.

 Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on the review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company's Annual Report on Form 10-K.

 
The Compensation Committee,
 
 
 
William C. Wyer, Chairman
 
Kenneth R. Biederman
 
John R. Eisenbrey, Jr.
65
CEO Pay Ratio

The 2021 compensation disclosure ratio of the median annual total compensation of all Company employees to the annual total compensation of the Company’s Chief Executive Officer is as follows:

  
2021 Total Compensation
  
 
Median employee total annual compensation
 
  
$
87,764
  
Annual total compensation of Dian C. Taylor, CEO
 
  
$
940,287
  
Ratio of CEO to median employee compensation
  
11:1
  

For simplicity, we identified the median employee by examining the base annual salary for all individuals, excluding our CEO, who were employed by us on October 31, 2020.  We included all employees, whether employed on a full-time, part-time, or seasonal basis.  We believe that the use of base annual salary compensation, excluding overtime, is a consistently applied compensation measure because we do not widely distribute annual equity awards to employees and believe that it provides a reasonable estimate of the pay ratio calculated in a manner consistent with Item 402(u) of Regulation S-K.  After identifying the median employee by examining base annual salary excluding overtime, we calculated annual total compensation, including overtime, for such employee using the same methodology we use for our named executive officers set forth in the 2021 Summary Compensation Table.

Summary Compensation Table:

Name and Principal Position
Year
  
Salary ($)
    
Bonus ($)
    
Stock
Awards
($)(1)
    
All Other
Compensation
($)(2),(3),(4)
    
Total ($)
  
 
 
                              
Dian C. Taylor, Chair, Chief Executive
2021
    
592,712
      
153,000
      
40,980
      
153,595
      
940,287
  
Officer & President
2020
    
575,574
      
250,000
      
35,010
      
214,924
      
1,075,508
  
 2019
    
558,800
      
250,000
      
36,110
      
138,308
      
983,218
  
 
 
                                        
David B. Spacht, Chief Financial
2021
    
395,272
      
75,000
      
N/A
      
36,404
      
506,676
  
Officer
2020
    
383,064
      
104,000
      
N/A
      
34,955
      
522,019
  
 2019
    
358,137
      
100,000
      
N/A
      
39,284
      
497,421
  
 
 
                                        
Joseph A. DiNunzio, Executive Vice
2021
    
431,046
      
75,000
      
N/A
      
31,900
      
537,946
  
President & Secretary
2020
    
418,585
      
100,000
      
N/A
      
32,483
      
551,068
  
 2019
    
406,384
      
103,000
      
N/A
      
32,054
      
541,438
  
 
 
                                        
Nicholle R. Taylor, Senior Vice
2021
    
350,864
      
78,000
      
40,980
      
98,953
      
568,797
  
President
2020
    
322,595
      
100,000
      
35,010
      
99,355
      
556,960
  
 2019
    
293,144
      
100,000
      
36,110
      
89,337
      
518,591
  
 
 
                                        
Jennifer L. Finch, Senior Vice
2021
    
352,749
      
75,000
      
N/A
      
16,035
      
443,784
  
President & Treasurer
2020
    
301,459
      
100,000
      
N/A
      
14,793
      
416,252
  
 2019
    
274,800
      
100,000
      
N/A
      
16,995
      
391,795
  
                                           
66

(1)
On May 4, 2021, Dian Taylor and Nicholle Taylor each received a restricted stock award of 1,000 shares of Class A Stock in their capacities as directors of the Company.  The award was valued at the fair market value on the date of the award (last reported sale price on the date of award) or $40.11 per share. The restricted shares vest one year from the date of grant. On May 6, 2020, Dian Taylor and Nicholle Taylor each received a restricted stock award of 1,000 shares of Class A Stock.  The award was valued at the fair market value on the date of the award or $35.01 per share. The restricted shares vested one year from the date of grant. On May 8, 2019, Dian Taylor and Nicholle Taylor each received a restricted stock award of 1,000 shares of Class A Stock.  The award was valued at the fair market value on the date of the award or $36.11 per share. The restricted shares vested one year from the date of grant.

(2)
Under the Company’s defined contribution 401(k) Plan, the Company contributes two percent of an eligible employee's gross earnings. The Company also matches 50 percent of the first six percent of the employee's gross earnings that the employee contributes to the 401(k) Plan. In addition, all employees hired before April 26, 1994 and under the age of 60 at that date are eligible for additional contributions to the 401(k) Plan. Employees over the age of 60 at that date receive Company paid medical, dental and life insurance benefits upon retirement. The Company will not provide the additional 401(k) or medical, dental and life insurance benefits to any other current or future employees. In 2021, Company contributions to the 401(k) Plan under terms available to all other employees based upon their years of service and plan eligibility were made in the amounts of:

Dian C. Taylor
  
$
31,900
  
David B. Spacht
  
$
31,900
  
Joseph A. DiNunzio
  
$
31,900
  
Nicholle R. Taylor
  
$
31,900
  
Jennifer L. Finch
  
$
14,500
  
 

(3)
Included in the "All Other Compensation" column in the table above are amounts received by Dian C. Taylor as compensation for attendance at meetings of the Board and its committees in 2021 totaling $67,100, $36,026 for security provided at her personal residence, $16,756 for country club dues and personal use of a company-owned vehicle. Also included in the "All Other Compensation" column in the table above are amounts received by Nicholle R. Taylor as compensation for attendance at meetings of the Board and its committees in 2021 totaling $66,100.

Grants of Plan-Based Awards Table

Name
Grant Date
Vest Date
  
All Other
Stock Awards:
Number of
Shares of
Stock or Units
(#)
    
All Other Option
Awards: Number
of Securities
Underlying
Options (#)
    
Exercise or
Base Price
of Option
Awards
($/share)
    
Grant Date Fair
Value of Stock &
Option Awards ($)
  
 
  
 
                        
Dian C. Taylor
5/04/2021
5/04/2022
    
1,000
      
-
      
-
      
40,110
  
Nicholle R. Taylor
5/04/2021
5/04/2022
    
1,000
      
-
      
-
      
40,110
  

On May 4, 2021, Dian C. Taylor and Nicholle R. Taylor each received a restricted stock award of 1,000 shares of Class A Stock, as noted in the table above. The awards were valued at the fair market value on the date of the award (last reported sale price on the date of award) or $40.11 per share. The restricted stock awards vest one year from the date of grant.

Outstanding Equity Awards at Fiscal Year-End Table

 
  
Option Awards
Name
  
Number of Securities Underlying Unexercised Options(#) Exercisable
    
Number of Securities Underlying Unexercised Options (#) Unexercisable
    
Option Exercise Price($)
  
Option
Expiration
Date
 
                  
     
   Dian C. Taylor
    
6,750
      
---
      
19.01
  
5/09/2022
 
    
6,750
      
---
      
22.66
  
5/08/2023
     
6,750
      
---
      
21.86
  
5/07/2024
 
                        
     
  Nicholle R. Taylor
    
2,000
      
---
      
19.01
  
5/09/2022
 
    
6,750
      
---
      
22.66
  
5/08/2023
     
6,750
      
---
      
21.86
  
5/07/2024
  

Option Exercises and Stock Vested Table

 
  
Option Awards
    
Stock Awards
  
 
Name
  
Number of
Shares Acquired
on Exercise (#)
    
Value
Realized on
Exercise ($)
    
Number of
Shares Acquired
on Vesting (#)
    
Value
Realized on
Vesting ($)
  
Dian C. Taylor
    
6,750
      
137,490
      
1,000
      
40,980
  
Nicholle R. Taylor
    
6,347
      
146,147
      
1,000
      
40,980
  
67

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the beneficial ownership of the equity securities of the Company, as of March 8, 2022 for each director, each named executive officer, each beneficial owner of more than five percent (5%) of the outstanding shares of any class of the Company's voting securities and all directors and executive officers as a group, based in each case on information furnished to the Company. Addresses are provided for each beneficial owner of more than five percent (5%) of the Company’s voting securities.

 
  
Class A Non-Voting Common Stock(1)
    
Class B Common Stock(1)
  
 
  
Shares
    
Percent(2)
    
Shares
    
Percent(2)
  
 
                        
Dian C. Taylor (3)
664 Churchmans Road
Newark, Delaware 19702
    
166,704
      
1.9
      
159,509
      
18.1
  
 
                                
Kenneth R. Biederman (3)
    
36,375
      
*
      
---
      
---
  
 
                                
John R. Eisenbrey, Jr. (3)(4)(5)
15 Albe Drive
Newark, Delaware 19702
    
66,251
      
*
      
45,707
      
5.2
  
 
                                
Nicholle R. Taylor (3)(6)
20 Brendle Lane
Wilmington, Delaware 19807
    
36,702
      
*
      
281,184
      
31.9
  
 
                                
Michael Houghton
    
---
      
---
      
---
      
---
  
                                 
William C. Wyer (3)
    
40,750
      
*
      
---
      
---
  
 
                                
Joseph A. DiNunzio
    
19,062
      
*
      
203
      
*
  
 
                                
David B. Spacht
    
4,024
      
*
      
189
      
*
  
 
                                
Jennifer L. Finch
    
1,778
      
*
      
---
      
---
  
 
                                
Louisa Taylor Welcher
219 Laurel Avenue
Newark, DE  19711
    
85,568
      
1.0
      
135,862
      
15.4
  
 
                                
Directors and Executive Officers as a Group (12 Individuals)(3)
    
406,333
      
4.7
      
488,142
      
55.4
  
 
                                
* less than 1%
                                
68

((1)
The nature of ownership consists of sole voting and investment power unless otherwise indicated.  The amount also includes all shares issuable to such person or group upon the exercise of options or vesting of restricted shares held by such person or group to the extent such options are exercisable or restricted shares vest within 60 days after March 8, 2022.

(2)
The percentage of the total number of shares of the class outstanding is shown where that percentage is one percent or greater.  Percentages for each person are based on the aggregate number of shares of the applicable class outstanding as of March 8, 2022, and all shares issuable to such person upon the exercise of options or vesting of restricted shares held by such person to the extent such options are exercisable or restricted shares vest within 60 days of that date.

(3)
Includes vesting of restricted shares and options to purchase shares of the Company’s Class A Stock, as follows: Ms. D. Taylor (21,250 shares); Mr. Biederman (14,500 shares); Mr. Eisenbrey, Jr. (14,500 shares); Ms. N. Taylor (16,500 shares); Mr. Wyer (21,250 shares).

(4)
89,123 shares were pledged by Mr. Eisenbrey, Jr. as collateral for a loan.

(5)
Includes 780 shares of the Class B Stock owned by a trust, of which Mr. Eisenbrey, Jr. is a trustee and has a beneficial ownership interest, and 1,555 shares of the Class B Stock held in custodial accounts for Mr. Eisenbrey, Jr.’s daughters.

(6)
Includes 710 shares of the Class A Stock and 45 shares of the Class B stock held in custodial accounts for Ms. N. Taylor’s daughter and 276 shares of Class A stock held by her spouse.
69

Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information

The following table provides information on the shares of our Class A Stock that may be issued upon exercise of outstanding stock options and vesting of awards as of December 31, 2021 under the Company’s stockholder approved stock plans.

Equity Compensation Plan Information
  
Plan category
Number of securities to be issued upon award vesting of exercise of outstanding options (a)
  
Weighted-average exercise price of outstanding options
  
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
  
 
            
Equity compensation plans approved by security holders
    
88,000
    
$
21.650
      
289,932
  
 
                        
Total
    
88,000
    
$
21.650
      
289,932
  

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We have four directors who are considered independent under the Nasdaq listing standards:  Kenneth R. Biederman, John R. Eisenbrey, Jr., Michael Houghton and William C. Wyer.

Review and Approval of Transactions with Related Persons

As set forth in the Company’s Audit Committee Charter, the Audit Committee is responsible for reviewing and, if appropriate, approving all related-party transactions between us and any officer, 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. We expect that any transactions in which related persons have a direct or indirect interest will be presented to the Audit Committee for review and approval.  While neither the Audit Committee nor the Board have adopted a written policy regarding related-party transactions, the Audit Committee considers such information as it deems important to determine whether the transaction is on reasonable and competitive terms and is fair to the Company.  In addition, the Audit Committee makes inquiries to our management and our auditors when reviewing such transactions.

Related person transactions include any transaction in which (1) the Company is a participant, (2) any related person has a direct or indirect material interest and (3) the amount involved exceeds the lesser of $120,000 or one percent of the average of the Company's total assets at year end for the last two completed fiscal years, but excludes certain type of transactions where the related person is deemed not to have a material interest.  A related person means: (a) any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director, an executive officer or a director nominee; (b) any person known to be the beneficial owner of more than 5% of any class of the Company’s voting securities; (c) any immediate family member of a person identified in items (a) or (b) above, meaning such person’s spouse, parent, stepparent, child, stepchild, sibling, mother- or father-in-law, son- or daughter-in-law, brother- or sister-in-law or any other individual (other than a tenant or employee) who shares the person’s household; or (d) any entity that employs any person identified in (a), (b) or (c) or in which any person identified in (a), (b) or (c) directly or indirectly owns or otherwise has a material interest.

In its review and approval or ratification of related person transactions (including its determination as to whether the related person has a material interest in a transaction), the Audit Committee will consider, among other factors:

-
the nature of the related person’s interest in the transaction;
-
the material terms of the transaction, including, without limitation, the amount and type of transaction;
-
the importance of the transaction to the related person;
-
the importance of the transaction to the Company;
-
whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company; and
-
any other matters the Audit Committee deems important or appropriate.

The Audit Committee intends to approve only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its stockholders.

Related Party Transactions

Mr. Michael Houghton currently serves as a director.  During 2021, Mr. Houghton was a Partner in the law firm of Morris Nichols Arsht & Tunnell, 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 $191,000, $386,000 and $253,000 was paid to MNAT during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively, for legal and director related services.  As of December 31, 2021, the Company had a $16,000 accounts payable balance due to MNAT.

As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5% of any class of the Company's voting securities or any other related person that would potentially require disclosure.  In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in the transactions; the satisfactory performance of work contracted with the related party prior to the election of Mr. Houghton as a director; and the material terms of the transactions, including, without limitation, the amount and type of transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company.  The Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders.

70

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 

Fees Billed by Independent Registered Public Accounting Firm

The following table sets forth the aggregate contract fees billed to the Company for the fiscal year 2021 and 2020 by the independent registered public accounting firm, BDO USA, LLP.

(In thousands)
  
2021
    
2020
  
Audit Fees
  
$
387
    
$
386
  
Audit-Related Fees
    
17
      
17
  
Tax Fees
    
---
      
---
  
All Other Fees
    
--
      
---
  
 
                
Total Fees
  
$
404
    
$
403
  
 
Audit Fees: consist primarily of fees for the audits of our financial statements included in our Annual Report on Form 10-K; the reviews of the financial statements included in our Quarterly Reports on Form 10-Q; and the audits of internal control over financial reporting, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and fees billed for assurance, services related to registration statements and other documents issued in connection with securities and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements.

Audit-Related Fees: consist of fees for services related to the audit of the Company’s 401(k) Plan. 

Tax Fees: consist of fees for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance, return preparation and tax audits.  The independent registered public accounting firm did not provide any tax services to the Company in 2021 and 2020.

All Other Fees: consist of fees for services other than described above. The independent registered public accounting firm did not provide any other services to the Company in 2021 and 2020.

Pursuant to our policy, the Audit Committee pre-approves audit and tax services for the year as well as non-audit services to be provided by the independent registered public accounting firm. Any changes in the amounts quoted are also subject to pre-approval by the committee. Any audit related fees and tax fees paid are pre-approved by the committee.

The Audit Committee of the Company’s Board of Directors has considered whether BDO’s provision of the services described above for the fiscal year ended December 31, 2021 is compatible with maintaining its independence.
71

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 
The following documents are filed as part of this report:
Page(s)*
(1)
 
 
Reports of Independent Registered Public Accountants (BDO USA,LLP; Wilmington, DE; PCAOB ID# 243)
  
 
  
 
  
 
  
 
  
 
  
 
 
  
(2)
Exhibits:  see the exhibit list below
  
 
 
 
 
 
 
 
* Page number shown refers to page number in this Report on Form 10-K
 
 
 
 
ITEM 16. FORM 10-K SUMMARY

Information with respect to this item is not required and has been omitted at our option.
72

ARTESIAN RESOURCES CORPORATION
FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 2021

 
EXHIBIT LIST
Exhibit
Number
Description
 
 
    3.1
Amended and Restated By-laws of Artesian Resources Corporation incorporated by reference to Exhibit 3.1 filed with the Company’s Form 8-K filed on November 23, 2020.
 
 
    3.2
Restated Certificate of Incorporation of the Company effective April 28, 2004 incorporated by reference to Exhibit 3.1 filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2004.
 
    3.3
By-laws of the Company effective March 26, 2004 incorporated by reference to Exhibit 3.3 filed with the Company’s Form 10-Q for the quarterly period ended March 31, 2004.
 
    4.1
Twenty-Fourth Supplemental Indenture dated as of December 17, 2019, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 4.1 filed with the Company's Form 8-K filed on December 19, 2019.
   
    4.2
Bond Purchase Agreement, dated December 17, 2019 by and between Artesian Water Company, Inc., subsidiary of the Company, and the Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 8-K filed on December 17, 2019.
   
    4.3
Twenty-Third Supplemental Indenture dated as of January 31, 2018, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 4.1 filed with the Company's Form 8-K filed on February 2, 2018.
   
    4.4
Bond Purchase Agreement, dated January 31, 2018 by and between Artesian Water Company, Inc., subsidiary of the Company, and CoBank, ACB.  Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 8-K filed on February 2, 2018.
   
    4.5
Twenty-Second Supplemental Indenture dated as of January 18, 2017, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 4.1 filed with the Company's Form 8-K filed on January 20, 2017.
   
Bond Purchase Agreement, dated January 18, 2017 by and between Artesian Water Company, Inc., subsidiary of the Company, and CoBank, ACB.  Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 8-K filed on January 20, 2017.
   
    4.7
First Amendment to Indenture of Mortgage and to the Sixteenth, Eighteenth and Twentieth Supplemental Indentures dated as of January 18, 2017, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee. Incorporated by reference to Exhibit 4.3 filed with the Company’s Form 10-K for the year ended December 31, 2017.
   
    4.8
Letter Agreement, dated as of September 15, 2015, by and between Artesian Water Company, Inc. and CoBank ACB. Incorporated by reference to Exhibit 4.1 filed with the Company’s Form 8-K filed on September 18, 2015.
   
    4.9
Twenty-First Supplemental Indenture dated as of November 20, 2009, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee. Incorporated by reference to Exhibit 4.4 filed with the Company’s Form 10-K for the year ended December 31, 2017.
   
Twentieth Supplemental Indenture dated as of December 1, 2008, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 4.1 filed with the Company's Form 8-K filed on December 4, 2008.
   
  4.11
First Amendment to Bond Purchase Agreement, dated as of January 18, 2017 by and between Artesian Water Company, Inc., subsidiary of the Company, and CoBank, ACB. Incorporated by reference to Exhibit 4.13 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
   
  4.12
Bond Purchase Agreement, dated December 1, 2008 by and between Artesian Water Company, Inc., subsidiary of the Company, and CoBank, ACB.  Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 8-K filed on December 4, 2008.
   
  4.13
Eighteenth Supplemental Indenture dated as of August 1, 2005, between Artesian Water Company, Inc., subsidiary of the Company, and Wilmington Trust Company, as Trustee.  Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
 
 
  4.14
Sixteenth Supplemental Indenture dated as of January 31, 2003 between Artesian Water Company, Inc., subsidiary of the Company, and the Wilmington Trust Company, as Trustee. Incorporated by reference to Exhibit 4.2 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
 
     4.15
Indenture of Mortgage dated July 1, 1961, between Artesian Water Company, Inc., subsidiary of the Company, and the Wilmington Trust Company, as Trustee. Incorporated by reference to Exhibit 4.10 filed with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2017.
 
  4.16
Second Amendment to Master Loan Agreement, dated as of November 13, 2019, by and between Artesian Wastewater Management, Inc. and CoBank, ACB.    Incorporated by reference to Exhibit 4.16 filed with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2019.
   
  4.17
First Amendment to Master Loan Agreement, dated as of January 10, 2019, by and between Artesian Wastewater Management, Inc. and CoBank, ACB.  Incorporated by reference to Exhibit 4.17 filed with the Company’s Annual
Report on Form 10-K for the year ended December 31, 2019.
   
  4.18
Guarantee of Payment, dated as of August 8, 2018, by and between Artesian Resources Corporation and CoBank, ACB. Incorporated by reference to Exhibit 4.3 filed with the Company’s Form 10-Q filed on August 9, 2018.
   
  4.19
Master Loan Agreement, dated as of August 8, 2018, by and between Artesian Wastewater Management, Inc. and CoBank, ACB. Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 10-Q filed on August 9, 2018.
   
  4.20
Artesian Resources Corporation 2015 Equity Compensation Plan. Incorporated by reference to Exhibit 4.1 filed with the Company’s Registration Statement on Form S-8 filed December 16, 2015.
   
  4.21
Interest Rate Lock Agreement, dated as of October 8, 2019, by and between Artesian Water Company, Inc. and CoBank, ACB, Incorporated by reference to Exhibit 4.1 filed with the Company’s Form 8-K filed on October 11, 2019.
   
      4.22
Description of the Company’s Securities.  Incorporated by reference to Exhibit 4.22 filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
   
      4.23
Interest Rate Lock Agreement, dated as of February 7, 2022, by and between Artesian Water Company, Inc. and CoBank, ACB. Incorporated by reference to Exhibit 4.1 filed with the Company’s Form 8-K filed on February 10, 2022.
   
Stock Purchase Agreement, dated August 27, 2021, by and among Artesian Wastewater Management, Inc., a Delaware corporation, and Middlesex Water Company, a New Jersey corporation. Incorporated by reference to Exhibit 10.1 filed with Company’s Form 10-Q filed on November 5, 2021.
   
  10.2
Asset Purchase Agreement, dated February 16, 2022, by and among Artesian Water Company, Inc. a Delaware corporation, and the Town of Clayton, a Delaware municipality. *
   
  10.3
Asset Purchase Agreement, dated June 11, 2020 by and among Artesian Water Company, Inc., a Delaware corporation, and the City of Delaware City, a Delaware municipality.  Incorporated by reference to Exhibit 10.1 filed with Company’s Form 8-K filed on June 16, 2020.
   
   
  10.4
Asset Purchase Agreement, dated February 27, 2020 by and among Artesian Water Company, Inc., a Delaware corporation, and the Town of Frankford, a Delaware municipality.  Incorporated by reference to Exhibit 10.1 filed with Company’s Form 8-K filed on March 4, 2020.
   
  10.5
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on April 30, 2020.
   
  10.6
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020A-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on April 30, 2020.
   
  10.7
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Form 8-K filed on April 30, 2020.
   
  10.8
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020B-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.4 filed with the Company’s Form 8-K filed on April 30, 2020.
   
  10.9
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.5 filed with the Company’s Form 8-K filed on April 30, 2020.
   
   10.10
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020C-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.6 filed with the Company’s Form 8-K filed on April 30, 2020.
   
  10.11
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2011-SRF, dated as of July 15, 2011, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on July 19, 2011.
 
 
  10.12
Financing Agreement, dated as of July 15, 2011, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on July 19, 2011.
 
 
  10.13
Financing Agreement and General Obligation Note dated February 12, 2010 between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund Delaware Department of Health and Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on February 17, 2010.
   
  10.14
Second Amended and Restated Revolving Credit Agreement between Artesian Water Company, Inc. and CoBank, ACB dated September 20, 2019. Incorporated by reference to Exhibit 4.2 filed with the Company’s Form 10-Q filed on November 8, 2019.
   
  10.15
Demand Line of Credit Agreement dated January 19, 2010 between Artesian Resources Corporation and each of its subsidiaries and Citizens Bank of Pennsylvania, as amended or modified from time to time.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on January 25, 2010.
   
Amendment to Agreement for Purchase of Water Assets of the Town of Port Deposit and for the provision of Potable Water Services, dated November 1, 2010 by and among Artesian Water Maryland, Inc., a Delaware Corporation, Artesian Resources Corporation, a Delaware Corporation and the Mayor and Town Council of Port Deposit, Maryland, a body corporate and politic organized under the laws of the State of Maryland. Incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on November 4, 2010.
 
 
Water Asset Purchase Agreement, dated December 1, 2009 by and among Artesian Water Maryland, Inc., a Delaware Corporation, Artesian Resources Corporation, a Delaware Corporation and the Mayor and Town Council of Port Deposit, Maryland, a body corporate and politic organized under the laws of the State of Maryland.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on December 2, 2009.
 
 
Limited Liability Interest Purchase Agreement between Artesian Water Maryland, Inc., subsidiary of the Company, and Mountain Hill Water Company, LLC, dated May 5, 2008.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on May 9, 2008.
 
 
Artesian Resources Corporation 2005 Equity Compensation Plan.  Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. ***
   
Amended and Restated Artesian Resources Corporation 1992 Non-Qualified Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.4 filed with the Company’s Form 10-Q for the quarterly period ended June 30, 2003.***
   
 10.21
Artesian Resources Corporation Incentive Stock Option Plan.  Incorporated by reference to Exhibit 10(e) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995.***
 
 
Officer's Medical Reimbursement Plan dated May 27, 1992.  Incorporated by reference to Exhibit 10.6 filed with the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2001.***
 
 
 21
Subsidiaries of the Company as of December 31, 2021. *
 
 
Consent of BDO USA, L P *
 
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
 
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
 
 
 32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
 
 
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). *
   
101.SCH
Inline XBRL Taxonomy Extension Schema Document. *
   
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document. *
   
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document. *
   
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document. *
   
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document. *
   
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). *
   
   

 *
Filed herewith.
**
Furnished herewith.
***
Compensation plan or arrangement required to be filed or incorporated as an exhibit.
73
Table of Contents

SIGNATURES
ARTESIAN RESOURCES CORPORATION

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date March 11, 2022
By: /s/ DAVID B. SPACHT
 
 
David B. Spacht
 
 
Chief Financial Officer (Principal Financial Officer)
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
Title
Date
 
 
 
/s/ DIAN C. TAYLOR
Chair of the Board of Directors, President  
 
Dian C. Taylor
and Chief Executive Officer (Principal
March 11, 2022
 
Executive Officer) 
 
 
 
/s/ DAVID B. SPACHT
 Chief Financial Officer (Principal Financial Officer)
 
David B. Spacht
  
March 11, 2022
 
 
 
 
 
 
/s/ JENNIFER L. FINCH
Corporate Treasurer and Senior Vice  
 
Jennifer L. Finch
President of Finance (Principal Accounting Officer)
March 11, 2022
 
 
 
/s/ KENNETH R. BIEDERMAN
 
 
Kenneth R. Biederman
Director
March 11, 2022
 
 
 
/s/ WILLIAM C. WYER
 
 
William C. Wyer
Director
March 11, 2022
 
 
 
/s/ JOHN R. EISENBREY, JR.
 
 
John R. Eisenbrey, Jr.
Director
March 11, 2022
 
 
 
/s/ MICHAEL HOUGHTON
    
Michael Houghton
Director
March 11, 2022
     
/s/ NICHOLLE R. TAYLOR
 
 
Nicholle R. Taylor
Director
March 11, 2022

74

Exhibit 10.2
ASSET PURCHASE AGREEMENT
FOR THE WATER ASSETS
OF THE TOWN OF CLAYTON
THIS ASSET PURCHASE AGREEMENT (“Agreement”) is entered into as of this ___ day of ____________________, 2022 by and between Artesian Water Company, Inc., a Delaware corporation (“Buyer”), and the Town of Clayton, a Delaware municipality (“Seller”).
WHEREAS, Seller is a municipality that provides public water service and water for fire protection service (the “Municipal Water Utility”) within its corporate limits and to certain customers outside its corporate limits (the “Service Area”); and
WHEREAS, in September 2021 Seller publicly issued Request for Proposal No. 21-01, titled Provision of Drinking Water Service to Town of Clayton Service Area (the “RFP”), and Addendum 1 thereto, concerning a potential sale of Seller’s Municipal Water Utility assets, which are incorporated herein by reference; and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell, assign, transfer, convey and deliver to Buyer, substantially all of the operating assets of Seller’s water system, including the right to provide water service to Seller’s existing customers, under the terms and conditions set forth herein, free and clear of all Indebtedness and Liens (as hereinafter defined); and
WHEREAS, in connection with sale of the water system assets, Seller and Buyer shall jointly file an application with the Delaware Public Service Commission (“PSC”) seeking regulatory approval to consummate the Agreement and the transactions contemplated in connection herewith;
NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements of the parties hereinafter set forth, as well as other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Buyer and Seller, intending to be legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 The following capitalized terms shall have the following meanings when used in this Agreement:
(a)  “Indebtedness” means all (i) indebtedness of Seller for borrowed money, including, without limitation, purchase money indebtedness, bonds, debentures, capital or financing leases, equipment operating leases, non-trade payables and credit facilities, or obligations for or in respect of the deferred purchase price of goods or services, (ii) obligations of Seller under any guaranty, letter of credit, performance credit or other contract having the effect of assuring a creditor against loss, (iii) obligations of Seller under any interest rate, currency or other hedging contract, and (iv) any prepayment penalties, premiums or fees under any of the foregoing items described under causes (i), (ii) or (iii).
Page 1 of 22
(b) “Liability” or “Liabilities” means any and all direct or indirect Indebtedness, liability, assessment, claim, loss, damage, deficiency, environmental liability, obligation or responsibility, expense (including, without limitation, reasonable attorneys’ fees, court costs, accountants’ fees, environmental consultants’ fees, laboratory costs and other professional fees), Order (as hereinafter defined), settlement payments, taxes, fines and penalties, fixed or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued, absolute, actual or potential, contingent or otherwise (including any liability under any guaranties or letters of credit, or with respect to insurance loss accruals).
(c) “Lien” or “Liens” means, with respect to any Purchased Asset (as hereinafter defined), any lien (including mechanic’s, warehouseman’s, laborer’s and landlord’s liens), charge, restriction, claim, hypothecation, pledge, security interest, mortgage, preemptive right, right of first refusal, option, judgment, title defect, right of way, easement, conditional sale or other title retention agreement, or other restriction or encumbrance of any kind in respect of or affecting such asset.
(d) “Order” means any order, judgment, preliminary or permanent injunction, temporary restraining order, award, citation, decree, consent decree or writ.
ARTICLE II
SALE AND DELIVERY OF PURCHASED ASSETS
Section 2.1 Sale and Delivery of Purchased Assets.
At Closing (as hereinafter defined), and subject to the terms and conditions of this Agreement, Seller shall sell, assign, transfer, convey and deliver to Buyer, free and clear of all Liens and Indebtedness, all of Seller’s right, title and interest in and to all of the following assets, rights, claims, properties and interests that Seller owns or in which Seller has any right, title or interest, other than the Excluded Property as hereinafter defined (each a “Purchased Asset” and collectively the “Purchased Assets”), as follows:
(a) Municipal Water Utility.  Subject to the accounts receivable terms of Section 3.2 below, all of Seller’s right, title and interest in and to the Municipal Water Utility, including, without limitation, all of Seller’s right to serve the customers now or hereafter provided water service in the Service Area and all of Seller’s right to be served by or otherwise interact with all vendors and suppliers with respect to the conduct of the Municipal Water Utility.  The Seller will cooperate with Buyer in Buyer’s efforts to secure exclusive franchise territory for any future growth or annexation areas identified or annexed by the Seller; and
Page 2 of 22
(b) Water Plant, Property and Equipment.  Except as specified herein as excluded property (the “Excluded Property”), all of Seller’s wells, supply facilities, water treatment facilities, water storage facilities, water service related equipment, water transmission and distribution mains, lines, conduits, and their related appurtenances, hydrants, services, meters and related appurtenances from the mains to the shut-off valve (located at the property line or the right-of-way) at each service location (collectively, the “Water Plant”) on an “as is” basis.  See Exhibit A-1 hereto for a non-exhaustive list of purchased assets.  The Excluded Property shall consist of, and the Purchased Assets shall not include (a) the meter pit or any on-site water facilities after the shut-off valve (located at the property line or the right-of-way) at any service location on the date of Closing and (b) all service lines that are outside the right-of-way; and
(c) Real Property.
(i)
Tax Parcel No. 3-04-01806-01-1300-00001 (the “WTP Parcel”), Tax Parcel No. 3-04-02700-01-0201-00001 (the “Underwoods Corner Parcel”), Tax Parcel No. 1-04-01807-03-0300-00001 (the “Well 3 and Tank 1 Parcel”), and Tax Parcel No. 1-04-01807-05-3500-00001 (the “Grain Mill Station Well Site Parcel”), together with access or use of any other real property in the Service Area (including via easements granted by deeds or other instruments) that relates to the Water Plant (collectively, the “Real Property”).  Within six months after Closing, Buyer shall coordinate with Seller to subdivide the WTP Parcel and the Underwoods Corner Parcel and transfer ownership of an unoccupied portion of each of the parcels to the Town of Clayton.  The subdivision shall be in a manner substantially similar to the proposed subdivision shown on Exhibit A-3.  In connection with that subdivision, the Seller agrees to convey to Buyer any and all necessary easements.  It is understood and agreed that the Seller will convey an easement to the Buyer granting rights to place a future well site on the reverted portion of the WTP Parcel.  Buyer and Seller shall cooperate in locating the future well site.  Buyer shall incur the costs of subdividing the existing parcels.  A map reflecting the location of the principal Purchased Assets and the parameters of the Service Area is attached hereto and incorporated herein as Exhibit A-2.
(ii)
Seller agrees to convey to Buyer any and all necessary easements for the westernmost unoccupied lot of the three lots comprising Tax Parcel No. 3-04-01810-01-3400-00001 (the “Well 1 Parcel”).  Seller agrees to convey to Buyer any and all necessary easements for a portion of the easternmost lot of the three lots that comprise the Well 1 Parcel, that portion being the portion that contains Well 1, the well house, and access thereto.  A map reflecting the location of the lots comprising the Well 1 Parcel is attached hereto and incorporated herein as Exhibit A-3.
(iii)
Within six months after Closing, Buyer shall coordinate with Seller to subdivide the Well 1 Parcel.  Seller shall then transfer to Buyer ownership of the westernmost unoccupied lot of the three lots comprising the Well 1 Parcel.  Buyer shall incur the costs of subdividing the existing parcel.  A map reflecting the location of the lots comprising the Well 1 Parcel and incorporated herein as Exhibit A-3.
Page 3 of 22
(d) Assumed Contracts.  All instruments, documents, contracts, agreements, arrangements, commitments, bids, licenses and any other contract rights (whether written or oral) (collectively, “Assumed Contracts”) of Seller existing on the date of Closing and relating to the Municipal Water Utility and/or Water Plant.
(i)
Seller’s current transmission agreement with Verizon for use of the elevated storage tanks for communications (including antennas or cellular, network, and/or broadband infrastructure) shall remain in effect between Seller and Verizon, and Seller shall retain the right to renew that transmission agreement.  All property of Verizon shall remain property of Verizon.  Seller shall continue to cooperate with Buyer and shall, to the extent possible, cause Verizon to cooperate with Buyer in temporarily removing Verizon’s equipment from the elevated storage tank during maintenance of the elevated storage tank.  Contact information for Verizon, including 24/7 emergency contact information, shall be provided to Buyer before Closing.  This contract shall not be modified to include additional antennas or cellular, network, and/or broadband infrastructure.
(e) Existing interconnection agreements between Buyer and Seller will terminate at the time of Closing; and
(f) Easements.  All of Seller’s rights to access or use any real property or fixtures (including by license or easement) directly or indirectly used in connection with the Municipal Water Utility and/or the Water Plant, with the understanding that Buyer will subdivide and return to the Town of Clayton an unoccupied portion of the WTP Parcel and the Underwoods Corner Parcel and that Seller shall retain the right to attach future antennas, cabling and related equipment to the existing elevated water storage tanks for the Town’s municipal networking, communications, and transmission needs (such as public safety or public works equipment).  This does not extend to commercial communication needs that are installed for revenue-generating purposes, with the exception of the Town’s current Verizon contract. Seller will convey to Buyer any and all necessary easements, licenses, and approvals to access or use any real property or fixtures owned by Seller directly or indirectly used in connection with the Municipal Water Utility and/or the Water Plant; and
(g) Permits.  All approvals, consents, licenses, permits, waivers, certificates of public convenience and necessity, or other authorizations issued, granted, given, or applied for at the time of Closing or otherwise made available by or under the authority of any governmental authority (collectively, “Permits”) for the ownership or operation of the Municipal Water Utility and/or Water Plant, to the extent such Permits are assignable.  Seller will cooperate with Buyer in obtaining and/or transferring any such Permits.
(h) Risk of Loss.  Buyer shall be given exclusive possession of the Purchased Assets at the time of Closing.  Until Closing, risk of loss with respect to the Purchased Assets shall remain with Seller, and Seller agrees to maintain comprehensive property/casualty insurance and third party public liability insurance covering the Purchased Assets until Closing.
Page 4 of 22
Section 2.2 Liabilities.
(a) Liabilities Assumed by Buyer.  At Closing, Buyer shall assume Liability for and agree to pay, perform and discharge all of the following (collectively, the “Assumed Liabilities”):
(i)
All obligations and responsibilities to provide water service to the Service Area; and
(ii)
All accounts payable and trade payables first accruing from and after Closing with respect to the provision of water service to the Service Area; and
(iii)
The Assumed Contracts with respect to all periods from and after Closing, but shall not assume any Liability arising from Seller’s performance or non-performance under any Assumed Contracts at any time prior to Closing, whether asserted before or after Closing; and
(iv)
All Liabilities with respect to taxes first accruing immediately after Closing and which are incurred in connection with Buyer’s ownership or operation of the Purchased Assets; and
(v)
All Liabilities arising out of ownership and/or operation of the Purchased Assets subsequent to Closing; and
(vi)
All sales and use, transfer-related taxes, stamp, real property recordation fees or taxes and all other fees and/or costs associated with the transfer of title of the Purchased Assets from Seller to Buyer.
(b) Liabilities Retained by Seller.  Except for the Assumed Liabilities, Buyer shall not assume, and shall not be deemed to have assumed through anything contained in this Agreement or otherwise, any Indebtedness, Liabilities or Liens of Seller whatsoever (the “Excluded Liabilities”).  Without limiting the generality of the foregoing, Buyer shall not assume, and shall not be deemed by anything contained in this Agreement or otherwise to have assumed the following Excluded Liabilities:
(i)
Liabilities and obligations of Seller set forth in this Agreement; and
(ii)
Liabilities arising out of ownership or operation of the Municipal Water Utility or the Purchased Assets prior to Closing; and
(iii)
Liabilities or demands for any unclaimed property relating to the Municipal Water Utility or the Purchased Assets that is in Seller’s possession, custody or control; and
(iv)
Liabilities or demands arising out of any litigation (whether civil or criminal), arbitration, mediation, administrative proceeding, audit or investigation, or threatened litigation or proceedings, relating to any period ending at or prior to Closing; and
Page 5 of 22
(v)
Liabilities or demands arising out of any work or contract of Seller that were to be performed by Seller at or prior to Closing, including, without limitation, any warranty claims relating thereto; and
(vi)
Liabilities or demands, including, without limitation, for any interest, penalties, late charges, prepayment charges or termination fees relating to any Indebtedness outstanding as of Closing, or resulting from cancellation of such Indebtedness; and
(vii)
any other Liens, Liabilities or Indebtedness of Seller that are not specifically enumerated above.
Section 2.3 Purchase Price.
(a) Purchase Price for the Purchased Assets.  In consideration of the sale, assignment, transfer, conveyance and delivery of the Purchased Assets by Seller to Buyer and in reliance on the representations, warranties, covenants and agreements made by Seller in this Agreement, at the Closing Buyer shall pay Seller as set forth below:
(i)
the sum of Five Million and 00/100 Dollars ($5,000,000.00) (the “Cash Purchase Price”), less the current payoff amount of any secured debt or debt associated with the water system, including the Real Property;
(b) Payment of the Purchase Price for the Purchased Assets.  No later than five (5) business days prior to Closing, Seller shall deliver to Buyer:  (i) a statement setting forth the payoff amount as of the Closing date of any secured debt or debt associated with the water system, including the Real Property, together with wire payment instructions for making the payoff payment of such debt; and (ii) wire payment instructions for payment to Seller of the Cash Purchase Price, less  the current payoff amount of any secured debt or debt associated with the water system, including the Real Property.
(c) Proration.  The parties shall make customary proration with respect to any personal or real property taxes, and power or other utility charges as of the Closing date.
(d) Allocation of Purchase Price.  Buyer and Seller agree to allocate the Cash Purchase Price (and all other capitalizable costs) among the Purchased Assets for all purposes (including financial, accounting and tax purposes) in accordance with an allocation schedule to be agreed upon by Buyer and Seller, and, in the absence of an agreement then in such manner as determined by Buyer in its reasonable discretion.  Buyer and Seller shall file all tax returns, reports and other documents, including an asset acquisition statement on Form 8594, required by any competent taxing authority in a timely manner consistent with the allocation set forth on such agreed schedule.
Page 6 of 22
ARTICLE III
CLOSING
Section 3.1 Closing.
The closing of the transactions contemplated by this Agreement (“Closing”) is contingent upon obtaining regulatory approval from the PSC.  Closing on the purchase of the Purchased Assets shall take place at Seller’s offices located at 414 Main Street, Clayton, Delaware 19938 on the later of (x) within thirty (30) days following the receipt of all necessary approvals from the PSC, and (y) within thirty (30) days of the satisfaction of any condition precedent and the completion of due diligence to the satisfaction of Buyer.
Section 3.2 Municipal Water Utility Accounts Receivable at Closing.
On the date of Closing Seller shall, with the assistance of Buyer, read the meters of all Municipal Water Utility customers.  Once Buyer has posted the final bills relating to the period of Seller’s ownership of the Municipal Water Utility, the Metering and Billing Agreement between Seller and Buyer shall terminate.  Seller shall retain all rights to accounts receivable relating to the Municipal Water Utility as of the date of Closing and be responsible for the collection thereof.
Section 3.3 Closing Deliveries.
(a) At Closing, Seller shall deliver or cause to be delivered to Buyer each of the following:
(i)
the Purchased Assets; and
(ii)
a permanent easement in substantially the same form attached hereto as Exhibit B, which is incorporated herein by reference, duly executed in triplicate, granting Buyer rights in connection with its provision of water service relating to rights-of-way owned by Seller (the “Rights-of-Way Easement”); and
(iii)
a permanent easement in substantially the same form attached hereto as Exhibit C, which is incorporated herein by reference, duly executed in triplicate, granting Buyer rights in connection with Buyer’s ownership and operation of Purchased Assets and providing public water utility service (the “Parcel Easement”, and collectively with the Rights-of-Way Easement, the “Easements”); and
(iv)
duly executed duplicate originals of a Bill of Sale and General Assignment in substantially the same form attached hereto and incorporated herein as Exhibit D (the “Bill of Sale”); and
(v)
executed copies of a deed and related transfer documents for the WTP Parcel, the Underwoods Corner Parcel, the Well 3 and Tank 1 Parcel, and the Grain Mill Station Well Site Parcel; and
Page 7 of 22
(vi)
to the extent Seller has not delivered them to Buyer prior to Closing, such records relating to the Municipal Water Utility and/or the Purchased Assets, such as Permits, certificates of title duly endorsed for transfer, maintenance records, equipment warranties, and customer account information, if any, as are necessary or proper to facilitate the transactions contemplated hereby, Buyer’s ownership of the Purchased Assets, or Buyer’s subsequent provision of public water utility service to the Service Area; and
(vii)
a correct and complete list of Seller’s Municipal Water Utility customers as of Closing.
(b) At Closing, Buyer shall deliver or cause to be delivered to Seller each of the following:
(i)
duly executed triplicate originals of the Easements; and
(ii)
duly executed duplicate originals of the Bill of Sale.
(c) During Closing, Buyer shall pay the Cash Purchase Price, less the current payoff amount of any secured debt or debt associated with the water system, including the Real Property, to Seller using the wire payment instructions provided by Seller.  Before or during Closing, Buyer shall pay the current payoff amount of any secured debt or debt associated with the water system, including the Real Property, using the wire payment instructions to be provided by Seller.  Seller shall ensure that any liens are removed from property and assets associated with this acquisition.
Section 3.4 Conditions to Closing.
At or before Closing, the following provisions shall have been satisfied.
(a) Absence of Certain Changes.  There shall have been no change that constitutes or results in a material adverse change in the Municipal Water Utility or the Purchased Assets.
(b) Due Diligence.  Buyer shall have completed due diligence of the Purchased Assets, including review of title to and condition of the Real Property, the results of which shall have been satisfactory to Buyer in its sole discretion.  Seller shall cooperate with Buyer in the completion of Buyer’s due diligence, including but not limited to providing access to real property and/or other assets and providing requested information and documents related to the Municipal Water Utility and Water Plant.
(c) CPCN and Other Approvals. If and as necessary, Buyer (a) shall have been granted by the PSC regulatory approval to consummate the Agreement and the transactions contemplated in connection herewith and a Certificate of Public Convenience and Necessity (“CPCN”) to provide exclusive water service to the Service Area and (b) shall have received such other approvals and agreements from such parties, including but not limited to the PSC and the Town of Clayton, as Buyer deems necessary in order to operate the Purchased Assets.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer that each of the following representations and warranties are, as of the date hereof, and as of the Closing date will be, true and correct:
Section 4.1 Authority and Validity.
Seller’s execution and delivery of this Agreement, performance by Seller hereunder, and the consummation by Seller of the transactions contemplated hereby have been duly and validly authorized by all required action by or on behalf of Seller.  This Agreement has been duly and validly executed and delivered by Seller, and constitutes valid and legally binding obligations of Seller that are enforceable against Seller in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the enforcement of creditors’ rights generally or by principles governing the availability of equitable remedies.
Section 4.2 No Conflict.
Neither the execution and delivery of this Agreement nor the carrying out of any of the transactions contemplated hereby will result in any:  (a) violation, termination or modification of, or be in conflict with, Seller's powers or authority under applicable laws; (b) material breach of, or constitute a default (or with notice, lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation, or result in the creation of any Lien upon any of its properties or assets pursuant to any Permit or any contract to which Seller is a party or by which it or any of the Purchased Assets are bound or affected, or (c) violation of, or be in conflict with, any law or Permit applicable to Seller or by which the Purchased Assets are bound or affected.
Section 4.3 Title to Assets.
(a) The Purchased Assets constitute all of Seller’s assets, properties and rights (in each case whether real or personal, tangible or intangible), other than the Excluded Property, necessary for Buyer to conduct the Municipal Water Utility after Closing in the same manner as conducted immediately prior to Closing.  Title to the Purchased Assets shall be conveyed to Buyer at Closing free and clear of all Indebtedness, Liens and Liabilities.  Except as otherwise stated herein, Seller has good and marketable title to, or a valid license to use, all of the Purchased Assets (in each case whether real or personal, tangible or intangible) used by Seller in the Municipal Water Utility or located on any property owned or used by Seller, free and clear of all Liens and defects of title.  Seller specifically warrants and represents that, except as otherwise identified herein and set for repayment as part of Closing in accordance with the terms hereof, no Liens or Indebtedness exist relating to the Purchased Assets other than current, ordinary monthly accruals such as the current month’s electric bill.
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(b) Except as previously disclosed in Seller’s publicly-issued Request for Proposals regarding the sale of the Municipal Water Utility, all of the Water Plant is in good condition and repair, ordinary wear and tear excepted, and has been maintained and repaired in a good and workmanlike manner in accordance with industry standards.
Section 4.4 Litigation.
There are no outstanding Orders of any governmental authority involving the Purchased Assets or the Municipal Water Utility.  There is no litigation (civil or criminal) and there are no other actions, suits, arbitrations, mediations, administrative proceedings, audits or investigations, whether or not the defense thereof or Liabilities in respect thereof are covered by insurance (collectively, “Claims”), pending or, to Seller’s knowledge, threatened against, or involving the Purchased Assets or the Municipal Water Utility.
Section 4.5 Environmental.
(a) None of the real property relating to the Purchased Assets or the Easement is or has been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation, Liability Information System (“CERCLIS”) or any similar state list, or is or has been the subject of any “Superfund” evaluation or investigation, or any other investigation or proceeding of any governmental authority or unaffiliated third party or of Seller evaluating whether any remedial action is necessary to respond to any release of any hazardous substance, pollutant or contaminant in connection with such real property.
(b) Seller is not aware of and has received no notice, written or otherwise, which remains outstanding or unresolved, to the effect that the Water Plant is not being operated in compliance in all material respects with all applicable laws concerning the protection of public health, public safety or the environment (“Environmental Laws”) or that there are any water quality deficiencies or violations.  Seller has received no notice, written or otherwise, which remains outstanding or unresolved, (i) (A) alleging that Seller or any of its agents is liable under any Environmental Law, or (B) ordering Seller or any of its agents to remedy or recommending that Seller or any of agents remediate, any environmental damage to any real property or modify or upgrade its Water Plant to comply with Environmental Laws, and (ii) to Seller’s knowledge, no such claims or notices are threatened or pending.
(c)  There has been no violation of Environmental Laws that remain unremedied or unresolved respecting the release or threatened release of any hazardous substance, pollutant or contaminant to any soil, groundwater, surface water, building component, wastewater, air or other media on or from any real property relating to the Purchased Assets or the Easement during the ownership, occupation or use of such real property by Seller or any of its agents.
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(d) There are no and have not been any underground storage tanks, underground piping (except for water or sewer), per- and polyfluoroalkyl substances, or polychlorinated biphenyls used, stored, treated or disposed of at any real property relating to the Purchased Assets or the Easement.
Section 4.6 Unclaimed Property.
Seller has no unpaid unclaimed property Liability relating to the Municipal Water Utility with respect to any taxable period ending on or before the Closing date for which Buyer would be liable or to which the Purchased Assets would be subject.
Section 4.7    Compliance with Laws.
The ownership and operation of the Purchased Assets and the operation of the Municipal Water Utility as it is currently conducted do not violate or infringe any law in any material respect.  Seller has not received written notice (or, to Seller’s knowledge, oral notice) of any violation by Seller of any law applicable to the operation of the Municipal Water Utility as currently conducted or the Purchased Assets as currently operated.  Seller has timely paid all applicable fees, including registration fees and maintenance fees, required by any governmental authority, to maintain Permits in good standing.
Section 4.8 No Brokers.
Neither Seller, nor any representative or other person acting on behalf of Seller, has agreed to pay a commission, finder’s or investment banking fee, or similar payment in connection with this Agreement or any matter related hereto to any person, nor has any such person taken any action on which a claim for such a payment could be based, other than payments for which Buyer will have no Liability or obligation.
Section 4.9 Disclosure.
All agreements, schedules, exhibits, certificates and reports furnished or to be furnished to Buyer by or on behalf of Seller in connection with this Agreement or the transactions contemplated hereby are true, complete and accurate in all material respects.  Except for the representations and warranties expressly set forth in this Agreement, Seller has not made and does not hereby make any express or implied representations or warranties, statutory or otherwise, of any nature, including, without limitation, with respect to any express or implied representation or warranty as to the merchantability, quality, quantity, suitability or fitness for any particular purpose of the assets, each of which are hereby disclaimed.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller that the following representations and warranties are, as of the date hereof, and as of the Closing date will be, true and correct:
Section 5.1 Organization and Good Standing.
Buyer is a corporation duly organized, validly existing and in good standing under the applicable laws of the State of Delaware.  Buyer has full corporate power and authority to own its properties and carry on its business as it is now being conducted.
Section 5.2 Authority and Validity.
Buyer’s execution and delivery of this Agreement, performance by Buyer hereunder, and the consummation by Buyer of the transactions contemplated hereby have been duly and validly authorized by all required corporate action by or on behalf of Buyer.  This Agreement has been duly and validly executed and delivered by Buyer, and constitutes valid and binding obligations of Buyer that are enforceable against Buyer in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to the enforcement of creditors’ rights generally or by principles governing the availability of equitable remedies.
Section 5.3 No Violation.
There is no legal action, proceeding or investigation pending or, to the knowledge of Buyer, threatened against Buyer, nor is there any judgment outstanding against Buyer or to which Buyer is subject or bound, that materially adversely affects the ability of Buyer to consummate any of the transactions contemplated hereby.
Section 5.4 No Brokers.
Neither Buyer nor any person acting on behalf of Buyer has agreed to pay a commission, finder’s fee, investment banking fee or similar payment in connection with this Agreement or any matter relating hereto, nor has Buyer taken any action on which a claim for such a payment could be based.
Section 5.5 Disclosure.
None of the representations and warranties set forth in this Agreement furnished by Buyer to Seller pursuant hereto, taken as a whole, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading.
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ARTICLE VI
PRE-CLOSING COVENANTS
During the period from the date of this Agreement through and including the Closing date:
Section 6.1 Seller’s Conduct of the Municipal Water Utility Pending Closing.
Except as may be first consented to by Buyer in writing (such consent not to be unreasonably withheld, conditioned or delayed), during the period from the date of this Agreement through and including the Closing date: (i) Seller shall conduct the Municipal Water Utility and operate the Purchased Assets according to its ordinary and usual course of business, preserve intact its Municipal Water Utility and the Purchased Assets, and keep available the services of its employees and independent contractors; (ii) Seller will not sell, lease, transfer, assign, convey, hypothecate, encumber or make any dividend or distribution of any Purchased Assets, will not amend any unclaimed property filing relating to the Municipal Water Utility, and will otherwise use reasonable efforts to maintain satisfactory relationships with respect to the Municipal Water Utility with all relevant governmental authorities, suppliers, agents, customers, and others having relevant business relationships with Seller; and Seller shall promptly notify Buyer in writing of any notice or other communication that it receives (written or oral) respecting any litigation, regulatory proceeding, or audit involving or affecting Seller.  Should any major repairs to the Municipal Water Utility become necessary during the period between execution of this Agreement and Closing and should the parties agree that the reasonable cost of that repair exceeds Twenty-Five Thousand and 00/100 Dollars ($25,000.00), Buyer and Seller shall share such reasonable repair cost equally.  Should Closing occur more than ninety (90) days after the execution of this Agreement, the repair threshold shall be reduced to Fifteen Thousand and 00/100 Dollars ($15,000.00) for the period between the 90th day after the execution of Agreement and Closing.  Should Closing fail to occur, Seller shall reimburse to Buyer any such repair contribution made during this period.  Without limiting the foregoing, Seller, except as may be first consented to by Buyer in writing (such consent not to be unreasonably withheld, conditioned or delayed), shall not:
(a) enter into any contract relating to the Municipal Water Utility other than with customers or suppliers in the ordinary course of business substantially as conducted heretofore;
(b) cause any material adverse change in the Municipal Water Utility, including performing or not performing any action, the performance or non-performance of which would reasonably be expected to result in a material adverse change;
(c) make any loan or advance relating to the Municipal Water Utility other than for services provided to customers on credit in the ordinary course of business consistent with past practice;
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(d) incur any Indebtedness relating to the Purchased Assets or Municipal Water Utility, except expenses and current Liabilities incurred in connection with or for services rendered or goods supplied in the ordinary course of business, or obligations or Liabilities incurred by virtue of the execution of this Agreement, or (ii) create any Lien on any Purchased Assets; or
(e) change the accounting principles, methods or practices (including without limitation any change in depreciation or amortization policies or rates) utilized by Seller involving or affecting the Purchased Assets or the ownership or operation thereof; or
(f) make any capital expenditure or commitment therefor.
Section 6.2 2021 and 2022 Consumer Confidence Reports.
Seller and its agents will cooperate with Buyer in preparation of  the Consumer Confidence Reports (“CCR”) for the Municipal Water Utility for calendar year 2021 and 2022.
Section 6.3 Access; Cooperation.
Upon reasonable prior notice, during the period from the date of this Agreement through and including the Closing date: (i) Seller shall give Buyer and its representatives such access to the Purchased Assets, Municipal Water Utility records, customers and suppliers during regular business hours as may be reasonably requested by Buyer, including with respect to having surveys performed and a Phase I environmental assessment undertaken for the WTP Parcel, the Underwoods Corner Parcel, the Well 3 and Tank 1 Parcel, the Well 1 Parcel, and the Grain Mill Station Well Site Parcel; (ii) Seller and its representatives shall also cooperate with Buyer and its representatives, including Buyer’s auditors and counsel, in the preparation of any documents or other materials required in connection with the transactions contemplated by this Agreement, including with respect to obtaining all necessary regulatory approvals from the PSC; (iii) in addition, Seller and Buyer shall use their respective reasonable good faith efforts to satisfy all conditions to Closing and all other matters relating to the consummation of the transactions contemplated by this Agreement; and (iv) Seller and Buyer shall cooperate with each other in connection with any filings with any governmental entity with authority over the parties or the transactions contemplated by this Agreement.
ARTICLE VII
POST-CLOSING COVENANTS
Section 7.1 Remittance of Unclaimed Property.
  From and after Closing through and including the date that is the seventh (7th) anniversary of the Closing, Seller and Buyer shall cooperate fully with each other and make available or cause to be made available to each other in a timely fashion such data relating to taxes, prior tax returns, filings with the Internal Revenue Service or other governmental authorities, unclaimed property filings, and other information as may be reasonably requested for the preparation by Buyer or Seller of any tax returns or other filings with the Internal Revenue Service or other governmental authorities.
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Section 7.2 2021 and 2022 CCR.
Seller and its agents will cooperate with Buyer in preparation of the 2021 and 2022 CCRs, which Buyer shall provide to all necessary governmental authorities and customers.
Section 7.3 Access to Books and Records.
From and after Closing, Seller shall give Buyer and its agents such access to Seller’s books and records relating to the Purchased Assets and the Municipal Water Utility that pertain to the period prior to and ending at Closing as Buyer shall reasonably request, as necessary or appropriate for Buyer to prepare any tax filings or defend or prosecute any litigation or other proceeding.  Seller shall maintain its books and records relating to the period during which it owned the Purchased Assets and operated the Municipal Water Utility for at least seven (7) years after Closing, or such other period as mandated by applicable law.
Section 7.4 Rate Structure.
After Closing, Buyer shall continue to assess water charges in the Service Area based upon Seller’s Municipal Water Utility rates as of the date of Closing.  Buyer shall take all necessary and appropriate steps and seek all necessary regulatory approvals to make six annual adjustments in the water and fire protection rates in the Service Area, commencing on January 1, 2023 and occurring annually on January 1 for five additional years transitioning the rates to the rates that generally apply in the State of Delaware per Buyer’s PSC-approved tariff as amended from time to time (the “Rate Transition Period”), it being understood that:
(a) Buyer shall take reasonable steps to make the annual adjustments in Service Area rates during the Rate Transition Period similar in amount.  For illustrative purposes only, an example of a proposed rate transition schedule for an average residential customer, using 4,000 gallons per month, is attached hereto as Exhibit E; and
(b) after the Rate Transition Period, rates in the Service Area shall be the same as apply generally in the State of Delaware pursuant to Buyer’s PSC-approved tariff as amended from time to time; and
(c) Buyer will assess, collect, and retain the water fees charged to Seller’s customers, including a Five Hundred and 00/100 Dollars ($500) per equivalent dwelling unit water connection fee and an impact fee of Three Thousand and 00/100 Dollars ($3,000) per equivalent dwelling unit, which amounts may be amended from time to time.
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Section 7.5 Buyer’s Mandatory Investment in the Service Area.
After Closing, Buyer shall make the following investments in Service Area infrastructure, making good faith efforts to complete each item, it being understood that Buyer shall not be deemed in breach of this Agreement if, despite its good faith efforts, it is unable to do so for reasons beyond its control:
(a) All of the Seller’s water mains will be put into Buyer’s water main renewal program and the water quality and leak history of these mains will be tracked.  The mains will be evaluated regularly as part of Buyer’s water main renewal program. This program includes a variety of indices which are evaluated to determine when corrective action needs to be taken on a given main. Based on the age of certain cast iron mains identified by the Town, Buyer expects some corrective actions, up to and including replacement, to be necessary within the next ten years.  Buyer will report to or meet with the Town annually (so long as the Town continues to request such reports or meetings) regarding the maintenance and if necessary, renewal, of those water mains identified by the Town in V.A.4 (pages 3 and 4) of the RFP; and
(b) Buyer and the Town will coordinate and cooperate for the removal of any lead goosenecks or infrastructure found within the water system, including cooperating with the Town in accessing any public funding for such removal or for the benefit of the Municipal Water System and notification from the Town to the Buyer of any opportunity to access and inspect such infrastructure. If there are any costs borne by the Town in accessing or administering any awarded public funding for the benefit of the Municipal Water System, Buyer will ensure that such costs are covered by that public funding or otherwise reimbursed to the Town.  To the extent allowed, Buyer agrees to cooperate with the Town in any administrative functions of accessing or administering such public funding; and
(c) Buyer will evaluate and determine whether the 4” main that crosses Main Street needs to be replaced, upgraded, or supplemented in order to improve system reliability.  Buyer will work with Seller to determine if future development projects should be part of solving any issues identified with this 4” main.  Within one year after Closing, Buyer will report to or meet with the Town regarding the evaluation and determination related to the 4” main that crosses Main Street.
Section 7.6 Sampling and Monitoring by Buyer.
Buyer shall perform compliance monitoring consistent with its practices throughout the State of Delaware, which includes routine monthly bacteria sampling, annual disinfection by-product monitoring, and triannual lead and copper sampling.  Buyer will sample from the distribution entry point at the treatment plant. Notwithstanding anything to the contrary herein, Buyer’s sampling and monitoring shall conform to applicable state and federal statutes and regulations, including the Safe Drinking Water Act, as such statutes and regulations are amended from time to time.
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Section 7.7 Project Communications.
Absent an emergency, Seller shall notify Buyer at least three (3) months prior to the commencement of construction about any road improvement project where Buyer owns or operates water utility facilities in the Service Area.
Section 7.8 Continued Cooperation.
At any time and from time to time after Closing, without further consideration (but at Buyer’s cost of preparation and filing) Seller shall promptly execute and deliver such confirmatory instruments of sale, transfer, conveyance, assignment and delivery, and take such other reasonable actions, as Buyer may reasonably request to transfer, convey and assign to Buyer, and to confirm Buyer’s right, title and interest in and to, each and all of the Purchased Assets, to put Buyer in actual possession and operating control thereof, to assist Buyer in exercising all rights with respect thereto, and to carry out the purposes and intent of this Agreement.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 Indemnification.
The representations and warranties made by the parties in this Agreement shall survive the Closing, and shall remain in full force and effect until the date that is twelve (12) months from the Closing Date; provided, however, that the representations and warranties in Section 4.3(a) (the “Fundamental Representations”) shall survive until the date on which the statute of limitations otherwise applicable to such claims expires.  All covenants and agreements of the parties contained herein shall survive the Closing indefinitely or for the period explicitly specified therein. The parties each agree to indemnify, defend and hold harmless the other party, including the other party’s affiliates, directors, officers, agents, employees, contractors, subcontractors, successors and assigns, from and against any and all claims, counterclaims, actions, proceedings, suits, losses, debts, demands, judgments, liens, costs and liabilities, including reasonable attorneys’ fees and expert witness fees, arising out of or in any way relating to any breach of the indemnifying party’s representations and warranties.  Without limiting the foregoing, (i) Seller indemnifies Buyer and shall hold Buyer harmless for all Liens, encumbrances, Liabilities, Indebtedness, security interests and claims of any nature relating to the Purchased Assets existing as of Closing, or that arise after Closing and relate to the period prior to the transfer of title to Buyer, and Seller shall bear all costs and expenses, including attorneys’ fees, necessary to remove any such Liens, encumbrances, Liabilities, Indebtedness security interests and/or claims, provided, however, that with specific respect to defects in title, Seller’s obligation shall be to provide Buyer reasonable cooperation in curing such defects, rather than an obligation of indemnification, and (ii) Buyer indemnifies Seller and shall hold Seller harmless for all Liens, encumbrances, Liabilities, Indebtedness, security interests and claims of any nature relating to the Purchased Assets that arise after Closing and do not relate to the period prior to the transfer of title to Buyer, and Buyer shall bear all costs and expenses, including attorneys’ fees, necessary to remove any such Liens, encumbrances, Liabilities, Indebtedness security interests and/or claims.
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The indemnification provided for in this Section 8.1 shall be subject to the following limitations:
(a) Seller shall not be liable to Buyer for indemnification under this Section 8.1 until the aggregate amount of all losses exceeds Twenty-Five Thousand and 00/100 Dollars ($25,000.00) (the “Basket”), in which event Seller shall be required to pay or be liable for all such losses from the first dollar.  The aggregate amount of all losses for which Seller shall be liable pursuant to Section 8.1 shall not exceed One Million and 00/100 Dollars ($1,000,000.00) (the “Cap”).
(b) Buyer shall not be liable to Seller for indemnification under Section 8.1 until the aggregate amount of all losses exceeds the Basket, in which event Buyer shall be required to pay or be liable for all such losses from the first dollar. The aggregate amount of all losses for which Buyer shall be liable pursuant to Section 8.1 shall not exceed the Cap.
(c) Notwithstanding the foregoing, the limitations set forth in Section 8.1(a) and (b) above shall not apply to (i) losses based upon, arising out of, with respect to or by reason of any inaccuracy in or breach of any Fundamental Representation, and (ii) losses related to fraud.
(d) The indemnified party shall use reasonable efforts to mitigate loss.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 PSC Approval; Termination.
Notwithstanding anything to the contrary in this Agreement, the receipt from the PSC of regulatory approval relating to this Agreement or the transactions contemplated in connection herewith shall be a condition precedent to both parties’ obligation to consummate the transactions contemplated in this Agreement.
Notwithstanding anything in this Agreement to the contrary, this Agreement and the transactions contemplated by this Agreement may not be terminated, except prior to Closing as follows:
(a) by mutual consent in writing of Seller and Buyer; or
(b) by Seller or Buyer at any time after September 30, 2022 (the “Outside Date”) if regulatory approval from the PSC has not been received by such date or the Closing has otherwise failed to occur by such date; provided, that the right to terminate this Agreement under this Section 9.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement or whose efforts to hinder or delay this Agreement have been the cause of, or resulted in, the failure of the Closing to occur by such date.  Buyer and Seller agree to cooperate in the Buyer’s efforts to obtain any and all necessary approvals for such Closing to occur; or
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(c) by either Buyer or Seller at any time (if such party is not then itself in material breach of any of its representations and warranties, covenants, agreements or other obligations contained in this Agreement), if the other party is in material breach or default of any of its representations and warranties, covenants, agreements or other obligations herein, which breach or default remains uncured for a period of ten (10) days after such other party’s written notice of the breach or default; or
(d) by Buyer at any time prior to Closing if there is a material adverse change in the Municipal Water Utility or the Purchased Assets; or
(e) by Buyer at any time prior to Closing if the Buyer’s due diligence results in concerns regarding the Purchased Assets; or
(f) by Buyer at any time if the PSC refuses to grant Buyer a CPCN for the territory served by the Purchased Assets or otherwise withholds consent for Buyer to enter into or perform under this Agreement.
In the event that this Agreement shall be terminated pursuant to this Section 9.1, all further obligations of the parties under this Agreement shall terminate without further liability of any party to another.
Section 9.2 Expenses.
The parties shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, all fees and expenses of their respective representatives and all fees, expenses and costs for obtaining any required consents.
Section 9.3 Successors and Assigns; Third Party Beneficiaries.
This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors, heirs, executors and assigns; provided, however, that this Agreement and all rights and obligations hereunder may not be assigned or transferred without the prior written consent of the other party hereto, except Buyer may assign its rights hereunder to a directly or indirectly wholly-owned subsidiary or affiliate of Buyer or any successor-in-interest.  There are no intended third party beneficiaries in connection with this Agreement.
Section 9.4 Choice of Law; Venue.
This Agreement and the rights of the parties shall be governed by and construed in accordance with the laws of the State of Delaware without consideration of the choice of law or conflict of law principles.  Each of the parties hereto irrevocably consents to the service of any process, pleading, notices or other papers by the mailing of copies thereof by certified mail with return receipt requested, to such party at such party’s address set forth herein, or by any other method provided or permitted under the laws of the State of Delaware.  Each party hereby irrevocably submits to the jurisdiction of any federal or state court located in the State of Delaware (and any appellate court therefrom) with respect to any action or proceeding arising out of or relating to this Agreement.  Each party hereby irrevocably and unconditionally waives and agrees not to plead, to the fullest extent provided by law, any objection it may have to venue and the defense of an inconvenient forum to the maintenance of such action or proceeding in Delaware courts.
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Section 9.5 Waiver of Jury Trial.
EACH PARTY HERETO HEREBY KNOWINGLY AND VOLUNTARILY IRREVOCABLY WAIVES, AFTER CONSULTATION WITH COUNSEL, ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED IN CONTRACT, TORT, EQUITY OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY, OR THE ACTIONS OF ANY PARTY HERETO IN THE NEGOTIATION, PERFORMANCE OR ENFORCEMENT HEREOF.
Section 9.6   Notices.
Unless otherwise provided in this Agreement, any notice required or permitted under this Agreement shall be given in writing and addressed to the party to be notified as indicated below, or at such other addresses as the parties may designate from time to time by written notice to the other party:
If to Buyer:
Artesian Water Company, Inc.
Attention:  Courtney A. Emerson, General Counsel
664 Churchmans Road
Newark, Delaware 19702
If to Seller:
The Town of Clayton
Attention: Nick Smith, Mayor
414 Main Street
P.O. Box 1130
Clayton, Delaware 19938
Section 9.7 Severability.
If any portion of this Agreement shall be held invalid, illegal or unenforceable by a court of competent jurisdiction, that portion shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable, provided any such modification shall as nearly as possible retain the intent of the parties, and if such modification is not possible, such portion shall be severed from this Agreement.  In either case, the remainder of this Agreement shall be interpreted as if such provision were so modified or excluded, as the case may be, and shall be enforceable in accordance with its terms.
Section 9.8 Entire Agreement.
This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements, whether written or oral.
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Section 9.9 Construction.
 The parties have participated jointly in the negotiation and drafting of this Agreement.  In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring either party by virtue of authorship of any particular portion hereof.  The titles and section headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.  The Recitals in this Agreement form a part of this Agreement.
Section 9.10 Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Section 9.11 Time Is of the Essence.
The parties hereto agree that time is of the essence with respect to the performance of each party’s respective obligations and commitments under this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Asset Purchase Agreement as of the date first written above.
BUYER:
ATTEST: ARTESIAN WATER COMPANY, INC.,
a Delaware corporation

____________________________ By: 
Name:  Joseph A. DiNunzio Name:  Nicholle R. Taylor
Title:     Secretary Title:     President



SELLER:
WITNESS: THE TOWN OF CLAYTON,
a Delaware municipality

By:  __________________________ By:  ______________________________
Name:  _______________________ Name: Nickolaus Smith
Title:   ________________________ Title:    Mayor

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Exhibit A-1
Listing of Purchased Assets





Exhibit A-2
Map of Purchased Assets




Exhibit A-3
Subdivision Maps





Exhibit B
Form of Public Utility Easement and Right-of-Way Agreement












Exhibit C
Form of Parcel Easement







Exhibit D
Form of Bill of Sale and General Assignment Agreement








Exhibit E
Sample Rate Transition Schedule






EXHIBIT 21

ARTESIAN RESOURCES CORPORATION AND SUBSIDIARY COMPANIES

Subsidiaries of Registrant

The following list includes the Registrant and all of its subsidiaries.  All subsidiaries of the Registrant appearing in the following table are included in the consolidated financial statements of the Registrant and its subsidiaries.

Name of Company
 
State of Incorporation
 
 
 
 
 
Artesian Resources Corporation
 
Delaware
 
      Artesian Water Company, Inc.
 
Delaware
 
      Artesian Water Pennsylvania, Inc.
 
Pennsylvania
 
      Artesian Water Maryland, Inc.
 
Delaware
 
      Artesian Development Corporation
 
Delaware
 
      Artesian Wastewater Management, Inc.
 
Delaware
 
 
                      Tidewater Environmental Services, Inc. dba Artesian Wastewater
    
Delaware
  
      Artesian Wastewater Maryland, Inc.
 
Delaware
 
      Artesian Utility Development, Inc.
 
Delaware
 
        Artesian Storm Water Services, Inc.   Delaware  




EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm
 
Artesian Resources Corporation
Newark, Delaware

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-88531) and Form S-8 (No. 33-05255, 333-31209, 333-78043, 333-126910 and 333-208582) of Artesian Resources Corporation of our report dated March 11, 2022, relating to the consolidated financial statements which appear in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K.

/s/BDO USA, LLP

BDO USA, LLP
Wilmington, Delaware
March 11, 2022
EXHIBIT 31.1

Certification of Chief Executive Officer of Artesian Resources Corporation, required
by Rule 13a – 14(a) as adopted under the Securities and Exchange Act of 1934

I, Dian C. Taylor, certify that:

1.
I have reviewed this annual report on Form 10-K for the period ended December 31, 2021 of Artesian Resources Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: March 11, 2022
   /s/ Dian C. Taylor
 
Dian C. Taylor
 
Chief Executive Officer (Principal Executive Officer)
EXHIBIT 31.2

Certification of Chief Financial Officer of Artesian Resources Corporation, required
by Rule 13a – 14(a) as adopted under the Securities and Exchange Act of 1934

I, David B. Spacht, certify that:

1.
I have reviewed this annual report on Form 10-K for the period ended December 31, 2021 of Artesian Resources Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: March 11, 2022
   /s/ David B. Spacht
 
David B. Spacht
 
Chief Financial Officer (Principal Financial and Accounting Officer)
EXHIBIT 32

Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350

I, Dian C. Taylor, Chief Executive Officer, and David B. Spacht, Chief Financial Officer, of Artesian Resources Corporation, a Delaware corporation (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on our knowledge:

1.
The Company's Annual Report on Form 10-K for the period ended December 31, 2021 (the " Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 USC Section 78m(a) or Section 78o(d)), as amended; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Report and results of operations of the Company for the period covered by the Report.


Date: March 11, 2022

Chief Executive Officer:
  
Chief Financial Officer:
     
     
   /s/ Dian C. Taylor
  
   /s/ David B. Spacht
Dian C. Taylor
  
David B. Spacht
     


     These certifications accompany the Report to which they relate, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.