☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-18516
ARTESIAN RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
(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
Class A Non-Voting Common Stock
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
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 ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
The aggregate market value of the Class A Non-Voting Common Stock and Class B Common Stock held by non-affiliates of the registrant at June 30, 2018 was $312,086,000 and $9,789,000, respectively. The aggregate market value of Class A Non-Voting Common Stock was computed by reference to the closing price of such class as reported on the NASDAQ Global Select Market on June 30, 2018, which trade date was June 29, 2018. The aggregate market value of Class B Common Stock was computed by reference to the last reported trade of such class as reported on the OTC Bulletin Board as of June 30, 2018, which trade date was June 20, 2018.
As of March 11, 2019, 8,373,041 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
Statements in this Annual Report on Form 10-K which express our “belief,” “anticipation” or “expectation,” as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements. They include, but are not limited to, the statements below:
strategic plans for goals, priorities, growth and expansion;
expectations 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;
the execution of our strategic initiatives;
our expectation regarding the timing for construction on new projects;
the adoption of recent accounting pronouncements;
contract operations opportunities;
deferred tax assets;
the 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
sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs.
Certain factors, as discussed under Item 1A - Risk Factors, that could cause results to differ materially from those in the forward-looking statements include, but are not limited to:
changes in weather;
changes in our contractual obligations;
changes in government policies;
the timing and results of our rate requests;
failure to receive regulatory approvals;
changes in economic and market conditions generally; and
other matters discussed elsewhere in this annual report.
While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so, except as may be required under applicable securities laws, and you should not rely on any forward-looking statement as a representation of the Company’s views as of any date subsequent to the date of the filing of this Annual Report on Form 10-K.
Artesian Resources Corporation, or Artesian Resources, is a Delaware corporation incorporated in 1927, that operates as the holding company of nine wholly-owned subsidiaries offering water, wastewater and other services in Delaware, Maryland and Pennsylvania. The Company’s principal executive offices are located at 664 Churchmans Road, Newark, Delaware 19702. Our principal subsidiary, Artesian Water Company, Inc., is the oldest and largest investor-owned public water utility on the Delmarva Peninsula, and has been providing superior water service since 1905. We distribute and sell water, including water for public and private fire protection, to residential, commercial, industrial, municipal and utility customers in the states of Delaware, Maryland and Pennsylvania. We provide wastewater services to customers in Delaware. In addition, we provide contract water and wastewater operations, and water, sewer and internal Service Line Protection Plans. Our Class A Non-Voting Common Stock is listed on the NASDAQ Global Select Market and trades under the symbol "ARTNA." Our Class B Common Stock trades on the NASDAQ's OTC Bulletin Board under the symbol “ARTNB.”
Artesian Resources operates as the parent holding company of five regulated public utilities: Artesian Water Company, Inc., or Artesian Water, Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, Artesian Water Maryland, Inc., or Artesian Water Maryland, Artesian Wastewater Management, Inc., or Artesian Wastewater, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland; and four non-regulated subsidiaries: Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, Artesian Storm Water Services, Inc., or Artesian Storm Water, and Artesian Consulting Engineers, Inc., or Artesian Consulting Engineers. The terms "we," "our," “Artesian,” and the "Company" as used herein refer to Artesian Resources and its subsidiaries. The business activity conducted by each of our subsidiaries is discussed below under separate headings.
Our current market area is the Delmarva Peninsula. Our largest service area is in the State of Delaware. Substantial portions of Delaware, particularly outside of northern New Castle County, are not served by a public water or wastewater system and represent potential opportunities for Artesian Water and Artesian Wastewater to obtain new exclusive franchised service areas. We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout Delaware.
We hold Certificates of Public Convenience and Necessity, or CPCNs, for approximately 285 square miles of exclusive water service territory, most of which is in Delaware and some in Maryland and Pennsylvania. We hold CPCN’s for approximately 26 square miles of wastewater service territory located in Sussex County, Delaware. Our largest connected regional water system, consisting of approximately 141 square miles and 76,000 metered customers, is located in northern New Castle County and portions of southern New Castle County, Delaware. A significant portion of our exclusive service territory is in Sussex County, Delaware and remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by providing water and/or wastewater service to the newly developed areas and new customers.
Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905. Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware. In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers. We also provide water for public and private fire protection to customers in our service territories. Artesian Water produced approximately 90% of our 2018 consolidated operating revenues.
We derive about 95% of our self-supplied groundwater from wells that pump groundwater from aquifers and other formations located in the Atlantic Coastal Plain. The remaining 5% of our groundwater supply comes from wells in the Piedmont Province. We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation, ultra violet oxidation, arsenic removal, nitrate removal, radium removal, iron removal, and carbon adsorption to meet federal, state and local water quality standards. Additionally, a corrosion inhibitor is added to all of our self-supplied groundwater and most of the supply from interconnections. We have 54 different water treatment facilities in our Delaware systems. All water supplies that we purchase from neighboring utilities are potable.
To supplement our groundwater supply, we purchase treated surface water through interconnections only in the northern service area of our New Castle County, Delaware system. The treated surface water is blended with our groundwater supply for distribution to our customers. Nearly 85% of the overall 7.9 billion gallons of water we distributed in all of our Delaware systems during 2018 came from our groundwater wells, while the remaining 15% came from interconnections with other utilities and municipalities. In Delaware in 2018, we pumped an average of 18.5 million gallons per day, or mgd, from our groundwater wells and obtained an average of approximately 3.2 mgd from interconnections. Our peak water supply capacity currently is approximately 55.0 mgd.
Most of our New Castle County, Delaware water system is interconnected. In the remainder of the State of Delaware, we have several satellite systems that have not yet been connected by transmission and distribution facilities. We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.
In Delaware, we have 22 interconnections with two neighboring water utilities and six municipalities that provide us with the ability to purchase or sell water. An interconnection agreement with the Chester Water Authority has a "take or pay" clause requiring us to purchase 1.095 billion gallons annually. During the fiscal year ended December 31, 2018, we used the minimum draw under this agreement. The Chester Water Authority agreement, which expires December 31, 2021, provides for the right to extend the term of this agreement through and including December 31, 2047, at our option, subject to the approval of the Susquehanna River Basin Commission. All of the interconnections provide Artesian Water the ability to sell water to neighboring water utilities or municipalities. Artesian Water also has an interconnection with the Town of Chesapeake City that provides the town approximately 85,000 gallons per day on average. The interconnection is currently the town’s sole source of water supply.
As of December 31, 2018, we were serving customers through approximately 1,311 miles of transmission and distribution mains. Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron or cast iron.
We have 29 storage tanks in Delaware, most of which are elevated, providing total system storage of 42 million gallons. We have developed and are using an Aquifer Storage and Recovery, or ASR, system in New Castle County, Delaware. Our ASR system provides approximately 130 million gallons of storage capacity, which can be withdrawn at an average rate of approximately 1 mgd. At some locations, we rely on hydropneumatic tanks to maintain adequate system pressures. Where possible, we combine our smaller satellite systems with systems having elevated storage facilities.
Artesian Water Maryland
Artesian Water Maryland began operations in August 2007. Artesian Water Maryland distributes and sells water to residential, commercial, industrial and municipal customers in Cecil County, Maryland. Artesian Water Maryland owns and operates 8 public water systems including one in Port Deposit that has the ability to supply up to 1 mgd of water through an intake in the Susquehanna River.
The majority of the 0.1 billion gallons of water we distributed in all of our Maryland systems during 2018 came from our groundwater wells, while a portion came from treated surface water. We have eight separate water treatment facilities in our Maryland systems. We have one water treatment facility that treats surface water from the Susquehanna River, located in Cecil County, Maryland. Our peak water supply capacity currently is approximately 2.0 mgd. We have 7 storage tanks capable of storing approximately 2.4 million gallons. We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.
In Maryland, we have one interconnection that connects the Artesian Water system in Delaware to the Meadowview System, one interconnection with a neighboring utility, and three interconnections with the Town of Elkton. The interconnection with the Artesian Water Delaware system is capable of providing up to 3.0 mgd of water to our Maryland systems, of which 1.5 mgd is available to the Town of Elkton per our agreement with the town.
In January 2018, Artesian Water Maryland signed an interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day, commencing on the first day of the month following the date on which the interconnection is completed. The interconnection was completed in the first quarter of 2019.
Artesian Water Pennsylvania
Artesian Water Pennsylvania began operations in 2002. It provides water service to a residential community in Chester County, Pennsylvania.
Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company. Artesian Wastewater owns and operates four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day. Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.
Artesian Wastewater Maryland
Artesian Wastewater Maryland was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in the State of Maryland. It is currently not providing these services in Maryland.
Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions. Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental organizations. Artesian Utility also contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility. In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.
Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2022. The facilities include two wastewater treatment stations with capacities of up to approximately 2.5 mgd and 250,000 gallons per day, respectively. We also operate a wastewater disposal facility in Middletown in order to support the 2.5 mgd wastewater facility. One of the wastewater treatment facilities in Middletown now provides reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area.
Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. The WSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking water service lines up to an annual limit. The SSLP Plan covers all parts, material and labor required to repair or replace participating customers' leaking or clogged sewer lines up to an annual limit. The ISLP Plan enhances available coverage to include water and wastewater lines within customers' residences.
Artesian Development is a real estate holding company that owns properties, including land zoned for office buildings, a water treatment plant and wastewater facility, as well as property for current operations, including an office facility in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space.
Artesian Storm Water
Artesian Storm Water, incorporated on January 17, 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas. The ability to offer storm water services will complement the primary water and wastewater services that we provide.
Artesian Consulting Engineers
Artesian Consulting Engineers no longer offers development and architectural services to outside third parties. We will continue to provide design and engineering contract services through Artesian Utility.
Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and other matters. The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of regulatory relief we are granted by the respective regulatory commissions or authorities in the states in which we operate. See Note 13 to our Consolidated Financial Statements for a full description of recent regulatory proceedings.
Service Territory Expansion
In Delaware, a Certificate of Public Convenience and Necessity, or CPCN, grants a water or wastewater company the exclusive right to serve all existing and new customers within a designated area. The Delaware Public Service Commission, or DEPSC, has the authority to issue and revoke these CPCNs. In this Form 10-K, we may refer to CPCNs as "franchises" or "service territories."
For a water company, the DEPSC may grant a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Division of Public Health for human consumption or where the supply is insufficient to meet the projected demand. For a wastewater company, the DEPSC has jurisdiction over non-governmental wastewater utilities having fifty or more customers in the aggregate. A CPCN for water and wastewater utilities shall be granted by the DEPSC to applicants in possession of one of the following:
a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government;
a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or
a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served.
CPCNs are not transferable. A water or wastewater utility that has a CPCN must obtain the approval of the DEPSC to abandon a service territory. Once a CPCN is granted to a water or wastewater utility, it may not be suspended or terminated unless the DEPSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination. Although we have been granted an exclusive franchise for each of our existing water and wastewater systems in Delaware, our ability to expand service areas can be affected by the DEPSC awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.
In Maryland, the Company must obtain approval from the appropriate local government authority for the ability to serve a particular area and also ensure that the acquired area is in the county’s master water and sewer plan. The authority to exercise a franchise must then be obtained from the Maryland Public Service Commission, or MDPSC. Utilities that seek to develop a franchise by constructing new facilities must obtain appropriate approvals from the Maryland Department of the Environment, the local government and the MDPSC. The utility must also obtain approval for soil and erosion plans and easement agreements from appropriate parties.
Our water and wastewater operations are subject to federal, state, and local requirements relating to environmental protection. The United States Environmental Protection Agency, or the EPA, the Delaware Department of Natural Resources and Environmental Control, or DNREC, and the Delaware Division of Public Health, or DPH, regulate the water quality of our treatment and distribution systems in Delaware, as do the EPA and the Maryland Department of the Environment, or MDE, with respect to our operations in Maryland. The Chester Water Authority, which supplies water to Artesian Water through an interconnection in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection, as well as the EPA. We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. However, if new water quality regulations are too costly, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition and results of operations.
The water industry is capital intensive, with one of the highest levels of capital investment in plant and equipment per dollar of revenue among all utilities. Increasingly stringent drinking water regulations to meet the requirements of the Safe Drinking Water Act have required the water industry to invest in more advanced treatment systems and processes, which require a heightened level of expertise. Significant enhancements were made to existing facilities to effectively treat and remove compounds as required by government agencies, such as ultra violet oxidation treatment, ceramic membrane filtration and carbon filtration. We are currently in full compliance with the requirements of the Safe Drinking Water Act. Even though our water utility was founded in 1905, the majority of our investment in infrastructure occurred in the last 40 years.
Under Delaware state laws and regulations, we are required to file applications with DNREC for water allocation permits for each of our operating wells pumping greater than 50,000 gallons per day. For any wells in the Delaware River Basin, we must also file allocation permits with the Delaware River Basin Commission, or DRBC. We have 124 operating and 60 observation and monitoring wells in our Delaware systems. At December 31, 2018, we had allocation permits for 104 wells and 20 wells that do not require a permit.
Our access to aquifers within our service territory is not exclusive. Water allocation permits control the amount of water that can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits. We are also subject to water allocation regulations that control the amount of water that we can draw from water sources. As a result, if new or more restrictive water allocation regulations are imposed, they could have an adverse effect on our ability to supply the demands of our customers, and in turn, our water supply revenues and results of operations. Our ability to supply the demands of our customers historically has not been affected by private usage of the aquifers by landowners or the limits imposed by the state of Delaware. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.
As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water to ensure that the water is safe for human consumption. These limits are known as Maximum Contaminant Levels and Maximum Residual Disinfection Levels. The EPA also regulates how often public water systems monitor their water for contaminants and report the monitoring results to the individual state agencies or the EPA. Generally, the larger the population served by a water system, the more frequent the monitoring and reporting requirements. The Safe Drinking Water Act applies to all 50 states.
The DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA. The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations. Artesian Water is also subject to other laws regulating substances and contaminants in water, including rules for volatile organic compounds and the Total Coliform Rule.
A normal by-product of our iron removal treatment facilities is a solid consisting of the iron removed from untreated groundwater plus residue from chemicals used in the treatment process. The solids produced at our facilities are either disposed directly into approved wastewater facilities or removed from our facilities by a licensed third party vendor. A normal by-product of our carbon adsorption filtration process is exhausted carbon media, which is disposed of by the contractor providing the media replacement. Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of the Company, but there is no assurance that such compliance will continue to not have a material effect in the future.
The MDE ensures that water quality and quantity at all public water systems in Maryland meet the needs of the public and are in compliance with federal and state regulations. The MDE also ensures that public drinking water systems provide safe and adequate water to all current and future users in Maryland, and that appropriate usage, planning, and conservation policies are implemented for Maryland’s water resources. The MDE oversees the development of Source Water Assessments for water supplies and issues water appropriation permits for public drinking water systems. In order to appropriate water for municipal, commercial, industrial or other non-domestic uses, a Water Appropriation Permit must be obtained. Issuance of the permit involves evaluating the needs of the user and the potential impact of the withdrawal on neighboring users and the water source in order to maximize beneficial use of the water. Permits for large appropriations often involve conducting pump tests to measure adequacy of an aquifer and safe yield of a well, or reviewing stream flow records to determine the adequacy of a surface water source. Regulations require all new community water systems to have sufficient technical, managerial and financial capacity to provide safe drinking water to their consumers prior to being issued a Construction Permit. Also, capacity management guidance contains capacity limiting factors that can include, source capacity, treatment capacity and appropriation permit quantity. The quantity of water withdrawn from the Port Deposit surface water intake is allocated by the Susquehanna River Basin Commission, or SRBC, and MDE. We have 12 operating wells and one surface water in-take in our Maryland systems.
The Clean Water Act has established the foundation for wastewater discharge control in the United States. The Clean Water Act established a control program for ensuring that communities have clean water by regulating the release of contaminants into waterways. Permits that limit the amounts of pollutants discharged are required of all wastewater dischargers under the National Pollutant Discharge Elimination System, or the NPDES, permit program. In accordance with the NPDES permit program, the implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under the NPDES permit program can lead to the imposition of penalties. The Clean Water Act also requires that wastewater treatment plant discharges meet a minimum of secondary treatment. The secondary treatment process can remove up to 90% of the organic matter in wastewater.
Under Delaware state laws and regulations, we are required to hold a permit from DNREC for the construction, operation, maintenance or repair of any on-site wastewater treatment and disposal systems with daily design flow rates of 2,500 gallons or greater. A classification on the facility is performed in accordance with Regulations Licensing Operators of Wastewater Facilities. The class of operator required for the facility is determined by the Board of Certification for Licensed Wastewater Operations in accordance with Regulations Licensing Operators of Wastewater Facilities. We work to ensure that we operate environmentally friendly wastewater systems that meet federal, state, and local laws.
Substantially all of our water customers are metered, which allows us to measure and bill for our customers’ water consumption. Demand for water during the warmer months is generally greater than during cooler months primarily due to additional customer requirements for water in connection with cooling systems, swimming pools, irrigation systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand for water will vary with temperature and rainfall. In the event that temperatures during the typically warmer months are cooler than expected, or there is more rainfall than expected, the demand for water may decrease and our revenues may be adversely affected.
Our business in our franchised service areas is substantially free from direct competition with other public utilities, municipalities and other entities. However, our ability to provide additional water and wastewater services is subject to competition from other public utilities, municipalities and other entities. Even though our regulated utilities have been granted an exclusive franchise for each of our existing community water and wastewater systems, our ability to expand service areas can be affected by the DEPSC, the MDPSC or the Pennsylvania Public Utility Commission, or PAPUC, awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.
The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented. As of December 31, 2018, we had a total of 241 employees. We believe that our employee relations are good. Compensation and benefits are reviewed annually and are considered competitive within both the industry and the areas where we operate.
We are a Delaware corporation with our principal executive offices located at 664 Churchmans Road, Newark, Delaware, 19702. Our telephone number is (302) 453-6900 and our website address is www.artesianresources.com. We make available free of charge through our website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, our Corporate Governance Guidelines, and our Board Committee Charters as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website. Information contained on our website shall not be deemed incorporated into, or to be a part of, this report.
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act electronically with the SEC. The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
ITEM 1A. RISK FACTORS
We are exposed to a variety of risks and uncertainties. Most are general risks and uncertainties applicable to all water and wastewater utility companies. We describe below some of the specific known risk factors that could negatively affect our business, financial condition or results of operations. If one or more of these risks or uncertainties materialize, actual results may vary materially from our projections.
Our operating revenue is primarily from water sales. The rates that we charge our customers are subject to the regulations of the public service commissions in the states in which we operate. Additionally, our business requires significant capital expenditures on an annual basis and these expenditures are made for additions and replacement of property. If a public service commission disapproves or is unable to timely approve our requests for rate increases or approves rate increases that are inadequate to cover our investments or increased costs, our profitability may suffer.
We file rate increase requests, from time to time, to recover our investments in utility plant and expenses. Once a rate increase petition is filed with a public service commission, the ensuing administrative and hearing process may be lengthy and costly. We can provide no assurances that any future rate increase request will be approved by the DEPSC, MDPSC or PAPUC, and if approved, we cannot guarantee that these rate increases will be granted in a timely manner and/or will be sufficient in amount to cover the investments and expenses for which we initially sought the rate increase. To the extent we are able to pass through such costs to customers and a state public service commission subsequently determines that such costs should not have been paid by customers, we may be required to refund such costs, with interest, to customers. Any such costs not recovered through rates, or any such refund, could adversely affect our results of operations, financial position or cash flows.
We rely on governmental approvals in the States of Delaware, Maryland and Pennsylvania, as well as from the Delaware River Basin Commission and Susquehanna River Basin Commission for applicable water allocation, water appropriation and water capacity permits related to additional systems that will assist in the operation of our water business. In addition, we rely on governmental approvals in the States of Delaware and Maryland for applicable wastewater collection, treatment and disposal permits that will assist in the operation of our wastewater business.
Our water and wastewater services are governed by various federal and state governmental agencies. Pursuant to these regulations, we are required to obtain various permits for any additional systems to assist in our operations. If any of those permit approvals are not received timely or at all, we may risk the loss of economic opportunity and our ability to create additional systems for the effective operation of our water business in the States of Delaware, Maryland and Pennsylvania or our wastewater business in the States of Delaware and Maryland. We can provide no assurances that we will receive all necessary permits to create additional systems to assist in the operation of our water or wastewater business.
Our operating costs could be significantly increased if new or stricter regulatory standards are imposed by federal and state environmental agencies.
Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws. These federal and state regulations are issued by the EPA and state environmental regulatory agencies. Pursuant to these laws, we are required to obtain various water allocation permits and environmental permits for our operations. The water allocation permits control the amount of water that can be drawn from water resources. New or stricter water allocation regulations can adversely affect our ability to meet the demands of our customers. While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards would be imposed that will raise our operating costs. Thus, we can provide no assurances that our costs of complying with, or discharging liability under current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.
Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.
Demand for water during warmer months is generally greater than during cooler months primarily due to additional customer requirements in irrigation systems, swimming pools, cooling systems and other outside water use. In the event that temperatures during typically warmer months are cooler than normal, or rainfall is more than normal, the demand for our water may decrease and adversely affect our revenues.
Drought conditions and government imposed water use restrictions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may adversely affect our financial condition and results of operations.
We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories. However, severe drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers. This may adversely affect our revenues and earnings. Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for water, which may adversely affect our revenue and earnings.
We are subject to risks associated with the collection, treatment and disposal of wastewater.
Wastewater collection, treatment and disposal involve various unique risks. If collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in fees. This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflow and system failure. Liabilities resulting from such damages and injuries could materially and adversely affect our results of operations and financial condition.
Turnover in our management team could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.
Our success depends significantly on the continued contribution of our management team both individually and collectively. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results. In addition, turnover in our management team could adversely affect the financial market’s perception of our ability to continue to grow.
We face competition from other water and wastewater utilities for the acquisition of new exclusive service territories.
We face competition from other water and wastewater utilities as we pursue the right to exclusively serve territories in Delaware and Maryland by entering into agreements with landowners, developers or municipalities and, under current law, then applying to the DEPSC or the MDPSC for a CPCN. If we are unable to enter into agreements with landowners, developers or municipalities and secure CPCNs for the right to exclusively serve territories in Delaware or Maryland, our ability to expand may be significantly impeded.
We depend on the availability of capital for expansion, construction and maintenance. Weaknesses in capital and credit markets may limit our access to capital.
Our ability to continue our expansion efforts and fund our utility construction and maintenance program depends on the availability of adequate capital. There is no guarantee that we will be able to obtain sufficient capital in the future on favorable terms and conditions for expansion, construction and maintenance. In the event our lines of credit are not extended or we are unable to refinance our first mortgage bonds when due and the borrowings are called for payment, we will have to seek alternative financing sources, although there can be no assurance that these alternative financing sources will be available on terms acceptable to us. In the event we are unable to obtain sufficient capital, our expansion efforts could be curtailed, which may affect our growth and may affect our future results of operations.
General economic conditions may materially and adversely affect our financial condition and results of operations.
The effects of adverse U.S. economic conditions may lead to a number of impacts on our business that may materially and adversely affect our financial condition and results of operations. Such impacts may include a reduction in discretionary and recreational water use by our residential water customers, particularly during the summer months; a decline in usage by industrial and commercial customers as a result of decreased business activity and commerce in our customers’ businesses; an increased incidence of customers’ inability, bankruptcy or delay in paying their bills which may lead to higher bad debt expense and reduced cash flow; and a lower natural customer growth rate may result as compared to what had been experienced before the economic downturn due to a decline in new housing starts and a possible slight decline in the number of active customers due to housing vacancies or abandonments.
Any future acquisitions we undertake or other actions to further grow our water and wastewater business may involve risks.
An element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current service areas, and move into new ones. It is our intent, when practical, to integrate any businesses we acquire with our existing operations. The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources. We may not be successful in the future in identifying businesses that meet our acquisition criteria. The failure to identify such businesses may limit the rate of our growth. In addition, future acquisitions or expansion of our service areas by us could result in:
Dilutive issuance of our equity securities;
Incurrence of debt and contingent liabilities;
Difficulties in integrating the operations and personnel of the acquired businesses;
Diversion of our management’s attention from ongoing business concerns;
Failure to have effective internal control over financial reporting;
Overload of human resources; and
Other acquisition-related expense.
Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements. The businesses we acquire in the future may not achieve sales and profitability that would justify our investment.
We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close. Completion of certain acquisition transactions are conditioned upon, among other things, the receipt of approvals, including from certain state public utilities commissions. Failure to complete a pending transaction would prevent us from realizing the anticipated benefits. We would also remain liable for significant transaction costs, including legal and accounting fees, whether or not the transaction is completed.
We are subject to, and could be further subject to, governmental investigations or actions by other third parties.
We are subject to various federal and state laws, including environmental laws, violations of which can involve civil or criminal sanctions.
Our operations from time to time could be parties to or targets of lawsuits, claims, investigations and proceedings, including system failure, injury, contract, environmental, health and safety and employment matters, which are handled and defended in the ordinary course of business. The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could also materially and adversely affect our business, financial position and results of operations.
Contamination of our water supply may result in disruption in our services and could lead to litigation that may adversely affect our business, operating results and financial condition.
Our water supplies are subject to contamination from naturally-occurring compounds as well as pollution resulting from man-made sources. Even though we monitor the quality of our water on an on-going basis, any possible contamination due to factors beyond our control could interrupt the use of our water supply until we are able to substitute it from an uncontaminated water source. Additionally, treating the contaminated water source could involve significant costs and could adversely affect our business. We could also be held liable for consequences arising out of human or environmental exposure to hazardous substances, if found, in our water supply. This could adversely affect our business, results of operations and financial condition.
We are dependent on the continuous and reliable operation of our information technology systems.
We rely on our information technology systems to manage our operation of our business. Specifically, our business relies on the following technology systems: customer service and billing system, construction project management system, financial reporting system, asset tracking system, remote monitoring system for some of our treatment, storage and pumping facilities, human resources management system, inventory management system, and accounts receivable collection management system. Such systems require periodic modifications, upgrades or replacement that subject us to inherent costs and risks, including substantial capital expenditures, additional administration and operating expenses, and other risks and costs of delays in transitioning to new systems or of integrating new systems into our current systems. Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures or acts of war or terrorism or similar events or disruptions. A loss of these systems or major problems with the operation of these systems could affect our operations and have a material adverse effect on our results of operations.
There have been an increasing number of cyber-attacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data. These attacks have occurred over the internet, through malware, viruses or attachments to e-mails, or through persons inside the organization or with access to systems inside the organization. We have implemented security measures and will continue to devote resources to address any security vulnerabilities in an effort to prevent cyber-attacks. Despite our efforts, a cyber-attack, if it occurred, could cause water or wastewater system problems, disrupt service to our customers, compromise important data or systems or result in an unintended release of customer information. We feel we have adequate cyber-security insurance coverage to mitigate the cost of any such cyber-attack; however, a possible cyber-attack could affect our operations and have a material adverse effect on our results of operations.
Potential terrorist attacks may disrupt our operations and adversely affect our business, operating results and financial condition.
We have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply. We also have tightened our security measures regarding delivery and handling of certain chemicals used in our business. We have and will continue to bear any increase in costs, most of which have been recoverable under state regulatory policies, for security precautions to protect our facilities, operations and supplies. While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in water and wastewater rates. Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our water systems, should they occur.
Our corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and are owned by Artesian Water.
Artesian Development owns approximately six acres of land in New Castle County, Delaware zoned for office development and two nine-acre parcels of land in Sussex County, Delaware for water and wastewater treatment facilities and elevated water storage. Artesian Development also owns an office facility located in Sussex County, Delaware. The facility consists of approximately 10,000 square feet of office space along with approximately 10,000 square feet of warehouse space.
Artesian Water owns land, rights-of-way, easements, transmission and distribution mains, pump facilities, treatment plants, storage tanks, meters, vehicles and related equipment and facilities throughout Delaware, of which the majority are used for utility operations. Artesian Water Pennsylvania owns transmission and distribution mains in Pennsylvania. Artesian Water Maryland owns land, rights-of-way, easements, transmission and distribution mains, pump facilities, treatment plants, storage tanks and meters throughout Cecil County, Maryland. Artesian Wastewater owns land, rights-of-way, easements, collection mains, lift stations and treatment/disposal facilities in Southern Delaware. The following table indicates our utility plant as of December 31, 2018.
Utility plant comprises:
Estimated Useful Life
December 31, 2018
Utility plant at original cost
Utility plant in service-Water
Source of supply plant
Pumping and water treatment plant
Transmission and distribution plant
Utility plant in service-Wastewater
Treatment and disposal plant
Collection mains and lift stations
Property held for future use
Construction work in progress
Less – accumulated depreciation
Substantially all of Artesian Water's utility plant, except the utility plant in the town of Townsend, Delaware, is pledged as security for our First Mortgage Bonds. As of December 31, 2018, no other water utility plant has been pledged as security for loans. Two parcels of land in Artesian Wastewater are pledged as security for a loan.
We believe that our properties are generally maintained in good condition and in accordance with current standards of good water and wastewater works industry practice. We believe that all of our existing facilities adequately meet current necessary production capacities and current levels of utilization.
Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations. However, we cannot assure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense. In addition, any litigation may divert significant management attention.
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for the Company’s Common Equity
Artesian Resources' Class A Non-Voting Common Stock, or Class A Stock, is listed on the NASDAQ Global Select Market and trades under the symbol "ARTNA." On March 11, 2019, the last closing sale price as reported by the NASDAQ Global Select Market was $39.44 per share. On March 11, 2019 there were 632 holders of record of the Class A Stock.
Our Class B Voting Stock, or Class B Stock, is quoted on the OTC Bulletin Board under the symbol "ARTNB." There has been a limited and sporadic public trading market for the Class B Stock. As of March 11, 2019, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $40.55 per share on February 22, 2019. As of March 11, 2019, we had 149 holders of record of the Class B Stock. The Class B shares are paid the same dividend as the Class A shares.
Recent Sales of Unregistered Securities
During the year ended December 31, 2018, we did not issue any unregistered shares of our Class A or Class B Stock.
The following graph compares the percentage change in cumulative shareholder return on the Company’s Class A Stock with the Standard & Poor’s 500 Stock Index and a Peer Group of water utility companies. The graph covers the period from December 2013 (assuming a $100 investment on December 31, 2013, and the reinvestment of any dividends) through December 2018:
Years Ending December 31
Company Name / Index
Artesian Resources Corporation
S&P 500 Index
The Peer Group includes American States Water Company, American Water Works Company, Inc., Aqua America, Inc., California Water Service Group, Connecticut Water Service, Inc., Middlesex Water Company, SJW Group and York Water Company.
The selected statement of operations and balance sheet data shown below were derived from our consolidated financial statements. The consolidated statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2018 and 2017 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2015 and 2014 and the consolidated balance sheet data as of December 31, 2016, 2015 and 2014 have been derived from audited consolidated financial statements which are not included in this Annual Report on Form 10-K. You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In thousands, except per share data
STATEMENT OF OPERATIONS
Other utility operating revenue
Non-utility operating revenue
Total operating revenues
Operating and maintenance
Depreciation and amortization
State and federal income taxes
Property and other taxes
Total operating expenses
Other income, net
Total income before interest charges
Dividends on preferred stock (1)
Net income applicable to common stock
Net income per share of common stock:
Average shares of common stock outstanding:
Cash dividends per share of common stock
Utility plant, at original cost less accumulated depreciation
Lines of credit
Long-term obligations and redeemable preferred stock, including current portions
(1) There are no shares of preferred stock issued and outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our profitability is primarily attributable to the sale of water. Gross water sales comprised 88.1% of total operating revenues for the year ended December 31, 2018. Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans and other services we provide. Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature. In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.
While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. We anticipate continued growth in our non-regulated division due to our water, sewer, and internal SLP Plans.
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue. As of December 31, 2018, we had approximately 85,900 metered water customers in Delaware, an increase of approximately 1,700 compared to December 31, 2017. The number of metered water customers in Maryland and in Pennsylvania remained consistent compared to December 31, 2017. For the year ended December 31, 2018, approximately 7.9 billion gallons of water were distributed in our Delaware systems and approximately 138 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 the State of Maryland. It is not currently providing these services in Maryland. Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather. There has been consistent customer growth over the years. The number of Delaware wastewater customers totaled approximately 2,100 as of December 31, 2018, an increase of approximately 300, or 16.6%, compared to December 31, 2017. In addition, Artesian Wastewater entered into a wastewater services agreement with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer, under which service is expected to begin in 2019. The wastewater services agreement with Allen Harim 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 December 31, 2018, approximately 19,300, or 23.3%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,500, or 18.8%, of our eligible customers enrolled in the SSLP Plan, and approximately 6,300, or 7.6%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,700 non-utility customers enrolled in one of our three protection plans.
Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and SLP Plan services across the Delmarva Peninsula. We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance. By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously. We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue. We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.
In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water. Our strategy includes focused efforts to expand in new regions added to our Delaware service territory over the last 10 years. We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems. The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.
In June 2017, Artesian Water purchased existing water assets from Fort DuPont Redevelopment and Preservation Corporation. The Fort DuPont National Historic District, or Fort DuPont, consists of 325-acres and lies between the Delaware River on the east, the Chesapeake and Delaware Canal on the south and the Delaware City Branch Canal to the north and west. The final purchase price for the water assets consisting of a water treatment plant, storage tank, wells, mains, and other equipment used to provide potable water and fire suppression services to portions of Fort DuPont and the surrounding properties was $852,000. In connection with the planned future development of Fort DuPont, the parties intend to design, build and operate a state of the art, cost effective, safe and reliable water system that will include both new water assets as well as improvements and upgrades to the existing water assets. The water system can be expanded to meet the needs of the planned 600 residential units as well as new commercial customers, in addition to water service currently provided to the Governor Bacon Health Center and National Guard facilities.
On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, or SBWC, for $450,000. The public water system currently serves the community of Slaughter Beach located in Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The SBWC was founded in 1951 as a public water system in Delaware.
We believe that Delaware's generally lower cost of living in the region, availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County, and attractive financing rates for construction and mortgages have resulted, and will continue to result, in increases to our customer base. Delaware’s lower property and income tax rate make it an attractive region for new home development and retirement communities. Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.
In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.
Artesian Wastewater entered into agreements that will provide growth opportunities and will utilize our larger regional wastewater facilities. In August 2016, Artesian Wastewater and Sussex County, a political subdivision of Delaware, entered into an agreement to provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.
On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with Allen Harim for Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from Allen Harim’s properties located in Sussex County, Delaware upon completion of a pipeline to transfer the sanitary wastewater. The pipeline was completed in the second quarter of 2017. The transfer of sanitary wastewater is pending receipt of a construction permit and installation of related on-site improvements by Allen Harim at its facility. On January 27, 2017, Artesian Wastewater entered into a second wastewater agreement with Allen Harim for Artesian Wastewater to provide disposal services for approximately 1.5 million gallons per day of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from Allen Harim’s properties to a 90 million gallon storage lagoon at Artesian’s Sussex Regional Recharge Facility. We will use the reclaimed wastewater for spray irrigation on agricultural land in the area. The completion of the industrial process wastewater pipeline and storage lagoon should occur during 2019. Construction of the facility is 95% complete and nearing commencement of operation pending permit approval.
The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards and aging infrastructure. Our capital investment plan for the next three years includes projects for water treatment plant improvements and additions in both Delaware and Maryland and wastewater treatment plant improvements and expansion in Delaware. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.
In our non-regulated division, we continue pursuing opportunities to expand our contract operations. Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities. We also anticipate continued growth due to our water, sewer and internal SLP Plans. Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility. Artesian Storm Water was recently formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies and estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates, assumptions or other judgments by management. The following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Company. Changes in the estimates, assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period. We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our Consolidated Financial Statements. Senior management has discussed the selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
All additions to utility plant are recorded at cost. Cost includes direct labor, materials, and indirect charges for such items as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, any cost associated with retirement, less any salvage value or proceeds received, is charged to a regulated retirement liability. Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.
We record water service revenue, including amounts billed to customers, on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period. As actual usage amounts are received, adjustments are made to the unbilled estimates in the next billing cycle based on the actual results. Estimates are made on an individual customer basis, 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, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.
We record accounts receivable at the invoiced amounts. The reserve for bad debts is adjusted based on the provision for bad debts, which is calculated as a percentage of total water sales. The Company reviews the bad debt provision expense and the reserve for bad debts on a quarterly basis. Account balances are written off against the reserve when it is probable the receivable will not be recovered.
The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency. Our regulated utilities record deferred regulatory assets under FASB ASC Topic 980, which are costs that may be recovered over various lengths of time as prescribed by the DEPSC, MDPSC and PAPUC. As the utility incurs certain costs, such as expenses related to rate case applications, a deferred regulatory asset is created. Adjustments to these deferred regulatory assets are made when the DEPSC, MDPSC or PAPUC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is recoverable in rates charged to customers. In addition, our regulated utilities record deferred and/or amortized regulatory liabilities under FASB ASC Topic 980, as determined by the DEPSC, the MDPSC, and the PAPUC. Regulatory liabilities represent excess recovery of cost or other items that have been deferred because it is probable such amounts will be returned to customers through future regulated rates. Adjustments to reflect changes in recoverability of certain deferred regulatory assets or certain deferred regulatory liabilities may have a significant effect on our financial results.
Our long-lived assets consist primarily of utility plant in service and regulatory assets. We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360. We review regulatory assets for the continued application of FASB ASC Topic 980. Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets. Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverable in rates charged to customers. The Company believes there are no impairments in the carrying amounts of its long-lived assets or regulatory assets at December 31, 2018.
Revenues totaled $80.4 million for the year ended December 31, 2018, $1.8 million, or 2.2%, less than revenues for the year ended December 31, 2017. Water sales revenue decreased $2.2 million, or 3.1%, for the year ended December 31, 2018 from the corresponding period in 2017, primarily due to approximately $3.3 million placed in reserve that will be refunded to customers as a result of the Tax Cuts and Jobs Act, or TCJA. This refund amount was approved by the DEPSC on January 31, 2019 and is required to be paid in the second quarter of 2019, the majority of which will be issued as a credit to customer bills. This decrease in revenue related to the reserve is partially offset by an increase in overall water consumption and an increase in customer charges from customer growth. We realized 88.1% and 88.8% of our total operating revenue for the years ended December 31, 2018 and December 31, 2017, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.3 million, or 6.7%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in water service charges.
Non-utility operating revenue increased approximately $0.1 million, or 2.5%, for the year ended December 31, 2018 compared to the same period in 2017. The increase is primarily due to an increase in SLP Plan revenue.
Percentage of Operating Revenues
Government and Other
Other utility operating revenues
Non-utility operating revenues
Residential water service revenues in 2018 amounted to $42.4 million, a decrease of $1.2 million, or 2.6%, below the $43.6 million recorded in 2017, primarily due to revenue placed in reserve that will be refunded to customers as a result of the TCJA, partially offset by an increase in overall water consumption and an increase in customer charges from customer growth. The volume of water sold to residential customers increased to 3,803 million gallons in 2018 compared to 3,731 million gallons in 2017, a 1.9% increase. The number of residential customers served increased by approximately 1,800, or 2.2%, in 2018.
Water service revenues from commercial customers in 2018 decreased by 3.3%, to $17.2 million in 2018 from $17.8 million in 2017, primarily due to revenue placed in reserve that will be refunded to customers as a result of the TCJA, partially offset by an increase in overall water consumption. The volume of water sold to commercial customers increased to 2,256 million gallons in 2018 compared to 2,220 million gallons sold in 2017, an increase of 1.6%.
Water service revenues from industrial customers decreased to $51,000 in 2018 from $75,000 in 2017. The volume of water sold to industrial customers decreased to 4.8 million gallons in 2018 from 7.5 million gallons in 2017.
Government and other water service revenues in 2018 decreased by 4.0%, from $11.7 million in 2017 to $11.2 million in 2018, primarily due to revenue placed in reserve that will be refunded to customers as a result of the TCJA. The volume of water sold to government and other customers decreased to 927 million gallons in 2018 compared to 935 million gallons in 2017, a decrease of 0.9%.
Other Utility Operating Revenue
Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges and wastewater customer service revenues, increased 6.7%, from $4.2 million in 2017 to $4.5 million in 2018. The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in water service charges.
Non-Utility Operating Revenue
Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased 2.5%, from $5.0 million in 2017 to $5.1 million in 2018. The increase is primarily due to an increase in SLP Plan revenue.
Operating expenses, excluding depreciation and income taxes, increased $0.4 million, or 0.9%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The components of the change in operating expenses primarily include an increase in property and other taxes of $0.2 million, an increase in non-utility operating expenses of $0.1 million and a slight increase in utility operating expenses.
Property and other taxes increased $0.2 million, or 5.0%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.
Non-utility expenses increased approximately $0.1 million, or 3.7%, primarily due to an increase in plumbing services related to the SLP Plans as well as an increase in payroll and benefit costs.
Utility operating expenses increased $53,000, or 0.1%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The net increase is primarily related to the following.
Maintenance costs increased $0.1 million, primarily due to an increase in hardware and software support fees.
Purchase power expense increased $0.1 million, primarily due to an increase in electric demand related to an increase in water production.
Purchased water expense decreased $0.2 million, primarily due to more water purchased in 2017 during the relocation of a major transmission main in our northern New Castle County, Delaware water system due to state highway construction.
Percentage of Operating and Maintenance Expenses
Payroll and Associated Expenses
Repair and Maintenance
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.4% for the year ended December 31, 2018, compared to 55.7% for the year ended December 31, 2017.
Depreciation and amortization expense increased $0.7 million, or 7.7%, 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 decreased $2.3 million, or 31.6%, primarily due to the reduction in the Federal corporate income tax rate by the TCJA signed into law on December 22, 2017 as well as amortization and adjustments based on the DEPSC orders dated January 31, 2019 for Artesian Water and Artesian Wastewater related to the deferred income tax regulatory liability created from the TCJA.
Other income, net increased $1.0 million, primarily due to an increase in the amount of the patronage payment from CoBank, ACB, related to the refinancing of the Series O and Series Q First Mortgage bonds in January 2017 and savings generated from federal tax reform legislation passed at the end of 2017 along with earnings from significant non-recurring items in the first half of 2018. The patronage has been equal to 1.00% of the average line of credit and loan volume outstanding. In addition, a pledge was made in 2017 to a non-profit entity in Delaware to support the state’s economic development effort. A similar pledge was not made in 2018.
Interest expense increased $0.1 million, primarily due to an increase in borrowing under lines of credit. This increase is mostly offset by a decrease in interest charges due to the refinancing of the Series P First Mortgage bond in January 2018, reducing the interest rate from 6.58% to 4.71%.
Our net income applicable to common stock increased $0.3 million, primarily due to a decrease in federal and state income taxes and an increase in the amount of the patronage payment from CoBank, ACB, partially offset by a decrease in water sales revenue.
2017 Compared to 2016
Revenues totaled $82.2 million for the year ended December 31, 2017, $3.1 million, or 4.0%, above revenues of $79.1 million for the year ended December 31, 2016. Water sales revenues increased $2.5 million, or 3.5%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in water sales was primarily due to an increase in the Distribution System Improvement Charge, or DSIC, an increase in overall water consumption and an increase in customer charges from customer growth. We realized 88.8% of our total operating revenue for the year ended December 31, 2017 from the sale of water as compared to 89.3% for the year ended December 31, 2016.
Other utility operating revenue increased approximately $0.4 million, or 9.5%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily due to an increase in wastewater revenue from customer growth and an increase in water service charges.
Non-utility operating revenue increased approximately $0.3 million, or 6.7%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily due to an increase in SLP Plan revenue.
Residential water service revenues in 2017 amounted to $43.6 million, an increase of $1.3 million, or 3.1%, above the $42.3 million recorded in 2016, primarily due to an increase in DSIC revenue and an increase in the number of customers. The volume of water sold to residential customers decreased slightly to 3,731 million gallons in 2017 compared to 3,741 million gallons in 2016, a 0.3% decrease. The number of residential customers served increased by approximately 1,400, or 1.8%, in 2017.
Water service revenues from commercial customers in 2017 increased by 4.1%, from $17.1 million in 2016 to $17.8 million in 2017, primarily due to an increase in DSIC revenue and an increase in overall water consumption. The volume of water sold to commercial customers increased to 2,220 million gallons in 2017 compared to 2,178 million gallons sold in 2016, an increase of 1.9%.
Water service revenues from industrial customers decreased 2.6% from $77,000 in 2016 to $75,000 in 2017. The volume of water sold to industrial customers decreased to 7.5 million gallons in 2017 from 8.2 million gallons in 2016, a decrease of 8.5%.
Government and Other
Government and other water service revenues in 2017 increased by 4.5%, from $11.2 million in 2016 to $11.7 million in 2017, primarily due to an increase in DSIC revenue. The volume of water sold to government and other customers increased to 935 million gallons in 2017 compared to 810 million gallons in 2016, an increase of 15.4%.
Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges and wastewater customer service revenues, increased 9.5%, from $3.8 million in 2016 to $4.2 million in 2017. The increase was primarily due to an increase in wastewater revenue from customer growth and an increase in water service charges.
Non-Utility Operating Revenue
Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased 6.7%, from $4.7 million in 2016 to $5.0 million in 2017. The increase was primarily due to an increase in SLP Plan revenue.
Operating expenses, excluding depreciation and income taxes, increased $3.0 million, or 7.1%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The components of the change in operating expenses primarily include an increase in utility operating expenses of $2.6 million, an increase in non-utility operating expenses of $0.2 million and an increase in property and other taxes of $0.2 million.
Utility operating expenses increased $2.6 million, or 7.3%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The net increase was primarily related to the following.
Payroll, employee benefit costs and related expenses increased $1.5 million due to an increase in overall compensation, including equity compensation awards as well as an increase in discretionary profit sharing of 1% over last year.
Repair and maintenance expense increased $1.0 million, primarily due to an increase of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, and maintenance of water treatment facilities and storage tanks.
Purchased water expense increased $0.3 million, primarily due to increased purchased water during the relocation of a major transmission main in our northern New Castle County, Delaware water system due to state highway construction.
Water treatment expense increased $0.2 million, primarily due to an increase in the volume of chemicals purchased for water treatment and an increase in sludge removal related to supplementing the Town of Middletown during well repairs.
Administration expenses decreased $0.4 million, primarily due to a decrease in amortization of Delaware rate proceedings related to the 2014 rate case that was fully amortized at the end of 2016 and a decrease in legal costs associated with litigation before the DEPSC pertaining to a developer dispute over Contributions In Aid of Construction that was concluded in December 2016. This decrease was partially offset by an increase in wastewater consulting services.
Non-utility expenses increased approximately $0.2 million, or 6.7%, primarily due to an increase in plumbing services related to the SLP Plans as well as an increase in payroll and benefit costs and consulting fees.
Property and other taxes increased $0.2 million, or 5.3%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells. In addition, payroll taxes increased, primarily related to increased payroll related expenses.
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 55.7% for the year ended December 31, 2017, compared to 54.1% for the year ended December 31, 2016.
Depreciation and amortization expense increased $0.4 million, or 4.0%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense decreased $1.0 million, or 12.4%, primarily due to the reduction in the Federal corporate income tax rate by the TCJA. Also, the adoption of amended guidance issued by the FASB in 2017 that updated how stock compensation activities are recorded resulted in excess tax benefits being recorded immediately as a reduction to tax expense, compared to recording within equity previously. Also, we recognized an additional expense, for tax purposes only, related to the federal Domestic Production Activities Deduction, or DPAD, which reduced the effective tax rates.
Other Income, Net
Other income, net decreased $0.2 million, primarily due to a pledge made in 2017 to a non-profit entity in Delaware to support the State’s economic development efforts that partially offset other income.
Interest expense decreased $0.5 million, primarily due to the refinancing of the Series O and Series Q First Mortgage Bonds in January 2017, reducing interest rates from 8.17% and 4.75%, respectively, to 4.24%. Additionally, there was an interest rate change from 6.73% to 4.45% effective March 1, 2016 for the Series S First Mortgage Bond.
Our net income applicable to common stock increased $1.0 million. Operating revenues increased $3.1 million, while operating expenses increased $2.4 million. Partially offsetting the increase in operating expenses was a decrease in federal and state income tax expense of $1.0 million, primarily due to the reduction in the Federal corporate income tax rate by the TCJA. In addition, other income, net decreased $0.2 million and interest expense decreased $0.5 million.
Liquidity and Capital Resources
The Company’s primary sources of liquidity for the year ended December 31, 2018 were $29.1 million provided by cash flow from operating activities, $12.0 million from new loans in August and December 2018, $10.5 million in net contributions and advances from developers, $6.3 million from lines of credit borrowings and $1.0 million in net proceeds from the issuance of common stock. These funds were used to invest $49.1 million in capital expenditures, to pay dividends of approximately $8.8 million and for scheduled debt repayments of $1.3 million.
We depend on the availability of capital for expansion, construction and maintenance. We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations. We expect that our net investments in our utility plant and systems in 2019 will be approximately $43.6 million. Our total obligations related to interest and principal payments on indebtedness, rental payments, water service interconnection agreements and tank painting agreements for 2019 are anticipated to be approximately $11.7 million. We expect to fund our activities for the next year using our available cash balances, bank credit lines, projected cash generated from operations and potential capital market financings. 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 primary source of liquidity for the year ended December 31, 2018 was $29.1 million provided by cash flow from operating activities. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. 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.
The primary focus of our investment in 2018 was to continue to provide high quality reliable service to our growing service territory. We invested approximately $49.1 million in capital expenditures during 2018 compared to $41.1 million invested during the same period in 2017. During 2018, we invested approximately $13.1 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities. We invested $11.4 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $4.4 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $4.7 million for the installation of water mains and hydrants in 2018 compared to $5.9 million in 2017. We invested $2.1 million to upgrade and automate our meter reading equipment. We invested approximately $1.1 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades. An additional $12.3 million was invested in wastewater projects in Delaware, of which $10.6 million was invested in the ongoing construction of an eight mile pipeline and a 90 million gallon storage lagoon for spray irrigation to dispose of treated wastewater from a new industrial customer.
The following chart summarizes our investment in plant and systems over the past three fiscal years.
Source of supply, treatment and pumping
Transmission and distribution
General plant and equipment
Developer financed utility plant
Allowance for Funds Used During Construction, AFUDC
Of the $48.2 million we expect to invest in 2019, approximately $10.6 million will be invested in extending transmission and distribution facilities to address service needs in growth areas of our service territory. Approximately $4.8 million will be invested in renewals associated with the rehabilitation of aging infrastructure and approximately $4.2 million will be invested in the relocations of facilities as a result of government mandates. Approximately $15.4 million will be invested for new treatment facilities, facility upgrades, equipment and wells throughout Delaware and Maryland to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers. In addition, we will refund $0.9 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties.
We also plan to invest $3.6 million in general plant, which includes new corporate automation, building renovations and transportation and equipment upgrades. Additionally, $8.7 million will be invested in Artesian Wastewater for ongoing construction of wastewater plants and force mains. Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. The Company's investment for 2019 is expected to be offset by developer contributions and advances of $4.6 million for a net investment of $43.6 million in 2019.
We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations and potential capital market financings if necessary.
We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that the projected investment will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below.
Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state public service commissions.
Lines of Credit
At December 31, 2018, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of December 31, 2018, there was $35.1 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 24, 2019 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At December 31, 2018, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of December 31, 2018, there was $9.0 million of available funds under this line of credit. The interest rate for borrowings under this line is LIBOR plus 1.50%. CoBank may make an annual patronage refund, which has been equal to 1.00% of the average line of credit and loan volume outstanding by Artesian Water. The patronage refunds earned by Artesian Water for 2018 and 2017 were $1.2 million and $0.6 million respectively. The term of this line of credit expires on July 20, 2019. Artesian Water expects to renew this line of credit.
Our 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, guaranty certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business. In addition, this line of credit requires us to abide by certain financial covenants and ratios. As of December 31, 2018, we were in compliance with these covenants.
Artesian’s long-term debt agreements contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guaranty certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business. In addition, we are required to abide by certain financial covenants and ratios. As of December 31, 2018, we were in compliance with these covenants.
Payments Due by Period
First mortgage bonds (principal and interest)
State revolving fund loans (principal and interest)
Promissory note (principal and interest)
Unconditional purchase obligations
Tank painting contractual obligation
Total contractual cash obligations
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. The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period, and will be refinanced as future securities are issued. The promissory note obligation has an amortizing payment payable over a 20-year period. The first mortgage bonds, the state revolving fund loan and the promissory note have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately repaid, including all interest. We have not experienced conditions that would result in our default under these agreements.
On January 18, 2017, Artesian Water and CoBank entered into a Bond Purchase Agreement relating to the issue and sale by Artesian Water to CoBank of a $40 million principal amount First Mortgage Bond, Series T, or the Series T Bond, due December 20, 2036, or the Series T Maturity Date. The Series T 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-Second Supplemental Indenture dated as of January 18, 2017 from Artesian Water to Wilmington Trust Company, as Trustee. The Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Series T Bond were used to prepay indebtedness of Artesian Water under two existing First Mortgage Bonds: Series O, principal amount $20 million with interest rate of 8.17% and related prepayment costs of $4.5 million; and Series Q, principal amount $15.4 million with interest rate of 4.75%. The DEPSC approved the issuance of the Series T Bond on December 20, 2016. The DEPSC also approved deferral of the prepayment costs associated with the First Mortgage Bond, Series O and the previously deferred debt related costs associated with the First Mortgage Bonds, Series O and Series Q.
The Series T Bond carries an annual interest rate of 4.24% through and including the Series T Maturity Date. Interest is payable on June 30th and December 31st of each year, beginning June 30, 2017, until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Twenty-Second Supplemental Indenture. The terms of the Series T Bond also include certain limitations on Artesian Water’s indebtedness.
On January 24, 2018, Artesian Water Maryland signed an interconnection agreement with the Town of North East that has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons of water per day that shall commence on the first day of the month following the date on which the interconnection is completed. The interconnection was completed in the first quarter of 2019.
On January 31, 2018, Artesian Water and CoBank entered into a Bond Purchase Agreement relating to the issue and sale by Artesian Water to CoBank of a $25 million principal amount First Mortgage Bond, Series U, or the Series U Bond, due January 31, 2038, or the Series U Maturity Date. The Series U 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-Third Supplemental Indenture, dated as of January 31, 2018 from Artesian Water to Wilmington Trust Company, as Trustee. The Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Series U Bond, together with other funds of Artesian Water, were used to pay in full at maturity indebtedness of Artesian Water under those certain First Mortgage Bonds, Series P. The DEPSC approved the issuance of the Series U Bond on December 21, 2017.
The Series U Bond carries an annual interest rate of 4.71% through and including the Series U Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Series U Maturity Date, beginning April 30, 2018 until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Twenty-Third Supplemental Indenture. The term of the Series U Bond also includes certain limitations on Artesian Water’s indebtedness.
On August 8, 2018, Artesian Wastewater and CoBank entered into a Master Loan Agreement, or the MLA, and two supplements to the MLA, in which CoBank will loan Artesian Wastewater up to a total principal amount of $12 million. As of December 31, 2018, $12.0 million was issued from this loan. Artesian Wastewater agreed to pay interest, pursuant to a promissory note, on the unpaid principal balance of the loans at 5.12% per annum. Interest shall be calculated and paid quarterly in arrears on the thirtieth (30th) day of each of March, June, September and December. Artesian Wastewater agrees to repay each loan, pursuant to a promissory note, in eighty consecutive quarterly installments, each due on the thirtieth (30th) day of each March, June, September, and December, with the first installment due on March 30, 2019, and the last installment due on December 30, 2038. The amount of each installment shall be the same principal amount that would be required to be repaid if the loan was scheduled to be repaid in level installments of principal and interest and such schedule was calculated utilizing 5.12% as the rate accruing on the loan; provided, however, that the last installment of each loan shall be in an amount equal to the then unpaid principal balance of the loan. Two parcels of land in Artesian Wastewater are pledged as security for this loan pursuant to the terms of a mortgage and security agreement between Artesian Wastewater and CoBank. Closing on the debt financing was approved by the DEPSC on June 5, 2018.
In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican. The fixed rate for MidAmerican will be lowered 10.8% starting in September 2018. The current contract term has been in effect since October 2015. The new fixed price contract will be effective from September 2018 through May 2022. In August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy. The fixed rate for Constellation NewEnergy will be lowered 4.9% starting in May 2019. The current contract term has been in effect since December 2015. The new fixed price contract will be effective from May 2019 through May 2022.
Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under our interconnection agreement with the Chester Water Authority, which expires December 31, 2021 and minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires February 29, 2024.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 19 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal course of business. Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt. The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2028 to 2038, and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing fixed rate of the long-term debt prior to such debt’s maturity. In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit with two banks, under which the interim bank loans payable at December 31, 2018 were approximately $15.9 million. An increase in interest rates will result in an increase in the cost of borrowing on this variable rate line. We are also exposed to market risk associated with changes in commodity prices. Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our costs through rate increases to our customers. We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at fixed prices.