Artesian Resources(ARTNA) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the period ITEM 1 – FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining the company's accounting policies, revenue recognition, regulatory assets and liabilities, stock compensation, and the impact of recent events like COVID-19 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheets (Amounts in thousands): | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Total Assets | $565,587 | $560,368 | | Total Stockholders' Equity | $162,354 | $160,268 | | Total Current Assets | $12,679 | $14,207 | | Total Current Liabilities | $27,923 | $25,599 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance over a period, showing revenues, expenses, and net income Condensed Consolidated Statements of Operations (Amounts in thousands, except per share amounts): | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change ($k) | Change (%) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :---------- | :--------- | | Total Operating Revenues | $19,901 | $19,386 | $515 | 2.7% | | Operating Income | $4,462 | $4,284 | $178 | 4.2% | | Net Income Applicable to Common Stock | $4,074 | $3,590 | $484 | 13.5% | | Basic Income per Common Share | $0.44 | $0.39 | $0.05 | 12.8% | | Diluted Income per Common Share | $0.44 | $0.39 | $0.05 | 12.8% | | Cash Dividends per Share of Common Stock | $0.2496 | $0.2423 | $0.0073 | 3.0% | Condensed Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities over a period Condensed Consolidated Statements of Cash Flows (Amounts in thousands): | Item | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by Operating Activities | $7,129 | $7,621 | | Net Cash Used in Investing Activities | $(9,182) | $(9,064) | | Net Cash Provided by Financing Activities | $1,787 | $1,415 | | Net Decrease in Cash and Cash Equivalents | $(266) | $(28) | | Cash and Cash Equivalents at End of Period | $330 | $265 | Condensed Consolidated Statements of Changes in Stockholders' Equity This section illustrates the changes in the company's equity accounts, including net income, dividends, and stock issuances Condensed Consolidated Statements of Changes in Stockholders' Equity (Amounts in thousands): | Item | March 31, 2020 | March 31, 2019 | | :----------------------------------- | :------------- | :------------- | | Balance as of December 31 | $160,268 | $153,251 | | Net Income | $4,074 | $3,590 | | Cash Dividends Declared | $(2,319) | $(2,241) | | Issuance of Common Stock (Dividend reinvestment plan) | $108 | $87 | | Issuance of Common Stock (Employee stock options and awards) | $134 | $277 | | Issuance of Common Stock (Employee Retirement Plan) | $89 | $78 | | Balance as of March 31 | $162,354 | $155,042 | NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS These notes provide essential details and explanations for the figures presented in the condensed consolidated financial statements NOTE 1 – GENERAL This note describes Artesian Resources Corporation's business operations, including its regulated water and wastewater services and non-regulated infrastructure development activities - Artesian Resources Corporation operates through eight wholly-owned subsidiaries, providing water and wastewater services in Delaware, Maryland, and Pennsylvania, alongside non-regulated activities like infrastructure development and service line protection plans[19][20][25] - Artesian Wastewater Management, Inc. received an operations permit in March 2020 for a new disposal facility (90 million gallon storage lagoon) in Delaware, expected to operate in Q2 2020 for an industrial customer at approximately 1.5 million gallons per day[21] - Non-regulated subsidiaries include Artesian Utility Development, Inc. (design/build infrastructure, contract operations, Service Line Protection Plans), Artesian Development Corporation (real estate holding), and Artesian Storm Water Services, Inc. (storm water management systems)[25][26][30] NOTE 2 – BASIS OF PRESENTATION This note explains the preparation of the unaudited condensed consolidated financial statements in accordance with SEC rules, including consolidation principles and the nature of interim results - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for Form 10-Q, with certain information condensed or omitted[31] - The statements include Artesian Resources Corporation and its wholly-owned subsidiaries, reflecting all normal recurring adjustments[32] - Interim results are not necessarily indicative of the results for the full year or for future periods[33] NOTE 3 – REVENUE RECOGNITION This note details the company's revenue streams from tariff and non-tariff contract services and discusses the anticipated impact of COVID-19 on receivables and bad debt reserves - Artesian's operating revenues are primarily from tariff contract services (water consumption, industrial wastewater, fixed fees, service charges, DSIC) and non-tariff contract revenues (Service Line Protection Plan fees, water/wastewater contract operations, wastewater inspection fees)[35] - Due to the COVID-19 pandemic and state executive orders prohibiting service disconnections and late fees, the Company anticipates a longer receivable cycle and increased reserves for bad debt compared to 2019[42] Disaggregated Revenues (Amounts in thousands): | Revenue Type | 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 | NOTE 4 – LEASES This note provides information on the company's operating lease arrangements, including right-of-use assets, liabilities, and future payment maturities - The Company leases land and office equipment under operating leases with remaining terms of 2 to 77 years, some including options to extend for up to 66 years[52] Supplemental Balance Sheet Information Related to Leases (Amounts in thousands): | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $474 | $480 | | Total operating lease liabilities | $465 | $469 | | Weighted Average Remaining Lease Term (years) | 58 | 58 | | Weighted Average Discount Rate (%) | 5.0 | 5.0 | Maturities of Operating Lease Liabilities (Amounts in thousands) as of March 31, 2020: | Year | Operating Leases | | :--- | :--------------- | | 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 | NOTE 5 – STOCK COMPENSATION PLANS This note outlines the company's equity compensation plan, detailing stock option and restricted stock awards, associated expenses, and unrecognized compensation costs - The 2015 Equity Compensation Plan allows for various forms of grants, including stock options and restricted stock awards, administered by the Compensation Committee[58] Stock Compensation Expense (Amounts in thousands): | Period | Compensation Expense | | :----------------------------------- | :------------------- | | Three Months Ended March 31, 2020 | $45 | | Three Months Ended March 31, 2019 | $47 | Summary of Class A Stock Options/Restricted Stock Awards (Amounts in thousands, except shares and years) (as of March 31, 2020): | Item | Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Yrs.) | Aggregate Intrinsic Value ($k) | Restricted Stock Awards | | :----------------------------------- | :------------ | :------------------------------ | :------------------------------------- | :----------------------------- | :---------------------- | | Outstanding at January 1, 2020 | 153,250 | $20.40 | N/A | $2,575 | 5,000 | | Exercised/Vested and Released | (4,750) | $18.61 | N/A | $70 | – | | Outstanding at March 31, 2020 | 148,500 | $20.46 | 2.384 | $2,512 | 5,000 | | Exercisable/Vested at March 31, 2020 | 148,500 | $20.46 | 2.384 | $2,512 | – | - As of March 31, 2020, there was $18,000 in total unrecognized expenses related to non-vested restricted shares, to be recognized over 0.10 years[62] NOTE 6 – REGULATORY ASSETS This note explains regulatory assets, which represent expenses recoverable through customer rates, and provides a breakdown of these assets - Regulatory assets represent certain expenses recoverable through customer rates, deferred and amortized over future periods as permitted by state regulatory agencies (DEPSC, MDPSC, PAPUC)[63] Regulatory Assets, net of amortization (Amounts in thousands): | Item | 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 | | Total Regulatory Assets, net | $6,785 | $6,891 | - Debt related costs associated with the Series V First Mortgage bond (issued December 2019) are recovered over the term of the new long-term debt[66] NOTE 7 – REGULATORY LIABILITIES This note describes regulatory liabilities, which are deferred cost recoveries or other items probable to be returned to customers through future regulated rates - Regulatory liabilities represent excess recovery of costs or other items deferred because they are probable to be returned to customers through future regulated rates, as determined by state commissions[69] - The utility plant retirement cost obligation consists of estimated costs for facility removal and replacement, charged to a regulated retirement liability annually[70] Regulatory Liabilities (Amounts in thousands): | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Utility plant retirement cost obligation | $216 | $247 | | Deferred income taxes (related to TCJA) | $21,888 | $21,999 | | Total Regulatory Liabilities | $22,104 | $22,246 | NOTE 8 – NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE This note presents the calculation of basic and diluted net income per common share and the company's equity per common share Weighted Average Common Shares Outstanding (Shares in thousands): | Item | March 31, 2020 | March 31, 2019 | | :----------------------------------- | :------------- | :------------- | | Basic computation | 9,297 | 9,258 | | Dilutive effect of employee stock options and awards | 46 | 56 | | Diluted computation | 9,343 | 9,314 | - Equity per common share was $17.46 at March 31, 2020, compared to $17.28 at December 31, 2019[76] - 6,050 shares of restricted stock awards were excluded from diluted net income per share calculations for Q1 2020 due to an anti-dilutive effect[74] NOTE 9 – REGULATORY PROCEEDINGS This note details the regulatory oversight by state commissions and the mechanisms for rate adjustments, including temporary increases and Distribution System Improvement Charges - Artesian's water and wastewater utilities are regulated by the Delaware Public Service Commission (DEPSC), Maryland Public Service Commission (MDPSC), and Pennsylvania Public Utility Commission (PAPUC)[78] - In Delaware, utilities can implement temporary rate increases under bond, up to the lesser of $2.5 million annually or 15% of gross water sales, pending final regulatory approval[79] Distribution System Improvement Charge (DSIC) Rates (Delaware): | Application Date | DEPSC Approval Date | Effective Date | Cumulative DSIC Rate (%) | Net Eligible Plant Improvements – Cumulative Dollars (in millions) | | :--------------- | :------------------ | :------------- | :----------------------- | :--------------------------------------------------------------- | | 11/28/2018 | 12/20/2018 | 01/01/2019 | 5.55 | $30.4 | | 05/29/2019 | 06/18/2019 | 07/01/2019 | 7.41 | $43.1 | | 11/15/2019 | 12/12/2019 | 01/01/2020 | 7.50 | $43.1 | - DSIC revenue for the three months ended March 31, 2020, was approximately $1.2 million, up from $0.9 million in the prior year period[82] NOTE 10 – INCOME TAXES This note discusses deferred income taxes, the impact of the Tax Cuts and Jobs Act on Contributions in Aid of Construction, and the company's tax examination status - Deferred income taxes are provided on temporary differences between tax basis and financial statement amounts, with rate-regulated utilities recognizing regulatory liabilities or assets for deferred taxes[83] - The Tax Cuts and Jobs Act (TCJA) repealed the 1996 exclusion from taxable income for Contributions in Aid of Construction (CIAC) and Advances, effective December 22, 2017[85] - The Company accrued approximately $5,000 in penalties and interest for uncertain tax positions for the three months ended March 31, 2020, and is subject to examination for tax years 2016 through 2019[84] NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS This note explains how the fair value of financial instruments, particularly long-term debt, is determined and its approximation for current assets and liabilities - The carrying amounts of current assets and liabilities approximate fair value due to their short maturity[87] - All outstanding long-term debt is fixed-rate, with fair value determined by discounting future cash flows using current market interest rates (classified as Level 2 measurements)[87] Long-term Debt (including current portion) (Amounts in thousands): | Item | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Carrying amount | $145,352 | $145,862 | | Estimated fair value | $164,083 | $157,710 | NOTE 12 – RELATED PARTY TRANSACTIONS This note discloses payments made to a law firm where a director is a partner and the company's policy for reviewing related party transactions - The Company paid $119,000 to the law firm Morris Nichols Arsht & Tunnell (MNAT) for legal and director-related services during the three months ended March 31, 2020, compared to $40,000 in the prior year period[89] - Mr. Michael Houghton, a director of Artesian Resources, is a Partner in MNAT[89] - The Audit Committee reviews and approves all related party transactions to ensure they are in the best interests of the Company and its stockholders[90] NOTE 13 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS This note discusses the impact of new FASB guidance on credit losses and the anticipated effects of the COVID-19 pandemic on receivables and bad debt reserves - New FASB guidance on credit losses (effective after December 15, 2019) is primarily applicable to accounts receivable balances[92] - Due to the COVID-19 pandemic and state government executive orders, the Company anticipates a longer receivable cycle and the need for increased reserves for bad debt[92] - The MDPSC authorized deferred regulatory treatment for incremental COVID-19 costs, including increased bad debt expense, and the DEPSC is anticipated to issue a similar order[92] NOTE 14 – SUBSEQUENT EVENTS This note addresses the potential impacts of the COVID-19 pandemic, recent financing agreements, and the CARES Act on the company's operations - The COVID-19 outbreak was classified as a pandemic in March 2020, leading to potential impacts on operations, workforce disruptions, longer receivable cycles, increased bad debt reserves, and changes in revenue mix[93] - On April 28, 2020, Artesian Water entered into three financing agreements with the Delaware Drinking Water State Revolving Fund for up to $4.0 million in loans (0.6% interest + 0.6% administrative fee) to finance water transmission main replacements in New Castle County, Delaware[95] - The United States Government enacted the CARES Act on March 27, 2020, and the Company is reviewing its provisions to assess potential impacts on operations[94] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance, condition, and future outlook for the three months ended March 31, 2020. It discusses the impact of the COVID-19 pandemic, operational results across water, wastewater, and non-regulated divisions, strategic direction, and liquidity and capital resources CAUTION REGARDING FORWARD-LOOKING STATEMENTS This section warns that the report contains forward-looking statements subject to various risks and uncertainties, many of which are heightened by the COVID-19 pandemic - The report contains forward-looking statements subject to risks and uncertainties, including those related to the COVID-19 pandemic, weather, regulatory decisions, and economic conditions[97] - Many of these risks and uncertainties are currently elevated by and may continue to be elevated by the COVID-19 pandemic[97] RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2020 This section analyzes the company's operational performance for the three months ended March 31, 2020, covering revenue drivers, divisional results, and strategic initiatives OVERVIEW This overview highlights that gross water sales are the primary driver of profitability, with the company actively seeking growth in wastewater and non-regulated services for diversification - Gross water sales constituted 87.4% of total operating revenues for the three months ended March 31, 2020, making profitability primarily attributable to water sales[98] - The Company seeks growth opportunities in wastewater services and non-regulated contract operations (e.g., wastewater management, design, construction, engineering) to diversify revenue streams and mitigate seasonal weather fluctuations affecting water sales[99] COVID-19 Pandemic This section discusses the potential future adverse impacts of the COVID-19 pandemic on the company's financial results, including workforce disruptions, receivable cycles, and bad debt - While the COVID-19 pandemic did not materially adversely affect Q1 2020 financial results, rapid changes in economic and health conditions since the period end pose future risks[101] - Anticipated future impacts include prolonged workforce disruptions, a longer receivable cycle, increased bad debt reserves, and changes in revenue mix between commercial and residential customers due to state executive orders[102] - The MDPSC authorized deferred regulatory treatment for incremental COVID-19 costs, including increased bad debt expense, and the DEPSC is expected to issue a similar order[102] Water Division This section provides an update on the company's water customer base and distributed water volumes in its Delaware and Maryland systems - As of March 31, 2020, the Company had approximately 88,000 metered water customers in Delaware (up ~1,900 YoY) and ~2,490 in Maryland (up ~60 YoY), with consistent customer numbers in Pennsylvania[104] - For Q1 2020, approximately 1.8 billion gallons of water were distributed in Delaware systems and 23.4 million gallons in Maryland systems[104] Wastewater Division This section details the growth in Delaware wastewater customers, the flat monthly fee billing structure, and agreements with industrial customers - 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[105] - Residential and commercial wastewater customers are billed a flat monthly fee, providing a revenue stream unaffected by weather[105] - Artesian Wastewater has wastewater services agreements with Allen Harim Foods, LLC, a large industrial customer[105] Non-Regulated Division This section describes the Non-Regulated Division's Service Line Protection Plans, highlighting consistent customer growth and their weather-unaffected revenue contribution - The Non-Regulated Division, primarily through Artesian Utility, offers Service Line Protection (SLP) Plans (WSLP, SSLP, ISLP) with consistent customer growth, providing a weather-unaffected revenue stream[106] SLP Plan Customer Enrollment (as of March 31, 2020): | Plan Type | Number of Customers | % of Eligible Water Customers | | :----------------------------------- | :------------------ | :---------------------------- | | WSLP Plan | ~20,500 | 24.3% | | SSLP Plan | ~16,000 | 19.0% | | ISLP Plan | ~7,200 | 8.6% | | Non-utility customers enrolled in one of the three plans | ~1,890 | N/A | Strategic Direction This section outlines the company's strategy to expand services, increase customer growth, and enhance earnings through acquisitions and infrastructure investments across the Delmarva Peninsula - The Company's strategy is to increase customer growth, revenues, earnings, and dividends by expanding water, wastewater, and SLP Plan services across the Delmarva Peninsula, leveraging acquisitions and infrastructure investments[108] - Recent acquisitions include utility assets in Kent County, Delaware (Oct 2019, ~400 customers) and the Town of Frankford's water system (Feb 2020, closed April 2020, ~360 customers for $3.6 million)[110][111] - In the regulated wastewater division, the Company plans to utilize larger regional facilities to expand service areas and convert smaller treatment facilities into regional pump stations for efficiency[113] - A new 90 million gallon storage lagoon and spray irrigation facility for industrial process wastewater (Allen Harim) is expected to be operational in Q2 2020, treating approximately 1.5 mgd[114] Inflation This section notes that inflation impacts the company through increasing costs for maintaining, improving, and expanding service capabilities, which must be recovered through future cash flows - The Company is affected by inflation, particularly through continually increasing costs for maintaining, improving, and expanding service capabilities, which must be recovered from future cash flows[117] Results of Operations – Analysis of the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019 This section provides a detailed comparative analysis of the company's operating revenues, expenses, other income, interest charges, and net income for the first quarter of 2020 versus 2019 Operating Revenues This section analyzes the increase in total operating revenues, primarily driven by higher water sales due to DSIC and consumption, alongside changes in other utility and non-utility revenues - Total operating revenues increased by $0.5 million, or 2.7%, to $19.9 million for Q1 2020, primarily driven by a $0.5 million increase in water sales revenue[118] - The increase in water sales was mainly due to higher Distribution System Improvement Charge (DSIC) revenue (7.50% rate in Q1 2020 vs. 5.55% in Q1 2019) and consumption revenue[118] - Other utility operating revenue increased by $0.1 million (11.9%) due to wastewater customer growth and inspection fee revenue, while non-utility operating revenue decreased by $0.1 million (5.7%) due to lower contract service revenue[119][120] Operating Expenses This section examines the increase in operating expenses, driven by higher payroll and employee benefits, partially offset by reduced repair and maintenance costs, and an increase in income tax expense - Operating expenses (excluding depreciation and income taxes) increased by $0.1 million, or 1.1%, for Q1 2020[120] - Utility operating expenses rose by $0.1 million (1.2%) due to increased payroll and employee benefit costs, partially offset by decreased repair and maintenance costs[121] - Federal and state income tax expense increased by $0.2 million (15.2%) due to higher pre-tax book income[122] Other Income, Net This section details the increase in other income, primarily from a patronage refund and an increase in Allowance for Funds Used During Construction - Other income increased by $0.5 million, primarily driven by a $0.3 million increase in miscellaneous income from an annual patronage refund from CoBank, ACB (including a one-time additional distribution)[122] - Allowance for Funds Used During Construction (AFUDC) increased by $0.2 million due to higher long-term construction activity[122] Interest Charges This section explains the increase in interest expense, mainly due to higher long-term debt from a new bond issuance, partially offset by lower short-term borrowing costs - Interest expense increased by $0.2 million, mainly due to higher long-term debt interest from the Series V First Mortgage Bond issued on December 17, 2019[123] - This increase was partially offset by a decrease in short-term debt interest, primarily related to lower short-term borrowing levels in 2020[123] Net Income This section summarizes the increase in net income applicable to common stock, attributing it to higher operating revenues and other income, partially offset by increased expenses - Net income applicable to common stock increased by $0.5 million, driven by a $0.5 million increase in operating revenues and a $0.5 million increase in other income, partially offset by a $0.3 million increase in operating expenses and a $0.2 million increase in interest expense[124] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's sources of liquidity, capital expenditure plans, financing arrangements, and compliance with debt covenants Overview This overview identifies primary liquidity sources and emphasizes the importance of timely rate increases for recovering utility plant investments - Primary liquidity sources for Q1 2020 included $7.1 million from operating activities, $3.2 million in net contributions/advances from developers, $1.1 million from lines of credit borrowings, and $0.3 million from common stock issuance[125] - Maintaining financial objectives relies on ensuring investments in utility plant and equipment are recovered through timely and adequate rate increases[125] Investment in Plant and Systems This section details capital expenditures for Q1 2020, highlighting key investments in infrastructure and future financing plans - Capital expenditures for Q1 2020 were $9.2 million, compared to $9.1 million in Q1 2019[126] - Key investments in Q1 2020 included $2.0 million for transmission/distribution rehabilitation, $1.9 million for treatment facility enhancements, $1.3 million for Delaware wastewater projects, and $1.7 million for mandatory utility plant expenditures due to governmental highway projects[126] - Future investments are expected to be financed by operations and external sources, including available cash, bank credit lines, state revolving fund loans, and potential capital market financing[127] Lines of Credit and Long Term Debt This section outlines the company's available lines of credit, details contractual cash obligations, and confirms compliance with debt covenants - As of March 31, 2020, Artesian Resources had a $40 million line of credit with Citizens Bank ($38.9 million available, LIBOR + 1.00%, expires May 23, 2020) and Artesian Water had a $20 million line of credit with CoBank ($12.5 million available, LIBOR + 1.50% or weekly variable rate, expires July 20, 2020); both are expected to be renewed[129][130] Contractual Cash Obligations (Amounts in thousands) as of March 31, 2020: | Obligation Type | 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 | - The Company was in compliance with all affirmative and negative covenants in its long-term debt agreements and revolving lines of credit as of March 31, 2020[131] Off-Balance Sheet Arrangements This section confirms that the company does not have any off-balance sheet arrangements, including those with structured finance or special purpose entities - The Company does not have any off-balance sheet arrangements, including with structured finance, special purpose, or variable interest entities[138] Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements This section states that there have been no material changes to critical accounting policies or significant impacts from new accounting pronouncements during the quarter - There have been no changes in the Company's critical accounting policies from those disclosed in its 2019 Annual Report on Form 10-K[140] - No new accounting policies adopted in the first three months of 2020 had a material impact on the Company's financial condition, liquidity, or results of operations[141] ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section outlines the company's exposure to market risks, primarily fluctuating interest rates on variable-rate debt and commodity price changes. It details how these risks are mitigated through fixed-rate long-term debt, multi-year fixed-price electric supply contracts, and the ability to recover costs through rate increases - The Company is exposed to interest rate risk on $60 million of variable rate lines of credit, with approximately $8.6 million outstanding at March 31, 2020[142] - Interest rate risk is managed through the use of fixed-rate long-term debt (4.24% to 5.96% interest rates, maturities 2028-2038)[142] - Commodity price risk (e.g., chemicals, electricity) is mitigated by the ability to recover costs through rate increases to customers and by signing multi-year fixed-price electric supply contracts[142] ITEM 4 – CONTROLS AND PROCEDURES This section confirms that management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2020, concluding they were effective. It also states that no material changes to internal control over financial reporting occurred during the quarter - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance for timely and accurate financial reporting[143] - No change in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[144] Part II - Other Information This section covers legal proceedings, risk factors, and other required disclosures, including exhibits, for the reporting period ITEM 1 – LEGAL PROCEEDINGS This section states that the company is periodically involved in ordinary course legal proceedings but does not believe their ultimate resolution will materially affect its business, financial position, or results of operations, while acknowledging potential litigation expenses and diversion of management attention - The Company is periodically involved in legal proceedings arising in the ordinary course of business[145] - Management does not believe the ultimate resolution of these matters will materially affect the Company's business, financial position, or results of operations[145] - However, significant litigation expense and diversion of management attention may occur regardless of the outcome[145] ITEM 1A – RISK FACTORS This section highlights that the company's business and financial results may be adversely affected by pandemics like COVID-19. Government orders prohibiting service disconnections and late fees are expected to lead to longer receivable cycles, increased bad debt reserves, and shifts in revenue mix, while market volatility may impact stock price - The Company's 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 COVID-19 outbreak[146][147] - State government executive orders prohibiting service disconnections for non-payment and late fees are anticipated to result in a longer receivable cycle, increased reserves for bad debt, and changes in revenue mix between commercial and residential customers[148] - Concerns over the economic impact of COVID-19 have caused extreme volatility in financial and capital markets, which has and may continue to adversely impact the Company's stock price[148] ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This item is not applicable to the current report ITEM 3 – DEFAULTS UPON SENIOR SECURITIES This item is not applicable to the current report ITEM 4 – MINE SAFETY DISCLOSURES This item is not applicable to the current report ITEM 5 – OTHER INFORMATION This item is not applicable to the current report ITEM 6 - EXHIBITS This section lists all exhibits filed with the Form 10-Q, including various agreements, notes, and certifications, which provide supporting documentation for the financial statements and other disclosures - Exhibits include the Asset Purchase Agreement with the Town of Frankford (dated February 27, 2020) and multiple Financing Agreements and General Obligation Notes with the Delaware Drinking Water State Revolving Fund (dated April 28, 2020)[151] - Certifications of the Chief Executive Officer and Chief Financial Officer (required by Rule 13a–14(a) and 13a-14(b)) are filed or furnished[151] - The financial statements are also provided in eXtensible Business Reporting Language (XBRL) format[151]