Artesian Resources(ARTNA) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents the company's financial performance and condition for the reported periods ITEM 1 – FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements of Artesian Resources Corporation, including balance sheets, statements of operations, cash flows, and changes in stockholders' equity, along with detailed notes explaining accounting policies, revenue recognition, leases, stock compensation, regulatory assets/liabilities, and recent acquisitions for the periods ended June 30, 2020 and December 31, 2019 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific dates | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :-------------------- | :------------ | :---------------- | | Total Assets | $575,899 | $560,368 | | Total Stockholders' Equity | $162,910 | $160,268 | | Long-term Debt, net | $143,183 | $144,156 | | Total Current Liabilities | $36,473 | $25,599 | - Total Assets increased by $15.5 million (2.78%) from December 31, 2019, to June 30, 2020, primarily driven by an increase in utility plant and other deferred assets[8] - Current liabilities saw a significant increase of $10.874 million (42.48%) from December 31, 2019, to June 30, 2020, mainly due to higher lines of credit and income taxes payable[8] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income over specific reporting periods | Metric (in thousands, except per share) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Operating Revenues | $21,752 | $20,652 | $41,653 | $40,037 | | Operating Income | $6,124 | $5,320 | $10,585 | $9,604 | | Net Income Applicable to Common Stock | $4,566 | $3,778 | $8,640 | $7,368 | | Basic EPS | $0.49 | $0.41 | $0.93 | $0.80 | | Diluted EPS | $0.49 | $0.41 | $0.92 | $0.79 | | Cash Dividends Per Share | $0.2496 | $0.2459 | $0.4992 | $0.4882 | - Total Operating Revenues increased by 5.3% for the three months and 4.0% for the six months ended June 30, 2020, compared to the same periods in 2019, primarily driven by water sales[11] - Net Income Applicable to Common Stock increased by 20.8% for the three months and 17.3% for the six months ended June 30, 2020, year-over-year[11] Condensed Consolidated Statements of Cash Flows This section outlines the sources and uses of cash from operating, investing, and financing activities | Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $11,837 | $8,928 | | Net Cash Used in Investing Activities | $(20,550) | $(18,073) | | Net Cash Provided by Financing Activities | $8,490 | $9,037 | | Net Decrease in Cash and Cash Equivalents | $(223) | $(108) | | Cash and Cash Equivalents at End of Period | $373 | $185 | - Net cash provided by operating activities increased by $2.909 million (32.58%) for the six months ended June 30, 2020, compared to the same period in 2019, primarily due to higher net income and changes in working capital[12] - Net cash used in investing activities increased by $2.477 million (13.71%) due to higher capital expenditures and investments in acquisitions, including the Frankford Water System[12][102] Condensed Consolidated Statements of Changes in Stockholders' Equity This section tracks changes in the company's equity, including retained earnings and capital contributions | Metric (in thousands) | December 31, 2019 | June 30, 2020 | | :-------------------- | :---------------- | :------------ | | Total Stockholders' Equity | $160,268 | $162,910 | | Retained Earnings | $49,165 | $50,831 | | Additional Paid-in Capital | $101,811 | $102,746 | - Total stockholders' equity increased by $2.642 million from December 31, 2019, to June 30, 2020, driven by net income and issuance of common stock through dividend reinvestment and employee plans, partially offset by cash dividends declared[19][20] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies, significant transactions, and financial statement line items NOTE 1 – GENERAL (Company Overview and Subsidiaries) This note describes Artesian Resources Corporation's business, its wholly-owned subsidiaries, and their primary services - Artesian Resources Corporation operates through eight wholly-owned subsidiaries, primarily providing water and wastewater services in Delaware, Maryland, and Pennsylvania[21][22][24][26][27] - Key regulated subsidiaries include Artesian Water Company, Inc. (largest public water utility in Delaware), Artesian Wastewater Management, Inc., Artesian Water Maryland, Inc., and Artesian Water Pennsylvania, Inc[22][23][24][26] - Non-regulated subsidiaries (Artesian Utility Development, Artesian Development Corporation, Artesian Storm Water Services) focus on infrastructure design/build, contract operations, real estate, and storm water management[27][28][31][32] NOTE 2 – BASIS OF PRESENTATION This note explains the accounting principles and management's estimates used in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for Form 10-Q, with certain information condensed or omitted compared to annual statements[33] - Management makes estimates and assumptions, particularly regarding lease agreements and the impact of the COVID-19 pandemic on credit losses and bad debt reserves due to executive orders prohibiting late fees and service disconnections[36][37] NOTE 3 – REVENUE RECOGNITION This note details the company's revenue sources, recognition policies, and the impact of COVID-19 on receivables - Operating revenues are primarily from tariff-based contract services (water consumption, industrial wastewater, fixed fees, DSIC) approved by state Public Service Commissions[39] - Non-tariff revenues include Service Line Protection Plan (SLP Plan) fees, water/wastewater contract operations, and inspection fees[39][47][48][49] | Revenue Type (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Tariff Revenue | $20,128 | $18,921 | $38,331 | $36,604 | | Total Non-Tariff Revenue | $1,300 | $1,420 | $2,706 | $2,821 | | Other Operating Revenue | $324 | $311 | $616 | $612 | | Total Operating Revenue | $21,752 | $20,652 | $41,653 | $40,037 | - Due to COVID-19, the Company anticipates a longer receivable cycle and increased bad debt reserves, as state executive orders prohibit service disconnections and late fees for non-payment[45][103] NOTE 4 – LEASES This note outlines the company's operating lease agreements, associated assets, and liabilities - The Company leases land and office equipment under operating leases with terms ranging from 2 to 77 years, some including automatic extension options[57] | Lease Metric | June 30, 2020 | | :---------------------------- | :------------ | | Operating lease right-of-use assets | $469 thousand | | Total operating lease liabilities | $460 thousand | | Weighted Average Remaining Lease Term | 58 years | | Weighted Average Discount Rate | 5.0% | - Total undiscounted operating lease payments amount to $1.465 million, with $42 thousand due in 2020 and $1.317 million thereafter[63] NOTE 5 – STOCK COMPENSATION PLANS This note describes the company's equity compensation plans, including stock options and restricted stock awards - The 2015 Equity Compensation Plan authorizes grants of incentive stock options, nonqualified stock options, stock units, stock awards, and dividend equivalents[64] - Compensation expense for restricted stock awards was $45,000 for the three months and $90,000 for the six months ended June 30, 2020[65] | Stock Compensation (June 30, 2020) | Options (Shares) | Restricted Stock Awards (Shares) | | :--------------------------------- | :--------------- | :------------------------------- | | Outstanding at January 1, 2020 | 153,250 | 5,000 | | Granted | — | 5,000 | | Exercised/Vested and Released | (25,000) | (5,000) | | Outstanding at June 30, 2020 | 128,250 | 5,000 | | Weighted Average Exercise Price (Options) | $20.73 | N/A | | Weighted Average Remaining Life (Options) | 2.438 years | N/A | | Aggregate Intrinsic Value (Options) | $1,995 thousand | N/A | | Unrecognized Expenses (Restricted Stock) | — | $148 thousand | NOTE 6 – OTHER DEFERRED ASSETS This note details other deferred assets, including investments and goodwill from acquisitions - Other deferred assets include an investment in CoBank ($4.374 million at June 30, 2020) and goodwill ($1.220 million at June 30, 2020) resulting from the acquisition of water assets from the Town of Frankford[72][73] NOTE 7 - REGULATORY ASSETS This note explains regulatory assets, representing costs recoverable through future customer rates - Regulatory assets represent expenses recoverable through customer rates, deferred and amortized over future periods as permitted by regulatory agencies (DEPSC, MDPSC, PAPUC)[74] | Regulatory Asset (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------ | :------------ | :---------------- | | Postretirement benefit obligation | $51 | $51 | | Deferred income taxes | $378 | $386 | | Expense of rate case studies | $22 | $27 | | Debt related costs | $5,398 | $5,556 | | Goodwill | $284 | $288 | | Deferred acquisition and franchise costs | $564 | $583 | | Total Regulatory Assets, net | $6,697 | $6,891 | NOTE 8 – REGULATORY LIABILITIES This note describes regulatory liabilities, representing amounts to be returned to customers through future rates - Regulatory liabilities represent excess cost recovery or other deferred items that are probable to be returned to customers through future regulated rates[80] - A significant portion of regulatory liabilities ($21.777 million at June 30, 2020) is related to deferred income taxes from the Tax Cuts and Jobs Act (TCJA), amortized over 49.5 years[82][84] | Regulatory Liability (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------------- | :------------ | :---------------- | | Utility plant retirement cost obligation | $192 | $247 | | Deferred income taxes (related to TCJA) | $21,777 | $21,999 | | Total Regulatory Liabilities | $21,969 | $22,246 | NOTE 9 - NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE This note provides details on basic and diluted earnings per share and equity per common share | Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic Shares Outstanding | 9,326 | 9,276 | 9,311 | 9,267 | | Diluted Shares Outstanding | 9,367 | 9,324 | 9,357 | 9,319 | - Equity per common share was $17.50 at June 30, 2020, up from $17.28 at December 31, 2019[87] NOTE 10 - REGULATORY PROCEEDINGS This note outlines the regulatory environment and rate-setting mechanisms for the company's utility operations - The Company's utilities are regulated by the DEPSC, MDPSC, and PAPUC, which establish rates to cover operating and investment costs[88][89] - Delaware law permits semi-annual increases for distribution system improvements through a DSIC, which generated $1.3 million and $2.4 million in revenue for the three and six months ended June 30, 2020, respectively[92][93] | DSIC Application | 11/28/2018 | 05/29/2019 | 11/15/2019 | 05/29/2020 | | :--------------- | :--------- | :--------- | :--------- | :--------- | | DEPSC Approval Date | 12/20/2018 | 06/18/2019 | 12/12/2019 | 06/17/2020 | | Effective Date | 01/01/2019 | 07/01/2019 | 01/01/2020 | 07/01/2020 | | Cumulative DSIC Rate | 5.55% | 7.41% | 7.50% | 7.41% | NOTE 11 – INCOME TAXES This note details the company's deferred income taxes and uncertain tax positions - Deferred income taxes are provided for temporary differences between tax basis and financial statement amounts, with rate-regulated utilities recognizing regulatory liabilities/assets for deferred taxes[94] - The Company accrued approximately $10,100 in penalties and interest for uncertain tax positions for the six months ended June 30, 2020, and is subject to examination by federal and state authorities for tax years 2016-2019[95] NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS This note discusses the fair value measurements of the company's financial instruments, particularly long-term debt - Current assets and liabilities approximate fair value due to their short maturity[98] | Long-term Debt (in thousands) | June 30, 2020 | December 31, 2019 | | :---------------------------- | :------------ | :---------------- | | Carrying amount | $144,982 | $145,862 | | Estimated fair value | $173,779 | $157,710 | - The fair value of long-term debt differs from carrying values due to differences between fixed interest rates and current market rates, classified as Level 2 measurements[98] NOTE 13 – RELATED PARTY TRANSACTIONS This note discloses transactions with related parties, including legal services from a director's firm - The Company utilized legal services from Morris Nichols Arsht & Tunnell (MNAT), where a director, Mr. Michael Houghton, is a Partner[99] | Payments to MNAT (in thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------ | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Legal and director services | $109 | $228 | $97 | $123 | NOTE 14 – BUSINESS COMBINATIONS This note details recent acquisitions of water system operating assets and their accounting treatment - On April 2, 2020, Artesian Water acquired the water system operating assets from the Town of Frankford for $3.6 million, serving approximately 360 customers[102] - The acquisition was accounted for as a business combination, with the purchase price primarily attributed to utility plant assets, pending final valuation[102] NOTE 15 - IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS This note describes the impact of new accounting guidance on credit losses and bad debt reserves - New FASB guidance on credit losses (effective after December 15, 2019) is primarily applicable to accounts receivable[103] - An adjustment of $0.3 million was made to increase the reserve for bad debt as of June 30, 2020, due to COVID-19 related executive orders prohibiting service disconnections and late fees[103] NOTE 16 - SUBSEQUENT EVENT This note reports a significant event occurring after the reporting period, specifically a water system acquisition - On August 3, 2020, Artesian Water completed the purchase of water system operating assets from the City of Delaware City for $2.1 million, serving approximately 800 customers[104] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides an overview of the Company's financial performance, strategic direction, and the impact of the COVID-19 pandemic. It details the results of operations for the three and six months ended June 30, 2020, compared to 2019, highlighting revenue and expense drivers, and discusses liquidity and capital resources CAUTION REGARDING FORWARD-LOOKING STATEMENTS This section warns about forward-looking statements and outlines key risks and uncertainties affecting future results - The report contains forward-looking statements regarding financial condition, operations, growth plans, regulatory decisions, and the impact of COVID-19, which involve risks and uncertainties[106] - Key risk factors include changes in weather, contractual obligations, government policies, regulatory approvals, economic conditions, and the ongoing impact of the COVID-19 pandemic[106] RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2020 This section analyzes the company's operational performance for the reported period, detailing revenue and expense drivers OVERVIEW This overview highlights the primary drivers of profitability and strategic growth areas for the company - Profitability is primarily driven by water sales, which constituted 88.3% of total operating revenues for the six months ended June 30, 2020[107] - The Company seeks growth in wastewater services and non-regulated contract operations (water/wastewater operations, SLP Plans, design/construction/engineering services) to diversify revenue streams and mitigate weather-related fluctuations[107][108] COVID-19 Pandemic This section assesses the impact of the COVID-19 pandemic on financial results and future operational considerations - The COVID-19 pandemic did not materially adversely affect financial results for the six months ended June 30, 2020, but its full impact remains uncertain and could affect future quarters[110][112] - State executive orders prohibiting service disconnections and late fees are expected to lead to a longer receivable cycle and increased bad debt reserves, with potential changes in revenue mix between commercial and residential customers[111] - DEPSC and MDPSC authorized deferred regulatory treatment for incremental COVID-19 related costs[111] Water Division This section provides key metrics and operational details for the company's water utility services - Metered water customers in Delaware increased by approximately 2,350 to 88,900 customers as of June 30, 2020, compared to June 30, 2019[114] - Approximately 3.9 billion gallons of water were distributed in Delaware systems and 63.1 million gallons in Maryland systems for the six months ended June 30, 2020[114] Wastewater Division This section details the growth and operational developments within the company's wastewater services - Delaware wastewater customers increased by approximately 380 (16.7%) to 2,650 customers as of June 30, 2020, compared to June 30, 2019[115] - Artesian Wastewater received an operations permit in March 2020 for a disposal facility to provide treated process wastewater disposal services for an industrial customer (Allen Harim) at 1.5 mgd, anticipated to be operational in Q3 2020[23][126] Non-Regulated Division This section describes the activities and customer enrollment in the company's non-regulated services - The non-regulated division, primarily Artesian Utility, provides contract water/wastewater operations and Service Line Protection (SLP) Plans[116] | SLP Plan Enrollment (June 30, 2020) | Number of Customers | % of Eligible Water Customers | | :---------------------------------- | :------------------ | :---------------------------- | | WSLP Plan | 20,600 | 24.2% | | SSLP Plan | 16,000 | 18.9% | | ISLP Plan | 7,300 | 8.6% | Strategic Direction This section outlines the company's growth strategy, including customer expansion and recent acquisitions - The Company's strategy focuses on increasing customer growth, revenues, earnings, and dividends by expanding water, wastewater, and SLP Plan services across the Delmarva Peninsula through strategic acquisitions and partnerships[117][118] - Recent acquisitions include utility assets from High Point Associates (Oct 2019), the Frankford Water System (April 2020 for $3.6 million), and the Delaware City Water System (Aug 2020 for $2.1 million)[120][121][122] - Significant growth opportunities are foreseen in the regulated wastewater division, with plans to expand service areas using larger regional facilities and convert smaller treatment facilities into pump stations for efficiency[124] Results of Operations – Analysis of the Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019. This section analyzes the financial performance for the three-month period, detailing revenue and expense changes - Operating revenues increased by $1.1 million (5.3%) to $21.8 million, primarily due to a $1.2 million (6.8%) increase in water sales revenue from residential consumption and higher DSIC and fixed fee revenues[130] - Operating expenses (excluding depreciation and income taxes) increased by $0.1 million (1.0%), driven by a $0.3 million increase in bad debt expense due to COVID-19 related non-payment prohibitions[132][134] - Net income applicable to common stock increased by $0.8 million, reflecting higher operating revenues and other income, partially offset by increased operating and interest expenses[137] Results of Operations – Analysis of the Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019. This section analyzes the financial performance for the six-month period, detailing revenue and expense changes - Operating revenues increased by $1.6 million (4.0%) to $41.7 million, mainly from a $1.7 million (4.8%) increase in water sales revenue due to residential consumption and higher DSIC and fixed fee revenues[137] - Operating expenses (excluding depreciation and income taxes) increased by $0.2 million (1.0%), with a $0.3 million increase in bad debt expense and $0.3 million in payroll/employee benefits, partially offset by decreases in general administration and purchased water expenses[140][141][142] - Net income applicable to common stock increased by $1.3 million, driven by higher operating revenues and other income, partially offset by increased operating and interest expenses[147] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash flow, funding sources, capital expenditures, and debt obligations - Primary liquidity sources for the six months ended June 30, 2020, included $11.8 million from operating activities, $5.7 million from contributions/advances, $7.2 million from lines of credit, and $0.9 million from common stock issuance[148] - Capital expenditures were $20.6 million for the first six months of 2020, up from $18.2 million in 2019, focusing on transmission/distribution, treatment facilities, and the Frankford acquisition[149] | Contractual Obligations (in thousands) | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | | :------------------------------------- | :--------------- | :-------- | :-------- | :------------ | :---- | | First mortgage bonds (principal and interest) | $6,650 | $13,218 | $13,115 | $194,734 | $227,717 | | State revolving fund loans (principal and interest) | $1,002 | $838 | $674 | $3,963 | $6,477 | | Promissory note (principal and interest) | $960 | $1,921 | $1,921 | $13,018 | $17,820 | | Operating leases | $42 | $60 | $46 | $1,317 | $1,465 | | Operating agreements | $72 | $85 | $78 | $890 | $1,125 | | Unconditional purchase obligations | $3,881 | $2,042 | $57 | — | $5,980 | | Total contractual cash obligations | $12,607 | $18,164 | $15,891 | $213,922 | $260,584 | - The Company had $40 million and $20 million lines of credit with Citizens Bank and CoBank, respectively, with $32.8 million and $12.5 million available as of June 30, 2020, and expects to renew them[151][152] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks primarily from fluctuating interest rates on its debt and changes in commodity prices. It manages interest rate risk through fixed-rate long-term debt and mitigates commodity price risk by recovering costs through rate increases and multi-year fixed-price supply contracts for electricity - The Company is exposed to interest rate risk on its $60 million variable rate lines of credit, with $14.7 million outstanding at June 30, 2020[164] - Commodity price risks (chemicals, electricity) are mitigated by the ability to recover costs through customer rate increases and multi-year fixed-price electric supply contracts[158][164] ITEM 4 – CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2020, concluding they were effective. No material changes to internal control over financial reporting occurred during the quarter, and the COVID-19 pandemic had no impact on these controls - Disclosure controls and procedures were evaluated as effective, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[166] - No material changes to internal control over financial reporting occurred during the quarter, and the COVID-19 pandemic had no impact on these controls[167] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal matters and risk factors ITEM 1 – LEGAL PROCEEDINGS The Company is periodically involved in legal proceedings arising in the ordinary course of business. Management does not believe the ultimate resolution of these matters will materially affect its business, financial position, or results of operations, though significant litigation expense and diversion of management attention may occur - The Company is involved in ordinary course legal proceedings, which are not expected to materially affect business, financial position, or results of operations[168] - Potential risks include significant litigation expense and diversion of management attention, regardless of the outcome[168] ITEM 1A – RISK FACTORS This section updates the risk factors from the annual report, specifically highlighting the adverse impact of pandemics like COVID-19 on the Company's business, financial condition, cash flows, and stock price. It notes that state executive orders related to COVID-19 may lead to longer receivable cycles and increased bad debt reserves - The COVID-19 pandemic is a new material risk factor that may adversely affect the Company's business, results of operations, financial condition, cash flows, and stock price[169][170] - State executive orders prohibiting service disconnections and late fees due to COVID-19 are anticipated to result in a longer receivable cycle and increased bad debt reserves[171] - Concerns over the economic impact of COVID-19 have caused extreme volatility in financial markets, potentially impacting the Company's stock price[171] 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 financing agreements, general obligation notes, an asset purchase agreement, and certifications from the Chief Executive Officer and Chief Financial Officer - Exhibits include financing agreements and general obligation notes with the Delaware Drinking Water State Revolving Fund for water main transmission replacements[174] - An Asset Purchase Agreement dated June 11, 2020, between Artesian Water Company Inc. and the City of Delaware City is filed as an exhibit[174] - Certifications from the CEO and CFO (Rule 13a–14(a) and 13a-14(b)) are included[174]