Table of Contents

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

FORM 10-Q

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from  _____  to  _____

Commission file number 000-18516

 
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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☑
Yes
□
No
  

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☑
Yes
□
No
  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.


Large Accelerated Filer □
Accelerated Filer ☐
Non-accelerated Filer ☑
Smaller Reporting Company ☒
Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

☐
Yes
☑
No
  

As of November 2, 2022, 8,609,535 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.



Table of Contents


TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION
FORM 10-Q

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Page(s)
         
     
3
         
     
4
         
     
5 - 6
         
     
7
         
     
  8 - 23
         
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24 - 33
         
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34
         
-
  
34
         
      Part II
-
  
35
         
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35
         
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35
         
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36
         
   
36
         
   
36
         
   
36
         
-
  
37
 -
        
   Signatures
        


2

Table of Contents




PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In thousands)

ASSETS
  
September 30, 2022
    
December 31, 2021
  
Utility plant, at original cost (less accumulated depreciation - 2022 - $169,474; 2021 - $159,385)
  
$
655,960
    
$
590,431
  
Current assets
                
Cash and cash equivalents
    
108
      
92
  
Accounts receivable (less allowance for doubtful accounts - 2022 - $486; 2021 - $429)
    
11,720
      
8,367
  
Income tax receivable
    
833
      
2,234
  
Unbilled operating revenues
    
1,992
      
1,080
  
Materials and supplies
    
2,505
      
1,933
  
Prepaid property taxes
    
3,021
      
2,306
  
Prepaid expenses and other
    
2,724
      
2,652
  
Total current assets
    
22,903
      
18,664
  
Other assets
                
Non-utility property (less accumulated depreciation - 2022 - $973; 2021 - $919)
    
3,756
      
3,751
  
Other deferred assets
    
10,548
      
5,097
  
Goodwill
    
2,983
      
—
  
   Operating lease right of use assets
    
444
      
451
  
Total other assets
    
17,731
      
9,299
  
Regulatory assets, net
    
6,210
      
6,321
  
Total Assets
  
$
702,804
    
$
624,715
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Stockholders' equity
                
Common stock
  
$
9,491
    
$
9,414
  
Preferred stock
    
—
      
—
  
Additional paid-in capital
    
106,779
      
104,989
  
Retained earnings
    
71,603
      
63,607
  
Total stockholders' equity
    
187,873
      
178,010
  
Long-term debt, net of current portion
    
174,035
      
143,259
  
     
361,908
      
321,269
  
Current liabilities
                
Lines of credit
    
9,400
      
26,703
  
Current portion of long-term debt
    
2,023
      
1,591
  
Accounts payable
    
9,083
      
10,206
  
Accrued expenses
    
4,140
      
4,038
  
Overdraft payable
    
129
      
30
  
Accrued interest
    
1,362
      
917
  
Income taxes payable
    
1,096
      
-
  
Customer and other deposits
    
2,478
      
2,273
  
Other
    
3,165
      
1,448
  
Total current liabilities
    
32,876
      
47,206
  
                 
Commitments and contingencies
    
     
 
                 
Deferred credits and other liabilities
                
Net advances for construction
    
3,963
      
4,295
  
Operating lease liabilities
    
439
      
440
  
Regulatory liabilities
    
31,550
      
21,260
  
Deferred investment tax credits
    
443
      
456
  
Deferred income taxes
    
54,894
      
53,133
  
Total deferred credits and other liabilities
    
91,289
      
79,584
  
                 
Net contributions in aid of construction
    
216,731
      
176,656
  
Total Liabilities and Stockholders’ Equity
  
$
702,804
    
$
624,715
  
See notes to the condensed consolidated financial statements.

3




ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share amounts)

 
For the Three Months Ended September 30,
    
For the Nine Months Ended September 30,
  
   
2022
    
2021
    
2022
    
2021
  
Operating revenues
                        
Water sales
  
$
21,702
    
$
21,279
    
$
59,567
    
$
59,187
  
Other utility operating revenue
    
2,841
      
2,177
      
8,281
      
4,566
  
Non-utility operating revenue
    
2,039
      
1,463
      
5,932
      
4,279
  
Total Operating Revenues
    
26,582
      
24,919
      
73,780
      
68,032
  
                                 
Operating expenses
                                
Utility operating expenses
    
10,428
      
10,889
      
30,994
      
30,055
  
Non-utility operating expenses
    
1,570
      
979
      
4,418
      
2,756
  
Depreciation and amortization
    
3,210
      
2,969
      
9,350
      
8,958
  
State and federal income taxes
    
1,834
      
1,784
      
4,978
      
4,677
  
Property and other taxes
    
1,458
      
1,400
      
4,371
      
4,160
  
Total Operating Expenses
    
18,500
      
18,021
      
54,111
      
50,606
  
                                 
Operating income
    
8,082
      
6,898
      
19,669
      
17,426
  
                                 
Other income, net
                                
   Allowance for funds used during construction (AFUDC)
    
393
      
112
      
898
      
727
  
 Miscellaneous (expense) income
    
(101
)
    
(44
)
    
1,311
      
1,299
  
                                 
Income before interest charges
    
8,374
      
6,966
      
21,878
      
19,452
  
                                 
Interest charges
    
2,230
      
1,910
      
6,205
      
5,685
  
                                 
Net income applicable to common stock
  
$
6,144
    
$
5,056
    
$
15,673
    
$
13,767
  
                                 
Income per common share:
                                
Basic
  
$
0.65
    
$
0.54
    
$
1.66
    
$
1.47
  
Diluted
  
$
0.65
    
$
0.54
    
$
1.65
    
$
1.46
  
                                 
Weighted average common shares outstanding:
                                
Basic
    
9,477
      
9,404
      
9,451
      
9,389
  
Diluted
    
9,492
      
9,432
      
9,473
      
9,421
  
                                 
Cash dividends per share of common stock
  
$
0.2729
    
$
0.2610
    
$
0.8133
    
$
0.7791
  

See notes to the condensed consolidated financial statements.

4




ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)

 
For the Nine Months
Ended September 30,
  
   
2022
    
2021
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net income
  
$
15,673
    
$
13,767
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
    
9,350
      
8,958
  
Deferred income taxes, net
    
1,582
      
(2,426
)
Stock compensation
    
162
      
142
  
AFUDC, equity portion
    
(612
)
    
(491
)
                 
Changes in assets and liabilities, net of acquisitions:
                
Accounts receivable, net of allowance for doubtful accounts
    
(3,402
)
    
570
  
Income tax receivable
    
1,401
      
569
  
Unbilled operating revenues
    
(547
)
    
(493
)
Materials and supplies
    
(572
)
    
(131
)
Income tax payable
    
1,096
      
1,660
  
Prepaid property taxes
    
(138
)
    
(1,303
)
Prepaid expenses and other
    
(62
)
    
(213
)
Other deferred assets
    
(5,477
)
    
(393
)
Regulatory assets
    
280
      
14
  
Regulatory liabilities
    
9,651
      
(426
)
Accounts payable
    
(4,086
)
    
(826
)
Accrued expenses
    
(791
)
    
(178
)
Accrued interest
    
445
      
422
  
Deposits and other
    
1,097
      
459
  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    
25,050
      
19,681
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Capital expenditures (net of AFUDC, equity portion)
    
(36,660
)
    
(30,373
)
Investment in acquisitions, net of cash acquired
    
(6,341
)
    
—
  
Proceeds from sale of assets
    
49
      
88
  
NET CASH USED IN INVESTING ACTIVITIES
    
(42,952
)
    
(30,285
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Net (repayments) borrowings under lines of credit agreements
    
(17,303
)
    
794
  
Increase in overdraft payable
    
99
      
328
  
Net advances and contributions in aid of construction
    
11,576
      
13,946
  
Net proceeds from issuance of common stock
    
1,705
      
1,133
  
Issuance of long-term debt
    
30,828
      
3,753
  
Dividends paid
    
(7,677
)
    
(7,310
)
Deferred debt issuance costs
    
(120
)
    
(19
)
Principal repayments of long-term debt
    
(1,190
)
    
(1,439
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
    
17,918
      
11,186
  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    
16
      
582
  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
92
      
28
  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  
$
108
    
$
610
  

5



ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
Unaudited
(In thousands)

Non-cash Investing and Financing Activity:
        
Utility plant received as construction advances and contributions
$
4,407
$
2,799
Dividends declared but not paid
  
—
  
2,516
Change in amounts included in accounts payable and accrued payables related to capital expenditures
  
1,574
  
(670)
         
Supplemental Disclosures of Cash Flow Information:
        
Interest paid
$
5,760
$
5,263
Income taxes paid
$
1,431
$
5,179
         
         
Preliminary purchase price allocation of investment in acquisitions:
        
Utility plant
$
34,234
$
—
Cash
  
280
  
—
Goodwill
  
2,983
  
—
Other assets
  
1,033
  
—
Total assets
  
38,530
  
—
Less:
        
Liabilities
  
3,852
  
—
Future contractual obligation payable to seller
  
1,569
  
—
   Contributions in aid of construction
  
26,488
  
—
Cash paid for acquisitions
  
6,621
  
—
Cash received from acquisitions
  
280
  
—
Net cash paid for acquisitions
$
6,341
$
—

See notes to the condensed consolidated financial statements.

6




ARTESIAN RESOURCES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Unaudited
(In thousands)

 
  
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
    
Common Shares Outstanding Class B Voting (2)
    
$1 Par Value Class A Non-Voting
    
$1 Par Value Class B Voting
    
Additional Paid-in Capital
    
Retained Earnings
    
Total
  
 
                                          
Balance as of December 31, 2020
    
8,475
      
882
    
$
8,475
    
$
882
    
$
103,463
    
$
56,606
    
$
169,426
  
Net income
    
—
      
—
      
—
      
—
      
—
      
4,206
      
4,206
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(2,406
)
    
(2,406
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
3
      
—
      
3
      
—
      
95
      
—
      
98
  
Employee stock options and awards(4)
    
22
      
—
      
22
      
—
      
438
      
—
      
460
  
Employee Retirement Plan(3)
    
2
      
—
      
2
      
—
      
84
      
—
      
86
  
Balance as of March 31, 2021
    
8,502
      
882
      
8,502
      
882
      
104,080
      
58,406
      
171,870
  
Net income
    
—
      
—
      
—
      
—
      
—
      
4,505
      
4,505
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(4,904
)
    
(4,904
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
2
      
—
      
2
      
—
      
103
      
—
      
105
  
Employee stock options and awards(4)
    
11
      
—
      
11
      
—
      
165
      
—
      
176
  
Employee Retirement Plan(3)
    
3
      
—
      
3
      
—
      
105
      
—
      
108
  
Balance as of June 30, 2021
    
8,518
      
882
      
8,518
      
882
      
104,453
      
58,007
      
171,860
  
Net income
    
—
      
—
      
—
      
—
      
—
      
5,056
      
5,056
  
Cash dividends declared
                                                        
Common stock
    
—
      
—
      
—
      
—
      
—
      
(2,516
)
    
(2,516
)
Issuance of common stock
                                                        
Dividend reinvestment plan
    
3
      
—
      
3
      
—
      
94
      
—
      
97
  
Employee stock options and awards(4)
    
1
      
—
      
1
      
—
      
49
      
—
      
50
  
Employee Retirement Plan(3)
    
2
      
—
      
2
      
—
      
93
      
—
      
95
  
Balance as of September 30, 2021
    
8,524
      
882
      
8,524
      
882
      
104,689
      
60,547
      
174,642
  

 
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, 2021
  
8,532
 
 
882
 
$
8,532
 
$
882
 
$
104,989
 
$
63,607
 
$
178,010
Net income
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
4,483
 
 
4,483
Cash dividends declared
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
 
Common stock
 
—
 
 
—
 
 
—
 
 
—
 
 
—
 
 
(2,518)
  
 
(2,518)
Issuance of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend reinvestment plan
 
2
 
 
—
 
 
2
 
 
—
 
 
87
 
 
—
 
 
89
Employee stock options and awards(4)
 
22
 
 
—
 
 
22
 
 
—
 
 
475
 
 
—
 
 
497
Employee Retirement Plan(3)
 
0
 
 
—
 
 
0
 
 
—
 
 
0
 
 
—
 
 
0
Balance as of March 31, 2022
  
8,556
    
882
    
8,556
    
882
    
105,551
    
65,572
    
180,561
Net income
  
—
    
—
    
—
    
—
    
—
    
5,046
    
5,046
Cash dividends declared
                                        
Common stock
  
—
    
—
    
—
    
—
    
—
    
(5,159)
    
(5,159)
Issuance of common stock
                                        
Dividend reinvestment plan
  
2
    
—
    
2
    
—
    
97
    
—
    
99
Employee stock options and awards(4)
  
19
    
—
    
19
    
—
    
336
    
—
    
355
Employee Retirement Plan(3)
  
0
    
—
    
0
    
—
    
0
    
—
    
0
Balance as of June 30, 2022
 
8,577
 
 
882
 
  
8,577
 
  
882
 
  
105,984
 
  
65,459
 
  
180,902
Net income
  
—
    
—
    
—
    
—
    
—
    
6,144
    
6,144
Cash dividends declared
                                        
Common stock
  
—
    
—
    
—
    
—
    
—
    
—
    
—
Issuance of common stock
                                        
Dividend reinvestment plan
  
2
    
—
    
2
    
—
    
88
    
—
    
90
Employee stock options and awards(4)
  
30
    
—
    
30
    
—
    
707
    
—
    
737
Employee Retirement Plan(3)
  
—
    
—
    
—
    
—
    
—
    
—
    
—
Balance as of September 30, 2022
  
8,609
    
882
    
8,609
    
882
    
106,779
    
71,603
    
187,873

(1)
At September 30, 2022 and September 30, 2021, Class A Common Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 8,638,474 and 8,553,070, respectively.
(2)
At September 30, 2022 and September 30, 2021, Class B Common Stock had 1,040,000 shares authorized and 881,452 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 Company’s 401(k) retirement plan.
(4)
Under the Equity Compensation Plan, effective December 9, 2015, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for September 30, 2022, and September 30, 2021, see Note 6-Stock Compensation Plans.

See notes to the condensed consolidated financial statements

7





NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our wholly owned subsidiaries. The terms "we", "our", "Artesian" and the "Company" as used herein refer to Artesian Resources and its subsidiaries.

DELAWARE REGULATED SUBSIDIARIES

Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, 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, municipal and state water providers.  Artesian Water also provides water for public and private fire protection to customers in our service territories.

On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.  The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.

Artesian Wastewater Management, Inc., or 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.

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 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 Water Company, or Middlesex, for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton.

MARYLAND REGULATED SUBSIDIARIES

Artesian Water Maryland, Inc., or Artesian Water Maryland, began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland.

Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in the State of Maryland.  It is currently not providing these services.

PENNSYLVANIA REGULATED SUBSIDIARY

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

OTHER SUBSIDIARIES

Our three other subsidiaries, none of which are regulated, are Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water.
8



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 throughout 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 (collectively, SLP Plans).

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.  Artesian Utility currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 million gallons per day. 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 up to an annual limit.

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

Artesian Storm Water, incorporated 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.

NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q.  Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.  Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2021 as filed with the SEC on March 11, 2022.

The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water.  In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of September 30, 2022, the results of its operations for the three and nine-month periods ended September 30, 2022 and September 30, 2021, its cash flows for the nine-month periods ended September 30, 2022 and September 30, 2021 and the changes in stockholders’ equity for the three and nine-month periods ended September 30, 2022 and September 30, 2021.  The December 31, 2021 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2021 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

The results of operations for the interim periods presented are not necessarily indicative of the results for the full year or for future periods.
9



Use of Estimates

The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements and contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from management's estimates.

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.  Artesian Wastewater acquired TESI in January 2022 and Artesian Water purchased substantially all of the water operating assets from the Town of Clayton in May 2022. As of September 30, 2022, the fair value determination for TESI is finalized, with the exception of deferred income taxes, which is still preliminary but expected to be complete by December 31, 2022.  The fair value for deferred income taxes affects both goodwill and deferred income taxes.  As of September 30, 2022, The town of Clayton transaction is preliminary.  Management’s preliminary determination of fair value of the tangible assets acquired using the cost method requires management to make significant estimates and assumptions related to economic lives of the assets, replacement costs, and physical characteristics of the tangible assets acquired.  A third-party valuation specialist is assisting with the valuation of the assets acquired.  The purchase price allocation for the Town of Clayton is expected to be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date.

Reclassification

Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.  These reclassifications had no effect on net income or stockholders' equity.

NOTE 3 – REVENUE RECOGNITION

Background

Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC.  Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices.  Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, 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.
10



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, the minimum required volume was prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021.

Artesian generates revenue from metered wastewater services provided to customers in Sussex County, Delaware.  We recognize metered wastewater services at tariff rates on a cycle basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of water transferred, as well as unbilled amounts for estimated volume from the date of the last meter reading to the end of the accounting period.  As actual volume 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 volume in the same period, the previous billing period’s volume, 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 volume and revenue for the fiscal period will not differ materially from actual billed consumption.  The majority of these wastewater customers are billed for the volume of water transferred on a quarterly basis.  As a result, we record unbilled operating revenue (contract asset) for any estimated volume through the end of the accounting period that will be billed in the next monthly cycle.

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 either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis.  For contract services billed in arrears, we record unbilled operating revenue (contract asset) for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle.  For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided.  This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet.

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

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

Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing. An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.  However, due to the COVID-19 pandemic causing hardships for many utility customers, 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.
11



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. The majority of 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 most of these revenues.  We have one operation contract that was paid in advance resulting in a contract liability for services that have not yet been provided.  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 September 30, 2022, there is no associated contract asset or liability.  There is no allowance for doubtful accounts or bad debt expense associated with this revenue.

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

Sales Tax

The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax.  Revenues earned in the State of Maryland and the Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax.  Therefore, no sales tax is collected on revenues.

Disaggregated Revenues

The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location:
(in thousands)
  
Three months ended
September 30, 2022
    
Three months ended
September 30, 2021
    
Nine months ended
September 30, 2022
    
Nine months ended
September 30, 2021
  
Tariff Revenue
                        
     Consumption charges
  
$
13,927
    
$
13,595
    
$
36,676
    
$
36,672
  
     Fixed fees
    
7,924
      
7,112
      
23,452
      
20,983
  
     Service charges
    
156
      
130
      
449
      
450
  
     DSIC
    
1,406
      
1,387
      
3,870
      
3,876
  
     Metered wastewater services
    
193
      
—
      
462
      
—
  
     Industrial wastewater services
    
467
      
497
      
1,295
      
118
  
Total Tariff Revenue
  
$
24,073
    
$
22,721
    
$
66,204
    
$
62,099
  
                                 
Non-Tariff Revenue
                                
     Service line protection plans
  
$
1,224
    
$
1,181
    
$
3,662
    
$
3,411
  
     Contract operations
    
238
      
210
      
691
      
658
  
     Design and installation
    
621
      
139
      
1,723
      
351
  
     Inspection fees
    
127
      
108
      
234
      
244
  
Total Non-Tariff Revenue
  
$
2,210
    
$
1,638
    
$
6,310
    
$
4,664
  
Other Operating Revenue
  
$
299
    
$
560
    
$
1,266
    
$
1,269
  
Total Operating Revenue
  
$
26,582
    
$
24,919
    
$
73,780
    
$
68,032
  

12



Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
  
September 30, 2022
    
December 31, 2021
  
             
Contract Assets – Tariff
  
$
3,009
    
$
2,144
  
                 
Deferred Revenue
                
     Deferred Revenue – Tariff
  
$
1,196
    
$
1,227
  
     Deferred Revenue – Non-Tariff
    
399
      
287
  
Total Deferred Revenue
  
$
1,595
    
$
1,514
  

For the nine months ended September 30, 2022, 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 changes in Contract Assets and Deferred Revenue are primarily due to normal timing differences between our performance and customer payments.

Remaining Performance Obligations

As of September 30, 2022 and December 31, 2021, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months.

As of September 30, 2022 and December 31, 2021, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services, wastewater inspections and one operation contract, which are expected to be satisfied and associated revenue recognized within the next three months, one year and seven years for the SLP Plan revenue, inspection fee revenue and contract operations revenue, respectively.

NOTE 4 – ACCOUNTS RECEIVABLE

Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply.  Approximately $2.5 million was paid in August 2022.  The remaining $7.5 million is due in three equal installments no later than August of each year from 2023 through 2025.  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.  The following table summarizes the changes in the Company’s accounts receivable balance:

 
September 30,
    
December 31,
  
In thousands
  
2022
    
2021
  
 
            
Customer accounts receivable – water
  
$
7,110
    
$
5,986
  
Customer accounts receivable – wastewater
    
470
      
1,326
  
Settlement agreement receivable
    
7,510
      
—
  
Miscellaneous accounts receivable
    
329
      
202
  
Developer receivable
    
1,778
      
1,282
  
 
    
17,197
      
8,796
  
Less: Long-term portion of settlement agreement receivable (included in other deferred assets)
    
4,991
      
—
  
Less allowance for doubtful accounts
    
486
      
429
  
Net accounts receivable
  
$
11,720
    
$
8,367
  

13



NOTE 5 – LEASES

The Company leases land and office equipment under operating leases from non-related parties.  Our leases have remaining lease terms of 20 years 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.

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

 
(in thousands)
  
   
Three Months Ended
    
Nine Months Ended
  
   
September 30,
    
September 30,
  
   
2022
    
2021
    
2022
    
2021
  
                         
Minimum rentals
  
$
21
    
$
24
    
$
30
    
$
38
  
Contingent rentals
    
—
      
—
      
—
      
—
  
                                 
   
$
21
    
$
24
    
$
30
    
$
38
  

Supplemental cash flow information related to leases is as follows:

 
  
(in thousands)
  
 
  
Nine Months Ended
    
Nine Months Ended
  
   
September 30, 2022
    
September 30, 2021
  
 
          
Cash paid for amounts included in the measurement of lease liabilities:
            
     Operating cash flows from operating leases
  
$
30
    
$
38
  
Right-of-use assets obtained in exchange for lease obligations:
                
     Operating leases
  
$
444
    
$
444
  

Supplemental balance sheet information related to leases is as follows:
14



 
  
(in thousands,
except lease term and discount rate)
  
 
  
September 30, 2022
    
December 31, 2021
  
 
            
Operating Leases:
            
     Operating lease right-of-use assets
  
$
444
    
$
451
  
                 
     Other current liabilities
  
$
2
      
6
  
     Operating lease liabilities
    
439
      
440
  
Total operating lease liabilities
  
$
441
    
$
446
  
                 
                 
Weighted Average Remaining Lease Term
                
     Operating leases
  
61 years
    
61 years
  
Weighted Average Discount Rate
                
     Operating leases
    
5.0
%
    
5.0
%

Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2022 are as follows:

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

As of September 30, 2022, we have not entered into operating or finance leases that will commence at a future date.

NOTE 6 – STOCK COMPENSATION PLANS

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

Compensation expense, for the three and nine months ended September 30, 2022 of approximately $57,000 and $162,000, respectively, was recorded for restricted stock awards issued in May 2021 and May 2022.   Compensation expense, for the three and nine months ended September 30, 2021 of approximately $51,000 and $142,000, respectively, was recorded for restricted stock awards issued in May 2020 and May 2021.  Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards.

There was no stock compensation cost capitalized as part of an asset.
15



On May 3, 2022, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards.  The fair value per share was $45.58, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 3, 2022.  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 4, 2021, 5,000 shares of Class A Common Stock, or 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.

The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the nine months ended September 30, 2022:

 
Options
    
Restricted Awards
  
   
Option Shares
    
Weighted Average Exercise Price
    
Weighted Average Remaining Life (Yrs.)
    
Aggregate Intrinsic Value (in thousands)
    
Outstanding Restricted Stock Awards
    
Weighted Average
Grant Date
FairValue
  
Plan options/restricted stock awards
                                    
Outstanding at January 1, 2022
    
83,000
    
$
21.65
          
$
2,048
      
5,000
    
$
40.11
  
Granted
    
—
      
—
            
—
      
5,000
      
45.58
  
Exercised/vested and released
    
(66,104
)
    
21.65
            
1,894
      
(5,000
)
    
40.11
  
Expired/cancelled
    
—
      
—
            
—
      
—
      
—
  
Outstanding at September 30, 2022
    
16,896
    
$
21.86
      
1.602
    
$
444
      
5,000
    
$
45.58
  
                                                 
Exercisable/vested at September 30, 2022
    
16,896
    
$
21.86
      
1.602
    
$
444
      
—
      
—
  

The total intrinsic value of options exercised during the nine months ended September 30, 2022 was approximately $1,894,000.

There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2022.

As of September 30, 2022, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.  

As of September 30, 2022, there was $134,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan.  The cost will be recognized over 0.59 years, the remaining vesting period for the restricted stock awards.

NOTE 7 – 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. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 4-Accounts Receivable.

In thousands
September 30, 2022
  
December 31, 2021
 
 
 
 
Investment in CoBank
$5,351
 
$4,850
Settlement agreement receivable-long term
4,991
  
—
Other deferred assets
206
 
247
 
$10,548
 
$5,097
16



NOTE 8 - 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 First Mortgage bonds. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations.

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)
  
   
September 30, 2022
    
December 31, 2021
  
             
Deferred income taxes
  
$
470
    
$
355
  
Deferred contract costs and other
    
243
      
288
  
Debt related costs
    
4,757
      
4,902
  
Goodwill
    
268
      
273
  
Deferred acquisition and franchise costs
    
472
      
503
  
   
$
6,210
    
$
6,321
  

NOTE 9 – 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.
17



Deferred settlement refunds consist of reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s past capital and operating costs, totaling approximately $10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site in groundwater that Artesian Water uses for public potable water supply, pursuant to the Settlement Agreement.  Approximately $2.5 million was paid in August 2022.  The remaining $7.5 million is due in three equal installments no later than August of each year from 2023 through 2025.  Artesian Water received approval from the DEPSC in October 2022 to refund to its customers these reimbursements for past capital and operating costs.  The refund for the reimbursements will be applied to current and future customer bills in annual installments, with the first refund occurring in October 2022, and future customer refunds occurring no later than August of each year from 2023 through 2025.  The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers.  Artesian Water will record 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate applications.  For a full discussion of the Settlement Agreement, refer to Part II – Other Information – Item 1 – Legal Proceedings. 

Pursuant to the enactment of the Tax Cuts and Jobs Act, or TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 11) resulting in a decrease in the net deferred income tax liability of $24.3 million, of which $22.8 million was reclassified to a regulatory liability related to Artesian Water and Artesian Water Maryland.  The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes.  On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date. In May 2022, the Company received a rate order from the DEPSC instructing the Company to continue amortizing the liability over a period of 49.5 years, subject to review in the Company’s next base rate filing.  The MDPSC has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers.

Regulatory liabilities comprise:
  
 
  
(in thousands)
  
 
  
September 30, 2022
    
December 31, 2021
  
 
            
Utility plant retirement cost obligation
  
$
156
    
$
149
  
Deferred settlement refunds
    
10,042
      
—
  
Deferred income taxes (related to TCJA)
    
21,352
      
21,111
  
   
$
31,550
    
$
21,260
  

NOTE 10 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE

Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share is based on the weighted average number of common shares outstanding, the potentially dilutive effect of employee stock options and restricted stock awards.

The following table summarizes the shares used in computing basic and diluted net income per share:

 
For the Three Months Ended
September 30,
    
For the Nine Months Ended
September 30,
  
   
2022
    
2021
    
2022
    
2021
  
   
(in thousands)
  
Weighted average common shares outstanding during the period for Basic computation
    
9,477
      
9,404
      
9,451
      
9,389
  
Dilutive effect of employee stock options and awards
    
15
      
28
      
22
      
32
  
                                 
Weighted average common shares outstanding during the period for Diluted computation
    
9,492
      
9,432
      
9,473
      
9,421
  
18



For the three and nine months ended September 30, 2022 and 2021, no shares of restricted stock awards 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 Common Stock, or Class B Stock. As of September 30, 2022, 8,609,497 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of September 30, 2021, 8,524,093 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 $19.88 and $18.94 at September 30, 2022 and December 31, 2021, respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on September 30, 2022 and December 31, 2021, respectively.

NOTE 11 - REGULATORY PROCEEDINGS

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

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
11/20/20
DEPSC Approval Date
12/14/20
Effective Date
01/01/21
Cumulative DSIC Rate
7.50%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
$43.1
Eligible Plant Improvements – Installed Beginning Date
10/01/2014
Eligible Plant Improvements – Installed Ending Date
04/30/2019

19



The rate reflects the eligible plant improvements installed through April 30, 2019.  The January 1, 2021 rate currently remains in effect and is subject to periodic audit by the DEPSC. For the three and nine months ended September 30, 2022, we earned approximately $1.4 million and $3.9 million in DSIC revenue, respectively.  For the three and nine months ended September 30, 2021, we earned approximately $1.4 million and $3.9 million in DSIC revenue, respectively.

NOTE 12 – INCOME TAXES

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

Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes.  The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known.  The statute of limitations for the 2017 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 2018 tax returns lapsed during the third quarter of 2022, which resulted in the reversal of the reserve in the amount of approximately $212,000.  The Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense.  During the third quarter, the Company has reversed approximately $10,000 in penalties and interest for the nine months ended September 30, 2022 leaving a zero balance. The Company remains subject to examination by federal and state authorities for the tax years 2019 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.

NOTE 13 – 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.

20



All of Artesian Resources’ outstanding long-term debt as of September 30, 2022 and December 31, 2021 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
      
   
September 30, 2022
    
December 31, 2021
  
Carrying amount
  
$
176,058
    
$
144,850
  
Estimated fair value
  
$
153,174
    
$
163,182
  

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 14 – 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 LLP, or MNAT, in Wilmington, Delaware.  Mr. Houghton retired from MNAT as a Partner, effective January 1, 2022, however, Mr. Houghton continues to perform legal services for MNAT as an independent contractor and non-partner.  In the normal course of business, the Company utilized the services of MNAT in 2021 for various regulatory, real estate and public policy matters.  Approximately $89,000 and  $160,000 was paid to MNAT during the three and nine months ended September 30, 2021, respectively, for legal services and director related services.

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

NOTE 15 – BUSINESS COMBINATIONS

As part of the Company’s growth strategy, on January 14, 2022 Artesian Wastewater completed its agreement to acquire TESI, which provides regulated wastewater services in Delaware.  Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex, consisting of $3.1 million paid at closing. This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware.  The acquisition is being accounted for as a business combination under ASC Topic 805, “Business Combinations.” The purchase price allocation is primarily attributed to intangible assets and utility plant assets acquired and liabilities assumed based on their respective estimated fair values.  The acquisition method of accounting requires, among other things, that assets acquired, and liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date.  The Company utilized a third-party valuation firm to assist with the fair value of the assets acquired. The fair value determination is now finalized, with the exception of deferred income taxes, which is still preliminary but expected to be complete by December 31, 2022.  The fair value for deferred income taxes affects both goodwill and deferred income taxes.  A combination of methods was used to determine the reasonableness of the purchase price: the cost approach and the comparative sales (market) approach.  Given the majority of the net assets acquired were tangible utility plant assets and related contributions in aid of construction, the Company primarily utilized the cost approach to record the fair value of the assets as well as some of the assumed liabilities.  This approach values the underlying assets to derive market value based on the estimated replacement cost, adjusted for depreciation.  Real property was valued using the comparative sales approach.  Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure.  Any goodwill as a result of the transaction is not expected to be deductible for tax purposes.
21



The TESI acquisition was approved by the DEPSC on October 27, 2021, subject to the DEPSC determining the appropriate ratemaking treatment of the acquisition price and the assets acquired in Artesian Wastewater’s next base rate case.

The Company reflected revenue of $0.8 million and $2.2 million for the three and nine months ended September 30, 2022, respectively, in its condensed consolidated statement of operations related to the acquisition.  The pro forma revenue for the three and nine months ended September 30, 2022 is estimated to be approximately $0.8 million and $2.2 million, respectively.  The Company anticipates the pro forma effects of revenue for the three and nine months ended September 30, 2021 to be approximately the same given there has not been any changes in the rates.  The pro forma information is not necessarily indicative of the Company’s future results.  Any pro forma effects of earnings is not practicable, as we continue to integrate TESI operations and adjust the operating cost structure as it relates to operating expenses reflective of synergies of the combined operations, and therefore would not present an accurate comparison.

The table below sets forth the purchase price allocation of this acquisition as of September 30, 2022.  The fair value determination is now finalized, with the exception of deferred income taxes, which is still preliminary but expected to be complete by December 31, 2022.  The fair value for deferred income taxes affects both goodwill and deferred income taxes, which is included in the liability amount below.

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

Additionally, as part of the Company’s growth strategy, on May 26, 2022, Artesian Water completed its purchase of substantially all of the water system operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.  The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.  At closing, Artesian Water paid approximately $3.4 million of the total purchase price.  The remaining $1.6 million is payable in five equal annual installments on the anniversary date of the closing date.  Each annual installment is payable with interest at an annual rate of 2.0%. The acquisition was accounted for as a business combination under ASC Topic 805.  The preliminary purchase price allocation is $8.9 million of utility plant assets offset by $3.8 million of CIAC.  This preliminary purchase price allocation will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date.

This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022.  The DEPSC will determine 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 business acquired are not material to the Company’s financial position or results of operations based on estimated annual revenue of approximately $0.5 million related to customers acquired.

22


NOTE 16 – 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 September 30, 2022, Artesian Water was serving approximately 94,400 customers, Artesian Water Maryland was serving approximately 2,600 customers and Artesian Water Pennsylvania was serving approximately 40 customers.

Artesian Wastewater and TESI provide wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC. The number of wastewater customers served more than doubled following the acquisition of TESI in January 2022.  As of September 30, 2022, Artesian Wastewater combined with TESI were serving approximately 7,400 customers, including one large industrial customer.

NOTE 17 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

There was no new guidance issued by the FASB during the nine months ended September 30, 2022 that is applicable to the Company.


23


ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that express our "belief," "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995.  Statements regarding specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations, our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected.  Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements.  Certain factors as discussed under Item 1A -Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements.  While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2022

OVERVIEW

Our profitability is primarily attributable to the sale of water. Gross water sales composed 80.7% of total operating revenues for the nine months ended September 30, 2022.  Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans, wastewater services 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, SLP Plans 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.

24



COVID-19 Pandemic

As of September 30, 2022, 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.

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.

Water Division

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers.  Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue.  As of September 30, 2022, the number of metered water customers in Delaware increased approximately 3.4% compared to September 30, 2021.  The number of metered water customers in Maryland increased approximately 1.8% compared to September 30, 2021.  The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2021.  For the nine months ended September 30, 2022, approximately 6.5 billion gallons of water were distributed in our Delaware systems and approximately 103.7 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 Artesian’s Delaware wastewater customers more than doubled compared to September 30, 2021, following the acquisition of Tidewater Environmental Services, Inc., or TESI.  This acquisition agreement is discussed further in the “Strategic Direction” section below.


Non-Regulated Division

Artesian Utility provides contract water and wastewater operation services to private, municipal and governmental institutions.  Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan.  SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather.  There has been consistent customer growth over the years.  As of September 30, 2022, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.8%, 1.4% and 13.5%, respectively, compared to September 30, 2021.  The non-utility customers enrolled in one of our three protections plans increased 2.6%.
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Strategic Direction

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

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

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

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.

On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System.  The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.  This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022.

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’s Delaware wastewater subsidiaries are the sole regional regulated wastewater utilities 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.
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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 note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served by Artesian 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.


Results of Operations – Analysis of the Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021.

Operating Revenues

Revenues totaled $26.6 million for the three months ended September 30, 2022, $1.7 million, or 6.7%, more than revenues for the three months ended September 30, 2021.  Other utility operating revenue increased approximately $0.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.  This increase is primarily due to an increase in wastewater revenue associated with residential customer growth resulting from the acquisition of TESI in January 2022 and organic residential customer growth.

Non-utility operating revenue increased approximately $0.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.  This increase is primarily due to an increase in contract service revenue mostly related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue.

Water sales revenue increased $0.4 million, or 2.0%, for the three months ended September 30, 2022 from the corresponding period in 2021, primarily due to an increase in overall water consumption revenue and an increase in fixed fee revenue related to added customers.  We realized 81.6% and 85.4% of our total operating revenue for the three months ended September 30, 2022 and September 30, 2021, respectively, from the sale of water.


Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.2 million, or 1.4%, for the three months ended September 30, 2022, compared to the same period in 2021.  Non-utility operating expenses increased $0.6 million, while utility operating expenses decreased $0.5 million.

Non-utility operating expenses increased $0.6 million primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract and an increase in plumbing services related to Service Line Protection Plan repairs.
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Utility operating expenses decreased $0.5 million, or 4.2%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.  The net decrease is primarily related to the following.

Purchased water costs decreased $0.8 million, related to a decrease of water purchased under a new contract, effective January 2022, in which the minimum amount of water required to be purchased was reduced.
Repair and maintenance costs decreased $0.2 million, primarily due to reimbursements received from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s operating costs related to certain treatment costs pursuant to a settlement agreement.
Water treatment costs increased $0.3 million, primarily related to an increase in the cost and usage of water and wastewater treatment chemicals and an increase in water treatment testing costs.
Purchased power costs increased $0.1 million, primarily due to an increase in usage related to the additional operational costs associated with the TESI acquisition and upgraded wastewater treatment facilities, in addition to an increase in overall water operations.
Administrative costs increased $0.1 million, primarily related to an increase in outside contract services for wastewater treatment and station maintenance associated with the TESI acquisition.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 50.6% for the three months ended September 30, 2022, compared to 53.2% for the three months ended September 30, 2021.

Depreciation and amortization expense increased $0.2 million, or 8.1%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense increased $50,000, or 2.8%, primarily due to higher pre-tax income in 2022 compared to 2021, partially offset by a decrease related to stock options exercised.

Other Income, Net

Other income, net increased $0.2 million, primarily due to a $0.3 million increase in Allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2022 compared to the same period in 2021.

Interest Charges

Long-term debt interest increased $0.3 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022.

Net Income

Our net income applicable to common stock increased $1.1 million, or 21.5%.  Total operating revenues increased $1.7 million and AFUDC increased $0.3 million, partially offset by a $0.5 million increase in total operating expenses and $0.3 million increase in interest charges.

Results of Operations – Analysis of the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021.

Operating Revenues

Revenues totaled $73.8 million for the nine months ended September 30, 2022, $5.7 million, or 8.4%, more than revenues for the nine months ended September 30, 2021. Other utility operating revenue increased approximately $3.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.  This increase is primarily due to an increase in wastewater revenue associated with residential customer growth resulting from the acquisition of TESI in January 2022, industrial wastewater services that started in June 2021, as well as organic residential customer growth.

Non-utility operating revenue increased approximately $1.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.  This increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue.
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Water sales revenue increased approximately $0.4 million, or 0.6%, for the nine months ended September 30, 2022 from the corresponding period in 2021, primarily due to an increase in fixed fee revenue related to added customers and a slight increase in overall water consumption revenue.  We realized 80.7% and 87.0% of our total operating revenue for the nine months ended September 30, 2022 and September 30, 2021, respectively, from the sale of water.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $2.8 million, or 7.6%, for the nine months ended September 30, 2022, compared to the same period in 2021.  Non-utility operating expenses increased $1.7 million, utility operating expenses increased $0.9 million, and property and other taxes increased $0.2 million.

Non-utility operating expenses increased $1.7 million primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract and an increase in plumbing services related to Service Line Protection Plan repairs.

Utility operating expenses increased $0.9 million, or 3.1%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.  The net increase is primarily related to the following.

Administrative costs increased $0.6 million, primarily due to an adjustment made in June 2021 to reduce the additional bad debt reserve from 2020 associated with the COVID-19 pandemic.  In addition, outside contract services for wastewater treatment and station maintenance associated with the TESI acquisition increased.
Repair and maintenance costs increased $0.7 million, related to an increase in maintenance costs primarily associated with water treatment facilities and equipment, including tank painting, water treatment filter replacements, wastewater treatment and fuel.  In addition, overall maintenance costs increased related to the TESI acquisition.  This increase in repair and maintenance costs is partially offset reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s operating costs related to certain treatment costs pursuant to a settlement agreement.
Payroll and employee benefit costs increased $0.5 million, primarily related to an increase in overall compensation.
Water treatment costs increased $0.5 million, primarily related to an increase in the cost and usage of water and wastewater treatment chemicals and an increase water treatment testing costs.
Purchased power costs increased $0.3 million, primarily due to an increase in usage related to the additional operational costs associated with the TESI acquisition and upgraded wastewater treatment facilities, in addition to an increase in overall water operations.
Purchased water costs decreased $1.7 million, related to a decrease of water purchased under a new contract, effective January 2022, in which the minimum amount of water required to be purchased was reduced.


Property and other taxes increased $0.2 million, or 5.1%, primarily due to an increase in payroll taxes, related to increased payroll related expenses and 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.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.9% for the nine months ended September 30, 2022, compared to 54.3% for the nine months ended September 30, 2021.

Depreciation and amortization expense increased $0.4 million, or 4.4%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense increased $0.3 million, or 6.4%, primarily due to higher pre-tax income in 2022 compared to 2021, partially offset by a decrease related to stock options exercised.

Other Income, Net

Other income, net increased $0.2 million, primarily due to a $0.2 million increase in AFUDC, as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2022 compared to the same period in 2021.
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Interest Charges

Long-term debt interest increased $0.5 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022.

Net Income

Our net income applicable to common stock increased $1.9 million, or 13.8%.  Total operating revenues increased $5.7 million and AFUDC increased $0.2 million, partially offset by a $3.5 million increase in total operating expenses and $0.5 million increase in interest charges.


LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of liquidity for the nine months ended September 30, 2022 were $25.1 million of cash provided by operating activities, $30.0 million principal amount from a new First Mortgage Series Bond issued in April 2022, $11.6 million in net contributions and advances from developers and $1.7 million in net proceeds from the issuance of common stock.  Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer.  A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers.  As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.  We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.  In addition, the Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating activities.

Investment in Plant and Systems

The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory.  Capital expenditures during the first nine months of 2022 were $36.7 million compared to $30.4 million during the same period in 2021.  During the first nine months of 2022, we continue to focus our investment through our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains, installation of new main, enhancing or improving existing treatment facilities, construction of new water storage tanks, and replacing aging wells and pumping equipment to better serve our customers.  In May 2022, we completed the purchase of substantially all of the water operating assets from the Town of Clayton.  We also continue to invest in wastewater projects, including the acquisition of TESI in January 2022.  Developers contributed $6.2 million of the total investment during the first nine months of 2022.

We depend on the availability of capital for expansion, construction and maintenance.  We have several sources of liquidity to finance our investment in utility plant and other fixed assets.  We estimate that future investments will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations, state revolving fund loans and capital market financing.  We believe that internally generated funds along with existing credit facilities will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements.  However, because part of our business strategy is to expand through strategic acquisitions, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes.  There is no assurance that we will be able to secure funding on terms acceptable to us, or at all.  Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state public service commissions.

Lines of Credit and Long-Term Debt

At September 30, 2022, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources.  As of September 30, 2022, there was $34.2 million of available funds under this line of credit.  The previous interest rate for borrowings under this line was the London Interbank Offered Rate, or LIBOR, plus 1.00%.  It is expected that the LIBOR rate for USD currency will be discontinued after June 30, 2023.  As a result, effective May 20, 2022, this line of credit agreement was amended to replace LIBOR with the Daily Secured Overnight Financing Rate, or SOFR.  The interest rate is a one month SOFR plus 10 basis points, or Term SOFR, plus an applicable margin of 0.85%.  Term SOFR cannot be less than 0.00%.  This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time.  The term of this line of credit expires on the earlier of May 21, 2023 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
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At September 30, 2022, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland.  As of September 30, 2022, there was $16.4 million of available funds under this line of credit.  The previous interest rate for borrowings under this line allowed the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company historically used the weekly variable interest rate.  In October 2022, this line of credit was amended to replace the previous interest rate options with a daily SOFR rate plus 1.45% option or a term SOFR rate plus 1.45% option that is locked in for either one or three months.  The term of this line of credit expires on October 29, 2023.  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:
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Material Cash Requirements
Payments Due by Period
In thousands
Less than
1 Year
 
1-3
Years
 
4-5
Years
 
After 5
Years
 
Total
First mortgage bonds (principal and interest)
$
7,924
 
$
15,773
 
$
15,659
 
$
240,933
  
$
280,289
State revolving fund loans (principal and interest)
 
845
  
 
1,534
 
 
1,219
 
 
4,649
 
 
8,247
Promissory note (principal and interest)
  
961
    
1,921
    
1,924
    
10,854
    
15,660
Asset purchase contractual obligation (principal and interest)
  
345
    
672
    
647
    
---
    
1,664
Lines of credit
  
9,400
    
---
    
---
    
---
    
9,400
Operating leases
 
24
 
 
48
  
 
49
 
 
1,328
 
 
1,449
Operating agreements
  
60
    
78
    
83
    
796
    
1,017
Unconditional purchase obligations
  
791
    
1,510
    
919
    
---
    
3,220
Tank painting contractual obligation
 
626
 
 
1,096
 
 
---
 
 
---
  
 
1,722
Total contractual cash obligations
$
20,976
  
$
22,632
 
$
20,500
  
$
258,560
 
$
322,668

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 September 30, 2022, 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 April 29, 2022, Artesian Water and CoBank entered into a Bond Purchase Agreement, or the Agreement, relating to the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series W, or the Bond, due April 30, 2047, or the Maturity Date.  The Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fifth Supplemental Indenture dated as of April 29, 2022, or the Supplemental Indenture, from Artesian Water to Wilmington Trust Company, as Trustee.  The Supplemental Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant.  The proceeds from the sale of the Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources, with any additional proceeds used to fund capital investments in Artesian Water.  The Delaware Public Service Commission approved the issuance of the Bond on April 20, 2022.  The Bond carries an annual interest rate of 4.43% through but excluding the Maturity Date.  Interest is payable on June 30th, September 30th, December 30th and March 30th in each year and on the Maturity Date, beginning June 30, 2022, until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged.  Overdue payments shall bear interest as provided in the Supplemental Indenture. The term of the Bond also includes certain limitations on Artesian Water’s indebtedness.
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On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton.  The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the water operating assets.  At closing, Artesian Water paid approximately $3.4 million of the total purchase price.  The remaining $1.6 million is payable in five equal annual installments on the anniversary date of the closing date.  Each annual installment is payable with interest an annual rate of 2.0%.

On August 12, 2022, Artesian Water entered into three Financing Agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund (the “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.  The Department makes loans to, and acquires obligations of, eligible persons in Delaware to finance the costs of drinking water facilities in accordance with the Federal Safe Drinking Water Act using funds from the Fund. Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to $966,000, $1,167,000 and $3,200,000 (collectively, the “Loans”) from the Fund to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the “Projects”).  In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. In connection with the Financing Agreements, Artesian Water issued to the Department three General Obligation Notes dated as of August 12, 2022, or the Notes. Under the Notes, borrowings under the Financing Agreements bear interest at a rate of 1.0% per annum and are further subject to an administrative fee at a rate of 1.0% per annum (collectively, interest and the administrative fee are referred to herein as “Fee”).  The Fee shall be paid semiannually on each February 1 and August 1, beginning on February 1, 2023 (each, a “Payment Date”).  The Notes will mature on February 1, 2043.  As of September 30, 2022, approximately $0.8 million was borrowed under the Loans.

In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican effective from September 2018 through May 2022.  In February 2021, Artesian Water entered into a new electric supply contract with MidAmerican that is effective from May 2021 to May 2025.  The fixed rate 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.  In January 2022, following the acquisition of Tidewater Environmental Services, Inc., TESI dba Artesian Wastewater assumed an electricity supply contract with WGL Energy that is effective through December 2024.

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 which required us to purchase water on a step down schedule through July 5, 2022, and now requires 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 was $1.2 million.  In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional year.  Pursuant to the amended agreement, the total expenditure for the four years is $2.2 million.


Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2021 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2021.  The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods.  Actual amounts or results could differ from those based on such assumptions and estimates.

Our critical accounting assumptions, estimates and policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2021.  There have been no changes in our critical accounting assumptions, estimates and policies.  Our significant accounting policies are described in our notes to the 2021 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2021.

Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2021 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2021 and also in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.  We did not adopt any accounting policy in the first nine months of 2022 that had a material impact on our financial condition, liquidity or results of operations.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal course of business.  Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt.  The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 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 September 30, 2022 were approximately $9.4 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 SOFR 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.


ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business.  We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations.  However, we cannot ensure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense and may have significant diversion of management attention.

On July 19, 2022, final judgment was entered by the United States District Court, or Court, for a Consent Decree between the Delaware Sand and Gravel Remedial Trust, or Trust, and the United States Environmental Protection Agency, or USEPA, that governs the implementation of Amendment No 2 to the USEPA’s 1988 Record of Decision for the Delaware Sand & Gravel Landfill Superfund Site, or Site, located in New Castle County, Delaware, issued on December 12, 2017, or ROD Amendment No. 2, confirming, among other things, the terms and conditions set forth in a Settlement Agreement upon which The Chemours Company FC, LLC, Hercules, LLC, Waste Management of Delaware, Inc., SC Holdings, Inc., Cytec Industries, Inc., Zeneca Inc., and Bayer CropScience Inc., collectively the Percentage Settlors, and the Trust, on one hand, and Artesian Water, on the other hand, have agreed to resolve certain of Artesian Water’s claims and issues relating to releases of contaminants from the Site.

ROD Amendment No. 2 sets forth the remedy for the contamination existing at and emanating from the Site, or the Remedy, to address a release of contaminants of concern and of emerging concern, or COC’s, from the Site into groundwater.  Artesian Water has found in groundwater that Artesian Water uses for public potable water supply certain COC’s that the Remedy is designed to address, as a result of which Artesian has incurred, and potentially will incur additional, capital and operating costs to treat the groundwater to meet applicable drinking water standards.  The Remedy includes requirements that are directly linked to Artesian’s continued operation of the treatment plant associated with groundwater around the Site.

As set forth in the Settlement Agreement, Artesian Water shall have access to financial assurances that the Percentage Settlors have provided, or will provide, to the USEPA in connection with the Consent Decree governing the implementation of the Remedy.  In addition, the Trust shall reimburse Artesian Water for past capital and operating costs, totaling approximately $10.0 million, with approximately $2.5 million due by August 18, 2022, within 30 days after the Court’s July 19, 2022 approval of the Consent Decree.  The remaining $7.5 million will be payable in three equal installments annually on the anniversary date of the Court’s approval of the Consent Decree.  In addition, the Trust shall reimburse Artesian Water for documented reasonable and necessary capital and operating costs after July 1, 2021 that Artesian Water incurs to treat Site-related COC’s.  Any reimbursements Artesian Water receives from the Trust shall be subject to final determination by the DEPSC as to the appropriate regulatory rate-making treatment.  Artesian Water received approval from the DEPSC in October 2022 to refund the reimbursements for past capital and operating costs to its customers.  The refund for the reimbursements will be applied to current and future customer bills in annual installments, with the first refund occurring in October 2022, and future customer refunds occurring no later than August of each year from 2023 through 2025.  The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers.  Artesian Water will record 2022 and future recovery of capital expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate applications.  The Trust’s reimbursement of such costs shall end if and when, based upon testing information from the Trust’s Remedy facilities and Artesian Water’s facilities, treatment of Site-related COC’s is no longer necessary for Artesian Water to meet the treatment levels that Artesian Water chooses to not exceed in water it distributes to the general public throughout its service territory to provide a margin of safety in complying with applicable drinking water standards.

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in such Annual Report on Form 10-K.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
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ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None.

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ITEM 6 - EXHIBITS

Exhibit No.
Description
   
   
First Amendment to Second Amended and Restated Revolving Credit Agreement between Artesian Water Company, Inc. and CoBank, ACB dated October 25, 2022.*
   
Financing Agreement, Loan No. 22000030, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on August 15, 2022.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022A-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on August 15, 2022.
   
Financing Agreement, Loan No. 22000029, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.3 filed with the Company’s Form 8-K filed on August 15, 2022.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022B-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.4 filed with the Company’s Form 8-K filed on August 15, 2022.
   
Financing Agreement, Loan No. 22000028, dated as of August 12, 2022, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.5 filed with the Company’s Form 8-K filed on August 15, 2022.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2022C-DWSRF, dated as of August 12, 2022, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health., incorporated by reference to Exhibit 10.6 filed with the Company’s Form 8-K filed on August 15, 2022.
   
Settlement Agreement upon which The Chemours Company FC, LLC, Hercules, LLC, Waste Management of Delaware, Inc., SC Holdings, Inc., Cytec Industries, Inc., Zeneca Inc., and Bayer CropScience Inc., collectively the Percentage Settlors, and the Delaware Sand and Gravel Remedial Trust, on one hand, and Artesian Water Company, Inc., on the other hand, have agreed to resolve certain of Artesian Water’s claims and issues relating to releases of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, incorporated by reference to Exhibit 10.2 filed with the Company’s Quarterly Report on Form 10-Q filed on August 5, 2022.
   
Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).**
 
 
101.BAL
Inline XBRL Condensed Consolidated Balance Sheets (unaudited)*
 
101.OPS
Inline XBRL Condensed Consolidated Statements of Operations (unaudited)*
   
101.CSH
Inline XBRL Condensed Consolidated Statements of Cash Flows (unaudited)*
   
101.NTS
Inline XBRL Notes to the Condensed Consolidated Financial Statements (unaudited)*
   
104
The cover page from Artesian Resources Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022, formatted in Inline XBRL (contained in exhibit 101).*
 
   
*   Filed herewith
** Furnished herewith
37

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARTESIAN RESOURCES CORPORATION

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

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


*   Filed herewith
** Furnished herewith


38


 
Exhibit 31.1
Certification of Chief Executive Officer of Artesian Resources Corporation
required by Rule 13a – 14 (a) under the Securities Act of 1934, as amended
 
I, Dian C. Taylor, certify that:
 
 
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2022 of Artesian Resources Corporation;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
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 that 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:  November 4, 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) under the Securities Act of 1934, as amended
 
I, David B. Spacht, certify that:
 
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the period ended September 30, 2022 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 that 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: November 4, 2022
   /s/ DAVID B. SPACHT
 
David B. Spacht
 
Chief Financial Officer (Principal Financial 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 Quarterly Report on Form 10-Q for the period ended September 30, 2022 (the " Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 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:  November 4, 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.
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this “Amendment”) is entered into as of October [ ], 2022, between ARTESIAN WATER COMPANY, INC., a Delaware corporation (the “Company”), and CoBANK, ACB, a federally chartered instrumentality of the United States (“CoBank”).
BACKGROUND
The Company and CoBank are parties to a Second Amended and Restated Revolving Credit Agreement dated as of September 20, 2019 (the “Agreement”).  The parties now desire to amend the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION 1. Defined Terms. Capitalized terms used in this Amendment and not defined herein shall have the meanings given to those terms in the Agreement.
SECTION 2. Amendments.
(a) Section 2.01 of the Agreement is hereby amended and restated to read as follows:
SECTION 2.01. The Commitment.  On the terms and conditions set forth in this Agreement, the Lender agrees to make loans (each a “Loan” and collectively the “Loans”) to the Company from time to time until October 29, 2023 or such later date as CoBank may, in its sole discretion, authorize in writing (the “Maturity Date”), in an aggregate principal amount not to exceed, at any one time outstanding, $20,000,000 (the “Commitment”). The Commitment will be renewed for an additional year only if, on or before the Maturity Date, CoBank provides to the Company a written notice of renewal for an additional year (a “Renewal Notice”).  If on or before the Maturity Date, CoBank grants a short-term extension of the Commitment, the Commitment will be renewed for an additional year only if CoBank provides to the Company a Renewal Notice on or before such extended expiration date.  All annual renewals will be measured from, and effective as of, the same day as the Maturity Date in any year.  Within the limits and during the term of the Commitment, the Company may borrow, prepay pursuant to Section 2.07 hereof, and reborrow.
(b) Section 2.04 of the Agreement is hereby amended and restated to read as follows:
SECTION 2.04. Interest.
(A) Interest Rate Options. The Company agrees to pay interest on the unpaid principal balance of the Loans in accordance with one or more of the following interest rate options, as selected by the Company in accordance with the terms hereof:
(1) Daily Simple SOFR Option.  At a variable rate per annum equal at all times to 1.45% above Daily Simple SOFR (the “Daily Simple SOFR Option”). Any change in Daily Simple SOFR due to a change in SOFR shall be effective from and including the effective date of such change in SOFR without notice to the Company.
(2) Term SOFR Option.  At a rate per annum equal at all times to 1.45% above Term SOFR for the applicable Interest Period as published by the Term SOFR Administrator on the date that is two U.S. Government Securities Business Days prior to the first day of such interest period (the “Term SOFR Option”).  Under the Term SOFR Option, rates may be fixed on balances of $100,000 or in multiples thereof for Interest Periods of one or three months, as selected by the Company; provided, however, that: (a) in no event may rates be fixed for Interest Periods extending past the Maturity Date; and (b) the maximum number of balances that may be subject to the Term SOFR Option at any one time shall be five.
(B) Elections. Subject to the limitations set forth above, the Company: (1) shall select the applicable rate option(s) each time it requests a Loan; (2) may, on three Business Days’ notice, elect to convert balances bearing interest at the Daily Simple SOFR Option to the Term SOFR Option; and (3) may, three Business Days’ prior to the expiration of any Interest Period elect, effective on the last day of the Interest Period, to refix a rate under the Term SOFR Option or convert the balance to the Daily Simple SOFR Option; provided, that, no balances may be refixed under or converted to the Term SOFR Option during a Default or Event of Default.  In the absence of an election provided for herein, the Company shall be deemed to have elected the Daily Simple SOFR Option.  All elections provided for herein may be made telephonically, in writing, or, if agreed to in a separate agreement, electronically, and must be received by 12:00 Noon Company’s local time on the applicable day.  Any election made telephonically, shall, if required by CoBank, be promptly confirmed in writing.
(C) Calculation and Payment.  Interest shall be calculated on the actual number of days each Loan is outstanding on the basis of a year consisting of 360 days.  In calculating interest, the date each Loan is made shall be included and the date each Loan is repaid shall, if received before 3:00 P.M. Mountain time, be excluded.  Interest shall be: (1) calculated monthly in arrears as of the last day of each month and on the Maturity Date; and (2) due and payable on the 20th day of the following month and on the Maturity Date.  Notwithstanding the foregoing, at CoBank’s option, interest on balances bearing interest at the Term SOFR Option shall be payable on the last day of the Interest Period.
(D) Benchmark and Tenor Replacement and Modification.  Notwithstanding anything to the contrary in this Agreement or in any other Credit Document:
(1) if at any time CoBank determines that (a) any interest rate offered hereunder (each such interest rate, a “Benchmark”) or any tenor of such Benchmark has been, or is likely to be, discontinued; (b) any Benchmark or any tenor of any Benchmark is not or is likely to not be representative of the underlying market and economic reality that such Benchmark or tenor is intended to measure; (c) any Benchmark or any tenor of any Benchmark does not, or is likely not to, adequately and fairly reflect the cost to CoBank of making or maintaining loans hereunder; or (d) any Benchmark or any tenor of any Benchmark is, or is likely to be, unlawful, CoBank may amend this Agreement and any other Credit Document to replace such Benchmark or tenor with a Benchmark Replacement or to remove such tenor.  The selection of a Benchmark Replacement by CoBank may be for one, some or all tenors of the then-current Benchmark.  “Benchmark Replacement” means, for any Benchmark or tenor, a replacement benchmark rate, which may include a spread adjustment, that has been selected by CoBank in its sole discretion, giving due consideration to (i) any recommendation by a relevant governmental body of a replacement benchmark rate, the mechanism for determining such a rate or a spread adjustment, or (ii) any evolving or then-prevailing market convention for determining a benchmark rate or a spread adjustment. CoBank may effect such amendments to this Agreement and the other Credit Documents as CoBank in its sole discretion deems appropriate to reflect the adoption and implementation of such replacement rate, which amendments will become effective without any further action or consent of any other party to this Agreement or any other Credit Document; provided that CoBank shall give the Company notice of any such amendment.  In no event shall any Benchmark Replacement be less than zero percent (0.00%).
(2) if at any time CoBank determines in its discretion that any Benchmark or any tenor of any Benchmark is unavailable for any reason on a temporary basis, CoBank may (a) calculate such Benchmark or tenor using such previous or historical publications of such Benchmark or tenor as CoBank determines in its discretion to be appropriate, (b) suspend the availability of such tenor or (c) select and apply a Benchmark Replacement during such period.
(3) CoBank will have the right to make from time to time any technical, administrative or operational changes that CoBank decides in its discretion may be appropriate to permit or enhance the efficient administration of any Benchmark or any tenor of any Benchmark or the adoption, implementation or administration of any Benchmark Replacement or any tenor of any Benchmark Replacement.  Any amendments implementing such changes will become effective without any further action or consent of any other party to this Agreement or any other Credit Document; provided that CoBank shall give the Company notice of any such amendment.
(4) CoBank does not warrant or accept responsibility for, and each of the parties hereto hereby acknowledge and agree (for the benefit of CoBank) that CoBank shall not have any liability with respect to (a) the administration of, submission of, calculation of or any other matter related to any rate using SOFR as an index, any Benchmark, or any component definition thereof or rates referred to in the definition thereof or any alternative, successor or replacement rate thereto (including any Benchmark Replacement), including whether the composition or characteristics of any such alternative, successor or replacement rate (including any Benchmark Replacement) will be similar to, or produce the same value or economic equivalence of, or have the same volume or liquidity as, any rate using SOFR as an index, any initial Benchmark or any other Benchmark, or any Benchmark Replacement prior to its discontinuance or unavailability, or (b) the effect, implementation or composition of any modifications pursuant to this Section 2.04(D).  CoBank and its affiliates or other related entities may engage in transactions that affect the calculation of any rate using SOFR as an index, any Benchmark, any alternative, successor or replacement rate (including any Benchmark Replacement) or any relevant adjustments thereto, in each case, in a manner adverse to the Company.  CoBank may select information sources or services in its reasonable discretion to ascertain any rate using SOFR as an index, any initial Benchmark or any other Benchmark or Benchmark Replacement, in each case pursuant to the terms of this Agreement, and shall have no liability to the Company or any other Person for damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages, costs, losses or expenses (whether in tort, contract or otherwise and whether at law or in equity), for any error or calculation of any such rate (or component thereof) provided by any such information source or service.
(c) Section 2.07(A) of the Agreement is hereby amended and restated to read as follows:
(A) Voluntary. The Company shall have the right upon three Business Days prior notice (which notice shall be irrevocable), to prepay the Loans in whole or part. In the event the Company prepays any balance bearing interest at the Term SOFR Option, then at the time thereof, the Company shall pay to CoBank a prepayment surcharge calculated in accordance with Section 2.11 hereof.
(d) Section 2.11 of the Agreement is hereby amended and restated to read as follows:
SECTION 2.11. Broken Funding Surcharge.  In the event the Company:  (i) repays any balance bearing interest at the Term SOFR Option prior to the last day of the Interest Period applicable thereto, whether such payment is made voluntary, by reason of acceleration, or otherwise; or (ii) fails for any reason to borrow, convert to, or renew any balance bearing interest at the Term SOFR Option on the date fixed therefor, then the Company shall pay to the Lender a surcharge calculated in accordance with the next sentence hereof.  Such surcharge shall be in an amount equal to the greater of: (i) the present value of the sum of: (a) any funding losses imputed by the Lender to have been incurred as a result of such payment, conversion or failure; and (b) a per annum yield of ½ of 1% on the amount prepaid, converted or not borrowed for the period such amount was scheduled to have been outstanding at such fixed rate; or (ii) $300.  Such surcharge shall be determined and calculated in accordance with methodology established by the Lender, a copy of which will be made available upon request.
(e) Exhibit A to the Agreement is hereby amended to amend and restate the following definitions:
“Business Day” means a day on which CoBank and the Federal Reserve Bank are open for business.
“Interest Period” means a period commencing on the date an election by the Company of the Term SOFR Option becomes effective and ending on the numerically corresponding day that is one or three months thereafter, as the Company has selected pursuant to Section 2.04(A)(2); provided, however, that: (i) in the event such ending day is not a Business Day, such period shall be extended to the next Business Day unless such next Business Day falls in the next calendar month, in which case it shall end on the preceding Business Day; and (ii) if there is no numerically corresponding day in the month, then such period shall end on the last Business Day in the relevant month.
(f) Exhibit A to the Agreement is hereby amended to add the following definitions in alphabetical order:
“Daily Simple SOFR” means SOFR for the day that is five U.S. Government Securities Business Days prior to (i) if such day is a U.S. Government Securities Business Day, such day or (ii) if such day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such day, in each case, as SOFR is published (at such time as CoBank may determine in its sole discretion) by the SOFR Administrator on the SOFR Administrator’s website (or any successor source identified by the SOFR Administrator from time to time); provided, that, in no event shall the rate be less than 0.00%.
“Daily Simple SOFR Option” shall have the meaning set forth in Section 2.04(A)(1).
“SOFR” means, for any U.S. Government Securities Business Day, a rate per annum equal to the secured overnight financing rate for such U.S. Government Securities Business Day.
“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).
“Term SOFR” means the rate per annum determined by CoBank as the forward-looking term rate for a tenor comparable to the applicable Interest Period based on SOFR on the day that is two U.S. Government Securities Business Days prior to the first day of such Interest Period, as such rate is published by the Term SOFR Administrator;  provided, that, in no event shall the rate be less than 0.00%.
“Term SOFR Administrator” means CME Group Benchmark Administration Limited (CBA) (or a successor administrator of the Term SOFR selected by CoBank in its reasonable discretion).
“Term SOFR Option” shall have the meaning set forth in Section 2.04(A)(2).
“U.S. Government Securities Business Day” means any day except for (i) a Saturday, (ii) a Sunday, or (iii) a day on which the Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in United States government securities.
(g) Exhibit A to the Agreement is hereby amended to delete the definitions of “Banking Day”, “LIBOR”, “LIBOR Balance”, “LIBOR Option” and “Variable Rate Option”.
SECTION 3. Representations and Warranties. To induce CoBank to enter into this Amendment, the Company represents and warrants that: (A) no consent, permission, authorization, order or license of any governmental authority or of any party to any agreement to which the Company is a party or by which it or any of its property may be bound or affected, is necessary in connection with the execution, delivery, performance or enforcement of this Amendment; (B) this Amendment has been duly authorized, executed and delivered, and creates legal, valid, and binding obligations of the Company which are enforceable in accordance with their terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar Laws affecting the rights of creditors generally; and (C) the Company is in compliance with all of the terms of the Credit Documents, and no Default or Event of Default exists. Without limiting (C) above, the Company represents and warrants that it is in compliance with all notice provisions of the Agreement, including, without limitation, the requirement to notify CoBank of the commencement of material litigation and of certain environmental matters.
SECTION 4. Confirmation. Except as amended hereby, the Agreement shall remain in full force and effect as written.
SECTION 5. Counterparts and Electronic Delivery. This Amendment may be executed in counterparts (and by different parties in different counterparts), each of which shall constitute an original, and all of which when taken together shall constitute a single agreement. In addition, this Amendment may be delivered by electronic means.
Signature page follows
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the date shown above.
CoBANK, ACB
ARTESIAN WATER COMPANY, INC.
By:
    
By:
  
Name:
    
Name:
  
Title:
    
Title: