See notes to the condensed consolidated financial statements.
See notes to the condensed consolidated financial statements.
See notes to the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – GENERAL
Artesian Resources Corporation, or Artesian Resources, includes income from the earnings of all of our 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, 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, municipal and
state water providers. Artesian Water also provides water for public and private fire protection to customers in our service territories.
On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware
municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System.
Artesian Wastewater Management, Inc., or Artesian Wastewater, began providing wastewater services in Sussex County, Delaware in July 2005. 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.
In January 2022, Artesian Wastewater acquired Tidewater Environmental Services,
Inc. Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI. TESI was incorporated in 2004 and is a regulated entity that owns wastewater collection and treatment
infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company, or Middlesex, for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million note due from Middlesex. This acquisition more than doubled the
number of wastewater customers served by Artesian’s Delaware wastewater subsidiaries in Sussex County, Delaware and included all residents within the Town of Milton.
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.
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 throughout 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 (collectively, SLP Plans).
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. Artesian
Utility currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 million gallons per day. 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 up to an annual limit.
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 in 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. Artesian Storm Water
is not actively seeking new opportunities.
NOTE 2 – 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 2021 as filed with the SEC on March 11, 2022.
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 September 30, 2022, the results of its operations for the three and nine-month periods ended September 30, 2022 and September 30, 2021, its cash flows for the nine-month periods ended September 30, 2022 and September 30, 2021 and the changes in stockholders’ equity for the three and nine-month periods ended September 30, 2022 and September 30, 2021. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from the Company’s
December 31, 2021 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.
The condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the U.S., which require
management to make certain estimates and assumptions regarding the reported amounts of assets and liabilities including unbilled revenues, credit losses and reserves for bad debt, regulatory asset recovery, lease agreements and contingent assets and
liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates.
All additions to utility plant are recorded at cost. Business combinations pursuant to ASC Topic 805 may result in a purchase price
allocation and the acquired assets are required to be evaluated by the applicable regulatory agency. Artesian Wastewater acquired TESI in January 2022 and Artesian Water purchased substantially all of the water operating assets from the Town of
Clayton in May 2022. As of September 30, 2022, the fair value determination for TESI is finalized, with the exception of deferred income taxes, which is still preliminary but expected to be complete by December 31, 2022. The fair value for deferred
income taxes affects both goodwill and deferred income taxes. As of September 30, 2022, The town of Clayton transaction is preliminary. Management’s preliminary determination of fair value of the tangible assets acquired using the cost method
requires management to make significant estimates and assumptions related to economic lives of the assets, replacement costs, and physical characteristics of the tangible assets acquired. A third-party valuation specialist is assisting with the
valuation of the assets acquired. The purchase price allocation for the Town of Clayton is expected to be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date.
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.
NOTE 3 – REVENUE RECOGNITION
Background
Artesian’s operating revenues are primarily attributable to contract services based upon tariff rates approved by the Delaware Public Service Commission, or
DEPSC, the Maryland Public Service Commission, or MDPSC, and the Pennsylvania Public Utility Commission, or PAPUC. Tariff contract service revenues consist of water consumption, industrial wastewater services, fixed fees for water and wastewater
services including customer and fire protection fees, service charges and Distribution System Improvement Charges, or DSIC, billed to customers at rates outlined in our tariffs that represent stand-alone selling prices. Our non-tariff contract
revenues consist of Service Line Protection Plan, or SLP Plan, fees, water and wastewater contract operations, 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 agreements, which are not considered in the scope of Accounting Standards Codification 606, Revenue from Contracts with Customers.
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. Pursuant to a settlement agreement, the minimum required volume was prorated on
a seven month basis beginning June 1, 2021 and ending December 31, 2021.
Artesian generates revenue from metered wastewater services provided to customers in Sussex County, Delaware. We recognize metered wastewater services at
tariff rates on a cycle basis for the volume of wastewater transferred to Artesian’s wastewater facilities based upon meter readings for actual gallons of water transferred, as well as unbilled amounts for estimated volume from the date of the last
meter reading to the end of the accounting period. As actual volume 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 volume in the same period, the previous billing period’s volume, 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 volume and revenue for the fiscal period will not differ materially from actual billed consumption. The majority of these wastewater customers are billed for the volume of
water transferred on a quarterly basis. As a result, we record unbilled operating revenue (contract asset) for any estimated volume through the end of the accounting period that will be billed in the next monthly cycle.
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 either in advance or arrears at tariff rates on a monthly, quarterly or semi-annual basis. For contract services billed in arrears, we record unbilled operating revenue (contract asset)
for any services through the end of the accounting period that will be billed in the next monthly or quarterly cycle. For contract services billed in advance, we record deferred revenue (contract liability) and accounts receivable for any amounts for
which we have a right to invoice but for which services have not been provided. This deferred revenue is netted with unbilled operating revenue on the Condensed Consolidated Balance Sheet.
Artesian generates service charges primarily from non-payment fees, such as water shut-off and reconnection fees and finance charges. These fees are billed
and recognized as revenue at the point in time when our tariffs indicate the Company has the right to payment such as days past due have been reached or shut-offs and reconnections have been performed. There is no contract asset or liability
associated with these fees.
Artesian generates revenue from DSIC, which are surcharges applied to water customer tariff rates in Delaware related to specific types of water distribution
system improvements. This rate is calculated on a semi-annual basis based on an approved projected revenue requirement over the following six-month period. This rate is adjusted up or down at the next DSIC filing to account for any differences
between actual earned revenue and the projected revenue requirement. Since DSIC revenue is a surcharge applied to tariff rates, we recognize DSIC revenue based on the same guidelines as noted above depending on whether the surcharge was applied to
consumption revenue or fixed-fee revenue.
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, the Company experienced longer receivable cycles throughout 2020 and into 2021 and made an adjustment to increase the reserve for bad debt by $0.5 million in 2020. In June 2021 we made an adjustment to reduce the reserve by $0.3
million. We will continue to monitor factors that affect the reserve for bad debt.
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.
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. The majority of 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 most of these revenues. We have one
operation contract that was paid in advance resulting in a contract liability for services that have not yet been provided. 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 September 30, 2022, 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:
|
(in thousands)
|
|
Three months ended
September 30, 2022
|
|
|
Three months ended
September 30, 2021
|
|
|
Nine months ended
September 30, 2022
|
|
|
Nine months ended
September 30, 2021
|
|
|
Tariff Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumption charges
|
|
$
|
13,927
|
|
|
$
|
13,595
|
|
|
$
|
36,676
|
|
|
$
|
36,672
|
|
|
Fixed fees
|
|
|
7,924
|
|
|
|
7,112
|
|
|
|
23,452
|
|
|
|
20,983
|
|
|
Service charges
|
|
|
156
|
|
|
|
130
|
|
|
|
449
|
|
|
|
450
|
|
|
DSIC
|
|
|
1,406
|
|
|
|
1,387
|
|
|
|
3,870
|
|
|
|
3,876
|
|
|
Metered wastewater services
|
|
|
193
|
|
|
|
—
|
|
|
|
462
|
|
|
|
—
|
|
|
Industrial wastewater services
|
|
|
467
|
|
|
|
497
|
|
|
|
1,295
|
|
|
|
118
|
|
|
Total Tariff Revenue
|
|
$
|
24,073
|
|
|
$
|
22,721
|
|
|
$
|
66,204
|
|
|
$
|
62,099
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Tariff Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service line protection plans
|
|
$
|
1,224
|
|
|
$
|
1,181
|
|
|
$
|
3,662
|
|
|
$
|
3,411
|
|
|
Contract operations
|
|
|
238
|
|
|
|
210
|
|
|
|
691
|
|
|
|
658
|
|
|
Design and installation
|
|
|
621
|
|
|
|
139
|
|
|
|
1,723
|
|
|
|
351
|
|
|
Inspection fees
|
|
|
127
|
|
|
|
108
|
|
|
|
234
|
|
|
|
244
|
|
|
Total Non-Tariff Revenue
|
|
$
|
2,210
|
|
|
$
|
1,638
|
|
|
$
|
6,310
|
|
|
$
|
4,664
|
|
|
Other Operating Revenue
|
|
$
|
299
|
|
|
$
|
560
|
|
|
$
|
1,266
|
|
|
$
|
1,269
|
|
|
Total Operating Revenue
|
|
$
|
26,582
|
|
|
$
|
24,919
|
|
|
$
|
73,780
|
|
|
$
|
68,032
|
|
Contract Assets and Contract Liabilities
Our contract assets and liabilities consist of the following:
|
(in thousands)
|
|
September 30, 2022
|
|
|
December 31, 2021
|
|
| |
|
|
|
|
|
|
|
Contract Assets – Tariff
|
|
$
|
3,009
|
|
|
$
|
2,144
|
|
| |
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
|
|
|
|
|
|
|
Deferred Revenue – Tariff
|
|
$
|
1,196
|
|
|
$
|
1,227
|
|
|
Deferred Revenue – Non-Tariff
|
|
|
399
|
|
|
|
287
|
|
|
Total Deferred Revenue
|
|
$
|
1,595
|
|
|
$
|
1,514
|
|
For the nine months ended September 30, 2022, 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 $0.3 million from amounts that
were included in Deferred Revenue – Non- Tariff at the beginning of the year.
The changes in Contract Assets and Deferred Revenue are primarily due to normal timing differences between our performance and customer payments.
Remaining Performance Obligations
As of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021, Deferred Revenue – Non-Tariff is recorded within Other current liabilities and represents our remaining performance obligations for our
SLP Plan services, wastewater inspections and one operation contract, which are expected to be satisfied and associated revenue recognized within the next three months, one year and seven years for the SLP Plan revenue, inspection fee revenue and
contract operations revenue, respectively.
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amounts. As set forth in a settlement agreement, Artesian Water will receive reimbursements from the
Delaware Sand and Gravel Remedial Trust, or Trust, for Artesian Water’s past capital and operating costs, totaling approximately $10.0 million,
related to the treatment costs associated with the release of contaminants from the Delaware Sand & Gravel Landfill Superfund Site, or Site, in groundwater that Artesian Water uses for public potable water supply. Approximately $2.5 million was paid in August 2022. The remaining $7.5
million is due in three equal installments no later than August of each year from 2023 through 2025. 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. The following table summarizes the changes in the Company’s accounts receivable balance:
|
|
|
September 30,
|
|
|
December 31,
|
|
|
In thousands
|
|
2022
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable – water
|
|
$
|
7,110
|
|
|
$
|
5,986
|
|
|
Customer accounts receivable – wastewater
|
|
|
470
|
|
|
|
1,326
|
|
|
Settlement agreement receivable
|
|
|
7,510
|
|
|
|
—
|
|
|
Miscellaneous accounts receivable
|
|
|
329
|
|
|
|
202
|
|
|
Developer receivable
|
|
|
1,778
|
|
|
|
1,282
|
|
|
|
|
|
17,197
|
|
|
|
8,796
|
|
|
Less: Long-term portion of settlement agreement receivable (included in other deferred assets)
|
|
|
4,991
|
|
|
|
—
|
|
|
Less allowance for doubtful accounts
|
|
|
486
|
|
|
|
429
|
|
|
Net accounts receivable
|
|
$
|
11,720
|
|
|
$
|
8,367
|
|
NOTE 5 – LEASES
The Company leases land and office equipment under operating leases from non-related parties. Our leases have remaining lease terms of 20 years to 74 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
|
|
|
Nine Months Ended
|
|
| |
|
September 30,
|
|
|
September 30,
|
|
| |
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rentals
|
|
$
|
21
|
|
|
$
|
24
|
|
|
$
|
30
|
|
|
$
|
38
|
|
|
Contingent rentals
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$
|
21
|
|
|
$
|
24
|
|
|
$
|
30
|
|
|
$
|
38
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
September 30, 2022
|
|
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
30
|
|
|
$
|
38
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
444
|
|
|
$
|
444
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
(in thousands,
except lease term and discount rate)
|
|
|
|
|
September 30, 2022
|
|
|
December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
Operating Leases:
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
444
|
|
|
$
|
451
|
|
| |
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
2
|
|
|
|
6
|
|
|
Operating lease liabilities
|
|
|
439
|
|
|
|
440
|
|
|
Total operating lease liabilities
|
|
$
|
441
|
|
|
$
|
446
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
61 years
|
|
|
61 years
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Maturities of operating lease liabilities that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2022 are as follows:
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Year
|
|
|
|
|
2023
|
|
$
|
24
|
|
|
2024
|
|
|
24
|
|
|
2025
|
|
|
24
|
|
|
2026
|
|
|
24
|
|
|
2027
|
|
|
25
|
|
|
Thereafter
|
|
|
1,328
|
|
|
Total undiscounted lease payments
|
|
$
|
1,449
|
|
|
Less effects of discounting
|
|
|
(1,008
|
)
|
|
Total lease liabilities recognized
|
|
$
|
441
|
|
As of September 30, 2022, we have not entered into
operating or finance leases that will commence at a future date.
NOTE 6 – 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, for the three and nine months ended September 30, 2022 of approximately $57,000 and
$162,000, respectively, was recorded for restricted stock awards issued in May 2021 and May 2022. Compensation expense, for the three and nine months ended September 30, 2021 of
approximately $51,000 and $142,000,
respectively, was recorded for restricted stock awards issued in May 2020 and May 2021. 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 3, 2022, 5,000 shares of Class A Common
Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $45.58, the closing price of the Class A Stock as
recorded on the Nasdaq Global Select Market on May 3, 2022. Prior to their release date, these restricted stock awards may be subject to forfeiture in the event of the recipient’s termination of service.
On May 4, 2021, 5,000 shares of Class A Common
Stock, or Class A Stock, were granted as restricted stock awards. The fair value per share was $40.11, the closing price of the Class A Stock as
recorded on the Nasdaq Global Select Market on May 4, 2021. 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 nine months ended September 30, 2022:
|
|
|
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
FairValue
|
|
|
Plan options/restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2022
|
|
|
83,000
|
|
|
$
|
21.65
|
|
|
|
|
|
$
|
2,048
|
|
|
|
5,000
|
|
|
$
|
40.11
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
45.58
|
|
|
Exercised/vested and released
|
|
|
(66,104
|
)
|
|
|
21.65
|
|
|
|
|
|
|
1,894
|
|
|
|
(5,000
|
)
|
|
|
40.11
|
|
|
Expired/cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at September 30, 2022
|
|
|
16,896
|
|
|
$
|
21.86
|
|
|
|
1.602
|
|
|
$
|
444
|
|
|
|
5,000
|
|
|
$
|
45.58
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/vested at September 30, 2022
|
|
|
16,896
|
|
|
$
|
21.86
|
|
|
|
1.602
|
|
|
$
|
444
|
|
|
|
—
|
|
|
|
—
|
|
The total intrinsic value of options exercised during the nine months ended September 30, 2022 was approximately $1,894,000.
There were no unvested option shares outstanding under the 2015 Plan during the nine months ended September 30, 2022.
As of September 30, 2022, there were no unrecognized expenses related to non-vested option shares granted under the 2015 Plan.
As of September 30, 2022, there was $134,000 total unrecognized expenses related to non-vested awards of restricted shares awarded under the 2015 Plan. The cost will be recognized over 0.59 years, the remaining vesting period for the restricted stock awards.
NOTE 7 – 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. The settlement agreement receivable is related to the long-term portion of reimbursements due in years 2024 and 2025 as further discussed in Note 4-Accounts Receivable.
|
In thousands
|
September 30, 2022
|
|
December 31, 2021
|
|
|
|
|
|
|
Investment in CoBank
|
$5,351
|
|
$4,850
|
|
Settlement agreement receivable-long term
|
4,991
|
|
—
|
|
Other deferred assets
|
206
|
|
247
|
|
|
$10,548
|
|
$5,097
|
NOTE 8 - 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 First Mortgage bonds. Debt issuance costs and other debt related expenses are reviewed during Artesian Water’s rate applications as part of its cost of capital calculations.
Regulatory expenses amortized on a straight-line basis are noted below:
|
Expense
|
Years Amortized
|
|
Deferred contract costs and other
|
5
|
|
Rate case studies
|
5
|
|
Delaware rate proceedings
|
2.5
|
|
Maryland rate proceedings
|
5
|
|
Debt related costs
|
15 to 30 (based on term of related debt)
|
|
Goodwill (resulting from acquisition of Mountain Hill Water Company in 2008)
|
50
|
|
Deferred acquisition costs (resulting from purchase of water assets in Cecil County, Maryland in 2011 and Port Deposit, Maryland in
2010)
|
20
|
|
Franchise Costs (resulting from purchase of water assets in Cecil County, Maryland in 2011)
|
80
|
|
Regulatory assets, net of amortization, comprise:
|
|
| |
|
(in thousands)
|
|
| |
|
September 30, 2022
|
|
|
December 31, 2021
|
|
| |
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
470
|
|
|
$
|
355
|
|
|
Deferred contract costs and other
|
|
|
243
|
|
|
|
288
|
|
|
Debt related costs
|
|
|
4,757
|
|
|
|
4,902
|
|
|
Goodwill
|
|
|
268
|
|
|
|
273
|
|
|
Deferred acquisition and franchise costs
|
|
|
472
|
|
|
|
503
|
|
| |
|
$
|
6,210
|
|
|
$
|
6,321
|
|
NOTE 9 – 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.
Deferred settlement refunds consist of reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s past capital and operating costs,
totaling approximately $10.0 million, related to the treatment costs associated with the release of contaminants from the Delaware Sand &
Gravel Landfill Superfund Site in groundwater that Artesian Water uses for public potable water supply, pursuant to the Settlement Agreement. Approximately $2.5
million was paid in August 2022. The remaining $7.5 million is due in three equal installments no later than August of each year from 2023 through 2025. Artesian Water received approval from the DEPSC in October 2022 to refund to its customers these
reimbursements for past capital and operating costs. The refund for the reimbursements will be applied to current and future customer bills in annual installments, with the first refund occurring in October 2022, and future customer refunds occurring
no later than August of each year from 2023 through 2025. The amount of the credit will be calculated by dividing the amount of the reimbursement by the number of eligible customers. Artesian Water will record 2022 and future recovery of capital
expenditures as Contributions in Aid of Construction and will record expense recovery as an offset to operations and maintenance expense, with the intention that those recoveries will then be available for inclusion and consideration in any future rate
applications. For a full discussion of the Settlement Agreement, refer to Part II – Other Information – Item 1 – Legal Proceedings.
Pursuant to the enactment of the Tax Cuts and Jobs Act, or 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. In May 2022, the Company received a rate order from the DEPSC instructing the
Company to continue amortizing the liability over a period of 49.5 years, subject to review in the Company’s next base rate filing. The MDPSC
has not issued a final order on the regulatory liability amount of $0.6 million regarding the effects of the TCJA on Maryland customers.
|
Regulatory liabilities comprise:
|
|
|
|
|
|
|
|
|
|
September 30, 2022
|
|
|
December 31, 2021
|
|
|
|
|
|
|
|
|
|
|
Utility plant retirement cost obligation
|
|
$
|
156
|
|
|
$
|
149
|
|
|
Deferred settlement refunds
|
|
|
10,042
|
|
|
|
—
|
|
|
Deferred income taxes (related to TCJA)
|
|
|
21,352
|
|
|
|
21,111
|
|
| |
|
$
|
31,550
|
|
|
$
|
21,260
|
|
NOTE 10 -
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
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
| |
|
2022
|
|
|
2021
|
|
|
2022
|
|
|
2021
|
|
| |
|
(in thousands)
|
|
|
Weighted average common shares outstanding during the period for Basic computation
|
|
|
9,477
|
|
|
|
9,404
|
|
|
|
9,451
|
|
|
|
9,389
|
|
|
Dilutive effect of employee stock options and awards
|
|
|
15
|
|
|
|
28
|
|
|
|
22
|
|
|
|
32
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding during the period for Diluted computation
|
|
|
9,492
|
|
|
|
9,432
|
|
|
|
9,473
|
|
|
|
9,421
|
|
For the three and nine months ended September 30, 2022
and 2021, no shares of
restricted stock awards were excluded from the calculations of diluted net income per share.
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 September 30, 2022, 8,609,497 shares of Class A Stock and 881,452 shares of Class B Stock were issued and outstanding. As of September 30, 2021, 8,524,093 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 $19.88 and $18.94 at September 30, 2022 and December 31, 2021, respectively. These amounts were computed by dividing common stockholders' equity by the number of weighted average shares of common stock outstanding on September 30, 2022 and December 31, 2021,
respectively.
NOTE 11 - 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 Company's requested level of rates.
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:
|
Application Date
|
11/20/20
|
|
DEPSC Approval Date
|
12/14/20
|
|
Effective Date
|
01/01/21
|
|
Cumulative DSIC Rate
|
7.50%
|
|
Net Eligible Plant Improvements – Cumulative Dollars (in millions)
|
$43.1
|
|
Eligible Plant Improvements – Installed Beginning Date
|
10/01/2014
|
|
Eligible Plant Improvements – Installed Ending Date
|
04/30/2019
|
The rate reflects the eligible plant improvements installed through April 30,
2019. The January 1, 2021 rate currently remains in effect and is subject to periodic audit by the DEPSC. For the three and nine months ended September 30, 2022, we earned approximately $1.4
million and $3.9 million in DSIC revenue, respectively. For the three and nine months ended September 30, 2021, we earned approximately $1.4 million and $3.9 million in DSIC revenue,
respectively.
NOTE 12 – 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 statute of limitations for the 2017 tax returns lapsed during the fourth quarter of 2021, which resulted in the reversal
of the reserve in the amount of approximately $26,000. The statute of limitations for the 2018 tax returns lapsed during the third quarter of
2022, which resulted in the reversal of the reserve in the amount of approximately $212,000. 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. During the third quarter, the Company has
reversed approximately $10,000 in penalties and interest
for the nine months ended September 30, 2022 leaving a zero balance. The Company remains subject to examination by federal and state
authorities for the tax years 2019 through 2021.
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.
NOTE 13 – 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.
All of Artesian Resources’ outstanding long-term
debt as of September 30, 2022 and December 31, 2021 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
|
|
|
|
| |
|
September 30, 2022
|
|
|
December 31, 2021
|
|
|
Carrying amount
|
|
$
|
176,058
|
|
|
$
|
144,850
|
|
|
Estimated fair value
|
|
$
|
153,174
|
|
|
$
|
163,182
|
|
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 14 – RELATED PARTY TRANSACTIONS
Mr. Michael Houghton currently serves as a director. During 2021, Mr. Houghton was a Partner in the law firm of Morris, Nichols, Arsht & Tunnell LLP, or
MNAT, in Wilmington, Delaware. Mr. Houghton retired from MNAT as a Partner, effective January 1, 2022, however, Mr. Houghton continues to perform legal services for MNAT as an independent contractor and non-partner. In the normal course of business,
the Company utilized the services of MNAT in 2021 for various regulatory, real estate and public policy matters. Approximately $89,000 and $160,000 was paid to MNAT during the three and nine months ended September 30, 2021, respectively, for legal services and director related services.
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 15 – BUSINESS COMBINATIONS
As part of the Company’s growth strategy, on January 14, 2022 Artesian Wastewater completed its agreement to
acquire TESI, which provides regulated wastewater services in Delaware. Artesian Wastewater purchased all of the stock of TESI from Middlesex Water Company for $6.4 million in cash and other consideration, including forgiveness of a $2.1 million
note due from Middlesex, consisting of $3.1 million paid at closing. This acquisition more than doubled the number of wastewater customers served by Artesian in Sussex County, Delaware. The acquisition is being accounted for as a business combination under ASC Topic 805, “Business Combinations.” The
purchase price allocation is primarily attributed to intangible assets and utility plant assets acquired and liabilities assumed based on their respective estimated fair values. The acquisition method of accounting requires, among other things, that
assets acquired, and liabilities assumed in a business purchase combination be recognized at their fair values as of the acquisition date. The Company utilized a third-party valuation firm to assist with the fair value of the assets acquired. The
fair value determination is now finalized, with the exception of deferred income taxes, which is still preliminary but expected to be complete by December 31, 2022. The fair value for deferred income taxes affects both goodwill and deferred income
taxes. A combination of methods was used to determine the reasonableness of the purchase price: the cost approach and the comparative sales (market) approach. Given the majority of the net assets acquired were tangible utility plant assets and
related contributions in aid of construction, the Company primarily utilized the cost approach to record the fair value of the assets as well as some of the assumed liabilities. This approach values the underlying assets to derive market value based
on the estimated replacement cost, adjusted for depreciation. Real property was valued using the comparative sales approach. Goodwill was recognized primarily as a result of expected synergies of operations and interconnections to our existing
utility plant infrastructure. Any goodwill as a result of the transaction is not expected to be deductible for tax purposes.
The TESI acquisition was approved by the DEPSC on October 27, 2021, subject to the DEPSC determining the appropriate ratemaking
treatment of the acquisition price and the assets acquired in Artesian Wastewater’s next base rate case.
The Company reflected revenue of $0.8 million and $2.2 million for the three and nine months ended September 30, 2022, respectively, in its
condensed consolidated statement of operations related to the acquisition. The pro forma revenue for the three and nine months ended September 30, 2022 is estimated to be approximately $0.8
million and $2.2 million, respectively. The Company anticipates the pro forma effects of revenue for the three and nine months ended September 30, 2021 to be
approximately the same given there has not been any changes in the rates. The pro forma information is not necessarily indicative of the Company’s future results. Any pro forma effects of earnings is not practicable, as we continue to integrate
TESI operations and adjust the operating cost structure as it relates to operating expenses reflective of synergies of the combined operations, and therefore would not present an accurate comparison.
The table below sets forth the purchase price allocation of this acquisition as of September 30, 2022. The fair value determination is now finalized, with the exception of deferred income taxes, which is still
preliminary but expected to be complete by December 31, 2022. The fair value for deferred income taxes affects both goodwill and deferred income taxes, which is included in the liability amount below.
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Less: Liabilities and contributions in aid of construction (CIAC)
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Additionally, as part of the Company’s growth strategy, on May 26, 2022,
Artesian Water completed its purchase of substantially all of the water system operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and
the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. At closing, Artesian Water paid approximately $3.4 million of the total purchase price. The remaining $1.6 million is payable in five equal annual installments on the anniversary date of the closing date. Each annual installment
is payable with interest at an annual rate of 2.0%. The
acquisition was accounted for as a business combination under ASC Topic 805. The preliminary purchase price allocation is $8.9
million of utility plant assets offset by $3.8 million of CIAC. This preliminary purchase price allocation will be finalized once the
valuation of assets acquired has been completed, no later than one year after the acquisition date.
This transfer of Clayton’s exclusive franchise territory was approved by the
DEPSC on April 20, 2022. The DEPSC will determine 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 business acquired are not material to
the Company’s financial position or results of operations based on estimated annual revenue of approximately $0.5 million related to customers acquired.
NOTE 16 – 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 September 30, 2022, Artesian Water was serving approximately 94,400 customers, Artesian Water Maryland was serving approximately 2,600 customers
and Artesian Water Pennsylvania was serving approximately 40 customers.
Artesian Wastewater and TESI provide wastewater utility service to customers within their established service territory in Sussex County, Delaware pursuant
to rates filed with and approved by the DEPSC. The number of wastewater customers served more than doubled following the acquisition of TESI in January 2022. As of September 30, 2022, Artesian Wastewater combined with TESI were serving approximately 7,400
customers, including one large industrial customer.
NOTE 17 – IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
There was no new guidance issued by the FASB during the nine months ended September 30, 2022 that is applicable to the Company.