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 June 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. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. While the Company may elect to update forward-looking statements, we
specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2022
OVERVIEW
Our profitability is primarily attributable to the sale of water. Gross water sales composed 80.2% of total operating revenues for the six months ended June
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.
As of June 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.
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.
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 June
30, 2022, the number of metered water customers in Delaware increased approximately 3.3% compared to June 30, 2021. The number of metered water customers in Maryland
increased approximately 2.0% compared to June 30, 2021. The number of metered water customers in Pennsylvania remained consistent compared to June 30, 2021. For the six months ended June 30, 2022, approximately 4.0 billion gallons of water
were distributed in our Delaware systems and approximately 65.1 million gallons of water were distributed in our Maryland systems.
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 June 30, 2021, following the acquisition of Tidewater Environmental Services, Inc., or TESI. This acquisition agreement is discussed further in the “Strategic Direction” section below.
Artesian Utility provides contract water and wastewater operation services to
private, municipal and governmental institutions. Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather. There has been consistent customer growth over the years. As of June 30, 2022, the eligible customers
enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.4%, 1.3% and 14.6%, respectively, compared to June 30, 2021. The non-utility customers enrolled in one of our three protections plans increased 1.8%.
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.
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 June 30, 2022 Compared to the Three Months Ended June 30, 2021.
Revenues totaled $25.0 million for the three months ended June 30, 2022, $2.5 million, or 11.3%, more than revenues for the three months ended June 30, 2021. Other utility operating revenue increased approximately $1.9 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This
increase is primarily due to an increase in wastewater revenue associated with industrial wastewater services that started in June 2021, residential customer growth resulting from the acquisition of TESI in January 2022 and organic residential customer
growth.
Non-utility operating revenue increased approximately $1.0 million for the three months ended June 30, 2022 compared to the three months ended June 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.
Water sales revenue decreased $0.4 million, or 1.8%, for the three months ended June 30, 2022 from the corresponding period in 2021, primarily due to a
decrease in overall water consumption, partially offset by an increase in fixed fee revenue related to added customers. We realized 78.9% and 89.4% of our total operating revenue for the three months ended June 30, 2022 and June 30, 2021,
respectively, from the sale of water.
Operating expenses, excluding depreciation and income taxes, increased $1.5
million, or 12.8%, for the three months ended June 30, 2022, compared to the same period in 2021. Non-utility operating expenses increased $1.0 million, utility
operating expenses increased $0.4 million and property and other taxes increased $0.1 million.
Non-utility operating expenses increased $1.0 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 $0.4 million,
or 4.2%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The net increase is primarily related to the following.
|
Repair and maintenance costs increased $0.4 million, primarily related to an increase in tank painting
costs under contract, an increase in water and wastewater treatment costs, an increase in overall maintenance costs associated with the TESI acquisition and an increase in fuel costs.
|
|
Administrative costs
increased $0.3 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.
|
|
Payroll and employee benefit costs increased $0.2 million, primarily related to an increase in overall
compensation.
|
|
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.
|
|
Purchased water costs decreased $0.6 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 $0.1 million, or 5.4%, primarily due to an increase in payroll taxes, related to increased payroll related expenses. In
addition, utility plant subject to taxation increased. 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 53.5% for the three months ended June 30, 2022, compared to 52.8% for the three months ended June 30, 2021.
Depreciation and amortization expense increased $0.1 million, or 2.7%, primarily due to continued investment in utility plant providing supply, treatment,
storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense increased $0.2 million, or 11.9%, primarily due to higher pre-tax income in 2022 compared to 2021.
Interest Charges
Long-term debt interest increased $0.2 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 $0.5 million, or 12.0%. Total operating revenues increased $2.5 million, mostly offset by a $1.9 million
increase in total operating expenses and $0.2 million increase in interest charges.
Results of Operations – Analysis of the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021.
Revenues totaled $47.2 million for the six months ended June 30, 2022, $4.1 million, or 9.5%, more than revenues for the six months ended June 30, 2021. Other utility operating revenue increased approximately $3.0 million for the six months ended June 30, 2022 compared to the six months ended June 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 $1.1 million for the six months ended June 30, 2022 compared to the six months ended June 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.
Water sales revenue remained consistent for the six months ended June 30, 2022 from the corresponding period in 2021. Overall water consumption decreased,
partially offset by an increase in fixed fee revenue related to added customers. We realized 80.2% and 87.9% of our total operating revenue for the six months ended June 30, 2022 and June 30, 2021, respectively, from the sale of water.
Operating expenses, excluding depreciation and income taxes, increased $2.6
million, or 11.1%, for the six months ended June 30, 2022, compared to the same period in 2021. Utility operating expenses increased $1.4 million, non-utility
expenses increased $1.1 million and property and other taxes increased $0.1 million.
Utility operating expenses increased $1.4 million,
or 7.3%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The net increase is primarily related to the following.
|
Repair and maintenance costs increased $1.0 million, related to an increase in maintenance costs primarily
associated with water treatment facilities and equipment, including an increase in water treatment filter replacements, an increase in tank painting costs under contract, an increase in wastewater treatment costs and an increase in fuel
costs. In addition, overall maintenance costs increased related to the TESI acquisition.
|
|
Administrative costs
increased $0.5 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 associated
with the TESI acquisition increased.
|
|
Payroll and employee benefit costs increased $0.5 million, primarily related to an increase in overall
compensation.
|
|
Purchased power costs increased $0.2 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 $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.
|
Non-utility operating expenses increased $1.1 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.
Property and other taxes increased $0.1 million, or 5.5%, primarily due to an increase in payroll taxes, related to increased payroll related expenses. In
addition, utility plant subject to taxation increased. 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 55.8% for the six months ended June 30, 2022, compared to 55.0% for the six months ended June 30, 2021.
Depreciation and amortization expense increased $0.1 million, or 2.5%, primarily due to continued investment in utility plant providing supply, treatment,
storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense increased $0.3 million, or 8.7%, primarily due to higher pre-tax income in 2022 compared to 2021.
Interest Charges
Long-term debt interest increased $0.2 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 $0.8 million, or 9.4%. Total operating revenues increased $4.1 million, mostly offset by a $3.1 million
increase in total operating expenses and $0.2 million increase in interest charges.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the six months ended June 30, 2022
were $13.6 million of cash provided by operating activities, $30.0 million principal amount from a new First Mortgage Series Bond issued in April 2022, $8.0 million in
net contributions and advances from developers, and $0.9 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of
rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our
investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. We will
continue to borrow on available lines of credit in order to satisfy current liquidity needs. In addition, the Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating
activities.
Investment in Plant and Systems
The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory. Capital expenditures during
the first six months of 2022 were $29.6 million compared to $19.4 million during the same period in 2021. During the first six 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 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 $3.0 million of the total investment during the first six 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 June 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 June 30, 2022, there was $34.0 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.
At June 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 June 30, 2022, there was $16.4 million of available funds under this
line of credit. The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on October 30, 2022. Artesian Water expects to renew this line of credit.
The Company’s material cash requirements include the following lines of credit commitments and contractual obligations:
Material Cash Requirements
|
Payments Due by Period
|
In thousands
|
Less than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After 5
Years
|
|
Total
|
First mortgage bonds (principal and interest)
|
$
|
7,924
|
|
$
|
15,773
|
|
$
|
15,569
|
|
$
|
240,933
|
|
$
|
280,289
|
State revolving fund loans (principal and interest)
|
|
820
|
|
|
1,483
|
|
|
1,116
|
|
|
4,057
|
|
|
7,476
|
Promissory note (principal and interest)
|
|
961
|
|
|
1,921
|
|
|
1,924
|
|
|
11,094
|
|
|
15,900
|
Asset purchase contractual obligation (principal and interest)
|
|
345
|
|
|
672
|
|
|
647
|
|
|
---
|
|
|
1,664
|
Lines of credit
|
|
9,580
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
9,580
|
Operating leases
|
|
24
|
|
|
48
|
|
|
49
|
|
|
1,330
|
|
|
1,451
|
Operating agreements
|
|
59
|
|
|
78
|
|
|
83
|
|
|
804
|
|
|
1,024
|
Unconditional purchase obligations
|
|
774
|
|
|
1,525
|
|
|
1,103
|
|
|
---
|
|
|
3,402
|
Tank painting contractual obligation
|
|
392
|
|
|
392
|
|
|
---
|
|
|
---
|
|
|
784
|
Total contractual cash obligations
|
$
|
20,879
|
|
$
|
21,892
|
|
$
|
20,581
|
|
$
|
258,218
|
|
$
|
321,570
|
Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are
in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions,
transfer certain assets or change our business. As of June 30, 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.
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%.
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 is $1.2 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 six months of 2022 that had a material impact on our financial condition, liquidity or results of operations.