MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that express our "belief," "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations, our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. Certain factors as discussed under Item 1A -Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. Additionally, many of these risks and uncertainties are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2020
Our profitability is primarily attributable to the sale of water. Gross water sales composed 87.6% of total operating revenues for the nine months ended September 30, 2020. Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans and other services we provide. Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature. In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected. We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.
While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions. We anticipate continued growth in our non-regulated division due to our water, sewer, and internal SLP Plans.
In March 2020, the World Health Organization classified the coronavirus, or COVID-19, outbreak as a pandemic. Subsequently on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The emergence of COVID-19 around the world presents risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. While the COVID-19 pandemic did not materially adversely affect the Company’s financial results and business operations for the nine months ended September 30, 2020, economic and health conditions in the United States and across most of the globe have continued to change rapidly. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce.
The COVID-19 pandemic may affect the Company’s operations in future quarters. The Company maintains essential utility services and is following social distancing and remote work directives, however prolonged workforce disruptions may negatively impact performance of services or require use of emergency personnel. Due to the COVID-19 pandemic causing hardships for many utility customers, state government agencies previously issued executive orders requiring utility companies to take a number of steps to support their customers and communities, including prohibiting service disconnections for non-payment and prohibiting late fees. As a result, the Company anticipates a longer receivable cycle and the need for increased reserves for bad debt, along with changes in revenue mix between commercial and residential. In July 2020, the State of Delaware lifted its executive orders placing a moratorium on service disconnections for non-payment, with a provision requiring utilities to offer payment arrangements extending at least four months to customers. After properly notifying customers, Artesian reinstated its late fee process in September 2020 and began administering service disconnections in October 2020 for its Delaware customers. The State of Maryland and the Commonwealth of Pennsylvania lifted their executive orders placing moratoriums on service disconnections for non-payment effective November 2020. The State of Maryland requires utilities to offer payment arrangements extending twelve months. The DEPSC and the MDPSC issued orders authorizing utilities deferred regulatory treatment for incremental costs related to COVID-19.
Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full fiscal year. Given the changing nature of the COVID-19 outbreak and the responses to curb its spread, management cannot predict the full impact of the COVID-19 pandemic on the Company’s results of operations. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends.
Artesian Water, Artesian Water Maryland and Artesian Water Pennsylvania provide water service to residential, commercial, industrial, governmental, municipal and utility customers. Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue. As of September 30, 2020, we had approximately 90,000 metered water customers in Delaware, an increase of approximately 3,100 compared to September 30, 2019. The number of metered water customers in Maryland totaled approximately 2,490 as of September 30, 2020, an increase of approximately 20 compared to September 30, 2019. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2019. For the nine months ended September 30, 2020, approximately 6.3 billion gallons of water were distributed in our Delaware systems and approximately 100.7 million gallons of water were distributed in our Maryland systems.
Artesian Wastewater owns wastewater collection and treatment infrastructure and began providing regulated wastewater services to customers in Delaware in July 2005. Artesian Wastewater Maryland was incorporated on June 3, 2008 and is able to provide regulated wastewater services to customers in Maryland. It is not currently providing these services in Maryland. Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather. The number of Delaware wastewater customers totaled approximately 2,730 as of September 30, 2020, an increase of approximately 380, or 16.2%, compared to September 30, 2019. In addition, Artesian Wastewater entered into wastewater services agreements with a large industrial customer. The wastewater services agreements with this customer are discussed further in the “Strategic Direction” section below.
Artesian Utility provides contract water and wastewater operation services to private, municipal and governmental institutions. Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather. There has been consistent customer growth over the years. As of September 30, 2020, approximately 21,100, or 24.7%, of our eligible water customers enrolled in the WSLP Plan, approximately 16,300, or 19.1%, of our eligible customers enrolled in the SSLP Plan, and approximately 7,600, or 8.9%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,930 non-utility customers enrolled in one of our three protection plans.
Strategic Direction
Our strategy is to increase customer growth, revenues, earnings and dividends by expanding our water, wastewater and SLP Plan services across the Delmarva Peninsula. We remain focused on providing superior service to our customers and continuously seek ways to improve our efficiency and performance. Our strategy has included a focus on building strategic partnerships with county governments, municipalities and developers. By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously. We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue. We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.
In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include strategic acquisitions of existing systems, expanding certificated service area, identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water. Our strategy includes focused efforts to expand through strategic acquisitions and in new regions added to our Delaware service territory over the last 10 years. We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems. The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.
Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities. In the last three years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems. Some recent acquisitions are noted below.
On October 1, 2019, Artesian Water purchased utility assets from High Point Associates, L.P. and connected these assets to our public water system to serve the residents of High Point Park located in Kent County, Delaware.
On April 2, 2020, Artesian Water completed its purchase of substantially all of the operating assets of the water system of the Town of Frankford, a Delaware municipality, or Frankford, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System. Pursuant to the terms of the agreement, Frankford transferred to Artesian Water all of Frankford’s right, title and interest in and to all of the plant and equipment, associated real property, contracts, easements and permits possessed by Frankford at closing related to the Frankford Water System. The total purchase price was $3.6 million.
On August 3, 2020, Artesian Water completed the purchase of substantially all of the water system operating assets from the City of Delaware City, a Delaware municipality, or Delaware City, including the right to provide water service to Delaware City’s existing customers. The total purchase price was $2.1 million. Artesian Water had previously acquired the water assets of an area annexed by Delaware City, known as Fort DuPont, which was earmarked for growth and expansion of Delaware City.
We believe that Delaware's generally lower cost of living in the region, availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County, and attractive financing rates for construction and mortgages have resulted, and will continue to result, in increases to our customer base. Delaware’s lower property and income tax rate make it an attractive region for new home development and retirement communities. Substantial portions of Delaware currently are not served by a public water system, which could also assist in an increase to our customer base as systems are added.
In our regulated wastewater division, we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and governmental agencies to complement existing agreements for the provision of wastewater service on the Delmarva Peninsula. Artesian Wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater. We believe this will reduce operational costs at the smaller treatment facilities in the future because they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another.
On September 27, 2016, Artesian Wastewater entered into a wastewater services agreement with a large industrial customer for Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from this customer’s properties located in Sussex County, Delaware upon completion of a pipeline to transfer the sanitary wastewater. The pipeline was completed in the second quarter of 2017. The transfer of sanitary wastewater began in the second quarter of 2019. On January 27, 2017, Artesian Wastewater entered into a second wastewater agreement with this customer for Artesian Wastewater to provide disposal services for approximately 1.5 mgd of treated industrial process wastewater upon completion of an approximately eight mile pipeline that will transfer the wastewater from this customer’s properties to a 90 million gallon storage lagoon at Artesian’s Sussex Regional Recharge Facility. We will use the reclaimed wastewater for spray irrigation on agricultural land in the area. We received an operations permit in March 2020. We will begin operating this facility once this customer receives their process wastewater treatment operating permit.
The general need for increased capital investment in our water and wastewater systems is due to a combination of population growth, more protective water quality standards and aging infrastructure. Our capital investment plan for the next three years includes projects for water treatment plant improvements and additions in both Delaware and Maryland and wastewater treatment plant improvements and expansion in Delaware. Capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth. The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.
In our non-regulated division, we continue pursuing opportunities to expand our contract operations. Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities. We also anticipate continued growth due to our water, sewer and internal SLP Plans. Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility. Artesian Storm Water was formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.
Inflation
We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability. The cumulative effect of inflation results in significantly higher facility costs compared to investments made 20 to 40 years ago, which must be recovered from future cash flows.
Results of Operations – Analysis of the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019.
Revenues totaled $24.7 million for the three months ended September 30, 2020, $2.2 million, or 9.7%, more than revenues for the three months ended September 30, 2019. Water sales revenue increased $1.3 million, or 6.3%, for the three months ended September 30, 2020 from the corresponding period in 2019, primarily due to an increase in residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. We realized 86.4% and 89.1% of our total operating revenue for the three months ended September 30, 2020 and September 30, 2019, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.8 million, or 67.0%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase is primarily due to an increase in industrial wastewater service revenue, related to the minimum required volume of wastewater under contract. In addition, there was an increase in wastewater revenue from customer growth. This increase is partially offset by a decrease in service and finance charges, related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment.
Non-utility operating revenue increased approximately $0.1 million, or 7.7%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase is primarily due to an increase in SLP Plan revenue. In addition, contract service revenue increased related to a contract for the design and construction of wastewater infrastructure.
Operating expenses, excluding depreciation and income taxes, increased $0.6 million, or 4.8%, for the three months ended September 30, 2020, compared to the same period in 2019, primarily related to an increase in utility operating expenses of $0.5 million.
Utility operating expenses increased $0.5 million, or 4.3%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The net increase is primarily related to the following.
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.6% for the three months ended September 30, 2020, compared to 56.1% for the three months ended September 30, 2019.
Depreciation and amortization expense increased $0.2 million, or 5.8%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.
Federal and state income tax expense increased $0.3 million, or 19.1%, primarily due to increased pre-tax book income in 2020 compared to 2019.
Other Income, Net
Other income decreased $0.4 million, primarily due to a decrease in Allowance for funds used during construction, or AFUDC, as a result of lower long-term construction activity subject to AFUDC for the three months ended September 30, 2020 compared to the same period in 2019.
Interest Charges
Interest expense increased $0.1 million, primarily due to an increase in long-term debt interest related to the Series V First Mortgage Bond issued on December 17, 2019. This increase is partially offset by a decrease in short-term debt interest, primarily related to lower interest rates and short-term borrowing levels in 2020.
Net Income
Our net income applicable to common stock increased $0.6 million. Operating revenues increased $2.2 million, while operating expenses increased $1.1 million, other income, net decreased $0.4 million, and interest expense increased $0.1 million.
Results of Operations – Analysis of the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019.
Revenues totaled $66.4 million for the nine months ended September 30, 2020, $3.8 million, or 6.1%, more than revenues for the nine months ended September 30, 2019. Water sales revenue increased $3.0 million, or 5.3%, for the nine months ended September 30, 2020 from the corresponding period in 2019, primarily due to an increase in residential consumption revenue, partially offset by a decrease in non-residential consumption revenue. In addition, fixed fee revenue increased related to customer growth. Water sales revenue also increased due to an increase in DSIC revenue. The DSIC rate effective January 1, 2019 and July 1, 2019 was 5.55% and 7.41%, respectively. The DSIC rate effective January 1, 2020 and July 1, 2020 was 7.50% and 7.41%, respectively. We realized 87.6% and 88.2% of our total operating revenue for the nine months ended September 30, 2020 and September 30, 2019, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.9 million, or 25.6%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase is primarily due to an increase in industrial wastewater service revenue, related to the minimum required volume of wastewater under contract. In addition, there was an increase in wastewater revenue from customer growth. This increase is partially offset by a decrease in service and finance charges, related to executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment.
Operating expenses, excluding depreciation and income taxes, increased $0.8 million, or 2.4%, for the nine months ended September 30, 2020, compared to the same period in 2019. The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.7 million and an increase in property and other taxes of $0.2 million.
Utility operating expenses increased $0.7 million, or 2.3%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The net increase is primarily related to the following.
The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 54.2% for the nine months ended September 30, 2020, compared to 56.1% for the nine months ended September 30, 2019.
Federal and state income tax expense increased $0.7 million, or 16.9%, primarily due to increased pre-tax book income in 2020 compared to 2019.
Property and other taxes increased $0.2 million, or 4.2%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells.
Other Income, Net
Other income increased $0.2 million, primarily due to an increase in miscellaneous income of $0.3 million, related to an increase in the annual patronage refund from CoBank, ACB. The refund is calculated based on 0.8% of the average loan balance outstanding. In addition, in 2020, CoBank, ACB issued a one-time additional patronage distribution based on 0.1% of the average loan balance outstanding. Allowance for funds used during construction, or AFUDC, decreased $0.1 million, as a result of lower long-term construction activity subject to AFUDC for the nine months ended September 30, 2020 compared to the same period in 2019.
Interest Charges
Interest expense increased $0.5 million, primarily due to an increase in long-term debt interest related to the Series V First Mortgage Bond issued on December 17, 2019. This increase is partially offset by a decrease in short-term debt interest, primarily related to lower interest rates and short-term borrowing levels in 2020. Customer deposit interest decreased $0.1 million from the 2019 customer refund amount held in reserve related to the Tax Cuts and Jobs Act.
Net Income
Our net income applicable to common stock increased $1.9 million. Operating revenues increased $3.8 million and miscellaneous income increased $0.3 million, while operating expenses increased $1.7 million and interest expense increased $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the nine months ended September 30, 2020 were $14.3 million of cash provided by operating activities, $8.1 million in net contributions and advances from developers, $12.6 million from lines of credit borrowings and $1.1 million in net proceeds from the issuance of common stock. Cash flow from operating activities is primarily provided by our utility operations, and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions, particularly during the summer. A significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers. As such, from time to time, we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment. We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.
Investment in Plant and Systems
The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory. Capital expenditures during the first nine months of 2020 were $31.7 million compared to $27.3 million during the same period in 2019. During the first nine months of 2020, we invested approximately $8.6 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains. We invested $5.5 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers. We invested $2.3 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $3.2 million for the installation of water mains and hydrants in 2020 compared to $3.4 million in 2019. We invested $1.0 million to upgrade and automate our meter reading equipment. We invested approximately $3.0 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades. We invested $2.4 million in wastewater projects in Delaware. In addition, Artesian Water invested $5.7 million to purchase water system operating assets from the Town of Frankford and the City of Delaware City.
We depend on the availability of capital for expansion, construction and maintenance. We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that future investments will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations, state revolving fund loans and potential capital market financing if necessary. Our cash flows from operations are primarily derived from water sales revenues and may be materially affected by changes in water sales due to weather and the timing and extent of increases in rates approved by state public service commissions.
Lines of Credit and Long Term Debt
At September 30, 2020, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of September 30, 2020, there was $32.9 million of available funds under this line of credit. The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.25%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 31, 2021 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At September 30, 2020, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of September 30, 2020, there was $7.0 million of available funds under this line of credit. The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on July 30, 2021. Artesian Water expects to renew this line of credit.
Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business. In addition, we are required to abide by certain financial covenants and ratios. As of September 30, 2020, we were in compliance with these covenants.
Long-term debt obligations reflect the maturities of certain series of our first mortgage bonds, which we intend to refinance when due if not refinanced earlier. One first mortgage bond is subject to redemption in a principal amount equal to $150,000 plus interest per calendar quarter. The state revolving fund loan obligation has an amortizing mortgage payment payable over a 20-year period. The promissory note obligation has an amortizing payment payable over a 20-year period. The first mortgage bonds, the state revolving fund loans and the promissory note have certain financial covenant provisions, the violation of which could result in default and require the obligation to be immediately repaid, including all interest. We have not experienced conditions that would result in our default under these agreements.
On December 17, 2019, Artesian Water entered into a Bond Purchase Agreement relating to the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series V, or the Series V Bond, due October 31, 2049, or the Maturity Date. The Series V Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fourth Supplemental Indenture dated as of December 17, 2019 from Artesian Water to Wilmington Trust Company, as Trustee. The Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Series V Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources. The DEPSC approved the issuance of the Series V Bond on November 14, 2019.
The Series V Bond carries an annual interest rate of 4.42% through but excluding the Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Maturity Date, beginning January 30, 2020 until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Twenty-Fourth Supplemental Indenture. The term of the Series V Bond also includes certain limitations on Artesian Water’s indebtedness.
On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects. In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum. As of September 30, 2020, no funds were borrowed under the Loans.
In order to control purchased power costs, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican. The fixed rate for MidAmerican was lowered 10.8% starting in September 2018. The previous contract term was in effect since October 2015. The current fixed price contract is effective from September 2018 through May 2022. In August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy. The fixed rate for Constellation NewEnergy was lowered 4.9% starting in May 2019. The previous contract term was in effect since December 2015. The current fixed price contract is effective from May 2019 through May 2022.
Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under our interconnection agreement with the Chester Water Authority, which expires December 31, 2021 and minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including any arrangements with any structured finance, special purpose or variable interest entities.
Critical Accounting Assumptions, Estimates and Policies; Recent Accounting Pronouncements
This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2019 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2019. The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those based on such assumptions and estimates.
Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2019. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019.
Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019 and also in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. We did not adopt any accounting policy in the first nine months of 2020 that had a material impact on our financial condition, liquidity or results of operations.