Artesian Resources(ARTNA) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1 – FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements detail the company's financial position, performance, and cash flows Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (In thousands) | ASSETS | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Utility plant, at original cost (less accumulated depreciation) | $705,949 | $668,031 | | Cash and cash equivalents | $6,458 | $1,309 | | Total current assets | $33,946 | $27,804 | | Total Assets | $761,811 | $719,791 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total stockholders' equity | $229,593 | $187,931 | | Long-term debt, net of current portion | $175,875 | $175,619 | | Total current liabilities | $27,176 | $44,069 | | Total Liabilities and Stockholders' Equity | $761,811 | $719,791 | - Total Assets increased by $42.02 million (5.84%) from December 31, 2022, to September 30, 2023, primarily driven by an increase in utility plant and cash and cash equivalents[12] - Total Stockholders' Equity increased by $41.66 million (22.17%) from December 31, 2022, to September 30, 2023, largely due to an increase in additional paid-in capital and retained earnings[12] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (In thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenues | $26,570 | $26,582 | $74,317 | $73,780 | | Total Operating Expenses | $19,909 | $18,500 | $57,385 | $54,111 | | Operating income | $6,661 | $8,082 | $16,932 | $19,669 | | Net income applicable to common stock | $5,071 | $6,144 | $13,219 | $15,673 | | Basic Income per common share | $0.49 | $0.65 | $1.33 | $1.66 | | Diluted Income per common share | $0.49 | $0.65 | $1.33 | $1.65 | | Cash dividends per share of common stock | $0.2840 | $0.2729 | $0.8464 | $0.8133 | - For the three months ended September 30, 2023, Net income applicable to common stock decreased by $1.073 million (17.5%) compared to the same period in 2022, primarily due to increased operating expenses[15][159] - For the nine months ended September 30, 2023, Net income applicable to common stock decreased by $2.454 million (15.7%) compared to the same period in 2022, despite a slight increase in total operating revenues[15][174] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (In thousands) | Cash Flow Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $23,360 | $25,050 | | Net cash used in investing activities | $(48,762) | $(42,952) | | Net cash provided by financing activities | $30,551 | $17,918 | | Net increase in cash and cash equivalents | $5,149 | $16 | | Cash and cash equivalents at end of period | $6,458 | $108 | - Net cash provided by operating activities decreased by $1.69 million (6.75%) for the nine months ended September 30, 2023, compared to the same period in 2022[17] - Net cash provided by financing activities significantly increased by $12.63 million (70.49%) for the nine months ended September 30, 2023, primarily due to net proceeds from the issuance of common stock[17][175] Condensed Consolidated Statements of Changes in Stockholders' Equity Condensed Consolidated Statements of Changes in Stockholders' Equity (In thousands) | Metric | Balance as of Dec 31, 2022 | Balance as of Sep 30, 2023 | | :--- | :--- | :--- | | Total Stockholders' Equity | $187,931 | $229,593 | | Additional Paid-in Capital | $107,143 | $143,076 | | Retained Earnings | $71,286 | $76,240 | | Class A Non-Voting Common Shares Outstanding | 8,621 | 9,396 | | Class B Voting Common Shares Outstanding | 881 | 881 | - Total Stockholders' Equity increased by $41.66 million from December 31, 2022, to September 30, 2023, driven by net income, common stock issuance, and dividend reinvestment[23][111] - The Company completed a public offering of Class A Stock in May and June 2023, generating approximately $36.2 million in net proceeds, significantly increasing additional paid-in capital[23][111] Notes to the Condensed Consolidated Financial Statements NOTE 1 – GENERAL The Company operates regulated utilities and non-utility businesses through several wholly-owned subsidiaries - Artesian Resources Corporation operates regulated water and wastewater utilities in Delaware, Maryland, and Pennsylvania through multiple subsidiaries[27][28][30][32][34] - Non-utility subsidiaries focus on infrastructure design/build, contract operations, and real estate holdings[35][36][38][39] - Artesian Storm Water Services, Inc, a non-utility subsidiary, was dissolved effective June 20, 2023[35][40] NOTE 2 – BASIS OF PRESENTATION The financial statements adhere to SEC Form 10-Q rules and regulated utility accounting principles - The unaudited condensed consolidated financial statements are prepared in accordance with SEC Form 10-Q rules[41] - Regulated utility subsidiaries maintain accounting records per state public service commissions and follow FASB ASC Topic 980[44] - Fair value determinations for the TESI and Clayton acquisitions were finalized on December 31, 2022[46] NOTE 3 – REVENUE RECOGNITION Revenue is recognized from both tariff-regulated services and non-tariff business activities - Artesian's operating revenues are primarily from regulated tariff services approved by state commissions[47] - Non-tariff revenues include Service Line Protection Plans, contract operations, and design/installation services[47] Disaggregated Revenues (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Tariff Revenue | $24,272 | $24,073 | $67,693 | $66,204 | | Total Non-Tariff Revenue | $1,879 | $2,210 | $5,444 | $6,310 | | Other Operating Revenue | $419 | $299 | $1,180 | $1,266 | | Total Operating Revenue | $26,570 | $26,582 | $74,317 | $73,780 | NOTE 4 – ACCOUNTS RECEIVABLE Accounts receivable consist of customer balances, a settlement agreement, and developer receivables - Artesian Water is due approximately $10.0 million in reimbursements from the Delaware Sand and Gravel Remedial Trust, with $5.0 million remaining[66] Accounts Receivable (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Customer accounts receivable – water | $6,246 | $5,981 | | Customer accounts receivable – wastewater | $552 | $482 | | Settlement agreement receivable – short term | $2,516 | $2,532 | | Miscellaneous accounts receivable | $832 | $3,781 | | Developer receivable | $698 | $1,151 | | Less: provision for expected credit loss | $356 | $416 | | Net accounts receivable | $10,488 | $13,511 | - Net accounts receivable decreased by $3.023 million (22.37%) from December 31, 2022, to September 30, 2023, mainly due to a decline in miscellaneous receivables[67] NOTE 5 – LEASES The Company maintains long-term operating lease arrangements for land and office equipment - The Company leases land and office equipment under operating leases with remaining terms of 5 to 74 years[69] Supplemental Balance Sheet Information Related to Leases (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Operating lease right-of-use assets | $498 | $467 | | Operating lease liabilities | $492 | $466 | | Weighted Average Remaining Lease Term | 57 years | 61 years | | Weighted Average Discount Rate | 5.0% | 5.0% | - Total undiscounted operating lease payments amount to $1.568 million[73] NOTE 6 – STOCK COMPENSATION PLANS The 2015 Equity Compensation Plan governs the issuance of various stock-based awards to employees - The 2015 Equity Compensation Plan allows for grants of stock options, stock units, and other stock-based awards[74] - Compensation expense for restricted stock awards was approximately $185,000 for the nine months ended September 30, 2023[75] Summary of Class A Stock Options and Restricted Awards (9 Months Ended Sep 30, 2023) | Metric | Options Shares | Restricted Stock Awards | | :--- | :--- | :--- | | Outstanding at January 1, 2023 | 6,750 | 5,000 | | Granted | — | 5,000 | | Exercised/vested and released | — | (5,000) | | Outstanding at September 30, 2023 | 6,750 | 5,000 | | Unrecognized expenses related to non-vested awards | $0 | $166,000 | NOTE 7 – OTHER DEFERRED ASSETS Other deferred assets primarily consist of an investment in CoBank and a long-term settlement receivable Other Deferred Assets (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Investment in CoBank | $5,882 | $5,351 | | Settlement agreement receivable-long term | $2,496 | $4,991 | | Other deferred assets | $128 | $194 | | Total | $8,506 | $10,536 | - Other deferred assets decreased by $2.03 million (19.27%) due to the reduction in the long-term settlement agreement receivable[82] NOTE 8 – REGULATORY ASSETS Regulatory assets represent deferred costs that are recoverable through future customer rates - Regulatory assets represent costs recoverable through customer rates, as approved by state commissions[84] Regulatory Assets, Net of Amortization (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Deferred contract costs and other | $221 | $227 | | Rate case studies | $138 | $57 | | Rate proceedings | $222 | — | | Deferred income taxes | $449 | $465 | | Debt related costs | $4,416 | $4,682 | | Deferred costs affiliated interest agreement | $1,124 | $1,114 | | Goodwill | $260 | $266 | | Deferred acquisition and franchise costs | $435 | $463 | | Total | $7,265 | $7,274 | - Amortization periods for regulatory assets range from 2.5 years to 80 years[88] NOTE 9 – REGULATORY LIABILITIES Regulatory liabilities are deferred items probable to be returned to customers through future rates - Regulatory liabilities represent amounts deferred for future return to customers[90] - Deferred settlement refunds of $10.0 million are being refunded to customers in annual installments[92] Regulatory Liabilities (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Utility plant retirement cost obligation | — | — | | Deferred settlement refunds | $4,991 | $7,487 | | Deferred income taxes (related to TCJA) | $20,836 | $21,234 | | Total | $25,827 | $28,721 | NOTE 10 – NET INCOME PER COMMON SHARE AND EQUITY PER COMMON SHARE This note provides the calculation for basic and diluted net income per common share Shares Used in Computing Basic and Diluted Net Income Per Share (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Weighted average common shares outstanding for basic computation | 10,276 | 9,477 | 9,929 | 9,451 | | Dilutive effect of employee stock options and awards | 3 | 15 | 4 | 22 | | Weighted average common shares outstanding for diluted computation | 10,279 | 9,492 | 9,933 | 9,473 | - Equity per common share increased to $23.12 at September 30, 2023, from $19.86 at December 31, 2022[98] NOTE 11 – REGULATORY PROCEEDINGS The Company's utilities are subject to state and federal regulations, with a pending rate case in Delaware - Artesian's utilities are regulated by the DEPSC, MDPSC, and PAPUC, and subject to federal environmental laws[100][101] - On April 28, 2023, Artesian Water filed for a 23.84% (approximately $17.5 million) annualized revenue increase in Delaware[102] - Artesian Water plans to implement a temporary 15% base rate increase on November 28, 2023, subject to refund[102] NOTE 12 – INCOME TAXES The Company accounts for deferred income taxes and recognizes liabilities for uncertain tax positions - Deferred income taxes are provided on temporary differences, with regulatory assets/liabilities recognized for ratemaking impacts[105] - The Company establishes reserves for uncertain tax positions and accrues related interest and penalties[106] - The Company is subject to examination by tax authorities for tax years 2019 through 2022[106] NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value for current financial instruments approximates carrying value, while long-term debt is estimated - Current assets and liabilities' carrying amounts approximate fair value due to their short maturity[109] Long-term Debt (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Carrying amount | $178,094 | $177,622 | | Estimated fair value | $148,652 | $155,425 | - The fair value of long-term debt is lower than its carrying amount, indicating higher current market interest rates[110] NOTE 14 – COMMON STOCK OFFERING The Company completed a common stock offering in mid-2023, raising funds for capital expenditures - In May 2023, the Company sold 695,650 shares of Class A Stock, generating approximately $33.0 million in net proceeds[111] - In June 2023, the underwriter's over-allotment option exercise yielded an additional $3.2 million in net proceeds[111] - Total net proceeds of approximately $36.2 million were used to repay short-term borrowings financing capital expenditures[112] NOTE 15 – BUSINESS COMBINATIONS The Company completed two significant utility acquisitions in 2022, expanding its customer base - Artesian Wastewater acquired TESI in January 2022 for $6.4 million, expanding its customer base in Sussex County, Delaware[113] - Artesian Water purchased the Town of Clayton's water operating assets in May 2022 for $5.0 million[116] - Both acquisitions were accounted for as business combinations, with fair value determinations finalized by December 31, 2022[113][116][118] NOTE 16 – GEOGRAPHIC CONCENTRATION OF CUSTOMERS The Company's regulated utility customer base is concentrated across Delaware, Maryland, and Pennsylvania Customer Counts as of September 30, 2023 | Subsidiary | Service | Customers | | :--- | :--- | :--- | | Artesian Water | Water | ~95,600 | | Artesian Water Maryland | Water | ~2,600 | | Artesian Water Pennsylvania | Water | ~40 | | Artesian Wastewater & TESI | Wastewater | ~8,000 | - The majority of the Company's water customers are in Delaware, while wastewater services are primarily in Sussex County, Delaware[119][120] NOTE 17 – BUSINESS SEGMENT INFORMATION The Company's primary reportable segment is its Regulated Utility operations on the Delmarva Peninsula - The Company operates primarily through one reportable segment: Regulated Utility, encompassing water and wastewater services[121] - Non-utility businesses are aggregated and presented as 'Other' or 'Non-utility'[122] Segment Financials (in thousands) | Metric | Segment | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | Sep 30, 2023 Assets | | :--- | :--- | :--- | :--- | :--- | | Revenues | Regulated Utility | $24,877 | $69,377 | | | | Other (non-utility) | $1,747 | $5,101 | | | Operating Income | Regulated Utility | $6,387 | $16,104 | | | | Other (non-utility) | $274 | $828 | | | Assets | Regulated Utility | | | $749,834 | | | Other (non-utility) | | | $11,977 | NOTE 18 – LEGAL PROCEEDINGS A Consent Decree provides for reimbursement of costs related to a Superfund site, with funds returned to customers - Artesian Water is involved in a Consent Decree regarding contamination from the Delaware Sand & Gravel Landfill Superfund Site[127][128] - The Company will receive approximately $10.0 million for past costs, with $5.0 million remaining due by July 2025[129] - The DEPSC approved refunding these reimbursements to customers through annual installments[129] NOTE 19 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS No new accounting pronouncements in 2023 had a material impact on the Company's financial results - No new FASB guidance applicable to the Company was issued during the nine months ended September 30, 2023[130] - No accounting policy adopted in the first nine months of 2023 had a material impact on the Company's financial condition or results[190] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This analysis covers financial performance, liquidity, and capital resources, focusing on regulated utility operations OVERVIEW - Profitability is primarily driven by the regulated utility business, which comprised 93.4% of total operating revenues for the nine months ended September 30, 2023[132] - Water sales are subject to seasonal weather fluctuations, while wastewater and non-utility businesses provide more stable revenue[132][133] - The Company's strategy focuses on customer growth, revenue expansion, and strategic acquisitions[140] - Year-over-year customer growth was 1.3% for Delaware water, 0.8% for Maryland water, and 7.6% for Delaware wastewater[136][138] Results of Operations – Analysis of the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022. - Total Operating Revenues remained flat at $26.6 million for the three months ended September 30, 2023[149] - Water sales revenue decreased by $0.1 million (0.3%) due to wetter weather patterns, partially offset by customer growth[151] - Utility operating expenses increased by $1.2 million (11.1%), driven by higher payroll, maintenance, and administrative costs[153] - Net income applicable to common stock decreased by $1.1 million (17.5%) due to increased operating expenses[159] Results of Operations – Analysis of the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022. - Total Operating Revenues increased by $0.5 million (0.7%) to $74.3 million for the nine months ended September 30, 2023[161] - Utility operating expenses increased by $3.5 million (11.3%), primarily due to higher payroll, maintenance, and water treatment costs[165] - Non-utility operating revenue decreased by $1.0 million (16.7%) due to a construction contract nearing completion[164] - Net income applicable to common stock decreased by $2.5 million (15.7%), impacted by increased operating and interest expenses[174] LIQUIDITY AND CAPITAL RESOURCES - Primary liquidity sources included $23.4 million from operations, $17.0 million in contributions, and $36.5 million from stock issuance[175] - Capital expenditures for the first nine months of 2023 were $48.8 million, an increase from $36.7 million in 2022[176] Material Cash Requirements (in thousands) | Obligation | Less than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | First mortgage bonds (principal and interest) | $7,902 | $15,714 | $40,610 | $204,564 | $268,790 | | State revolving fund loans (principal and interest) | $964 | $1,906 | $1,704 | $7,636 | $12,210 | | Promissory note (principal and interest) | $960 | $1,923 | $1,924 | $9,893 | $14,700 | | Asset purchase contractual obligation (principal and interest) | $339 | $659 | $320 | — | $1,318 | | Operating leases | $34 | $68 | $65 | $1,401 | $1,568 | | Operating agreements | $76 | $112 | $109 | $749 | $1,046 | | Unconditional purchase obligations | $812 | $1,539 | $194 | — | $2,545 | | Tank painting contractual obligation | $626 | $470 | — | — | $1,096 | | Total contractual cash obligations | $11,713 | $22,391 | $44,926 | $224,243 | $303,273 | - The Company has $60 million in variable rate lines of credit with no outstanding balances as of September 30, 2023[178][179][191] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from fluctuating interest rates and commodity prices - The Company is exposed to interest rate risk from fixed-rate long-term debt and $60 million in variable rate lines of credit[191] - An increase in variable interest rates, particularly SOFR, is expected to increase borrowing costs[191] - Commodity price risks are mitigated by cost recovery through customer rates and fixed-price supply contracts[191] ITEM 4 – CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective as of September 30, 2023 - Management concluded that disclosure controls and procedures were effective as of September 30, 2023[192] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[193] PART II – OTHER INFORMATION ITEM 1 – LEGAL PROCEEDINGS The Company does not expect ordinary course legal proceedings to materially affect its financial position - The Company does not anticipate a material impact from ordinary course legal proceedings[194] - Further details on legal proceedings are provided in Note 18 to the financial statements[194] ITEM 1A – RISK FACTORS No material changes to the risk factors disclosed in the 2022 Annual Report have occurred - Readers should consider risk factors detailed in the Company's 2022 Annual Report on Form 10-K[195] - No material changes to the previously disclosed risk factors have occurred[195] ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES No unregistered sales or issuer purchases of equity securities occurred during the reporting period - No unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities occurred[196] ITEM 3 – DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities occurred[197] ITEM 4 – MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to the Company's operations - Mine safety disclosures are not applicable to the Company[198] ITEM 5 – OTHER INFORMATION No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or officers during the quarter[199] ITEM 6 – EXHIBITS This section lists exhibits filed with the Form 10-Q, including governance documents and certifications - Exhibits include amended corporate governance documents and a restated line of credit agreement dated August 3, 2023[201] - Certifications from the CEO and CFO are filed, along with Inline XBRL versions of the financial statements[201]