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 2021-03-31 Filed 2021-05-06
10-K 2020-12-31 Filed 2021-03-12
10-Q 2020-09-30 Filed 2020-11-06
10-Q 2020-06-30 Filed 2020-08-07
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 2020-11-23
8-K 2020-06-11
8-K 2020-05-06
8-K 2020-04-28
8-K 2020-04-02
8-K 2020-02-27
8-K 2019-12-17
8-K 2019-10-11
8-K 2019-07-30
8-K 2019-05-13
8-K 2018-09-23
8-K 2018-05-10
8-K 2018-05-07
8-K 2018-01-31

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 6 - Other Deferred Assets
Note 8 - Regulatory Liabilities
Note 9 - Net Income per Common Share and Equity per Common Share
Note 11 - Income Taxes
Note 13 - Related Party Transactions
Note 14 - Business Combinations
Note 15 - Geographic Concentration of Customers
Note 16 - Impact of Recent Accounting Pronouncements
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 2021-03-31

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

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

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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

Title of each class
Trading Symbol (s)
Name of each exchange on which registered

 
graphic
 

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol (s)
Name of each exchange on which registered
Common Stock Par Value
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 3, 2021, 8,502,980 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.





TABLE OF CONTENTS

ARTESIAN RESOURCES CORPORATION
FORM 10-Q

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4
         
     
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  8 - 21
         
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22 - 28
         
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29
         
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29
         
      Part II
-
 
29
         
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29
         
-
 
29
         
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29
         
   
30
         
   
30
         
   
30
         
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31
         
   Signatures
       


2



PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS

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

ASSETS
 
March 31, 2021
   
December 31, 2020
 
Utility plant, at original cost (less accumulated depreciation 2021 - $ 150,838; and 2020 - $147,469)
 
$
567,395
   
$
559,561
 
Current assets
               
Cash and cash equivalents
   
249
     
28
 
Accounts receivable (less allowance for doubtful accounts 2021 - $865; 2020 - $862)
   
8,815
     
10,162
 
Income tax receivable
   
6
     
629
 
Unbilled operating revenues
   
1,151
     
1,166
 
Materials and supplies
   
1,400
     
1,535
 
Prepaid property taxes
   
1,022
     
1,891
 
Prepaid expenses and other
   
1,954
     
2,208
 
Total current assets
   
14,597
     
17,619
 
Other assets
               
Non-utility property (less accumulated depreciation - 2021 - $884; 2020 - $865)
   
3,777
     
3,796
 
Other deferred assets
   
5,763
     
5,309
 
   Operating lease right of use assets
   
455
     
460
 
Total other assets
   
9,995
     
9,565
 
Regulatory assets, net
   
6,368
     
6,473
 
Total Assets
 
$
598,355
   
$
593,218
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Stockholders' equity
               
Common stock
 
$
9,384
   
$
9,357
 
Preferred stock
   
     
 
Additional paid-in capital
   
104,080
     
103,463
 
Retained earnings
   
58,406
     
56,606
 
Total stockholders' equity
   
171,870
     
169,426
 
Long-term debt, net of current portion
   
141,886
     
142,333
 
     
313,756
     
311,759
 
Current liabilities
               
Lines of credit
   
22,716
     
26,813
 
Current portion of long-term debt
   
1,677
     
1,757
 
Accounts payable
   
5,971
     
6,341
 
Accrued expenses
   
6,867
     
4,283
 
Overdraft payable
   
27
     
105
 
Accrued interest
   
1,325
     
930
 
Income taxes payable
   
2,064
     
28
 
Customer and other deposits
   
2,126
     
2,064
 
Other
   
1,406
     
1,403
 
Total current liabilities
   
44,179
     
43,724
 
                 
Commitments and contingencies
   
     
 
                 
Deferred credits and other liabilities
               
Net advances for construction
   
4,485
     
4,578
 
Operating lease liabilities
   
427
     
432
 
Regulatory liabilities
   
21,569
     
21,681
 
Deferred investment tax credits
   
469
     
473
 
Deferred income taxes
   
49,081
     
50,313
 
Total deferred credits and other liabilities
   
76,031
     
77,477
 
                 
Net contributions in aid of construction
   
164,389
     
160,258
 
Total Liabilities and Stockholders’ Equity
 
$
598,355
   
$
593,218
 
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,
 
       
   
2021
   
2020
 
Operating revenues
           
Water sales
 
$
17,830
   
$
17,392
 
Other utility operating revenue
   
1,467
     
1,253
 
Non-utility operating revenue
   
1,439
     
1,256
 
Total Operating Revenues
   
20,736
     
19,901
 
                 
Operating expenses
               
Utility operating expenses
   
9,596
     
9,235
 
Non-utility operating expenses
   
915
     
728
 
Depreciation and amortization
   
3,012
     
2,752
 
State and federal income taxes
   
1,351
     
1,359
 
Property and other taxes
   
1,420
     
1,365
 
Total Operating Expenses
   
16,294
     
15,439
 
                 
Operating income
   
4,442
     
4,462
 
                 
Other income, net
               
   Allowance for funds used during construction (AFUDC)
   
244
     
423
 
   Miscellaneous income
   
1,402
     
1,088
 
                 
Income before interest charges
   
6,088
     
5,973
 
                 
Interest charges
   
1,882
     
1,899
 
                 
Net income applicable to common stock
 
$
4,206
   
$
4,074
 
                 
Income per common share:
               
Basic
 
$
0.45
   
$
0.44
 
Diluted
 
$
0.45
   
$
0.44
 
                 
Weighted average common shares outstanding:
               
Basic
   
9,368
     
9,297
 
Diluted
   
9,407
     
9,343
 
                 
Cash dividends per share of common stock
 
$
0.2571
   
$
0.2496
 

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,
 
   
2021
   
2020
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
 
$
4,206
   
$
4,074
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
3,012
     
2,752
 
Deferred income taxes, net
   
(1,236
)
   
(1,310
)
Stock compensation
   
43
     
45
 
AFUDC, equity portion
   
(164
)
   
(281
)
                 
Changes in assets and liabilities:
               
Accounts receivable, net of allowance for doubtful accounts
   
1,347
     
179
 
Income tax receivable
   
623
     
19
 
Unbilled operating revenues
   
15
     
(79
)
Materials and supplies
   
135
     
(58
)
Prepaid property taxes
   
869
     
978
 
Prepaid expenses and other
   
254
     
223
 
Other deferred assets
   
(463
)
   
(418
)
Regulatory assets
   
91
     
92
 
Regulatory liabilities
   
(125
)
   
(178
)
Income tax payable
   
2,036
     
2,204
 
Accounts payable
   
(370
)
   
(1,579
)
Accrued expenses
   
2,584
     
(260
)
Accrued interest
   
395
     
667
 
Deposits and other
   
64
     
59
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
13,316
     
7,129
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Capital expenditures (net of AFUDC, equity portion)
   
(9,346
)
   
(9,212
)
Proceeds from sale of assets
   
7
     
30
 
NET CASH USED IN INVESTING ACTIVITIES
   
(9,339
)
   
(9,182
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (repayments) borrowings under lines of credit agreements
   
(4,097
)
   
1,138
 
  (Decrease) increase in overdraft payable
   
(78
)
   
13
 
Net advances and contributions in aid of construction
   
2,751
     
3,179
 
Net proceeds from issuance of common stock
   
601
     
286
 
Dividends paid
   
(2,406
)
   
(2,319
)
Principal repayments of long-term debt
   
(527
)
   
(510
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
   
(3,756
)
   
1,787
 
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
221
     
(266
)
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
28
     
596
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
249
   
$
330
 
                 
Non-cash Investing and Financing Activity:
               
Utility plant received as construction advances and contributions
 
$
1,991
   
$
320
 
Dividends declared but not paid
   
     
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Interest paid
 
$
1,487
   
$
1,232
 
Income taxes paid
 
$
30
   
$
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, 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
 

 
 
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
   
Common Shares Outstanding Class B Voting (2)
   
$1 Par Value Class A Non-Voting
   
$1 Par Value Class B Voting
   
Additional Paid-in Capital
   
Retained Earnings
   
Total
 
 
                                         
Balance as of December 31, 2020
 
$
8,475
   
$
882
   
$
8,475
   
$
882
   
$
103,463
   
$
56,606
   
$
169,426
 
 
Net income
   
     
     
     
     
     
4,206
     
4,206
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(2,406
)
   
(2,406
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
3
     
     
3
     
     
95
     
     
98
 
Employee stock options and awards(4)
   
22
     
     
22
     
     
438
     
     
460
 
Employee Retirement Plan(3)
   
2
     
     
2
     
     
84
     
     
86
 
Balance as of March 31, 2021
 
$
8,502
   
$
882
   
$
8,502
   
$
882
   
$
104,080
   
$
58,406
   
$
171,870
 

(1)
At March 31, 2021, and March 31, 2020, Class A Common Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 8,531,099 and 8,449,292, respectively.
(2)
At March 31, 2021, and March 31, 2020, 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, or the 2015 Plan, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in the form of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the 2015 Plan. Includes stock compensation expense for March 31, 2021 and March 31, 2020, see Note 5-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. The industrial customer recently received its process wastewater treatment operating permit and we expect to begin operating this facility in the second quarter of 2021.

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 agencies.  Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure within the Delmarva Peninsula.  In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.
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 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.
8



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 2020 as filed with the SEC on March 12, 2021.

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, 2021, the results of its operations for the three month periods ended March 31, 2021 and March 31, 2020, its cash flows for the three month periods ended March 31, 2021 and March 31, 2020 and the changes in stockholders’ equity for the three  month periods ended March 31, 2021 and March 31, 2020.  The December 31, 2020 Condensed Consolidated Balance Sheet was derived from the Company’s December 31, 2020 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.

Use of Estimates

The ultimate impact from COVID-19 on the Company’s operations and financial results will depend on, among other things, the severity and scope of the pandemic and full impact of governmental restrictions and executive orders issued.  We are not able to fully quantify the impact that these factors will have on our future financial results.  Management has made certain estimates and assumptions regarding credit losses and reserves for bad debt related to the executive orders issued by state government agencies in March 2020 requiring utility companies to temporarily prohibit late fees and service disconnections for non-payment.  In July 2020, the State of Delaware lifted its executive orders placing a moratorium on service disconnections for non-payment, with a provision requiring utilities to offer payment arrangements extending at least four months to customers.  After properly notifying customers, Artesian reinstated its late fee process in September 2020 and began administering service disconnections in October 2020 for its Delaware customers.  The State of Maryland and the Commonwealth of Pennsylvania lifted their executive orders placing moratoriums on service disconnections for non-payment effective November 2020.  The State of Maryland requires utilities to offer payment arrangements extending twelve months.  The DEPSC and the MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19.

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.
9



NOTE 3 – REVENUE RECOGNITION

Background

Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC.  Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices.  Our non-tariff contract revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, design and installation contract services, and wastewater inspection fees.  Other operating revenue primarily consists of developer guarantee contributions for wastewater and rental income for antenna 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 judgments described above, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.  The majority of our water customers are billed for water consumed on a monthly basis, while the remaining customers are billed on a quarterly basis.  As a result, we record unbilled operating revenue (contract asset) for any estimated usage through the end of the accounting period that will be billed in the next monthly or quarterly billing cycle.

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

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.
10


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

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

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

The DEPSC and the MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19.  As of March 31, 2021, we have not recorded a deferred regulatory asset for incremental costs related to COVID-19, but will continue to evaluate the on-going impact of the pandemic and whether incremental costs incurred are sufficient to warrant treatment as a deferred regulatory asset in accordance with the orders issued by the DEPSC and MDPSC.

Non-tariff Contract Revenues

Artesian generates SLP Plan revenue once a customer requests service to cover all parts, materials and labor required to repair or replace leaking water service lines, leaking or clogged sewer lines, or water and wastewater lines within the customer’s residence, up to an annual limit.  We recognize revenue from these services on a ratable basis over time as the customer simultaneously receives and consumes all the benefits of having service line protection services.  These contract services are billed in advance on a monthly or quarterly basis.  As a result, we record deferred revenue (contract liability) and accounts receivable for any amounts for which we have a right to invoice but for which services have not been provided.  Accounts receivable from SLP Plan customers are typically due within 25 days of invoicing.  An allowance for doubtful accounts is calculated as a percentage of total SLP Plan contract revenue.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.
11


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

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

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

Sales Tax

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

Disaggregated Revenues

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

   
For the Three Months
Ended March 31,
 
(in thousands)
 
2021
   
2020
 
Tariff Revenue
           
     Consumption charges
 
$
10,418
   
$
10,160
 
     Fixed fees
   
6,999
     
6,737
 
     Service charges
   
201
     
147
 
     DSIC
   
1,172
     
1,152
 
     Industrial wastewater services
 
$
6
   
$
8
 
Total Tariff Revenue
 
$
18,796
   
$
18,204
 
Non-Tariff Revenue
               
     Service line protection plans
 
$
1,096
   
$
1,088
 
     Contract operations
   
230
     
216
 
     Design and installation
   
151
     
 
     Inspection fees
   
84
     
102
 
Total Non-Tariff Revenue
 
$
1,561
   
$
1,406
 
Other Operating Revenue not in scope of ASC 606
 
$
379
   
$
291
 
Total Operating Revenue
 
$
20,736
   
$
19,901
 

Contract Assets and Contract Liabilities

Our contract assets and liabilities consist of the following:

(in thousands)
 
March 31, 2021
   
December 31, 2020
 
             
Contract Assets – Tariff
 
$
2,067
   
$
2,175
 
                 
Deferred Revenue
               
     Deferred Revenue – Tariff
 
$
1,055
   
$
1,150
 
     Deferred Revenue – Non-Tariff
   
292
     
300
 
Total Deferred Revenue
 
$
1,347
   
$
1,450
 

For the three months ended March 31, 2021, the Company recognized revenue of $1.2 million from amounts that were included in Deferred Revenue – Tariff at the beginning of the year and revenue of $0.2 million from amounts that were included in Deferred Revenue – Non-Tariff at the beginning of the year.
12


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

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

NOTE 4 – LEASES

The Company leases land and office equipment under operating leases from non-related parties.  Our leases have remaining lease terms of 1 year to 76 years, some of which include options to automatically extend the leases for up to 66 years.  Payments made under operating leases are recognized in the consolidated statement of operations on a straight-line basis over the period of the lease.  The annual lease payments for the land operating leases increase each year either by the most recent increase in the Consumer Price Index or by 3%, as applicable based on the lease agreements.  Periodically, the annual lease payment for one operating land lease is determined based on the fair market value of the applicable parcel of land.  None of the operating leases contain contingent rent provisions.  The commencement date of all the operating leases is the earlier of the date we become legally obligated to make rent payments or the date we may exercise control over the use of the land or equipment.  The Company currently does not have any financing leases and does not have any lessor leases that require disclosure.

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

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

(in thousands)
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2021
 
March 31, 2020
 
 
           
Minimum rentals
 
$
7
   
$
7
 
Contingent rentals
   
     
 
                 
   
$
7
   
$
7
 

Supplemental cash flow information related to leases is as follows:

 
(in thousands)
 
 
Three Months Ended
   
Three Months Ended
 
 
March 31, 2021
   
March 31, 2020
 
 
           
Cash paid for amounts included in the measurement of lease liabilities:
           
     Operating cash flows from operating leases
 
$
7
   
$
7
 
Right-of-use assets obtained in exchange for lease obligations:
               
     Operating leases
 
$
455
   
$
474
 

13


Supplemental balance sheet information related to leases is as follows:

 
 
(in thousands,
except lease term and discount rate)
 
 
 
March 31, 2021
   
December 31, 2020
 
 
           
Operating Leases:
           
     Operating lease right-of-use assets
 
$
455
   
$
460
 
                 
     Other current liabilities
 
$
20
     
20
 
     Operating lease liabilities
   
427
     
432
 
Total operating lease liabilities
 
$
447
   
$
452
 
                 
                 
Weighted Average Remaining Lease Term
               
     Operating leases
 
59 years
   
59 years
 
Weighted Average Discount Rate
               
     Operating leases
   
3.6
%
   
5.0
%

Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2021 are as follows:

 
 
(in thousands)
 
 
 
Operating Leases
 
Year
     
2021
 
$
42
 
2022
   
23
 
2023
   
23
 
2024
   
23
 
2025
   
24
 
Thereafter
   
1,304
 
Total undiscounted lease payments
 
$
1,439
 
Less effects of discounting
   
(992
)
Total lease liabilities recognized
 
$
447
 

As of March 31, 2021, 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. 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 $43,000, related to the May 2020 issue of restricted stock awards, was recorded for the three months ended March 31, 2021.  Compensation expense of $45,000 was recorded for the three months ended March 2020 for restricted stock awards issued in May 2019.  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 6, 2020, 5,000 shares of Class A Stock, were granted as restricted stock awards.  The fair value per share was 35.01, the closing price of the Class A Stock as recorded on the Nasdaq Global Select Market on May 6, 2020. 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, 2021:

 
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, 2021
   
116,347
   
$
2,090
         
$
1,882
     
5,000
   
$
35
 
Granted
   
     
           
     
     
 
Exercised/vested and released
   
(21,885
)
   
19
           
484
     
     
 
Expired/cancelled
   
     
           
     
     
 
Outstanding at March 31, 2021
   
94,462
   
$
21
     
2
   
$
1,704
     
5,000
   
$
35
 
                                                 
Exercisable/vested at March 31, 2021
   
94,462
   
$
21
     
2
   
$
1,704
     
     
 

The total intrinsic value of options exercised during the three months ended March 31, 2021 was approximately $484,000.

There were no unvested option shares outstanding under the 2015 Plan during the three months ended March 31, 2021.

As of March 31, 2021, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.  

As of March 31, 2021, there was $17,000 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.

14


NOTE 6 – OTHER DEFERRED ASSETS

The investment in CoBank, which is a cooperative bank, is related to certain outstanding First Mortgage Bonds and is a required investment in the bank based on the underlying long-term debt agreements.  Goodwill is a result of the acquisition of water assets from the Town of Frankford in April 2020 based on the purchase price allocation.  The DEPSC will evaluate this amount in Artesian Water’s next base rate case to determine the appropriate ratemaking treatment of the acquisition price and the assets acquired. A large portion of the remaining other deferred assets, approximately $0.2 million, is in relation to the Mountain Hill acquisition.

In thousands
 
March 31, 2021
   
December 31, 2020
 
 
           
Investment in CoBank
 
$
4,850
   
$
4,374
 
Goodwill
   
623
     
623
 
Other
   
290
     
312
 
 
 
$
5,763
   
$
5,309
 

NOTE 7 - REGULATORY ASSETS

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

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

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

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

15


Regulatory assets, net of amortization, comprise:
 
   
(in thousands)
 
   
March 31, 2021
   
December 31, 2020
 
             
Deferred income taxes
 
$
367
   
$
370
 
Expense of rate case studies and other
   
44
     
46
 
Debt related costs
   
5,145
     
5,233
 
Goodwill
   
279
     
281
 
Deferred acquisition and franchise costs
   
533
     
543
 
   
$
6,368
   
$
6,473
 

NOTE 8 – REGULATORY LIABILITIES

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

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

Pursuant to the enactment of the TCJA, on December 22, 2017, the Company adjusted its existing deferred income tax balances to reflect the decrease in the corporate income tax rate from 34% to 21% (see Note 11)) resulting in a decrease in the net deferred income tax liability of $24.3 million, of which $22.8 million was reclassified to a regulatory liability related to Artesian Water and Artesian Water Maryland.  The regulatory liability amount is subject to certain Internal Revenue Service normalization rules that require the benefits to customers be spread over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes.  On January 31, 2019, the DEPSC approved the amortization of the regulatory liability amount of $22.2 million over a period of 49.5 years beginning February 1, 2018, subject to audit at a later date.  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.
16


Regulatory liabilities comprise:
 
 
 
(in thousands)
 
 
 
March 31, 2021
   
December 31, 2020
 
 
           
Utility plant retirement cost obligation
 
$
125
   
$
126
 
Deferred income taxes (related to TCJA)
   
21,444
     
21,555
 
   
$
21,569
   
$
21,681
 

NOTE 9 - 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,
 
   
2021
   
2020
 
   
(in thousands)
 
             
Weighted average common shares outstanding during the period for Basic computation
   
9,368
     
9,297
 
Dilutive effect of employee stock options and awards
   
39
     
46
 
                 
Weighted average common shares outstanding during the period for Diluted computation
   
9,407
     
9,343
 

For the three months ended March 31, 2021, no shares of restricted stock awards were excluded from the calculations of diluted net income per share. For the three months ended March 31, 2020, 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, 2021 and March 31, 2020, 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, 2021, 8,502,122 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. 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. The par value for both classes is $1.00 per share.

Equity per common share was $18.35 and $18.16 at March 31, 2021 and December 31, 2020, respectively. These amounts were computed by dividing common stockholders' equity by the number of shares of common stock outstanding on March 31, 2021 and December 31, 2020, respectively.

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NOTE 10 - 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.

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

Water and Wastewater Rates

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

Other Proceedings

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

The following table summarizes (1) Artesian Water’s applications with the DEPSC to collect DSIC rates and (2) the rates upon which eligible plant improvements are based:
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Application Date
11/15/2019
05/29/2020
11/20/2020
DEPSC Approval Date
12/12/2019
06/17/2020
12/14/2020
Effective Date
01/01/2020
07/01/2020
01/01/2021
Cumulative DSIC Rate
7.50%
7.41%
7.50%
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
$43.1
$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
04/30/2019
04/30/2019
04/30/2019

The rate reflects the eligible plant improvements installed through April 30, 2019.  The DSIC rates effective January 1, 2020, July 1, 2020, and January 1, 2021 are still subject to audit at a later date by the DEPSC.  For each of the three months ended March 31, 2021 and March 31, 2020, we earned approximately $1.2 million in DSIC revenue.

NOTE 11 – 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 $5,300 in penalties and interest for the three months ended March 31, 2021. The Company remains subject to examination by federal and state authorities for the tax years 2017 through 2020.

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 taxable income effective prospectively 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.

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NOTE 12 – 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, 2021 and December 31, 2020 was fixed-rate.  The fair value of the Company’s long-term debt is determined by discounting their future cash flows using current market interest rates on similar instruments with comparable maturities consistent with FASB ASC 825.  Under the fair value hierarchy, the fair value of the long-term debt in the table below is classified as Level 2 measurements.  Level 2 is valued using observable inputs other than quoted prices.  The fair values for long-term debt differ from the carrying values primarily due to interest rates that differ from the current market interest rates.  The carrying amount and fair value of Artesian Resources' long-term debt (including current portion) are shown below:

In thousands
     
   
March 31, 2021
   
December 31, 2020
 
Carrying amount
 
$
143,563
   
$
144,090
 
Estimated fair value
 
$
161,162
   
$
171,374
 

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

NOTE 13 – RELATED PARTY TRANSACTIONS

Mr. Michael Houghton currently serves as a director.  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 $13,000 and  $119,000 was paid to MNAT during the three months ended March 31, 2021, and March 31, 2020, respectively, for legal and director related services.  As of March 31, 2021, the Company had a $1,000 accounts payable balance due to MNAT.

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

NOTE 14 – BUSINESS COMBINATIONS

As part of the Company’s growth strategy, on April 2, 2020, Artesian Water purchased substantially all of the water system operating assets from the Town of Frankford, or Frankford, a Delaware municipality located in Sussex County, Delaware, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System.  The Frankford Water System serves approximately 360 customers.  The total purchase price was 3.6 million.  The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations”.  The purchase price allocation is primarily attributed to utility plant assets.  The Company utilized a combination of three methods to determine the reasonableness of the purchase price: the cost approach, market approach and income approach.  Given the majority of the assets acquired were tangible utility plant, the Company utilized the cost approach to record the fair value of the assets.  The cost approach values the underlying assets to derive market value based on the estimated current new replacement cost, less the loss in value caused by physical deterioration, and functional and economic obsolescence of the assets.  Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing utility plant infrastructure.
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Additionally, as part of the Company’s growth strategy, on August 3, 2020, Artesian Water completed its purchase of substantially all of the water system operating assets from the City of Delaware City, or Delaware City, a Delaware municipality located in New Castle County, Delaware, including the right to provide water service to Delaware City’s existing customers, or the Delaware City Water System.  The Delaware City Water System currently serves approximately 800 customers.  The total purchase price was $2.1 million.  The acquisition was accounted for as a business combination under ASC Topic 805.  The purchase price allocation is primarily attributed to utility plant assets.  The Company utilized similar valuation methodologies to those described above.

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

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

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

NOTE 15 - GEOGRAPHIC CONCENTRATION OF CUSTOMERS

Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water utility service to customers within their established service territory in all three counties of Delaware and in portions of Maryland and Pennsylvania, pursuant to rates filed with and approved by the DEPSC, the MDPSC and the PAPUC.  As of March 31, 2021, Artesian Water was serving approximately 90,500 customers, Artesian Water Maryland was serving approximately 2,500 customers and Artesian Water Pennsylvania was serving approximately 40 customers.

Artesian Wastewater provides wastewater utility service to customers within its established service territory in Sussex County, Delaware pursuant to rates filed with and approved by the DEPSC.  As of March 31, 2021, Artesian Wastewater was serving approximately 2,900 customers, including one large industrial customer that comprises approximately 25% of the outstanding accounts receivable balance.  All wastewater customers are located in Sussex County, Delaware.

NOTE 16 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued new guidance that provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as the market transitions from reference rates that are expected to be discontinued, such as the London Inter-bank Offered Rate, or LIBOR.  The guidance was effective upon issuance and may be applied prospectively to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected.  LIBOR is expected to be phased out completely by June 30, 2023.  The guidance is optional and may be elected over time as reference rate reform activities occur.  The Company has not yet modified any agreements as a result of reference rate reform and is evaluating the impact of the new guidance on our financial position, results of operations and cash flows.

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ITEM 2

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

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q that express our "belief," "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995.  Statements regarding specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations, our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in cer