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 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 Form10-K for the year ended December 31, 2018,
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. 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, 2019
Our profitability is primarily attributable to the sale of water. Gross water sales composed 88.2% of total
operating revenues for the nine months ended September 30, 2019. 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.
Water Division
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, 2019, we had approximately 87,000 metered water customers in Delaware, an increase of approximately 1,400 compared to September 30, 2018. The number of metered water customers in Maryland totaled
approximately 2,470 as of September 30, 2019, an increase of approximately 110 compared to September 30, 2018. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2018. For the nine months ended
September 30, 2019, approximately 6.3 billion gallons of water were distributed in our Delaware systems and approximately 90.3 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
the State of 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 2,350 as of September 30, 2019, an increase of approximately 310, or 15.3%,
compared to September 30, 2018. In addition, Artesian Wastewater entered into wastewater services agreements with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer. The wastewater services agreements with Allen Harim 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, 2019, approximately 19,300, or 23.1%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,600, or 18.7%, of our eligible customers enrolled in the SSLP Plan, and
approximately 6,800, or 8.2%, of our eligible customers enrolled in the ISLP Plan. Approximately 1,800 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. 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
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 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.
On March 29, 2018, Artesian Water purchased the utility assets of Slaughter Beach Water Company, or SBWC, for
$450,000. The public water system currently serves the community of Slaughter Beach located in Sussex County, Delaware along the Delaware Bay consisting of 265 customers. The SBWC was founded in 1951 as a public water system in Delaware.
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 consisting of approximately 400 customers.
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 Allen Harim for
Artesian Wastewater to provide treatment and disposal services for sanitary wastewater discharged from Allen Harim’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 Allen Harim 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 Allen Harim’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. The completion of the industrial process wastewater pipeline and storage lagoon should occur
during 2019. Construction of the facility is substantially complete and nearing commencement of operation pending permit approval.
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 recently 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, 2019 Compared to the Three Months Ended September 30, 2018.
Revenues totaled $22.5 million for the three months ended September 30, 2019, $0.6 million, or 2.9%, more than revenues for the three months ended
September 30, 2018. Water sales revenue increased $0.6 million, or 3.3%, for the three months ended September 30, 2019 from the
corresponding period in 2018, primarily due to an increase in DSIC revenue related to a rate increase from 3.63% to 7.41% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. We realized 89.1% and
88.8% of our total operating revenue for the three months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.1 million, or 4.7%, for the three months ended September 30, 2019 compared to the three months
ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.
Non-utility operating revenue decreased approximately $0.1 million, or 5.1%, for the three months ended September 30, 2019 compared to the three months
ended September 30, 2018. The decrease is primarily due to a decrease in contract service revenue related to a reduction in treatment plant operation services.
Operating expenses, excluding depreciation and
income taxes, increased $0.3 million, or 2.5%, for the three months ended September 30, 2019, compared to the same period in 2018. The
components of the change in operating expenses primarily include an increase in utility operating expenses of $0.2 million and an increase in non-utility operating expenses of $0.1 million.
Utility operating expenses
increased $0.2 million, or 1.6%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily related to an increase in administration, water treatment, and purchased water costs.
Non-utility expenses increased approximately $0.1 million, or 14.1%, primarily due to an increase in payroll and
benefit costs as well as an increase in plumbing services related to the SLP Plans.
The ratio of operating expense, excluding
depreciation and income taxes, to total revenue was 56.1% for the three months ended September 30, 2019, compared to 56.3% for the three
months ended September 30, 2018.
Depreciation and amortization expense increased $0.2 million, or 6.6%, 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 decreased $0.3 million, or 18.3%, primarily due to a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that
was disallowed by the TCJA as well as the amortization of the deferred tax regulatory liability in 2019 related to the reduction in the federal corporate income tax rate by the TCJA.
Other Income, Net
Other income increased $0.3 million, primarily due
to an increase in AFUDC of $0.4 million, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased $0.2 million,
primarily due to a one-time additional patronage payment from CoBank, ACB, in 2018 related predominately to savings generated from the TCJA.
Interest Charges
Interest expense increased $0.2 million, primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018
and the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.
Net Income
Our net income applicable to common stock increased $0.5 million, primarily due to an increase in operating income.
Results of Operations – Analysis of the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018.
Revenues totaled $62.6 million for the nine months ended September 30, 2019,
$1.5 million, or 2.5%, more than revenues for the nine months ended September 30, 2018. Water sales revenue increased $1.2 million, or 2.3%, for the nine months ended September 30, 2019 from the corresponding period in 2018, primarily due to an increase in DSIC revenue and an increase
from customer growth. The DSIC rates during the first nine months of 2018 were 4.71% for six months and 3.63% for three months. The DSIC rates during the first nine months of 2019 were 5.55% for six months and 7.41% for three months. As a result
of the reduced tariff rates approved by the DEPSC on January 31, 2019 related to the impact of the TCJA, approximately $3.8 million was refunded to customers during the second quarter of 2019, the majority of which was issued as a credit to
customer bills. This amount was previously held in reserve and was not included in water sales revenue or net income. We realized 88.2% and 88.4% of our total operating
revenue for the nine months ended September 30, 2019 and September 30, 2018, respectively, from the sale of water.
Other utility operating revenue increased approximately $0.2 million, or 7.4%, for the nine months ended September 30, 2019 compared to the nine months
ended September 30, 2018. The increase is primarily due to an increase in wastewater revenue from customer growth.
Operating expenses, excluding depreciation and
income taxes, increased $0.9 million, or 2.6%, for the nine months ended September 30, 2019, compared to the same period in 2018. The
components of the change in operating expenses primarily include an increase in utility operating expenses of $0.4 million, an increase in non-utility operating expenses of $0.3 million and an increase in property and other taxes of $0.2 million.
Utility operating expenses increased $0.4 million, or 1.4%, for the nine months ended September 30, 2019 compared
to the nine months ended September 30, 2018. The net increase is primarily related to the following.
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Payroll, employee benefit costs and related expenses increased $0.4 million, primarily due to an
increase in overall compensation.
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Administration costs increased $0.2 million, primarily due to an increase in regulatory application
costs to expand our service territory in Delaware and contract services related to wastewater facilities.
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Repair and maintenance expense decreased $0.2 million, primarily due to the painting of an elevated
water storage tank in 2018 in our Cecil County, Maryland system as well as timing of expenses related to the maintenance of water treatment equipment, specifically carbon filter replacements, in our Delaware water system.
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Non-utility expenses increased approximately $0.3 million, or 15.3%, primarily due to an increase in payroll and
benefit costs as well as an increase in plumbing services related to the SLP Plans.
Property and other taxes increased $0.2 million, or 4.1%, 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. In addition, payroll taxes increased due to increased payroll related expenses.
The ratio of operating expense, excluding
depreciation and income taxes, to total revenue was 56.1% for both the nine months ended September 30, 2019 and September 30, 2018.
Depreciation and amortization expense increased $0.5 million, or 6.5%, 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 decreased $0.7 million, or 15.5%, primarily due to the amortization of the
deferred tax regulatory liability related to the reduction in the federal corporate income tax rate by the TCJA and a reversal of a federal tax deduction, the Domestic Production Activities Deduction, recorded in 2018 that was disallowed by the
TCJA.
Other Income, Net
Other income increased $0.3 million, or 21.1%,
primarily due to an increase in AFUDC of $0.6 million as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2019 compared to the same period in 2018. Miscellaneous income decreased
$0.3 million, primarily due to a one-time additional patronage payment in 2018 related predominately to savings generated from the TCJA as well as a decrease in the amount of the annual patronage refund, both paid by CoBank, ACB. The annual
patronage refund rate was reduced in 2019 to 0.80% from 1.00% of the average line of credit and loan volume outstanding.
Interest Charges
Interest expense increased $0.7 million primarily due to long-term debt interest associated with the $7.5 million wastewater loan issued in August 2018 and
the $4.5 million wastewater loan issued in December 2018. In addition, short-term debt interest increased due to an increase in the amount borrowed under lines of credit and an increase in the interest rate.
Net Income
Our net income applicable to common stock increased $0.5 million. Operating revenues increased $1.5 million and other income, net increased $0.3
million, while operating expenses increased $0.6 million and interest expense increased $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity for the
nine months ended September 30, 2019 were $13.2 million of cash provided by operating activities, $15.8 million from lines of credit borrowings, $6.0 million in net contributions and advances from developers and $0.8 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.
Investment in Plant and Systems
The primary focus of Artesian Water’s investment is to continue to provide high quality reliable service to our growing service territory. We invested
approximately $27.3 million in capital expenditures during the first nine months of 2019 compared to $35.0 million invested during the same period in 2018. During the first nine months of 2019, we invested approximately $6.0 million for our
rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for new transmission and distribution facilities. We invested $8.7 million to enhance or improve existing treatment facilities and
replace aging wells and pumping equipment to better serve our customers. We invested $1.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment. Developers financed $3.4 million for the installation
of water mains and hydrants in 2019 compared to $3.3 million in 2018. We invested $1.5 million to upgrade and automate our meter reading equipment. We invested approximately $1.9 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. An additional $4.1 million was invested in wastewater projects in Delaware, of which $2.1 million was invested in the
construction of an eight mile pipeline and a 90 million gallon storage lagoon for spray irrigation to dispose of treated wastewater from a new industrial customer that is scheduled to be completed in 2019.
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 a combination of capital investment and debt financing. We expect to fund our activities for the next
twelve months using our available cash balances, bank credit lines, projected cash generated from operations and financing in the debt markets. 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
At September 30, 2019, 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, 2019, there was $26.3 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 1.00%. 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 23, 2020 or any date on which Citizens demands payment. The Company expects to renew this line of credit.
At September
30, 2019, 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, 2019, there was $2.0 million of available funds under this line of credit. The interest rate for
borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate. The term of this line of credit expires on July 20,
2020. Artesian Water expects to renew this line of credit.
Line of Credit Commitments
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|
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Lines of Credit
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|
|
|
|
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$
|
--
|
|
|
$
|
--
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|
|
$
|
--
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Artesian’s long-term debt agreements 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, 2019, we were in compliance with these covenants.
Contractual Obligations
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Payments Due by Period
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In thousands
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Less than
1 Year
|
|
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1-3
Years
|
|
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4-5
Years
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|
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After 5
Years
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Total
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First mortgage bonds (principal and interest)
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$
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5,356
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|
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$
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10,620
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|
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$
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10,517
|
|
|
$
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138,162
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|
|
$
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164,655
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State revolving fund loans (principal and interest)
|
|
|
1,002
|
|
|
|
1,677
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|
|
|
1,244
|
|
|
|
3,135
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|
|
|
7,058
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Promissory note (principal and interest)
|
|
|
958
|
|
|
|
1,921
|
|
|
|
1,921
|
|
|
|
13,740
|
|
|
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18,540
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Operating leases
|
|
|
42
|
|
|
|
75
|
|
|
|
46
|
|
|
|
1,338
|
|
|
|
1,501
|
|
Operating agreements
|
|
|
72
|
|
|
|
95
|
|
|
|
76
|
|
|
|
911
|
|
|
|
1,154
|
|
Unconditional purchase obligations
|
|
|
3,892
|
|
|
|
4,902
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|
|
|
81
|
|
|
|
---
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|
|
|
8,875
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Tank painting contractual obligation
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|
|
106
|
|
|
|
---
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|
|
|
---
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|
|
|
---
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|
|
|
106
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|
Total contractual cash obligations
|
|
$
|
11,428
|
|
|
$
|
19,290
|
|
|
$
|
13,885
|
|
|
$
|
157,286
|
|
|
$
|
201,889
|
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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 loan 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 October 8, 2019, Artesian Water Company entered into an interest rate lock agreement, or the Agreement, with CoBank, ACB, or CoBank. The Company is
seeking to finance a $30 million principal amount First Mortgage Bond, or the Bond. The Agreement allows for a maturity period of 30 years and a fixed interest rate of 4.42% per annum, or the Fixed Rate, for the Bond. The Agreement is effective
through December 31, 2019, or the Settlement Date. Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization; interest on the outstanding principal balance will be payable quarterly on the 30th day of
January, April, July and October each year. The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, any additional proceeds shall be used to fund future capital investments in Artesian Water.
Closing on the debt financing is subject to approval by the DEPSC. Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30
million principal amount on or before the Settlement Date. The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt,
obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate.
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 2018
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, 2018. 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, 2018. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2018 consolidated financial statements included
in our annual report on Form 10-K for the year ended December 31, 2018.
Information concerning our implementation and the
impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2018 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2018 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 2019 that had a material impact on our financial condition, liquidity
or results of operations.