Company Quick10K Filing
Artesian Resources
Price36.54 EPS2
Shares9 P/E23
MCap341 P/FCF26
Net Debt114 EBIT24
TEV455 TEV/EBIT19
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-03
10-K 2017-12-31 Filed 2018-03-15
10-Q 2017-09-30 Filed 2017-11-03
10-Q 2017-06-30 Filed 2017-08-04
10-Q 2017-03-31 Filed 2017-05-05
10-K 2016-12-31 Filed 2017-03-10
10-Q 2016-09-30 Filed 2016-11-04
10-Q 2016-06-30 Filed 2016-08-05
10-Q 2016-03-31 Filed 2016-05-06
10-K 2015-12-31 Filed 2016-03-11
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-13
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-08
10-Q 2014-03-31 Filed 2014-05-09
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-08
10-K 2012-12-31 Filed 2013-03-14
10-Q 2012-09-30 Filed 2012-11-07
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-08
10-K 2011-12-31 Filed 2012-03-15
10-Q 2011-09-30 Filed 2011-11-08
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-09
10-K 2010-12-31 Filed 2011-03-15
10-Q 2010-09-30 Filed 2010-11-08
10-Q 2010-06-30 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-07
10-K 2009-12-31 Filed 2010-03-11
8-K 2020-05-06 Shareholder Vote
8-K 2020-04-28 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2020-04-02 Other Events
8-K 2020-02-27 Enter Agreement, Exhibits
8-K 2019-12-17 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-10-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-07-30 Officers
8-K 2019-05-13 Shareholder Vote
8-K 2018-09-23
8-K 2018-05-10
8-K 2018-05-07 Shareholder Vote
8-K 2018-01-31 Enter Agreement, Off-BS Arrangement, Exhibits

ARTNA 10Q Quarterly Report

Part I - Financial Information
Item 1 - Financial Statements
Note 1 - General
Note 2 - Basis of Presentation
Note 3 - Revenue Recognition
Note 4 - Leases
Note 5 - Stock Compensation Plans
Note 7 - Regulatory Liabilities
Note 8 - Net Income per Common Share and Equity per Common Share
Note 10 - Income Taxes
Note 12 - Related Party Transactions
Note 13 - Impact of Recent Accounting Pronouncements
Note 14 - Subsequent Events
Item 2
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 exhibit31-1.htm
EX-31.2 exhibit31-2.htm
EX-32 exhibit32.htm

Artesian Resources Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
55044033022011002012201420172020
Assets, Equity
25201510502016201720182020
Rev, G Profit, Net Income
1593-3-9-152012201420172020
Ops, Inv, Fin

10-Q 1 form10q.htm ARTESIAN RESOURCES CORP FILE 10-Q  

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

FORM 10-Q

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from  _____  to  _____

Commission file number 000-18516
 









 
ARTESIAN RESOURCES CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware
51-0002090
--------------------------------------------------------------------
-------------------------------------------------
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

664 Churchmans Road, Newark, Delaware 19702
------------------------------------------------------------------
Address of principal executive offices

(302) 453 – 6900
-----------------------------------------------------------
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol (s)
Name of each exchange on which registered
Common Stock
ARTNA
The Nasdaq Stock Market


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

Yes
No
 

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

Yes
No
 

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


Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act ).

Yes
No
 

As of May 5, 2020, 8,429,009 shares of Class A Non-Voting Common Stock and 881,442 shares of Class B Common Stock were outstanding.



TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION
FORM 10-Q

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2

Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

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

ASSETS
 
March 31, 2020
   
December 31, 2019
 
Utility plant, at original cost (less accumulated depreciation 2020 - $ 139,121; and 2019 - $136,588)
 
$
537,190
   
$
530,721
 
Current assets
               
Cash and cash equivalents
   
330
     
596
 
Accounts receivable (less allowance for doubtful accounts 2020 - $280; 2019 - $264)
   
6,734
     
6,913
 
Income tax receivable
   
-
     
19
 
Unbilled operating revenues
   
1,290
     
1,211
 
Materials and supplies
   
1,322
     
1,264
 
Prepaid property taxes
   
976
     
1,954
 
Prepaid expenses and other
   
2,027
     
2,250
 
Total current assets
   
12,679
     
14,207
 
Other assets
               
Non-utility property (less accumulated depreciation - 2020 - $809; 2019 - $790)
   
3,793
     
3,812
 
Other deferred assets
   
4,666
     
4,257
 
   Operating lease right of use assets
   
474
     
480
 
Total other assets
   
8,933
     
8,549
 
Regulatory assets, net
   
6,785
     
6,891
 
Total Assets
 
$
565,587
   
$
560,368
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Stockholders' equity
               
Common stock
 
$
9,302
   
$
9,292
 
Preferred stock
   
     
 
Additional paid-in capital
   
102,132
     
101,811
 
Retained earnings
   
50,920
     
49,165
 
Total stockholders' equity
   
162,354
     
160,268
 
Long-term debt, net of current portion
   
143,563
     
144,156
 
     
305,917
     
304,424
 
Current liabilities
               
Lines of credit
   
8,638
     
7,500
 
Current portion of long-term debt
   
1,789
     
1,706
 
Accounts payable
   
6,597
     
8,176
 
Accrued expenses
   
2,708
     
3,113
 
Overdraft payable
   
28
     
15
 
Accrued interest
   
1,497
     
830
 
Income taxes payable
   
2,740
     
343
 
Customer and other deposits
   
1,970
     
1,970
 
Other
   
1,956
     
1,946
 
Total current liabilities
   
27,923
     
25,599
 
                 
Commitments and contingencies
   
     
 
                 
Deferred credits and other liabilities
               
Net advances for construction
   
5,302
     
5,421
 
Operating lease liabilities
   
445
     
450
 
Regulatory liabilities
   
22,104
     
22,246
 
Deferred investment tax credits
   
486
     
490
 
Deferred income taxes
   
50,953
     
52,259
 
Total deferred credits and other liabilities
   
79,290
     
80,866
 
                 
Net contributions in aid of construction
   
152,457
     
149,479
 
Total Liabilities and Stockholders’ Equity
 
$
565,587
   
$
560,368
 
See notes to the condensed consolidated financial statements.
3

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

   
For the Three Months Ended March 31,
 
       
   
2020
   
2019
 
Operating revenues
           
Water sales
 
$
17,392
   
$
16,934
 
Other utility operating revenue
   
1,253
     
1,120
 
Non-utility operating revenue
   
1,256
     
1,332
 
Total Operating Revenues
   
19,901
     
19,386
 
                 
Operating expenses
               
Utility operating expenses
   
9,235
     
9,121
 
Non-utility operating expenses
   
728
     
767
 
Depreciation and amortization
   
2,752
     
2,715
 
State and federal income taxes
   
1,359
     
1,180
 
Property and other taxes
   
1,365
     
1,319
 
Total Operating Expenses
   
15,439
     
15,102
 
                 
Operating income
   
4,462
     
4,284
 
                 
Other income, net
               
   Allowance for funds used during construction (AFUDC)
   
423
     
226
 
   Miscellaneous income
   
1,088
     
800
 
                 
Income before interest charges
   
5,973
     
5,310
 
                 
Interest charges
   
1,899
     
1,720
 
                 
Net income applicable to common stock
 
$
4,074
   
$
3,590
 
                 
Income per common share:
               
Basic
 
$
0.44
   
$
0.39
 
Diluted
 
$
0.44
   
$
0.39
 
                 
Weighted average common shares outstanding:
               
Basic
   
9,297
     
9,258
 
Diluted
   
9,343
     
9,314
 
                 
Cash dividends per share of common stock
 
$
0.2496
   
$
0.2423
 

See notes to the condensed consolidated financial statements.

4

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

   
For the Three Months Ended March 31,
 
   
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
4,074
   
$
3,590
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,752
     
2,715
 
Deferred income taxes, net
   
(1,310
)
   
(768
)
Stock compensation
   
45
     
47
 
AFUDC, equity portion
   
(281
)
   
(145
)
                 
Changes in assets and liabilities:
               
Accounts receivable, net of allowance for doubtful accounts
   
179
     
1,184
 
Income tax receivable
   
19
     
763
 
Unbilled operating revenues
   
(79
)
   
(69
)
Materials and supplies
   
(58
)
   
(105
)
Prepaid property taxes
   
978
     
941
 
Prepaid expenses and other
   
223
     
142
 
Other deferred assets
   
(418
)
   
(361
)
Regulatory assets
   
92
     
95
 
Regulatory liabilities
   
(178
)
   
(114
)
Income tax payable
   
2,397
     
1,292
 
Accounts payable
   
(1,579
)
   
(3,324
)
Accrued expenses
   
(405
)
   
525
 
Accrued interest
   
667
     
565
 
Revenue reserved for refund
   
     
474
 
Customer deposits and other
   
11
     
174
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
7,129
     
7,621
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures (net of AFUDC, equity portion)
   
(9,212
)
   
(9,078
)
Proceeds from sale of assets
   
30
     
14
 
NET CASH USED IN INVESTING ACTIVITIES
   
(9,182
)
   
(9,064
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net borrowings under lines of credit agreements
   
1,138
     
2,669
 
Increase in overdraft payable
   
13
     
252
 
Net advances and contributions in aid of construction
   
3,179
     
748
 
Net proceeds from issuance of common stock
   
286
     
395
 
Dividends paid
   
(2,319
)
   
(2,241
)
Principal repayments of long-term debt
   
(510
)
   
(408
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
1,787
     
1,415
 
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
   
(266
)
   
(28
)
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
596
     
293
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
330
   
$
265
 
                 
Non-cash Investing and Financing Activity:
               
Utility plant received as construction advances and contributions
 
$
320
   
$
152
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Interest paid
 
$
1,232
   
$
1,155
 
Income taxes paid
 
$
360
   
$
 

See notes to the condensed consolidated financial statements.
5

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

 
 
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
   
Common Shares Outstanding Class B Voting (2)
   
$1 Par Value Class A Non-Voting
   
$1 Par Value Class B Voting
   
Additional Paid-in Capital
   
Retained Earnings
   
Total
 
 
                                         
Balance as of December 31, 2018
   
8,368
     
882
   
$
8,368
   
$
882
   
$
100,639
   
$
43,362
   
$
153,251
 
Net income
   
     
     
     
     
     
3,590
     
3,590
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(2,241
)
   
(2,241
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
2
     
     
2
     
     
85
     
     
87
 
Employee stock options and awards(4)
   
14
     
     
14
     
     
263
     
     
277
 
Employee Retirement Plan(3)
   
2
     
     
2
     
     
76
     
     
78
 
Balance as of March 31, 2019
   
8,386
     
882
     
8,386
     
882
     
101,063
     
44,711
     
155,042
 

 
 
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
   
Common Shares Outstanding Class B Voting (2)
   
$1 Par Value Class A Non-Voting
   
$1 Par Value Class B Voting
   
Additional Paid-in Capital
   
Retained Earnings
   
Total
 
 
                                         
Balance as of December 31, 2019
 
$
8,410
   
$
882
   
$
8,410
   
$
882
   
$
101,811
   
$
49,165
   
$
160,268
 
 
Net income
   
     
     
     
     
     
4,074
     
4,074
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(2,319
)
   
(2,319
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
3
     
     
3
     
     
105
     
     
108
 
Employee stock options and awards(4)
   
5
     
     
5
     
     
129
     
     
134
 
Employee Retirement Plan(3)
   
2
     
     
2
     
     
87
     
     
89
 
Balance as of March 31, 2020
 
$
8,420
   
$
882
   
$
8,420
   
$
882
   
$
102,132
   
$
50,920
   
$
162,354
 

(1)
At March 31, 2020, and March 31, 2019, Class A Common Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 8,449,292 and 8,415,799, respectively.
(2)
At March 31, 2020, and March 31, 2019, Class B Common Stock had 1,040,000 shares authorized and 881,452 shares issued.
(3)
Artesian Resources Corporation registered 500,000 shares of Class A Common Stock available for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.
(4)
Under the Equity Compensation Plan, effective December 9, 2015, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the Plan. Includes stock compensation expense for March 31, 2020 and March 31, 2019, see Note 1-Stock Compensation Plans.

See notes to the condensed consolidated financial statements.
6

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

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

DELAWARE REGULATED SUBSIDIARIES

Artesian Water Company, Inc., or Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905.  Artesian Water distributes and sells water to residential, commercial, industrial, governmental, municipal and utility customers throughout the State of Delaware.  In addition, Artesian Water provides services to other water utilities, including operations and billing functions, and has contract operation agreements with private and municipal water providers.  Artesian Water also provides water for public and private fire protection to customers in our service territories.

Artesian Wastewater Management, Inc., or Artesian Wastewater, is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company.  Artesian Wastewater owns and operates four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day.  Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.  Artesian Wastewater received an operations permit in March 2020 for a disposal facility that includes a 90 million gallon storage lagoon and spray irrigation to agricultural land.  This facility will be used to provide treated process wastewater disposal services for an industrial customer at a rate of approximately 1.5 million gallons per day. We expect to be operating this facility in the second quarter of 2020.

MARYLAND REGULATED SUBSIDIARIES

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

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

PENNSYLVANIA REGULATED SUBSIDIARY

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

OTHER SUBSIDIARIES

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

Artesian Utility was formed in 1996 and designs and builds water and wastewater infrastructure and provides contract water and wastewater operation services on the Delmarva Peninsula to private, municipal and governmental institutions.  Artesian Utility also evaluates land parcels, provides recommendations to developers on the size of water or wastewater facilities and the type of technology that should be used for treatment at such facilities, and operates water and wastewater facilities in Delaware for municipal and governmental organizations.  Artesian Utility also contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility.  In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.
7

Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2039.  The company has been operating these facilities, which currently include two wastewater treatment stations with a combined capacity of up to approximately 2.8 million gallons per day, or mgd, and the related wastewater disposal facilities, since 1998.  The wastewater treatment facilities in Middletown provide reclaimed wastewater for use in spray irrigation on public and agricultural lands in the area.

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

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

Artesian Storm Water, incorporated 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.

NOTE 2 – BASIS OF PRESENTATION

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC, for Form 10-Q.  Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.  Accordingly, these condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes in the Company's annual report on Form 10-K for fiscal year 2019 as filed with the SEC on March 13, 2020.

The condensed consolidated financial statements include the accounts of Artesian Resources Corporation and its wholly owned subsidiaries, including its principal operating company, Artesian Water.  In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments (unless otherwise noted) necessary to present fairly the Company's balance sheet position as of March 31, 2020, the results of its operations for the three month periods ended March 31, 2020 and March 31, 2019, its cash flows for the three month periods ended March 31, 2020 and March 31, 2019 and the changes in stockholders’ equity for the three  month periods ended March 31, 2020 and March 31, 2019.  The December 31, 2019 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2019 audited consolidated financial statements, but does not include all disclosures and notes normally provided in annual financial statements.

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

Management makes certain estimates and assumptions regarding each lease agreement, renewal and amendment, including, but not limited to, discount rates and probable term, which can impact the escalations in payment that are taken into consideration when calculating the straight line basis. The amount of rent expense and income reported could vary if different estimates and assumptions are used.  Management also makes certain estimates and assumptions regarding the fair value of the leased property at lease commencement and the separation of lease and nonlease components.

Reclassification

Certain accounts in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements.  These reclassifications had no effect on net income or stockholders' equity.
8

NOTE 3 – REVENUE RECOGNITION

Background

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

Tariff Contract Revenues

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

Artesian generates revenue from industrial wastewater services provided to a customer in Sussex County, Delaware.  We recognize industrial wastewater service revenue at a contract rate on a monthly basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of wastewater transferred.  These services are invoiced at the end of every month based on the actual meter readings for that month, and therefore there is no contract asset or liability associated with this revenue.

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

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

Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution system improvements.  This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period.  This rate is adjusted up or down at the next DSIC filing to account for any differences between actual earned revenue and the projected revenue requirement.  Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to consumption revenue or fixed fee revenue.
9

The DEPSC required Delaware utilities to determine the impact that the Tax Cuts and Jobs Act, or TCJA, had on its customers and potential rate relief due to customers.  The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019.  Approximately $3.8 million was refunded to customers during the second quarter of 2019.  This amount was previously held in reserve (refund liability) and was not reflected in income.

Accounts receivable related to tariff contract revenues are typically due within 25 days of invoicing.  An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.  However, due to the coronavirus, or COVID-19, pandemic causing hardships for many utility customers, state government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  The Company anticipates a longer receivable cycle and the need for increased reserves for bad debt compared to 2019.  The MDPSC issued an order authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19, which includes increased bad debt expense.  The Company anticipates the DEPSC will issue a similar order.  Management is monitoring the situation and as of March 31, 2020, no significant adjustment has been made.

Non-tariff Contract Revenues

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

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

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

Sales Tax

The majority of Artesian’s revenues are earned within the State of Delaware, where there is no sales tax.  Revenues earned in the State of Maryland and the Commonwealth of Pennsylvania are related primarily to the sale of water by a public water utility and are exempt from sales tax.  Therefore, no sales tax is collected on revenues.
10

Disaggregated Revenues

The following table shows the Company’s revenues disaggregated by service type; all revenues are generated within a similar geographical location:

(in thousands)
 
Three months ended March 31, 2020
   
Three months ended March 31, 2019
 
Tariff Revenue
           
     Consumption charges
 
$
10,160
   
$
10,393
 
     Fixed fees
   
6,737
     
6,648
 
     Service charges
   
147
     
177
 
     DSIC
   
1,152
     
888
 
     Industrial wastewater services
   
8
     
 
     Revenue reserved for refund –
          TCJA impact
   
     
(422
)
Total Tariff Revenue
 
$
18,204
   
$
17,684
 
                 
Non-Tariff Revenue
               
     Service line protection plans
 
$
1,088
   
$
1,050
 
     Contract operations
   
216
     
328
 
     Inspection fees
   
102
     
23
 
Total Non-Tariff Revenue
 
$
1,406
   
$
1,401
 
                 
Other Operating Revenue
     not in scope of ASC 606
 
$
291
   
$
301
 
                 
Total Operating Revenue
 
$
19,901
   
$
19,386
 

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
 
March 31, 2020
   
December 31, 2019
 
             
Contract Assets – Tariff
 
$
2,146
   
$
2,146
 
                 
Deferred Revenue
               
     Deferred Revenue – Tariff
 
$
979
   
$
1,050
 
     Deferred Revenue – Non-Tariff
   
221
     
251
 
Total Deferred Revenue
 
$
1,200
   
$
1,301
 
                 

For the three months ended March 31, 2020, the Company recognized revenue of $1.0 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.2 million from amounts that were included in Deferred Revenue – Non- Tariff at the beginning of the year.

The increases (decreases) of Accounts Receivable, Contract Assets and Deferred Revenue were primarily due to normal timing differences between our performance and customer payments.

Remaining Performance Obligations

As of March 31, 2020 and December 31, 2019, Deferred Revenue – Tariff is recorded net of contract assets within Unbilled operating revenues and represents our remaining performance obligations for our fixed fee water and wastewater services, all of which are expected to be satisfied and associated revenue recognized in the next three months.

As of March 31, 2020 and December 31, 2019, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our SLP Plan services and wastewater inspections, which are expected to be satisfied and associated revenue recognized within the next three months and one year for the SLP Plan revenue and inspection fee revenue, respectively.
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NOTE 4 – LEASES

The Company leases land and office equipment under operating leases from non-related parties.  Our leases have remaining lease terms of 2 years to 77 years, some of which include options to automatically extend the leases for up to 66 years.  Payments made under operating leases are recognized in the condensed consolidated statement of operations on a straight-line basis over the period of the lease.  The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3%, as applicable based on the lease agreements.  Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land.  None of the operating leases contain contingent rent provisions.  The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment.  The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.

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

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

(in thousands)
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2020
 
March 31, 2019
 
 
           
Minimum rentals
 
$
7
   
$
2
 
Contingent rentals
   
     
 
                 
   
$
7
   
$
2
 

Supplemental cash flow information related to leases is as follows:

 
(in thousands)
 
 
Three Months Ended
   
Three Months Ended
 
 
March 31, 2020
   
March 31, 2019
 
 
           
Cash paid for amounts included in the measurement of lease liabilities:
           
     Operating cash flows from operating leases
 
$
7
   
$
2
 
Right-of-use assets obtained in exchange for lease obligations:
               
     Operating leases
 
$
474
   
$
499
 

Supplemental balance sheet information related to leases is as follows:

 
 
(in thousands,
except lease term and discount rate)
 
 
 
March 31, 2020
   
December 31, 2019
 
 
           
Operating Leases:
           
     Operating lease right-of-use assets
 
$
474
   
$
480
 
                 
     Other current liabilities
 
$
20
     
19
 
     Operating lease liabilities
   
445
     
450
 
Total operating lease liabilities
 
$
465
   
$
469
 
                 
                 
Weighted Average Remaining Lease Term
               
     Operating leases
 
58 years
   
58 years
 
Weighted Average Discount Rate
               
     Operating leases
   
5.0
%
   
5.0
%
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Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2020 are as follows:

 
 
(in thousands)
 
 
 
Operating Leases
 
Year
     
2020
 
$
42
 
2021
   
42
 
2022
   
23
 
2023
   
23
 
2024
   
23
 
Thereafter
   
1,319
 
Total undiscounted lease payments
 
$
1,472
 
Less effects of discounting
   
(1,007
)
Total lease liabilities recognized
 
$
465
 

  As of March 31, 2020, we have not entered into operating or finance leases that will commence at a future date.

NOTE 5 – STOCK COMPENSATION PLANS

On December 9, 2015, the Company's stockholders approved the 2015 Equity Compensation Plan, or the 2015 Plan, which replaced the 2005 Equity Compensation Plan that expired on May 24, 2015. The 2015 Plan provides that grants may be in any of the following forms: incentive stock options, nonqualified stock options, stock units, stock awards, dividend equivalents and other stock-based awards. The 2015 Plan is administered and interpreted by the Compensation Committee, or the Committee, of the Board of Directors of the Company, or the Board. The Committee has the authority to determine the individuals to whom grants will be made under the 2015 Plan, the type, size and terms of the grants, the time when grants will be made and the duration of any applicable exercise or restriction period (subject to the limitations of the 2015 Plan), and deal with any other matters arising under the 2015 Plan. The Committee presently consists of three directors, each of whom is a non-employee director of the Company. All of the employees of the Company and its subsidiaries and non-employee directors of the Company are eligible for grants under the 2015 Plan. 

Compensation expense of $45,000 related to the May 2019 issue of restricted stock awards, was recorded for the three months ended March 31, 2020. Compensation expense of $47,000 was also recorded for the three months ended March 31, 2019 for restricted stock awards issued in May 2018. Costs were determined based on the fair value on the dates of the awards and those costs were charged to income over the service periods associated with the awards.

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

On May 8, 2019, 5,000 shares of Class A Common Stock, or Class A Stock, were granted as restricted stock awards.  The fair value per share was $36.11, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 8, 2019. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.

The following summary reflects changes in the shares of Class A Stock underlying options and restricted stock awards for the three months ended March 31, 2020:
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Options
   
Restricted Awards
 
   
Option Shares
   
Weighted Average Exercise Price
   
Weighted Average Remaining Life (Yrs.)
   
Aggregate Intrinsic Value (in thousands)
   
Outstanding Restricted Stock Awards
   
Weighted Average Grant Date Fair
Value
 
Plan options/restricted stock awards
                                   
Outstanding at January 1, 2020
   
153,250
   
$
20.40
         
$
2,575
     
5,000
   
$
36.11
 
Granted
   
     
           
     
     
 
Exercised/vested and released
   
(4,750
)
   
18.61
           
70
     
     
 
Expired/cancelled
   
     
           
     
     
 
Outstanding at March 31, 2020
   
148,500
   
$
20.46
     
2.384
   
$
2,512
     
5,000
   
$
36.11
 
                                                 
Exercisable/vested at March 31, 2020
   
148,500
   
$
20.46
     
2.384
   
$
2,512
     
     
 

The total intrinsic value of options exercised during the three months ended March 31, 2020 was approximately $70,000.

There were no unvested option shares outstanding under the 2015 Plan during the three months ended March 31, 2020.

As of March 31, 2020, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.  

As of March 31, 2020, there was $18,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan.  The cost will be recognized over 0.10 years, the remaining vesting period for the restricted stock awards.

NOTE 6 - REGULATORY ASSETS

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

The postretirement benefit obligation is the recognition of an offsetting regulatory liability as it relates to the accrual of the expected cost of providing postretirement health care and life insurance benefits to retired employees.  Artesian Water contributed approximately $5,700 to its postretirement benefit plan in the first three months of 2020. These contributions consist of insurance premium payments for medical, dental and life insurance benefits made on behalf of the Company's eligible retired employees.

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

Debt related costs include debt issuance costs and other debt related expense. The DEPSC has allowed rate recovery on issuance costs associated with the Series V First Mortgage bond in December 2019 that paid down outstanding lines of credit and a loan payable to Artesian Resources.  These amounts are recovered over the term of the new long-term debt issued.  For the Series V First Mortgage bond, cash was paid for the issuance costs and $30 million of cash was received from the proceeds of the bonds.
14


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

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

Regulatory assets, net of amortization, comprise:
 
   
(in thousands)
 
   
March 31, 2020
   
December 31, 2019
 
             
Postretirement benefit obligation
 
$
51
   
$
51
 
Deferred income taxes
   
382
     
386
 
Expense of rate case studies
   
25
     
27
 
Debt related costs
   
5,468
     
5,556
 
Goodwill
   
286
     
288
 
Deferred acquisition and franchise costs
   
573
     
583
 
   
$
6,785
   
$
6,891
 

NOTE 7 – REGULATORY LIABILITIES

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

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

Pursuant to the enactment of the TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 10).  This resulted in a decrease in the net deferred income tax liability of approximately $24.3 million, of which $22.8 million was reclassed to a regulatory liability.  The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes.  On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date.  The MDPSC has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers.

Regulatory liabilities comprise:
 
 
(in thousands)
 
 
March 31, 2020
 
December 31, 2019
 
 
           
Utility plant retirement cost obligation
 
$
216
   
$
247
 
Deferred income taxes (related to TCJA)
   
21,888
     
21,999
 
   
$
22,104
   
$
22,246
 
15


NOTE 8 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE

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

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

 
For the Three Months Ended March 31,
 
   
2020
   
2019
 
   
(in thousands)
 
             
Weighted average common shares outstanding during the period for Basic computation
   
9,297
     
9,258
 
Dilutive effect of employee stock options and awards
   
46
     
56
 
                 
Weighted average common shares outstanding during the period for Diluted computation
   
9,343
     
9,314
 

For the three months ended March 31, 2020, 6,050 shares of restricted stock awards were excluded from the calculations of diluted net income per share. For the three months ended March 31, 2019, no shares of restricted stock awards were excluded from the calculations of diluted net income per share.  Due to unrecognized compensation costs, the hypothetical repurchase of shares exceeded the number of restricted shares expected to vest during the period, creating an anti-dilutive effect. For the three months ended March 31, 2020 and March 31, 2019, no shares of stock options were excluded from the calculations of diluted net income per share, as the calculated proceeds from the options’ exercise were lower than the average market price of the Company’s common stock during the period.

The Company has 15,000,000 authorized shares of Class A Stock and 1,040,000 authorized shares of Class B Common Stock, or Class B Stock. As of March 31, 2020, 8,420,315 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of March 31, 2019, 8,386,822 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. The par value for both classes is $1.00 per share. During the three months ended March 31, 2020 and March 31, 2019, the Company issued 10,069 and 17,794 shares of Class A Stock, respectively.

Equity per common share was $17.46 and $17.28 at March 31, 2020 and December 31, 2019, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on March 31, 2020 and December 31, 2019, respectively.

NOTE 9 - REGULATORY PROCEEDINGS

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

We are subject to regulation by the following state regulatory commissions:
·
The DEPSC, regulates both Artesian Water and Artesian Wastewater.
·
The MDPSC, regulates both Artesian Water Maryland and Artesian Wastewater Maryland.
·
The PAPUC, regulates Artesian Water Pennsylvania.

Rate Proceedings

Our regulated utilities periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business.  In Delaware, utilities are permitted by law to place rates into effect, under bond, on a temporary basis pending completion of a rate increase proceeding. The first temporary increase may be up to the lesser of $2.5 million on an annual basis or 15% of gross water sales.  Should the rate case not be completed within seven months, by law, the utility may put the entire requested rate relief, up to 15% of gross water sales, in effect under bond until a final resolution is ordered and placed into effect.  If any such rates are found to be in excess of rates the DEPSC finds to be appropriate, the utility must refund customers the portion found to be in excess with interest.  The timing of our rate increase requests is therefore dependent upon the estimated cost of the administrative process in relation to the investments and expenses that we hope to recover through the rate increase.  We can provide no assurances that rate increase requests will be approved by applicable regulatory agencies and, if approved, we cannot guarantee that these rate increases will be granted in a timely or sufficient manner to cover the investments and expenses for which we initially sought the rate increase.
16


The DEPSC required Delaware utilities to determine the impact that the TCJA had on their customers and potential rate relief due to customers.  The reduction in corporate income tax expense resulting from the TCJA was passed through to customers in the form of reduced tariff rates as approved by the DEPSC on January 31, 2019.  Approximately $3.8 million was refunded to customers during the second quarter of 2019.  This amount was previously held in reserve and was not reflected in income..

Other Proceedings

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

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

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

The DSIC rate effective January 1, 2020 replaces the DSIC rate effective July 1, 2019.  The rate reflects the eligible plant improvements installed through April 30, 2019.  The DSIC rates effective January 1, 2019, July 1, 2019, and January 1, 2020 are still subject to audit at a later date by the DEPSC.  For the three months ended March 31, 2020 and March 31, 2019, we earned approximately $1.2 million and $0.9 million in DSIC revenue, respectively.

NOTE 10 – INCOME TAXES

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

Under FASB ASC Topic 740, an uncertain tax position represents our expected treatment of a tax position taken, or planned to be taken in the future, that has not been reflected in measuring income tax expense for financial reporting purposes.  The Company establishes reserves for uncertain tax positions based upon management's judgment as to the sustainability of these positions. These accounting estimates related to the uncertain tax position reserve require judgments to be made as to the sustainability of each uncertain tax position based on its technical merits. The Company believes its tax positions comply with applicable law and that it has adequately recorded reserves as required. However, to the extent the final tax outcome of these matters is different than the estimates recorded, the Company would then adjust its tax reserves or unrecognized tax benefits in the period that this information becomes known.  The Company has elected to recognize accrued interest (net of related tax benefits) and penalties related to uncertain tax positions as a component of its income tax expense.  The Company has accrued approximately $5,000 in penalties and interest for the three months ended March 31, 2020. The Company remains subject to examination by federal and state authorities for the tax years 2016 through 2019.

The Tax Reform Act of 1986 mandated that Advances and CIAC received subsequent to December 31, 1986, generally are taxable income.  The 1996 Tax Act provided an exclusion from taxable income for CIAC and Advances received after June 12, 1996 except for certain contributions for large services that are not included in rate base for rate-making purposes.  On December 22, 2017, the TCJA repealed the 1996 exclusion from gross income effective on the enactment date.

Investment tax credits were deferred through 1986 and are recognized as a reduction of deferred income tax expense over the estimated economic useful lives of the related assets.
17


NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Current Assets and Liabilities

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

Long-term Financial Liabilities

All of Artesian Resources’ outstanding long-term debt as of March 31, 2020 and December 31, 2019 was fixed-rate.  The fair value of the Company’s long-term debt is determined by discounting its future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825.  Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements.  Level 2 is valued using observable inputs other than quoted prices.  The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates.  The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below:

In thousands
   
 
March 31, 2020
 
December 31, 2019
 
Carrying amount
 
$
145,352
   
$
145,862
 
Estimated fair value
 
$
164,083
   
$
157,710
 

The fair value of Advances for Construction cannot be reasonably estimated due to the inability to estimate accurately the timing and amounts of future refunds expected to be paid over the life of the contracts.  Refund payments are based on the water sales to new customers in the particular development constructed.  The fair value of Advances for Construction would be less than the carrying amount because these financial instruments are non-interest bearing.

NOTE 12 – RELATED PARTY TRANSACTIONS

Mr. Michael Houghton currently serves as a director through the remainder of the three year term class that expires at the Annual Meeting of the Class B Stock shareholders to be held in 2021 and until his respective successor shall be elected and qualified.  Mr. Houghton is a Partner in the law firm of Morris Nichols Arsht & Tunnell, or MNAT, in Wilmington, Delaware.  In the normal course of business, the Company utilizes the services of MNAT for various regulatory, real estate and public policy matters.  Approximately $119,000 and $40,000 was paid to MNAT during the three months ended March 31, 2020, and March 31, 2019, respectively, for legal and director related services.  As of March 31, 2020, the Company had a $19,000 accounts payable balance due to MNAT.

As set forth in the Charter of the Audit Committee of the Board, the Audit Committee is responsible for reviewing and, if appropriate, approving all related party transactions between us and any officer, any director, any person known to be the beneficial owner of more than 5% of any class of the Company's voting securities or any other related person that would potentially require disclosure.  In its review and approval of the related party transactions with MNAT, the Audit Committee considered the nature of the related person's interest in the transactions; the satisfactory performance of work contracted with the related party prior to the director election of Mr. Houghton; and the material terms of the transactions, including, without limitation, the amount and type of transactions, the importance of the transactions to the related person, the importance of the transactions to the Company and whether the transactions would impair the judgment of a director or officer to act in the best interest of the Company.  The Audit Committee approves only those related person transactions that are in, or are consistent with, the best interests of the Company and its stockholders.
18


NOTE 13 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments, to provide financial statement users with more information about expected credit losses on financial instruments. The guidance revises the incurred loss impairment methodology to reflect current expected credit losses and requires consideration of a broader range of information to estimate credit losses.  The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. For the Company, this standard is primarily applicable to accounts receivable balances.  The company’s credit losses on accounts receivable is minimal since we mitigate our exposure by discontinuing services in the event of non-payment, however, due to the COVID-19 pandemic causing hardships for many utility customers, state government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  The Company anticipates a longer receivable cycle and the need for increased reserves for bad debt compared to 2019.  The MDPSC issued an order authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19, which includes increased bad debt expense.  The Company anticipates the DEPSC will issue a similar order.  Management is monitoring the situation and as of March 31, 2020, no significant adjustment has been made.

NOTE 14 - SUBSEQUENT EVENTS

In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. Subsequently on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce. The Company is following social distancing and remote work directives, however prolonged workforce disruptions may negatively impact performance of services or require use of emergency personnel.  The Company maintains essential utility services,  however a longer receivables cycle, need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential are possible as a result of broader economic impacts of the COVID-19 outbreak.  Given the changing nature of the COVID-19 outbreak and the responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations.

On March 27, 2020, the United States Government enacted the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which provides economic relief and stimulus to support the national economy during the COVID-19 epidemic.  This package included support for individuals, large corporations, small business, and health care entities, among other affected groups.  While the Company, and the utility industry broadly, were not direct beneficiaries of the stimulus, the Company continues to review the provisions of the CARES Act and assess the potential impact on the Company’s operations.

On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects.  In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at a rate of 0.6% per annum.
19

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

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that express our "belief", "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995.  Statements regarding specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations, our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected.  Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements.  Certain factors as discussed under Item 1A -Risk Factors, in our Annual Report on Form10-K for the year ended December 31, 2019, and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements.  Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic.  While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.


RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2020

OVERVIEW

Our profitability is primarily attributable to the sale of water. Gross water sales composed 87.4% of total operating revenues for the three months ended March 31, 2020.  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.
20


COVID-19 Pandemic

The emergence of the coronavirus, or COVID-19, around the world, presents risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time.  While the COVID-19 pandemic did not materially adversely affect the Company’s financial results and business operations for the three months ended March 31, 2020, economic and health conditions in the United States and across most of the globe have changed rapidly since the end of the period.

The COVID-19 pandemic may affect the Company’s operations in future quarters.  The Company maintains essential utility services and is following social distancing and remote work directives, however prolonged workforce disruptions may negatively impact performance of services or require use of emergency personnel.  Due to the COVID-19 pandemic causing hardships for many utility customers, state government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  As a result, the Company anticipates a longer receivable cycle, the need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential.  The MDPSC issued an order authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19.  The Company anticipates the DEPSC will issue a similar order.

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.  Management cannot predict the full impact of the COVID-19 pandemic on the Company’s results of operations.  The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic might end.

Water Division

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers.  Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue.  As of March 31, 2020, we had approximately 88,000 metered water customers in Delaware, an increase of approximately 1,900 compared to March 31, 2019.  The number of metered water customers in Maryland totaled approximately 2,490 as of March 31, 2020, an increase of approximately 60 compared to March 31, 2019.  The number of metered water customers in Pennsylvania remained consistent compared to March 31, 2019. For the three months ended March 31, 2020, approximately 1.8 billion gallons of water were distributed in our Delaware systems and approximately 23.4 million gallons of water were distributed in our Maryland systems.

Wastewater Division

Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in Delaware in July 2005.   Artesian Wastewater Maryland was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in the State of Maryland.  It is not currently providing these services in Maryland.  Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather.  The number of Delaware wastewater customers totaled approximately 2,550 as of March 31, 2020, an increase of approximately 350, or 15.9%, compared to March 31, 2019.  In addition, Artesian Wastewater entered into wastewater services agreements with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer.  The wastewater services agreements with Allen Harim are discussed further in the “Strategic Direction” section below.

Non-Regulated Division

Artesian Utility provides contract water and wastewater operation services to private, municipal and governmental institutions.  Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan.  SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather.  There has been consistent customer growth over the years.  As of March 31, 2020, approximately 20,500, or 24.3%, of our eligible water customers enrolled in the WSLP Plan, approximately 16,000, or 19.0%, of our eligible customers enrolled in the SSLP Plan, and approximately 7,200, or 8.6%, of our eligible customers enrolled in the ISLP Plan.  Approximately 1,890 non-utility customers enrolled in one of our three protection plans.
21


Strategic Direction

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

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

On October 1, 2019, Artesian Water purchased utility assets from High Point Associates, L.P. and connected these assets to our public water system to serve the residents of High Point Park located in Kent County, Delaware consisting of approximately 400 customers.

On February 27, 2020, Artesian Water signed an agreement to purchase from the Town of Frankford, a Delaware municipality, or Frankford, substantially all of the operating assets of Frankford’s water system, including the right to provide water service to Frankford’s existing customers.  Frankford transferred to Artesian Water all of Frankford’s right, title and interest in and to all of the plant and equipment, associated real property, contracts and permits possessed by Frankford at closing related to the water system.  This transaction closed on April 2, 2020.  The total purchase price was $3.6 million.  At closing, approximately $0.4 million of the purchase price was used to pay off Frankford’s indebtedness specifically related to the water system.  The existing water system subject to the agreement serves approximately 360 customers.

We believe that Delaware's generally lower cost of living in the region, availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County, and attractive financing rates for construction and mortgages have resulted, and will continue to result, in increases to our customer base.  Delaware’s lower property and income tax rate make it an attractive region for new home development and retirement communities.  Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.

In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.

On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with Allen Harim for Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from Allen Harim’s properties located in Sussex County, Delaware upon completion of a pipeline to transfer the sanitary wastewater.  The pipeline was completed in the second quarter of 2017.   The transfer of sanitary wastewater began in the second quarter of 2019.  On January 27, 2017, Artesian Wastewater entered into a second wastewater agreement with Allen Harim for Artesian Wastewater to provide disposal services for approximately 1.5 mgd of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from Allen Harim’s properties to a 90 million gallon storage lagoon at Artesian’s Sussex Regional Recharge Facility.  We will use the reclaimed wastewater for spray irrigation on agricultural land in the area.  We received an operations permit in March 2020.  We expect to be operating this facility in the second quarter of 2020.
22


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 formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.

Inflation


We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.  The cumulative effect of inflation results in significantly higher facility costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.

Results of Operations – Analysis of the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019.

Operating Revenues

Revenues totaled $19.9 million for the three months ended March 31, 2020, $0.5 million, or 2.7%, more than revenues for the three months ended March 31, 2019. Water sales revenue increased $0.5 million, or 2.7%, for the three months ended March 31, 2020 from the corresponding period in 2019, primarily due to an increase in DSIC revenue and consumption revenue.  The DSIC rate effective January 1, 2019 was 5.55%.  The DSIC rate effective January 1, 2020 was 7.50%.  We realized 87.4% of our total operating revenue for both the three months ended March 31, 2020 and March 31, 2019, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.1 million, or 11.9%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.  The increase is primarily due to an increase in wastewater revenue from customer growth and an increase in inspection fee revenue related to new development.

Non-utility operating revenue decreased approximately $0.1 million, or 5.7%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.  The decrease is primarily due to a decrease in contract service revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.1 million, or 1.1%, for the three months ended March 31, 2020, compared to the same period in 2019.  The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.1 million.

Utility operating expenses increased $0.1 million, or 1.2%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase in payroll and employee benefit costs, related to an increase in overall wages and an increase in employee benefits costs.  This increase is partially offset by a decrease in repair and maintenance costs, related to a decrease in the painting of elevated water storage tanks under contract.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.9% for the three months ended March 31, 2020, compared to 57.8% for the three months ended March 31, 2019.

Federal and state income tax expense increased $0.2 million, or 15.2%, primarily due to increased pre-tax book income in 2020 compared to 2019.
23


Other Income, Net

Other income increased $0.5 million, primarily due to an increase in miscellaneous income of $0.3 million, related to an increase in the annual patronage refund from CoBank, ACB.  The refund is calculated based on 0.8% of the average loan balance outstanding.  In addition, in 2020 CoBank, ACB, issued a one-time additional patronage distribution based on 0.1% of the average loan balance outstanding.  Allowance for funds used during construction, or AFUDC, increased $0.2 million, as a result of higher long-term construction activity subject to AFUDC for the three months ended March 31, 2020 compared to the same period in 2019.

Interest Charges

Interest expense increased $0.2 million, primarily due to an increase in long-term debt interest related to the Series V First Mortgage Bond issued on December 17, 2019.  This increase is partially offset by a decrease in short-term debt interest, primarily related to lower short-term borrowing levels in 2020.

Net Income

Our net income applicable to common stock increased $0.5 million.  Operating revenues increased $0.5 million and other income, net increased $0.5 million, while operating expenses increased $0.3 million and interest expense increased $0.2 million.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our primary sources of liquidity for the three months ended March 31, 2020 were $7.1 million of cash provided by operating activities, $3.2 million in net contributions and advances from developers, $1.1 million from lines of credit borrowings and $0.3 million in net proceeds from the issuance of common stock.  Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer.  A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers.  As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment.

Investment in Plant and Systems

The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory.  Capital expenditures during the first three months of 2020 were $9.2 million compared to $9.1 million during the same period in 2019.  During the first three months of 2020, we invested approximately $2.0 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities.  We invested $1.9 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers.  We invested $0.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment.  Developers financed $1.1 million for the installation of water mains and hydrants in 2020 compared to $0.8 million in 2019.  We invested $0.5 million to upgrade and automate our meter reading equipment.  We invested approximately $1.7 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 $1.3 million was invested in wastewater projects in Delaware.

We depend on the availability of capital for expansion, construction and maintenance.  We have several sources of liquidity to finance our investment in utility plant and other fixed assets.  We estimate that future investments will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations, state revolving fund loans and potential capital market financing if necessary.  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.
24


Lines of Credit and Long Term Debt

At March 31, 2020, 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 March 31, 2020, there was $38.9 million of available funds under this line of credit.  The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%.  This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time.  The term of this line of credit expires on the earlier of May 23, 2020 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At March 31, 2020, 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 March 31, 2020, there was $12.5 million of available funds under this line of credit.  The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate.  The term of this line of credit expires on July 20, 2020. Artesian Water expects to renew this line of credit.

Line of Credit Commitments
Commitment Due by Period
 
 
In thousands
Less than
1 Year
 
1-3 Years
 
4-5 Years
 
Over 5 Years
 
Lines of Credit
 
$
8,638
   
$
--
   
$
--
   
$
--
 


Contractual Obligations
 
Payments Due by Period
 
In thousands
 
Less than
1 Year
   
1-3
Years
   
4-5
Years
   
After 5
Years
   
Total
 
First mortgage bonds (principal and interest)
 
$
6,650
   
$
13,218
   
$
13,115
   
$
194,734
   
$
227,717
 
State revolving fund loans (principal and interest)
   
1,002
     
838
     
674
     
4,042
     
6,556
 
Promissory note (principal and interest)
   
960
     
1,921
     
1,921
     
13,257
     
18,059
 
Operating leases
   
42
     
65
     
46
     
1,319
     
1,472
 
Operating agreements
   
72
     
88
     
77
     
896
     
1,133
 
Unconditional purchase obligations
   
3,881
     
2,995
     
52
     
---
     
6,928
 
Total contractual cash obligations
 
$
12,607
   
$
19,125
   
$
15,885
   
$
214,248
   
$
261,865
 

Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business. In addition, we are required to abide by certain financial covenants and ratios.  As of March 31, 2020, we were in compliance with these covenants.

Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced earlier.  One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter.  The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period.  The promissory note obligation has an amortizing payment payable over a 20-year period.  The first mortgage bonds, the state revolving fund loans 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 December 17, 2019, Artesian Water entered into a Bond Purchase Agreement relating to the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series V, or the Series V Bond, due October 31, 2049, or the Maturity Date.  The Series V 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-Fourth Supplemental Indenture dated as of December 17, 2019 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 Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources.  The DEPSC approved the issuance of the Series V Bond on November 14, 2019.
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The Series V Bond carries an annual interest rate of 4.42% through but excluding the Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Maturity Date, beginning January 30, 2020 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-Fourth Supplemental Indenture.  The term of the Series V Bond also includes certain limitations on Artesian Water’s indebtedness.

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

In order to control purchased power costs, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican. The fixed rate for MidAmerican was lowered 10.8% starting in September 2018.  The previous contract term was in effect since October 2015.  The current fixed price contract is 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 was lowered 4.9% starting in May 2019.  The previous contract term was in effect since December 2015.  The current fixed price contract is 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 June 26, 2024.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.

Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements

This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2019 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2019.  The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods.  Actual amounts or results could differ from those based on such assumptions and estimates.

Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2019.  There have been no changes in our critical accounting policies.  Our significant accounting policies are described in our notes to the 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019.

Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019 and also in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.  We did not adopt any accounting policy in the first three months of 2020 that had a material impact on our financial condition, liquidity or results of operations.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal course of business.  Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt.  The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds and the term of the promissory note, which have final maturity dates ranging from 2028 to 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 March 31, 2020 were approximately $8.6 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.

ITEM 4CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  In addition, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to achieve the foregoing objectives.

(b) Change in Internal Control over Financial Reporting

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

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

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

ITEM 1ARISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors described in such Annual Report on Form 10-K, except as follows:

Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of the coronavirus, or COVID-19.
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Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19.  In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

We are considered an essential utility service company, as defined by the U.S. Department of Homeland Security.  Although we have continued to operate our business to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have an adverse effect on our operations.  The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken to contain or mitigate its effects.  Any resulting financial impact cannot be estimated reasonably at this time, but results of operations, financial condition and cash flows could be adversely impacted.  State government agencies issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees.  As a result, the Company anticipates a longer receivable cycle, the need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential.  Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price.  To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our 2019 Annual Report on Form 10-K, such as those relating to our financial performance.

ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

Not applicable.



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ITEM 6 - EXHIBITS

Exhibit No.
Description
 
 
Asset Purchase Agreement, dated February 27, 2020 by and among Artesian Water Company, Inc., a Delaware corporation, and the Town of Frankford, a Delaware municipality.  Incorporated by reference to Exhibit 10.1 filed with Company’s Form 8-K filed on March 4, 2020.
   
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.1 filed with the Company’s Form 8-K filed on April 30, 2020.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020A-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.2 filed with the Company’s Form 8-K filed on April 30, 2020.
   
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.3 filed with the Company’s Form 8-K filed on April 30, 2020.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020B-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.4 filed with the Company’s Form 8-K filed on April 30, 2020.
   
Financing Agreement, dated as of April 28, 2020, between Artesian Water Company, Inc. and Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.5 filed with the Company’s Form 8-K filed on April 30, 2020.
   
General Obligation Note (New Castle County Water Main Transmission Replacements Projects), Series 2020C-SRF, dated as of April 28, 2020, issued by Artesian Water Company, Inc. in favor of Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health.  Incorporated by reference to Exhibit 10.6 filed with the Company’s Form 8-K filed on April 30, 2020.
   
Certification of Chief Executive Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
Certification of Chief Financial Officer of the Registrant required by Rule 13a–14(a) under the Securities Exchange Act of 1934, as amended.*
 
 
Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).**
 
 
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The following financial statements from Artesian Resources Corporation's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to the Condensed Consolidated Financial Statements.*

*   Filed herewith
** Furnished herewith

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