10-K 1 form10k.htm ARTESIAN RESOURCES CORP FILE 10-K  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019
OR
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-18516

ARTESIAN RESOURCES CORPORATION

 (Exact name of registrant as specified in its charter)

Delaware
 
51-0002090
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

664 Churchmans Road, Newark, Delaware 19702
  
Address of principal executive offices

(302) 453 – 6900
  
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
                                                   Trading Symbol (s)
Name of each exchange on which registered
Common Stock
                                               ARTNA
The Nasdaq Stock Market


Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes
No
 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes
No
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
No
 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted  pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit  such files).

Yes
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.

Large Accelerated Filer
 
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
 
Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes
No
 

The aggregate market value of the Class A Non-Voting Common Stock and Class B Common Stock held by non-affiliates of the registrant at June 30, 2019 was $300,398,576 and $8,784,299, respectively.  The aggregate market value of Class A Non-Voting Common Stock was computed by reference to the closing price of such class as reported on the Nasdaq Global Select Market on June 30, 2019, which trade date was June 28, 2019.  The aggregate market value of Class B Common Stock was computed by reference to the last reported trade of such class as reported on the OTC Bulletin Board as of June 30, 2019, which trade date was June 26, 2019.

As of March 9, 2020, 8,414,956 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.


ARTESIAN RESOURCES CORPORATION
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
1

FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K which express our “belief,” “anticipation” or “expectation,” as well as other statements which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and 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.  They include, but are not limited to, the statements below:
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strategic plans for goals, priorities, growth and expansion;
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expectations for our water and wastewater subsidiaries and non-regulated subsidiaries;
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customer base growth opportunities in Delaware and Cecil County, Maryland;
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our belief regarding our capacity to provide water services for the foreseeable future to our customers;
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our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations;
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our expectation of the timing of decisions by regulatory authorities;
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the impact of weather on our operations;
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the execution of our strategic initiatives;
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our expectation regarding the timing for construction on new projects;
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the adoption of recent accounting pronouncements;
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contract operations opportunities;
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legal proceedings;
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our properties;
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deferred tax assets;
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the adequacy of our available sources of financing;
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the expected recovery of expenses related to our long-term debt;
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our expectation to be in compliance with financial covenants in our debt instruments;
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our ability to refinance our debt as it comes due;
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our ability to adjust our debt level, interest rate, maturity schedule and structure;
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the timing and terms of renewals of our lines of credit;
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plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather;
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expected future contributions to our postretirement benefit plan;
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anticipated growth in our non-regulated division;
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the impact of recent acquisitions on our ability to expand and foster relationships;
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anticipated investments in certain of our facilities and systems and the sources of funding for such investments; and
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sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs.

Certain factors, as discussed under Item 1A - Risk Factors, that could cause results to differ materially from those in the forward-looking statements include, but are not limited to:
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changes in weather;
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changes in our contractual obligations;
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changes in government policies;
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the timing and results of our rate requests;
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failure to receive regulatory approvals;
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changes in economic and market conditions generally; and
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other matters discussed elsewhere in this annual report.

While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so, except as may be required under applicable securities laws, 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 Annual Report on Form 10-K.
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PART I

ITEM 1. BUSINESS

General Information

Artesian Resources Corporation, or Artesian Resources, is a Delaware corporation incorporated in 1927, that operates as the holding company of eight wholly-owned subsidiaries offering water, wastewater and other services in Delaware, Maryland and Pennsylvania.  The Company’s principal executive offices are located at 664 Churchmans Road, Newark, Delaware 19702.  Our principal subsidiary, Artesian Water Company, Inc., is the oldest and largest investor-owned public water utility on the Delmarva Peninsula, and has been providing superior water service since 1905.  We distribute and sell water, including water for public and private fire protection, to residential, commercial, industrial, municipal and utility customers in the states of Delaware, Maryland and Pennsylvania.  We provide wastewater services to customers in Delaware. In addition, we provide contract water and wastewater operations, and water, sewer and internal Service Line Protection Plans. Our Class A Non-Voting Common Stock is listed on the Nasdaq Global Select Market and trades under the symbol "ARTNA."  Our Class B Common Stock trades on the Nasdaq's OTC Bulletin Board under the symbol “ARTNB.”

Artesian Resources operates as the parent holding company of five regulated public utilities: Artesian Water Company, Inc., or Artesian Water, Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, Artesian Water Maryland, Inc., or Artesian Water Maryland, Artesian Wastewater Management, Inc., or Artesian Wastewater, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland; and three non-regulated subsidiaries: Artesian Utility Development, Inc., or Artesian Utility, Artesian Development Corporation, or Artesian Development, and Artesian Storm Water Services, Inc., or Artesian Storm Water.  Artesian Consulting Engineers, Inc., a wholly-owned subsidiary, was dissolved effective October 11, 2019.  The terms "we," "our," “Artesian,” and the "Company" as used herein refer to Artesian Resources and its subsidiaries.  The business activity conducted by each of our subsidiaries is discussed below under separate headings.

Our Market

Our current market area is the Delmarva Peninsula.  Our largest service area is in the State of Delaware.  Substantial portions of Delaware, particularly outside of northern New Castle County, are not served by a public water or wastewater system and represent potential opportunities for Artesian Water and Artesian Wastewater to obtain new exclusive franchised service areas.  We continue to focus resources on developing and serving existing service territories and obtaining new territories throughout Delaware.

We hold Certificates of Public Convenience and Necessity, or CPCNs, for approximately 288 square miles of exclusive water service territory, most of which is in Delaware and some in Maryland and Pennsylvania.  We hold CPCN’s for approximately 28 square miles of wastewater service territory located in Sussex County, Delaware.  Our largest connected regional water system, consisting of approximately 141 square miles and 76,300 metered customers, is located in northern New Castle County and portions of southern New Castle County, Delaware.  A significant portion of our exclusive service territory is in Sussex County, Delaware and remains undeveloped, and if and when development occurs and there is population growth in these areas, we will increase our customer base by providing water and/or wastewater service to the newly developed areas and new customers.

Subsidiaries

Artesian Water

Artesian Water, our principal subsidiary, is the oldest and largest public water utility in the State of Delaware and has been providing water service within the state since 1905.  Artesian Water 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 and municipal water providers.  We also provide water for public and private fire protection to customers in our service territories.  Artesian Water produced approximately 88% of our 2019 consolidated operating revenues.

We derive about 91% of our self-supplied groundwater from wells that pump groundwater from aquifers and other formations located in the Atlantic Coastal Plain.  The remaining 9% of our groundwater supply comes from wells in the Piedmont Province.  We use a variety of treatment methods, including aeration, pH adjustment, chlorination, fluoridation, ultra violet oxidation, arsenic removal, nitrate removal, radium removal, iron removal, and carbon adsorption to meet federal, state and local water quality standards.  Additionally, a corrosion inhibitor is added to all of our self-supplied groundwater and most of the supply from interconnections.  We have 55 different water treatment facilities in our Delaware systems.  All water supplies that we purchase from neighboring utilities are potable.  

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To supplement our groundwater supply, we purchase treated surface water through interconnections only in the northern service area of our New Castle County, Delaware system.  The treated surface water is blended with our groundwater supply for distribution to our customers.  Nearly 86% of the overall 8.3 billion gallons of water we distributed in all of our Delaware systems during 2019 came from our groundwater wells, while the remaining 14% came from interconnections with other utilities and municipalities.  In Delaware in 2019, we pumped an average of 19.6 million gallons per day, or mgd, from our groundwater wells and obtained an average of approximately 3.2 mgd from interconnections.  Our peak water supply capacity currently is approximately 55.0 mgd.  

Most of our New Castle County, Delaware water system is interconnected.  In the remainder of the State of Delaware, we have several satellite systems that have not yet been connected by transmission and distribution facilities.  We intend to join these systems into larger integrated regional systems through the construction of a transmission and distribution network as development continues and our expansion efforts provide us with contiguous exclusive service territories.

In Delaware, we have 23 interconnections with two neighboring water utilities and six municipalities that provide us with the ability to purchase or sell water.  An interconnection agreement with Chester Water Authority has a "take or pay" clause requiring us to purchase 1.095 billion gallons annually.  During the fiscal year ended December 31, 2019, we used the minimum draw under this agreement.  The Chester Water Authority agreement, which expires December 31, 2021, provides for the right to extend the term of this agreement through and including December 31, 2047, at our option, subject to the approval of the Susquehanna River Basin Commission.  We provided written notice to Chester Water Authority that we do not intend to extend the term of the agreement under its existing terms.  All of the interconnections provide Artesian Water the ability to sell water to neighboring water utilities or municipalities.  Artesian Water also has an interconnection with the Town of Chesapeake City that provides the town approximately 98,000 gallons per day on average.  The interconnection is currently the town’s sole source of water supply.

As of December 31, 2019, we were serving customers through approximately 1,331 miles of transmission and distribution mains.  Mains range in diameter from two inches to twenty-four inches, and most of the mains are made of ductile iron or cast iron.

We have 30 storage tanks in Delaware, most of which are elevated, providing total system storage of 42 million gallons. We have developed and are using an Aquifer Storage and Recovery, or ASR, system in New Castle County, Delaware.  Our ASR system provides approximately 130 million gallons of storage capacity, which can be withdrawn at an average rate of approximately 1 mgd.  At some locations, we rely on hydropneumatic tanks to maintain adequate system pressures.  Where possible, we combine our smaller satellite systems with systems having elevated storage facilities.

Artesian Water Maryland

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 Water Maryland owns and operates 9 public water systems including one in Port Deposit that has the ability to supply up to 1 mgd of water through an intake in the Susquehanna River.

The majority of the 0.1 billion gallons of water we distributed in all of our Maryland systems during 2019 came from our groundwater wells, while a portion came from treated surface water.  We have nine separate water treatment facilities in our Maryland systems.  We have one water treatment facility that treats surface water from the Susquehanna River, located in Cecil County, Maryland.  Our peak water supply capacity currently is approximately 2.0 mgd.  We have 7 storage tanks capable of storing approximately 2.4 million gallons.  We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.

In Maryland, we have one interconnection that connects the Artesian Water system in Delaware to the Meadowview System, one interconnection with a neighboring utility, three interconnections with the Town of Elkton, and one interconnection with the Town of North East.  The interconnection with the Artesian Water Delaware system is capable of providing up to 3.0 mgd of water to our Maryland systems, of which 1.5 mgd is available to the Town of Elkton per our agreement with the town.

In January 2018, Artesian Water Maryland signed an interconnection agreement with the Town of North East.  In June 2019, a supplemental interconnection agreement was signed that superseded the previous agreement.  The agreement has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day, while the Town of North East shall make available to Artesian Water Maryland up to 305,000 gallons per day.

Artesian Water Pennsylvania

Artesian Water Pennsylvania began operations in 2002.  It provides water service to a residential community in Chester County, Pennsylvania.

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Artesian Wastewater

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.  Artesian Wastewater owns and operates four wastewater treatment facilities, which are permitted to treat approximately 500,000 gallons per day.  Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County.  There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.  Artesian Wastewater has substantially completed a disposal facility that includes a 90 million gallon storage lagoon and spray irrigation to agricultural land.  This facility will be used to provide treated process wastewater disposal services for an industrial customer at a rate of approximately 1.5 million gallons per day.  We currently expect this facility to be completed during 2020 with commencement of operation upon permit approval.

Artesian Wastewater Maryland

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 in Maryland.

Artesian Utility

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 organizations.  Artesian Utility also contracts with developers for design and construction of wastewater facilities within the Delmarva Peninsula, using a number of different technologies for treatment of wastewater at each facility.  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.

Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a renegotiated 20-year contract that expires in July 2039. The company has been operating these facilities, which currently include two wastewater treatment stations with a combined capacity of up to approximately 2.8 mgd and the related wastewater disposal facilities, since 1998. 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.

Artesian Development

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

Artesian Storm Water, incorporated on January 17, 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 Consulting Engineers

Artesian Consulting Engineers, Inc., a wholly owned subsidiary, ceased offering services in 2011 and the corporation was dissolved as of October 11, 2019. 

5


Regulatory Matters

Overview

Our water and wastewater utility operations are subject to regulation by their respective state regulatory commissions, which have broad administrative power and authority to regulate rates charged for service, determine franchise areas and conditions of service, approve acquisitions, authorize the issuance of securities and other matters.  The profitability of our utility operations is influenced, to a great extent, by the timeliness and adequacy of regulatory relief we are granted by the respective regulatory commissions or authorities in the states in which we operate.  See Note 14 to our Consolidated Financial Statements for a full description of recent regulatory proceedings.

Service Territory Expansion

In Delaware, a Certificate of Public Convenience and Necessity, or CPCN, grants a water or wastewater company the exclusive right to serve all existing and new customers within a designated area.  The Delaware Public Service Commission, or DEPSC, has the authority to issue and revoke these CPCNs.  In this Form 10-K, we may refer to CPCNs as "franchises" or "service territories."

For a water company, the DEPSC may grant a CPCN under circumstances where there has been a determination that the water in the proposed service area does not meet the regulations governing drinking water standards of the State Division of Public Health for human consumption or where the supply is insufficient to meet the projected demand.  For a wastewater company, the DEPSC has jurisdiction over non-governmental wastewater utilities having fifty or more customers in the aggregate.  A CPCN for water and wastewater utilities shall be granted by the DEPSC to applicants in possession of one of the following:

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a signed service agreement with the developer of a proposed subdivision or development, which subdivision or development has been duly approved by the respective county government;

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a petition requesting such service signed by a majority of the landowners of the proposed territory to be served; or

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a duly certified copy of a resolution from the governing body of a county or municipality requesting the applicant to provide service to the proposed territory to be served.

A water or wastewater utility that has a CPCN must obtain the approval of the DEPSC to abandon a service territory.  Once a CPCN is granted to a water or wastewater utility, it may not be suspended or terminated unless the DEPSC determines in accordance with its rules and regulations that good cause exists for any such suspension or termination.  Although we have been granted an exclusive franchise for each of our existing water and wastewater systems in Delaware, our ability to expand service areas can be affected by the DEPSC awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.

In Maryland, the Company must obtain approval from the appropriate local government authority for the ability to serve a particular area and also ensure that the acquired area is in the county’s master water and sewer plan.  The authority to exercise a franchise must then be obtained from the Maryland Public Service Commission, or MDPSC.  Utilities that seek to develop a franchise by constructing new facilities must obtain appropriate approvals from the Maryland Department of the Environment, the local government and the MDPSC.  The utility must also obtain approval for soil and erosion plans and easement agreements from appropriate parties.

Environmental Regulation

Our water and wastewater operations are subject to federal, state, and local requirements relating to environmental protection.  The United States Environmental Protection Agency, or the EPA, the Delaware Department of Natural Resources and Environmental Control, or DNREC, and the Delaware Division of Public Health, or DPH, regulate the water quality of our treatment and distribution systems in Delaware, as do the EPA and the Maryland Department of the Environment, or MDE, with respect to our operations in Maryland.  The Chester Water Authority, which supplies water to Artesian Water through an interconnection in northern New Castle County, is regulated by the Pennsylvania Department of Environmental Protection, as well as the EPA.  We believe that we are in material compliance with all current federal, state and local water quality standards, including regulations under the federal Safe Drinking Water Act. However, if new water quality regulations are too costly, or if we fail to comply with such regulations, it could have a material adverse effect on our financial condition and results of operations.

The water industry is capital intensive, with one of the highest levels of capital investment in plant and equipment per dollar of revenue among all utilities.  Increasingly stringent drinking water regulations to meet the requirements of the Safe Drinking Water Act have required the water industry to invest in more advanced treatment systems and processes, which require a heightened level of expertise.  Significant enhancements were made to existing facilities to effectively treat and remove compounds as required by government agencies, such as ultra violet oxidation treatment, ceramic membrane filtration and carbon filtration.  We are currently in full compliance with the requirements of the Safe Drinking Water Act.  Even though our water utility was founded in 1905, the majority of our investment in infrastructure occurred in the last 40 years.

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Under Delaware state laws and regulations, we are required to file applications with DNREC for water allocation permits for each of our operating wells pumping greater than 50,000 gallons per day.  For any wells in the Delaware River Basin, we must also file allocation permits with the Delaware River Basin Commission, or DRBC.  We have 126 operating and 60 observation and monitoring wells in our Delaware systems.  At December 31, 2019, we had allocation permits for 104 wells and 22 wells that do not require a permit.

Our access to aquifers within our service territory is not exclusive.  Water allocation permits control the amount of water that can be drawn from water resources and are granted with specific restrictions on water level draw down limits, annual, monthly and daily pumpage limits, and well field allocation pumpage limits.  We are also subject to water allocation regulations that control the amount of water that we can draw from water sources.  As a result, if new or more restrictive water allocation regulations are imposed, they could have an adverse effect on our ability to supply the demands of our customers, and in turn, our water supply revenues and results of operations.  Our ability to supply the demands of our customers historically has not been affected by private usage of the aquifers by landowners or the limits imposed by the state of Delaware. Because of the extensive regulatory requirements relating to the withdrawal of any significant amounts of water from the aquifers, we believe that third party usage of the aquifers within our service territory will not interfere with our ability to meet the present and future demands of our customers.

As required by the Safe Drinking Water Act, the EPA has established maximum contaminant levels for various substances found in drinking water to ensure that the water is safe for human consumption.  These limits are known as Maximum Contaminant Levels and Maximum Residual Disinfection Levels.  The EPA also regulates how often public water systems monitor their water for contaminants and report the monitoring results to the individual state agencies or the EPA.  Generally, the larger the population served by a water system, the more frequent the monitoring and reporting requirements.  The Safe Drinking Water Act applies to all 50 states.

The DPH has set maximum contaminant levels for certain substances that are more restrictive than the maximum contaminant levels set by the EPA.  The DPH is the EPA's agent for enforcing the Safe Drinking Water Act in Delaware and, in that capacity, monitors the activities of Artesian Water and reviews the results of water quality tests performed by Artesian Water for adherence to applicable regulations.  Artesian Water is also subject to other laws regulating substances and contaminants in water, including rules for volatile organic compounds and the Total Coliform Rule.

A normal by-product of our iron removal treatment facilities is a solid consisting of the iron removed from untreated groundwater plus residue from chemicals used in the treatment process.  The solids produced at our facilities are either disposed directly into approved wastewater facilities or removed from our facilities by a licensed third party vendor.  A normal by-product of our carbon adsorption filtration process is exhausted carbon media, which is disposed of by the contractor providing the media replacement.  Management believes that compliance with existing federal, state or local laws and regulations regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has no material effect upon the business and affairs of the Company, but there is no assurance that such compliance will continue to not have a material effect in the future.

The MDE ensures that water quality and quantity at all public water systems in Maryland meet the needs of the public and are in compliance with federal and state regulations. The MDE also ensures that public drinking water systems provide safe and adequate water to all current and future users in Maryland, and that appropriate usage, planning, and conservation policies are implemented for Maryland’s water resources. The MDE oversees the development of Source Water Assessments for water supplies and issues water appropriation permits for public drinking water systems.  In order to appropriate water for municipal, commercial, industrial or other non-domestic uses, a Water Appropriation Permit must be obtained.  Issuance of the permit involves evaluating the needs of the user and the potential impact of the withdrawal on neighboring users and the water source in order to maximize beneficial use of the water.  Permits for large appropriations often involve conducting pump tests to measure adequacy of an aquifer and safe yield of a well, or reviewing stream flow records to determine the adequacy of a surface water source.  Regulations require all new community water systems to have sufficient technical, managerial and financial capacity to provide safe drinking water to their consumers prior to being issued a Construction Permit.  Also, capacity management guidance contains capacity limiting factors that can include, source capacity, treatment capacity and appropriation permit quantity.  The quantity of water withdrawn from the Port Deposit surface water intake is allocated by the Susquehanna River Basin Commission, or SRBC, and MDE.  We have 14 operating wells and one surface water in-take in our Maryland systems.

The Clean Water Act has established the foundation for wastewater discharge control in the United States.  The Clean Water Act established a control program for ensuring that communities have clean water by regulating the release of contaminants into waterways.  Permits that limit the amounts of pollutants discharged are required of all wastewater dischargers under the National Pollutant Discharge Elimination System, or the NPDES, permit program.  In accordance with the NPDES permit program, the implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under the NPDES permit program can lead to the imposition of penalties.  The Clean Water Act also requires that wastewater treatment plant discharges meet a minimum of secondary treatment.  The secondary treatment process can remove 90% to 99% of the organic matter in wastewater.  Our removal efficiency is generally 96% to 98%.

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Under Delaware state laws and regulations, we are required to hold a permit from DNREC for the construction, operation, maintenance or repair of any on-site wastewater treatment and disposal systems with daily design flow rates of 2,500 gallons or greater.  A classification on the facility is performed in accordance with Regulations Licensing Operators of Wastewater Facilities.  The class of operator required for the facility is determined by the Board of Certification for Licensed Wastewater Operations in accordance with Regulations Licensing Operators of Wastewater Facilities.  We work to ensure that we operate environmentally friendly wastewater systems that meet federal, state, and local laws.

Additional General Information

Seasonality

Substantially all of our water customers are metered, which allows us to measure and bill for our customers’ water consumption.  Demand for water during the warmer months is generally greater than during cooler months primarily due to additional customer requirements for water in connection with cooling systems, swimming pools, irrigation systems and other outside water use.  Throughout the year, and particularly during typically warmer months, demand for water will vary with temperature and rainfall.  In the event that temperatures during the typically warmer months are cooler than expected, or there is more rainfall than expected, the demand for water may decrease and our revenues may be adversely affected.

Competition

Our business in our franchised service areas is substantially free from direct competition with other public utilities, municipalities and other entities.  However, our ability to provide additional water and wastewater services is subject to competition from other public utilities, municipalities and other entities.  Even though our regulated utilities have been granted an exclusive franchise for each of our existing community water and wastewater systems, our ability to expand service areas can be affected by the DEPSC, the MDPSC or the Pennsylvania Public Utility Commission, or PAPUC, awarding franchises to other regulated water or wastewater utilities with whom we compete for such franchises.
 
Employees

The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented.  As of December 31, 2019, we had a total of 239 employees.  We believe that our employee relations are good.  Compensation and benefits are reviewed annually and are considered competitive within both the industry and the areas where we operate.

Available Information

We are a Delaware corporation with our principal executive offices located at 664 Churchmans Road, Newark, Delaware, 19702. Our telephone number is (302) 453-6900 and our website address is www.artesianresources.com.  We make available free of charge through our website our Code of Ethics, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, our Corporate Governance Guidelines, and our Board Committee Charters as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. We include our website address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website.  Information contained on our website shall not be deemed incorporated into, or to be a part of, this report.

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Exchange Act electronically with the SEC.  The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.


ITEM 1A. RISK FACTORS

We are exposed to a variety of risks and uncertainties.  Most are general risks and uncertainties applicable to all water and wastewater utility companies.  We describe below some of the specific known risk factors that could negatively affect our business, financial condition or results of operations.  If one or more of these risks or uncertainties materialize, actual results may vary materially from our projections.  

Our operating revenue is primarily from water sales.  The rates that we charge our customers are subject to the regulations of the public service commissions in the states in which we operate.   If a public service commission disapproves or is unable to timely approve our requests for rate increases or approves rate increases that are inadequate to cover our investments or increased costs, our profitability may suffer.

8


We file rate increase requests, from time to time, to recover our investments in utility plant and expenses.  Once a rate increase petition is filed with a public service commission, the ensuing administrative and hearing process may be lengthy and costly.  We can provide no assurances that any future rate increase request will be approved by the DEPSC, MDPSC or PAPUC, and if approved, we cannot guarantee that these rate increases will be granted in a timely manner and/or will be sufficient in amount to cover the investments and expenses for which we initially sought the rate increase.  To the extent we are able to pass through such costs to customers and a state public service commission subsequently determines that such costs should not have been paid by customers, we may be required to refund such costs, with interest, to customers.  Any such costs not recovered through rates, or any such refund, could adversely affect our results of operations, financial position or cash flows.

We rely on governmental approvals in the States of Delaware, Maryland and Pennsylvania, as well as from the Delaware River Basin Commission and Susquehanna River Basin Commission for applicable water allocation, water appropriation and water capacity permits.  In addition, we rely on governmental approvals in the State of Delaware for applicable wastewater collection, treatment and disposal permits that will assist in the operation of our wastewater business.

Our water and wastewater services are governed by various federal and state governmental agencies.  Pursuant to these regulations, we are required to obtain various permits for any additional systems to assist in our operations.  If any of those permit approvals are not received timely or at all, we may risk the loss of economic opportunity and our ability to create additional systems for the effective operation of our water business in the States of Delaware, Maryland and Pennsylvania or our wastewater business in the State of Delaware.  We can provide no assurances that we will receive all necessary permits to create additional systems to assist in the operation of our water or wastewater business.

Our operating costs could be significantly increased if new or stricter regulatory standards are imposed by federal and state environmental agencies.

Our water and wastewater services are governed by various federal and state environmental protection and health and safety laws and regulations, including the federal Safe Drinking Water Act, the Clean Water Act and similar state laws.  These federal and state regulations are issued by the EPA and state environmental regulatory agencies.  Pursuant to these laws, we are required to obtain various water allocation permits and environmental permits for our operations.  The water allocation permits control the amount of water that can be drawn from water resources.  New or stricter water allocation regulations can adversely affect our ability to meet the demands of our customers.  While we have budgeted for future capital and operating expenditures to maintain compliance with these laws and our permits, it is possible that new or stricter standards would be imposed that will raise our operating costs.  Thus, we can provide no assurances that our costs of complying with, or discharging liability under current and future environmental and health and safety laws will not adversely affect our business, results of operations or financial condition.

Our business is subject to seasonal fluctuations, which could affect demand for our water service and our revenues.

Demand for water during warmer months is generally greater than during cooler months primarily due to additional customer requirements in irrigation systems, swimming pools, cooling systems and other outside water use.  In the event that temperatures during typically warmer months are cooler than normal, or rainfall is more than normal, the demand for our water may decrease and adversely affect our revenues.

Drought conditions and government imposed water use restrictions may impact our ability to serve our current and future customers, and may impact our customers’ use of our water, which may adversely affect our financial condition and results of operations.

We believe that we have in place sufficient capacity to provide water service for the foreseeable future to all existing and new customers in all of our service territories.  However, severe drought conditions could interfere with our sources of water supply and could adversely affect our ability to supply water in sufficient quantities to our existing and future customers.  This may adversely affect our revenues and earnings.  Moreover, governmental restrictions on water usage during drought conditions may result in a decreased demand for water, which may adversely affect our revenue and earnings.

We are subject to risks associated with the collection, treatment and disposal of wastewater.

Wastewater collection, treatment and disposal involve various unique risks.  If collection or treatment systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in fees.  This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflow and system failure.  Liabilities resulting from such damages and injuries could materially and adversely affect our results of operations and financial condition.

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Turnover in our management team could have an adverse impact on our business or the financial market’s perception of our ability to continue to grow.

Our success depends significantly on the continued contribution of our management team both individually and collectively. The loss of the services of any member of our management team or the inability to hire and retain experienced management personnel could harm our operating results.  In addition, turnover in our management team could adversely affect the financial market’s perception of our ability to continue to grow.

We face competition from other water and wastewater utilities for the acquisition of new exclusive service territories.

We face competition from other water and wastewater utilities as we pursue the right to exclusively serve territories in Delaware and Maryland by entering into agreements with landowners, developers or municipalities and, under current law, then applying to the DEPSC or the MDPSC for a CPCN.  If we are unable to enter into agreements with landowners, developers or municipalities and secure CPCNs for the right to exclusively serve territories in Delaware or Maryland, our ability to expand may be significantly impeded.

We depend on the availability of capital for expansion, construction and maintenance. Weaknesses in capital and credit markets may limit our access to capital.

Our ability to continue our expansion efforts and fund our utility construction and maintenance program depends on the availability of adequate capital.  There is no guarantee that we will be able to obtain sufficient capital in the future on favorable terms and conditions for expansion, construction and maintenance.  In the event our lines of credit are not extended or we are unable to refinance our first mortgage bonds when due and the borrowings are called for payment, we will have to seek alternative financing sources, although there can be no assurance that these alternative financing sources will be available on terms acceptable to us.  In the event we are unable to obtain sufficient capital, our expansion efforts could be curtailed, which may affect our growth and may affect our future results of operations.

General economic conditions may materially and adversely affect our financial condition and results of operations.

The effects of adverse U.S. economic conditions may lead to a number of impacts on our business that may materially and adversely affect our financial condition and results of operations.  Such impacts may include a reduction in discretionary and recreational water use by our residential water customers, particularly during the summer months; a decline in usage by industrial and commercial customers as a result of decreased business activity and commerce in our customers’ businesses; an increased incidence of customers’ inability, bankruptcy or delay in paying their bills which may lead to higher bad debt expense and reduced cash flow; and a lower natural customer growth rate may result as compared to what had been experienced before the economic downturn due to a decline in new housing starts and a possible slight decline in the number of active customers due to housing vacancies or abandonments.

Any future acquisitions we undertake or other actions to further grow our water and wastewater business may involve risks.

An element of our growth strategy is the acquisition and integration of water and wastewater systems in order to broaden our current service areas, and move into new ones.  It is our intent, when practical, to integrate any businesses we acquire with our existing operations.  The negotiation of potential acquisitions as well as the integration of acquired businesses could require us to incur significant costs and cause diversion of our management’s time and resources.  We may not be successful in the future in identifying businesses that meet our acquisition criteria. The failure to identify such businesses may limit the rate of our growth.  In addition, future acquisitions or expansion of our service areas by us could result in:

-
Dilutive issuance of our equity securities;
-
Incurrence of debt and contingent liabilities;
-
Difficulties in integrating the operations and personnel of the acquired businesses;
-
Diversion of our management’s attention from ongoing business concerns;
-
Failure to have effective internal control over financial reporting;
-
Overload of human resources; and
-
Other acquisition-related expense.

Some or all of these items could have a material adverse effect on our business and our ability to finance our business and comply with regulatory requirements.  The businesses we acquire in the future may not achieve sales and profitability that would justify our investment.

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Table of Contents

We also may experience risks relating to the challenges and costs of closing a transaction and the risk that an announced transaction may not close.  Completion of certain acquisition transactions are conditioned upon, among other things, the receipt of approvals, including from certain state public utilities commissions.  Failure to complete a pending transaction would prevent us from realizing the anticipated benefits.  We would also remain liable for significant transaction costs, including legal and accounting fees, whether or not the transaction is completed.

We are subject to, and could be further subject to, governmental investigations or actions by other third parties.

We are subject to various federal and state laws, including environmental laws, violations of which can involve civil or criminal sanctions.

Our operations from time to time could be parties to or targets of lawsuits, claims, investigations and proceedings, including system failure, injury, contract, environmental, health and safety and employment matters, which are handled and defended in the ordinary course of business.  The results of any future litigation or settlement of such lawsuits and claims are inherently unpredictable, but such outcomes could also materially and adversely affect our business, financial position and results of operations.

Contamination of our water supply may result in disruption in our services and could lead to litigation that may adversely affect our business, operating results and financial condition.

Our water supplies are subject to contamination from naturally-occurring compounds as well as pollution resulting from man-made sources.  Even though we monitor the quality of our water on an on-going basis, any possible contamination due to factors beyond our control could interrupt the use of our water supply until we are able to substitute it from an uncontaminated water source.  Additionally, treating the contaminated water source could involve significant costs and could adversely affect our business.  We could also be held liable for consequences arising out of human or environmental exposure to hazardous substances, if found, in our water supply.  This could adversely affect our business, results of operations and financial condition.

Aging infrastructure may lead to service disruptions, property damage and increased capital expenditures and operation and management costs, all of which could negatively impact our financial results.

We have risks associated with aging infrastructure, including water and sewer mains, pumping stations and water and wastewater treatment facilities. Additionally, the nature of information available on buried and newly acquired assets may be limited, which may challenge our ability to conduct efficient asset management and maintenance practices. Assets that have aged beyond their expected useful lives may experience a higher rate of failure. Failure of aging infrastructure could result in increased capital expenditures and operation and management costs. In addition, failure of aging infrastructure may result in property damage, and in safety, environmental and public health impacts. To the extent that any increased costs or expenditures are not fully recovered in rates, our results of operations, liquidity and cash flows could be negatively impacted.

We are dependent on the continuous and reliable operation of our information technology systems.

We rely on our information technology systems to manage our operation of our business.  Specifically, our business relies on the following technology systems: customer information system, financial reporting system, asset tracking system, remote monitoring system for some of our treatment, storage and pumping facilities, human resources management system, inventory management system, and accounts receivable collection management system.  Such systems require periodic modifications, upgrades or replacement that subject us to inherent costs and risks, including substantial capital expenditures, additional administration and operating expenses, and other risks and costs of delays in transitioning to new systems or of integrating new systems into our current systems.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications failures or acts of war or terrorism or similar events or disruptions.  A loss of these systems or major problems with the operation of these systems could affect our operations and have a material adverse effect on our results of operations.

There have been an increasing number of cyber-attacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data.  These attacks have occurred over the internet, through malware, viruses or attachments to e-mails, or through persons inside the organization or with access to systems inside the organization. We have implemented security measures and will continue to devote resources to address any security vulnerabilities in an effort to prevent cyber-attacks.  Despite our efforts, a cyber-attack, if it occurred, could cause water or wastewater system problems, disrupt service to our customers, compromise important data or systems or result in an unintended release of customer information.  We feel we have adequate cyber-security insurance coverage to mitigate the cost of any such cyber-attack; however, a possible cyber-attack could affect our operations and have a material adverse effect on our results of operations.

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Table of Contents

Potential terrorist attacks may disrupt our operations and adversely affect our business, operating results and financial condition.

We have security measures in place at our facilities, including for delivery and handling of certain chemicals, as well as programs in place to ensure employee awareness of potential threats.  We have and will continue to bear any increase in costs, most of which have been recoverable under state regulatory policies, for security precautions to protect our facilities, operations and supplies.  While the costs of increases in security, including capital expenditures, may be significant, we expect these costs to continue to be recoverable in water and wastewater rates.  Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our water systems, should they occur.

There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

Dividends on our common stock will only be paid if and when declared by our Board of Directors. Our earnings, financial condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate increases, will determine both our ability to pay dividends on common stock and the amount of the dividends declared by our Board of Directors. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they will be in amounts similar to past dividends.

The price of our common stock may be volatile and may be affected by market conditions beyond our control.

The trading price of our common stock may fluctuate in the future based on a variety of factors, many of which are beyond our control and unrelated to our financial results. Factors that could cause fluctuations in the trading price of our common stock include but are not limited to volatility of the general stock market or the utility stock index, regulatory developments, general economic conditions and trends, actual or anticipated changes or fluctuations in our results of operations, actual or anticipated changes in the expectations of investors or securities analysts, actual or anticipated developments in our competitors’ businesses or the competitive landscape generally, litigation involving us or our industry, major catastrophic events or sales of large blocks of our stock. Furthermore, we believe that stockholders invest in public utility stocks in part because they seek reliable dividend payments. If there is an over supply of stock of public utilities in the market relative to demand by such investors, the trading price of our common stock may decrease. Additionally, if interest rates rise above the dividend yield offered by our common stock, demand for our stock and its trading price may also decrease.

12


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our corporate headquarters are located at 664 Churchmans Road, Newark, Delaware and are owned by Artesian Water.

Artesian Development owns approximately six acres of land in New Castle County, Delaware zoned for office development and two nine-acre parcels of land in Sussex County, Delaware for water and wastewater treatment facilities and elevated water storage.  Artesian Development also owns an office facility located in Sussex County, Delaware.  The facility consists of approximately 10,000 square feet of office space along with approximately 10,000 square feet of warehouse space.

Artesian Water owns land, rights-of-way, easements, transmission and distribution mains, pump facilities, treatment plants, storage tanks, meters, vehicles and related equipment and facilities throughout Delaware, of which the majority are used for utility operations.  Artesian Water Pennsylvania owns easements, transmission and distribution mains and meters in Pennsylvania.  Artesian Water Maryland owns land, rights-of-way, easements, transmission and distribution mains, pump facilities, treatment plants, storage tanks and meters throughout Cecil County, Maryland.  Artesian Wastewater owns land, rights-of-way, easements, collection mains, lift stations and treatment/disposal facilities in Southern Delaware.  The following table indicates our utility plant as of December 31, 2019.



Utility plant comprises:
           
In thousands
           
 
 
Estimated Useful Life
(In Years)
   
December 31, 2019
 
Utility plant at original cost
           
Utility plant in service-Water
           
Intangible plant
   
---
   
$
140
 
Source of supply plant
   
45-85
     
22,611
 
Pumping and water treatment plant
   
8-62
     
90,795
 
Transmission and distribution plant
               
Mains
   
81
     
277,125
 
Services
   
39
     
48,190
 
Storage tanks
   
76
     
27,968
 
Meters
   
26
     
27,498
 
Hydrants
   
60
     
15,071
 
General plant
   
5-31
     
61,512
 
 
               
Utility plant in service-Wastewater
               
Treatment and disposal plant
   
21-81
     
19,315
 
Collection mains and lift stations
   
81
     
19,348
 
General plant
   
5-31
     
1,223
 
 
               
Property held for future use
   
---
     
24,632
 
Construction work in progress
   
---
     
31,881
 
 
           
667,309
 
Less – accumulated depreciation
           
136,588
 
 
         
$
530,721
 

Substantially all of Artesian Water's utility plant, except the utility plant in the town of Townsend, Delaware, is pledged as security for our First Mortgage Bonds.  As of December 31, 2019, no other water utility plant has been pledged as security for loans.  Two parcels of land in Artesian Wastewater are pledged as security for a loan.

We believe that our properties are generally maintained in good condition and in accordance with current standards of good water and wastewater works industry practice.  We believe that all of our existing facilities adequately meet current necessary production capacities and current levels of utilization.

13


ITEM 3. LEGAL PROCEEDINGS

Periodically, we are involved in other proceedings or litigation arising in the ordinary course of business.  We do not believe that the ultimate resolution of these matters will materially affect our business, financial position or results of operations.  However, we cannot assure that we will prevail in any litigation and, regardless of the outcome, may incur significant litigation expense. In addition, any litigation  may divert significant  management attention.




ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for the Company’s Common Equity

Artesian Resources' Class A Non-Voting Common Stock, or Class A Stock, is listed on the Nasdaq Global Select Market and trades under the symbol "ARTNA."  On March 9, 2020, the last closing sale price as reported by the Nasdaq Global Select Market was $35.32 per share.  As of March 9, 2020 there were 604 holders of record of the Class A Stock.

Our Class B Common Stock, or Class B Stock, is quoted on the OTC Bulletin Board under the symbol "ARTNB."  There has been a limited and sporadic public trading market for the Class B Stock.  As of March 9, 2020, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $35.00 per share on March 5, 2020.  As of March 9, 2020, there were 146 holders of record of the Class B Stock.  The Class B shares are paid the same dividend as the Class A shares.

Recent Sales of Unregistered Securities

During the year ended December 31, 2019, we did not issue any unregistered shares of our Class A or Class B Stock.
14

The following graph compares the percentage change in cumulative shareholder return on the Company’s Class A Stock with the Standard & Poor’s 500 Stock Index and a Peer Group of water utility companies.  The graph covers the period from December 2014 (assuming a $100 investment on December 31, 2014, and the reinvestment of any dividends) through December 2019:



 
 
 
INDEXED RETURNS
 
Base Period
Years Ending December 31
Company Name / Index
2014
2015
2016
2017
2018
2019
Artesian Resources Corporation
 
100
 
127.53
 
151.66
 
187.92
 
174.41
 
191.25
S&P 500 Index
 
100
 
101.38
 
113.51
 
138.29
 
132.23
 
173.86
Peer Group
 
100
 
112.75
 
138.44
 
176.71
 
177.94
 
238.69


The Peer Group includes American States Water Company, American Water Works Company, Inc., Aqua America, Inc., California Water Service Group, Connecticut Water Service, Inc. (included through October 9, 2019 when it was acquired by SJW Group), Middlesex Water Company, SJW Group and York Water Company.

15

ITEM 6.
SELECTED FINANCIAL DATA

The selected statement of operations and balance sheet data shown below were derived from our consolidated financial statements.  The consolidated statement of operations data for the years ended December 31, 2019, 2018 and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K.  The consolidated statement of operations data for the years ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016 and 2015 have been derived from audited consolidated financial statements which are not included in this Annual Report on Form 10-K.  You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In thousands, except per share data
 
2019
   
2018
   
2017
   
2016
   
2015
 
 
                             
STATEMENT OF OPERATIONS
                             
 
                             
Operating revenues
                             
Water sales
 
$
73,609
   
$
70,829
   
$
73,058
   
$
70,587
   
$
68,932
 
Other utility operating revenue
   
4,916
     
4,456
     
4,177
     
3,816
     
3,694
 
Non-utility operating revenue
   
5,070
     
5,126
     
5,000
     
4,686
     
4,398
 
Total operating revenues
 
$
83,595
   
$
80,411
   
$
82,235
   
$
79,089
   
$
77,024
 
 
                                       
Operating expenses
                                       
Operating and maintenance
 
$
42,504
   
$
41,209
   
$
41,054
   
$
38,260
   
$
38,453
 
Depreciation and amortization
   
10,803
     
10,288
     
9,555
     
9,188
     
8,837
 
State and federal income taxes
   
5,181
     
4,991
     
7,295
     
8,331
     
7,784
 
Property and other taxes
   
5,182
     
4,968
     
4,731
     
4,491
     
4,368
 
Total operating expenses
 
$
63,670
   
$
61,456
   
$
62,635
   
$
60,270
   
$
59,442
 
 
                                       
Operating income
 
$
19,925
   
$
18,955
   
$
19,600
   
$
18,819
   
$
17,582
 
Other income, net
   
2,024
     
1,575
     
560
     
779
     
721
 
Total income before interest charges
 
$
21,949
   
$
20,530
   
$
20,160
   
$
19,598
   
$
18,303
 
 
                                       
Interest charges
 
$
7,024
   
$
6,252
   
$
6,177
   
$
6,644
   
$
6,998
 
 
                                       
Net income
 
$
14,925
   
$
14,278
   
$
13,983
   
$
12,954
   
$
11,305
 
Dividends on preferred stock (1)
                                       
Net income applicable to common stock
 
$
14,925
   
$
14,278
   
$
13,983
   
$
12,954
   
$
11,305
 
 
                                       
Net income per share of common stock:
                                       
Basic
 
$
1.61
   
$
1.55
   
$
1.52
   
$
1.42
   
$
1.26
 
Diluted
 
$
1.60
   
$
1.54
   
$
1.51
   
$
1.41
   
$
1.26
 
 
                                       
Average shares of common stock outstanding:
                                       
Basic
   
9,277
     
9,239
     
9,175
     
9,098
     
8,960
 
Diluted
   
9,326
     
9,293
     
9,242
     
9,161
     
9,005
 
Cash dividends per share of common stock
 
$
0.98
   
$
0.95
   
$
0.93
   
$
0.90
   
$
0.87
 
 
In thousands
 
2019
   
2018
   
2017
   
2016
   
2015
 
BALANCE SHEET
                             
Utility plant, at original cost less accumulated depreciation
 
$
530,721
   
$
498,678
   
$
460,502
   
$
425,502
   
$
405,606
 
Total assets
 
$
560,368
   
$
529,830
   
$
494,639
   
$
450,976
   
$
431,626
 
Lines of credit
 
$
7,500
   
$
15,942
   
$
9,610
   
$
7,130
   
$
10,487
 
Long-term obligations and redeemable preferred stock, including current portions
 
$
145,862
   
$
117,587
   
$
106,931
   
$
103,647
   
$
104,936
 
Stockholders’ equity
 
$
160,268
   
$
153,251
   
$
146,644
   
$
139,023
   
$
132,331
 
Total capitalization
 
$
304,424
   
$
269,113
   
$
252,231
   
$
241,354
   
$
235,978
 
 
                                       
(1) There are no shares of preferred stock issued and outstanding.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our profitability is primarily attributable to the sale of water. Gross water sales comprised 88.1% of total operating revenues for the year ended December 31, 2019.  Our profitability is also attributed to the various contract operations, SLP Plans, wastewater services 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, SLP Plans, wastewater services 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 December 31, 2019, we had approximately 87,800 metered water customers in Delaware, an increase of approximately 1,900 compared to December 31, 2018.  The number of metered water customers in Maryland totaled approximately 2,500 as of December 31, 2019, a slight increase compared to December 31, 2018.  The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2018.  For the year ended December 31, 2019, approximately 8.3 billion gallons of water were distributed in our Delaware systems and approximately 118 million gallons of water were distributed in our Maryland systems.

Wastewater Division

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.  There has been consistent customer growth over the years.  The number of Delaware wastewater customers totaled approximately 2,400 as of December 31, 2019, an increase of approximately 300, or 15.3%, compared to December 31, 2018.  In addition, Artesian Wastewater entered into a wastewater services agreement with Allen Harim Foods, LLC, or Allen Harim, a large industrial customer.  The wastewater services agreement with Allen Harim is discussed further in the “Strategic Direction” section below.

Non-Regulated Division

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 December 31, 2019, approximately 20,200, or 24.1%, of our eligible water customers enrolled in the WSLP Plan, approximately 15,800, or 18.9%, of our eligible customers enrolled in the SSLP Plan, and approximately 7,000, or 8.4%, of our eligible customers enrolled in the ISLP Plan.  Approximately 1,900 non-utility customers enrolled in one of our three protection plans.

Strategic Direction and Recent Developments

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.

Artesian Wastewater entered into agreements that will provide growth opportunities and will utilize our larger regional wastewater facilities.  In August 2016, Artesian Wastewater and Sussex County, a political subdivision of Delaware, entered into an agreement to provide reciprocal services to address the periodic need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County.  There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are capable of being connected or integrated to allow for the movement and disposal of wastewater generated by one or the other’s system in a manner that most efficiently and cost effectively manages wastewater transmission, treatment and disposal.

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 million gallons per day 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, or  SRRF.  We will use the reclaimed wastewater for spray irrigation on agricultural land in the area.  We currently expect this facility to be completed during 2020. 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 formed in 2017 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.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates are those we believe are most important to portraying the financial condition and results of operations and also require significant estimates, assumptions or other judgments by management.  The following provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Company.  Changes in the estimates, assumptions or other judgments included within these accounting policies could result in a significant change to the financial statements in any quarterly or annual period.  We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our Consolidated Financial Statements.  Senior management has discussed the selection and development of our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

All additions to utility plant are recorded at cost.  Cost includes direct labor, materials, and indirect charges for  items such as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities.  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.  Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.

We record water service revenue, including amounts billed to customers, on a cycle basis and unbilled amounts based upon estimated usage from the date of the last meter reading to the end of the accounting period.  As actual usage amounts are received, 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, we believe the overall total estimate of consumption and revenue for the fiscal period will not differ materially from actual billed consumption.

We record accounts receivable at the invoiced amounts.  The reserve for bad debts is adjusted based on the provision for bad debts, which is calculated as a percentage of total water sales.  The Company reviews the bad debt provision expense and the reserve for bad debts on a quarterly basis.  Account balances are written off against the reserve when it is probable the receivable will not be recovered.

The Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 980 stipulates generally accepted accounting principles for companies whose rates are established or subject to approvals by a third-party regulatory agency.  Our regulated utilities record deferred regulatory assets under FASB ASC Topic 980, which are costs that may be recovered over various lengths of time as prescribed by the DEPSC, MDPSC and PAPUC.  As the utility incurs certain costs, such as expenses related to rate case applications, a deferred regulatory asset is created.  Adjustments to these deferred regulatory assets are made when the DEPSC, MDPSC or PAPUC determines whether the expense is recoverable in rates, the length of time over which an expense is recoverable, or, because of changes in circumstances, whether a remaining balance of deferred expense is recoverable in rates charged to customers.  In addition, our regulated utilities record deferred and/or amortized regulatory liabilities under FASB ASC Topic 980, as determined by the DEPSC, the MDPSC, and the 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.  Adjustments to reflect changes in recoverability of certain deferred regulatory assets or certain deferred regulatory liabilities may have a significant effect on our financial results.

Our long-lived assets consist primarily of utility plant in service and regulatory assets.  We review for impairment of our long-lived assets, including utility plant in service, in accordance with the requirements of FASB ASC Topic 360.  We review regulatory assets for the continued application of FASB ASC Topic 980.  Our review determines whether there have been changes in circumstances or events that have occurred that require adjustments to the carrying value of these assets.  Adjustments to the carrying value of these assets would be made in instances where changes in circumstances or events indicate the carrying value of the asset may not be recoverable in rates charged to customers.  The Company believes there are no impairments in the carrying amounts of its long-lived assets or regulatory assets at December 31, 2019.


Results of Operations

2019 Compared to 2018

Operating Revenues

Revenues totaled $83.6 million for the year ended December 31, 2019, $3.2 million, or 4.0%, more than revenues for the year ended December 31, 2018Water sales revenue increased $2.8 million, or 3.9%, for the year ended December 31, 2019 from the corresponding period in 2018, primarily due to an increase in DSIC revenue, an increase in overall water consumption and an increase from customer growth.  The DSIC rates in 2018 were 4.71% for the first six months and 3.63% for the last six months.  The DSIC rates during 2019 were 5.55% for the first six months and 7.41% for the last six months.  As a result of the reduced tariff rates approved by the DEPSC on January 31, 2019 related to the impact of the Tax Cuts and Jobs Act of 2017, or 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 88.1% of our total operating revenue for the years ended December 31, 2019 and December 31, 2018, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.5 million, or 10.3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.  The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in water service charges.
Non-utility operating revenue decreased approximately $0.1 million, or 1.1%, for the year ended December 31, 2019 compared to the same period in 2018.  The decrease is primarily due to a decrease in contract revenue, partially offset by an increase in SLP Plan revenue.


Percentage of Operating Revenues
                 
 
 
2019
   
2018
   
2017
 
Water Sales
                 
Residential
   
52.8
%
   
52.7
%
   
52.9
%
Commercial
   
21.0
     
21.4
     
21.6
 
Industrial
   
0.1
     
0.1
     
0.1
 
Government and Other
   
14.1
     
13.9
     
14.2
 
Other utility operating revenues
   
5.9
     
5.5
     
5.1
 
Non-utility operating revenues
   
6.1
     
6.4
     
6.1
 
Total
   
100.0
%
   
100.0
%
   
100.0
%

Residential

Residential water service revenues in 2019 amounted to $44.2 million, an increase of $1.8 million, or 4.2%, above the $42.4 million recorded in 2018, primarily due to an increase in DSIC revenue and an increase in overall water consumption.  The volume of water sold to residential customers increased to 3,900 million gallons in 2019 compared to 3,803 million gallons in 2018, a 2.6% increase.  The number of residential customers served increased by approximately 1,900, or 2.3%, in 2019.

Commercial

Water service revenues from commercial customers in 2019 increased by 2.2%, to $17.6 million in 2019 from $17.2 million in 2018, primarily due to an increase in DSIC revenue and an increase in overall water consumption.  The volume of water sold to commercial customers increased to 2,303 million gallons in 2019 compared to 2,256 million gallons sold in 2018, an increase of 2.1%.

Industrial

Water service revenues from industrial customers increased to $88,000 in 2019 from $51,000 in 2018.  The volume of water sold to industrial customers increased to 11.1 million gallons in 2019 from 4.8 million gallons in 2018.

Government and Other

Government and other water service revenues in 2019 increased by 5.3%, from $11.2 million in 2018 to $11.8 million in 2019, an increase in DSIC revenue and an increase in overall water consumption. The volume of water sold to government and other customers increased to 993 million gallons in 2019 compared to 927 million gallons in 2018, an increase of 7.1%.


Other Utility Operating Revenue

Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges, wastewater customer service revenues and industrial wastewater service revenues, increased 10.3%, from $4.5 million in 2018 to $4.9 million in 2019.  The increase is primarily due to an increase in wastewater revenue from customer growth, partially offset by a decrease in water service charges.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated water and wastewater operations, decreased slightly but remained at $5.1 million for the year December 31, 2019 compared to the year ended December 31, 2018.  The decrease is primarily due to a decrease in contract revenue, partially offset by an increase in SLP Plan revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $1.5 million, or 3.3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.  The components of the change in operating expenses primarily include an increase in utility operating expenses of $0.9 million, an increase in non-utility operating expenses of $0.4 million and an increase in property and other taxes of $0.2 million.

Utility operating expenses increased $0.9 million, or 2.2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.  The net increase is primarily related to the following.

-
Payroll, employee benefit costs and related expenses increased $0.7 million, primarily due to an increase in overall compensation and an increase in employee benefits costs.
-
Administration costs increased $0.3 million, primarily due to an increase in consulting services, and increases in regulatory application costs to expand our service territory in Delaware and contract services related to wastewater facilities.
-
Water treatment expense increased $0.2 million, primarily due to an increase in the purchase price and usage of certain chemicals in 2019, in addition to an increase in water testing costs.
-
Repair and maintenance expense decreased $0.3 million, primarily due to the painting of an elevated water storage tank in 2018 in our Cecil County, Maryland system as well as a decrease in expenses related to the maintenance of wells.

Non-utility expenses increased approximately $0.4 million, or 15.1%, primarily due to an increase in plumbing services related to the SLP Plans as well as an increase in payroll and benefit costs.

Property and other taxes increased $0.2 million, or 4.3%, 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.
-

Percentage of Operating and Maintenance Expenses
 
 
 
2019
   
2018
   
2017
 
Payroll and Associated Expenses
   
50.1
%
   
48.9
%
   
49.1
%
Administrative
   
13.6
     
14.3
     
14.4
 
Purchased Water
   
9.9
     
10.1
     
10.7
 
Repair and Maintenance
   
9.3
     
10.3
     
10.0
 
Purchased Power
   
5.5
     
5.8
     
5.6
 
Water Treatment
   
3.8
     
3.6
     
3.4
 
Non-utility Operating
   
7.8
     
7.0
     
6.8
 
 
                       
Total
   
100.0
%
   
100.0
%
   
100.0
%

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.0% for the year ended December 31, 2019, compared to 57.4% for the year ended December 31, 2018.

Depreciation and amortization expense increased $0.5 million, or 5.0%, 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 $0.2 million, or 3.8%, primarily due to higher pre-tax income for the year ended December 31, 2019, compared to the year ended December 31, 2018.


Other Income, Net

Other income, net increased $0.4 million, or 28.5%, primarily due to an increase in allowance for funds used during construction, or AFUDC, of $0.8 million as a result of higher long-term construction activity subject to AFUDC for the year ended December 31, 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 $0.8 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 average amount borrowed under lines of credit and an increase in the interest rate.

Net Income

Our net income applicable to common stock increased $0.6 million.  Operating revenues increased $3.2 million and other income, net increased $0.4 million, while operating expenses increased $2.2 million and interest expense increased $0.8 million.

See Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K for a comparative discussion of the years ended December 31, 2018 and 2017.


Liquidity and Capital Resources

Overview

The Company’s primary sources of liquidity for the year ended December 31, 2019 were $18.9 million provided by cash flow from operating activities, $30.0 million from a new First Mortgage Series Bond issued in December 2019, $10.5 million in net contributions and advances from developers and $1.0 million in net proceeds from the issuance of common stock.  These funds were used to invest $40.7 million in capital expenditures, to pay dividends of approximately $9.1 million and to repay $8.4 million of the Company’s line of credit.

We depend on the availability of capital for expansion, construction and maintenance.  We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations.  We expect that our net investments in our utility plant and systems in 2020 will be approximately $54.3 million.  Our total obligations related to interest and principal payments on indebtedness, rental payments and water service interconnection agreements for 2020 are anticipated to be approximately $12.6 million.  We expect to fund our activities for the next year using our available cash balances, bank credit lines, and projected cash generated from operations and potential capital market financings if necessary.  We believe that internally generated funds along with existing credit facilities will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements.  However, because part of our business strategy is to expand through strategic acquisitions, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes.  There is no assurance that we will be able to secure funding on terms acceptable to us, or at all.

Operating Activities

Our primary source of liquidity for the year ended December 31, 2019 was $18.9 million provided by cash flow from operating activities.  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.  In addition, the Company has a long history of paying regular quarterly dividends as approved by our Board of Directors using net cash from operating activities.

Investment Activities

The primary focus of our investment in 2019 was to continue to provide high quality reliable service to our growing service territory.  We invested approximately $40.7 million in capital expenditures during 2019 compared to $49.1 million invested during the same period in 2018.  During 2019, we invested approximately $10.2 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 $11.0 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers.  We invested $3.1 million for equipment purchases, computer hardware and software upgrades and transportation equipment.  Developers financed $4.5 million for the installation of water mains and hydrants in 2019 compared to $4.7 million in 2018.  We invested $1.7 million to upgrade and automate our meter reading equipment.  We invested approximately $3.3 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 $6.9 million was invested in wastewater projects in Delaware, of which $3.6 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 was substantially completed in 2019.

The following chart summarizes our investment in plant and systems over the past three fiscal years.

In thousands
 
2019
   
2018
   
2017
 
   
Source of supply, treatment and pumping
 
$
13,000
   
$
11,470
   
$
5,778
 
Transmission and distribution
   
13,789
     
16,395
     
14,265
 
General plant and equipment
   
3,180
     
4,454
     
6,080
 
Developer financed utility plant
   
4,573
     
4,772
     
5,909
 
Wastewater facilities
   
7,021
     
12,389
     
9,290
 
Allowance for Funds Used During Construction, AFUDC
   
(886
)
   
(427
)
   
(227
)
   
Total
 
$
40,677
   
$
49,053
   
$
41,095
 

Of the $63.4 million expected to be invested in 2020, approximately $18.0 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory.  Approximately $5.3 million will be invested in renewals associated with the rehabilitation of aging infrastructure and approximately $4.5 million will be invested in the relocations of facilities as a result of government mandates.  Approximately $18.0 million will be invested for new treatment facilities, facility upgrades, equipment and wells throughout Delaware, Maryland, and Pennsylvania to identify, develop, treat and protect sources of water supply to assure uninterrupted service to our customers.  In addition, we will refund $0.9 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties.

We also plan to invest $4.9 million in general plant, which includes new corporate automation, building renovations and transportation and equipment upgrades.  Additionally, $11.8 million will be invested in Artesian Wastewater for ongoing construction of wastewater plants and force mains.  Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.  The Company's investment for 2020 is expected to be offset by developer contributions and advances of $9.1 million for a net investment of $54.3 million in 2020.

Financing Activities

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 financings if necessary.

We have several sources of liquidity to finance our investment in utility plant and other fixed assets. We estimate that the projected investment will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below.

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 December 31, 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 December 31, 2019, there was $40.0 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 December 31, 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 December 31, 2019, there was $12.5 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 patronage refunds earned by Artesian Water for 2019 and 2018 were $0.9 million and $1.2 million respectively.  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
 
Commitment Due by Period
 
 
In thousands
 
Less than
1 Year
   
1-3 Years
   
4-5 Years
   
Over 5 Years
 
Lines of Credit
 
$
7,500
   
$
-----
   
$
-----
   
$
-----
 


Contractual Obligations
 
Payments Due by Period
 
In thousands
 
Less than
1 Year
   
1-3
Years
   
4-5
Years
   
After 5
Years
   
Total
 
First mortgage bonds (principal and interest)
 
$
6,682
   
$
13,272
   
$
13,169
   
$
201,275
   
$
234,398
 
State revolving fund loans (principal and interest)
   
1,002
     
1,677
     
1,244
     
3,056
     
6,979
 
Promissory note (principal and interest)
   
958
     
1,921
     
1,921
     
13,499
     
18,299
 
Operating leases
   
42
     
70
     
46
     
1,320
     
1,478
 
Operating agreements
   
72
     
91
     
77
     
906
     
1,146
 
Unconditional purchase obligations
   
3,892
     
3,938
     
66
     
---
     
7,896
 
Total contractual cash obligations
 
$
12,648
   
$
20,969
   
$
16,523
   
$
220,056
   
$
270,196
 

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 December 31, 2019, 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 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 December 17, 2019, Artesian Water Company 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 Series V 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 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 Series V Maturity Date. Interest is payable on January 30th, April 30th, July 30th and October 30th in each year and on the Series V 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.

In order to control purchased power cost, 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.

In January 2018, Artesian Water Maryland signed an interconnection agreement with the Town of North East.  In June 2019, a supplemental interconnection agreement was signed that superseded the previous agreement.  The agreement has a “take or pay” clause requiring us to purchase a minimum of 35,000 gallons per day, while the Town of North East shall make available to Artesian Water Maryland up to 305,000 gallons per day.

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.



IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 20 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is subject to the risk of fluctuating interest rates in the normal course of business.  Our policy is to manage interest rates through the use of fixed rate long-term debt and, to a lesser extent, short-term debt.  The Company's exposure to interest rate risk related to existing fixed rate, long-term debt is due to the term of the majority of our First Mortgage Bonds, which have final maturity dates ranging from 2028 to 2049, and interest rates ranging from 4.24% to 5.96%, which exposes the Company to interest rate risk as interest rates may drop below the existing fixed rate of the long-term debt prior to such debt’s maturity.  In addition, the Company has interest rate exposure on $60 million of variable rate lines of credit with two banks, under which the interim bank loans payable at December 31, 2019 were approximately $7.5 million.  An increase in interest rates will result in an increase in the cost of borrowing on this variable rate line.  We are also exposed to market risk associated with changes in commodity prices.  Our risks associated with price increases in chemicals, electricity and other commodities are mitigated by our ability to recover our costs through rate increases to our customers.  We have also sought to mitigate future significant electric price increases by signing multi-year supply contracts at  fixed prices.

25



  ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
In thousands

ASSETS
 
December 31, 2019
   
December 31, 2018
 
Utility plant, at original cost less accumulated depreciation
 
$
530,721
   
$
498,678
 
Current assets
               
Cash and cash equivalents
   
596
     
293
 
Accounts receivable (less allowance for doubtful accounts 2019 - $264; 2018-$232)
   
6,913
     
8,159
 
Income tax receivable
   
19
     
772
 
Unbilled operating revenues
   
1,211
     
1,441
 
Materials and supplies
   
1,264
     
1,459
 
Prepaid property taxes
   
1,954
     
1,870
 
Prepaid expenses and other
   
2,250
     
2,124
 
Total current assets
   
14,207
     
16,118
 
Other assets
               
Non-utility property (less accumulated depreciation 2019-$790; 2018-$734)
   
3,812
     
3,849
 
Other deferred assets
   
4,257
     
3,931
 
Operating lease right of use assets
   
480
     
 
Total other assets
   
8,549
     
7,780
 
Regulatory assets, net
   
6,891
     
7,254
 
Total Assets
 
$
560,368
   
$
529,830
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Stockholders' equity
               
Common stock
 
$
9,292
   
$
9,250
 
Preferred stock
   
     
 
Additional paid-in capital
   
101,811
     
100,639
 
Retained earnings
   
49,165
     
43,362
 
Total stockholders' equity
   
160,268
     
153,251
 
Long-term debt, net of current portion
   
144,156
     
115,862
 
 
   
304,424
     
269,113
 
Current liabilities
               
Lines of credit
   
7,500
     
15,942
 
Current portion of long-term debt
   
1,706
     
1,725
 
Accounts payable
   
8,176
     
8,187
 
Accrued expenses
   
3,113
     
3,902
 
Overdraft payable
   
15
     
117
 
Accrued interest
   
830
     
784
 
Income taxes payable
   
343
     
 
Customer and other deposits
   
1,970
     
1,850
 
Revenue reserved for refund
   
     
3,298
 
Other
   
1,946
     
1,926
 
Total current liabilities
 
$
25,599
   
$
37,731
 
 
               
Commitments and contingencies (Note 12)
               
 
               
Deferred credits and other liabilities
               
Net advances for construction
 
$
5,421
   
$
6,596
 
Operating lease liabilities
   
450
     
 
Regulatory liabilities
   
22,246
     
22,813
 
Deferred investment tax credits
   
490
     
508
 
Deferred income taxes
   
52,259
     
55,054
 
Total deferred credits and other liabilities
 
$
80,866
   
$
84,971
 
 
               
Net contributions in aid of construction
   
149,479
     
138,015
 
Total Liabilities and Stockholders' Equity
 
$
560,368
   
$
529,830
 
 
The notes are an integral part of the consolidated financial statements.

26

Table of Contents
CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts

 
 
For the Year Ended December 31,
 
 
 
2019
   
2018
   
2017
 
 
                 
Operating revenues
                 
Water sales
 
$
73,609
   
$
70,829
   
$
73,058
 
Other utility operating revenue
   
4,916
     
4,456
     
4,177
 
Non-utility operating revenue
   
5,070
     
5,126
     
5,000
 
Total Operating Revenues 
   
83,595
     
80,411
     
82,235
 
                         
Operating expenses
                       
Utility operating expenses
   
39,189
     
38,330
     
38,277
 
Non-utility operating expenses
   
3,315
     
2,879
     
2,777
 
Depreciation and amortization
   
10,803
     
10,288
     
9,555
 
Taxes
                       
State and federal income tax expense (benefit)
                       
Current
   
8,420
     
4,172
     
(929
)
Deferred
   
(3,239
)
   
819
     
8,224
 
Property and other taxes
   
5,182
     
4,968
     
4,731
 
  Total Operating Expenses
   
63,670
     
61,456
     
62,635
 
 
                       
Operating income
   
19,925
     
18,955
     
19,600
 
 
                       
Other income, net
                       
Allowance for funds used during construction (AFUDC)
   
1,410
     
622
     
334
 
Miscellaneous
   
614
     
953
     
226
 
 
   
2,024
     
1,575
     
560
 
 
                       
Income before interest charges
   
21,949
     
20,530
     
20,160
 
 
                       
Interest charges
   
7,024
     
6,252
     
6,177
 
 
                       
Net income applicable to common stock
 
$
14,925
   
$
14,278
   
$
13,983
 
 
                       
Income per common share:
                       
Basic
 
$
1.61
   
$
1.55
   
$
1.52
 
Diluted
 
$
1.60
   
$
1.54
   
$
1.51
 
 
                       
Weighted average common shares outstanding:
                       
Basic
   
9,277
     
9,239
     
9,175
 
Diluted
   
9,326
     
9,293
     
9,242
 
 
                       
Cash dividends per share of common stock
 
$
0.9837
   
$
0.9549
   
$
0.9269
 

The notes are an integral part of the consolidated financial statements.

27

CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
   
For the Year Ended December 31,
 
 
 
2019
   
2018
   
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income
 
$
14,925
   
$
14,278
   
$
13,983
 
Adjustments to reconcile net income to net cash  provided by operating activities:
                       
Depreciation and amortization
   
10,803
     
10,288
     
9,555
 
Deferred income taxes, net
   
(2,813
)
   
899
     
8,206
 
Stock compensation
   
181
     
192
     
423
 
AFUDC, equity portion
   
(886
)
   
(427
)
   
(227
)
 
                       
Changes in assets and liabilities:
                       
Accounts receivable, net of allowance for doubtful accounts
   
(94
)
   
(87
)
   
(187
)
Income tax receivable
   
753
     
1,581
     
(2,203
)
Unbilled operating revenues
   
230
     
(14
)
   
(24
)
Materials and supplies
   
195
     
60
     
45
 
Income taxes payable
   
343
     
     
 
Prepaid property taxes
   
(84
)
   
(75
)
   
(126
)
Prepaid expenses and other
   
(126
)
   
(82
)
   
(215
)
Other deferred assets
   
(361
)
   
(245
)
   
(172
)
Regulatory assets
   
388
     
417
     
405
 
Regulatory liabilities
   
(642
)
   
(388
)
   
(37
)
Accounts payable
   
(11
)
   
(666
)
   
3,321
 
Accrued expenses
   
(789
)
   
1,014
     
1,579
 
Accrued interest
   
46
     
(1,021
)
   
805
 
Revenue reserved for refund
   
(3,298
)
   
3,298
     
 
Customer deposits and other
   
110
     
119
     
648
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
18,870
     
29,141
     
35,779
 
 
                       
CASH FLOWS USED IN INVESTING ACTIVITIES
                       
Capital expenditures (net of AFUDC, equity portion)
   
(40,677
)
   
(49,053
)
   
(41,094
)
Proceeds from sale of assets
   
51
     
49
     
87
 
NET CASH USED IN INVESTING ACTIVITIES
   
(40,626
)
   
(49,004
)
   
(41,007
)
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Net (repayments) borrowings under lines of credit agreements
   
(8,442
)
   
6,332
     
2,480
 
(Decrease) increase in overdraft payable
   
(102
)
   
(187
)
   
272
 
Net advances and contributions in aid of construction
   
10,507
     
10,461
     
11,353
 
Net proceeds from issuance of common stock
   
1,033
     
956
     
1,711
 
Issuance of long-term debt
   
30,000
     
12,000
     
 
Dividends paid
   
(9,122
)
   
(8,819
)
   
(8,496
)
Debt issuance costs
   
(90
)
   
(195
)
   
(148
)
Principal repayments of long-term debt
   
(1,725
)
   
(1,344
)
   
(1,218
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
22,059
     
19,204
     
5,954
 
 
                       
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
303
     
(659
)
   
726
 
 
                       
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
293
     
952
     
226
 
 
                       
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
596
   
$
293
   
$
952
 
 
                       
Non-cash Investing and Financing Activity:
                       
Utility plant received as construction advances and contributions in aid of construction
 
$
3,716
   
$
1,153
   
$
5,662
 
Contractual amounts of contributions in aid of construction due from developers included in accounts receivable
 
$
710
   
$
2,156
   
$
2,910
 
Contractual amounts of contributions in aid of construction received from developers previously included in accounts receivable
 
$
2,050
   
$
2,981
   
$
1,995
 
 
                       
Supplemental Disclosures of Cash Flow Information:
                       
Interest paid
 
$
6,978
   
$
7,273
   
$
5,372
 
Income taxes paid
 
$
7,332
   
$
3,287
   
$
1,281
 

The notes are an integral part of the consolidated financial statements.

28

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
In thousands

 
 
Common Shares Outstanding Class A Non-Voting (1) (3) (4)
   
Common Shares Outstanding Class B Voting (2)
   
$1 Par Value Class A Non-Voting
   
$1 Par Value Class B Voting
   
Additional Paid-in Capital
   
Retained Earnings
   
Total
 
 
                                         
Balance as of December 31, 2016
   
8,245
     
882
   
$
8,245
   
$
882
   
$
97,480
   
$
32,416
   
$
139,023
 
 
                                                       
Net income
   
     
     
     
     
     
13,983
     
13,983
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(8,496
)
   
(8,496
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
11
     
     
11
     
     
378
     
     
389
 
Employee stock options and awards(4)
   
67
     
     
67
     
     
1,313
     
     
1,380
 
Employee Retirement Plan(3)
   
10
     
     
10
     
     
355
     
     
365
 
Balance as of December 31, 2017
   
8,333
     
882
   
$
8,333
   
$
882
   
$
99,526
   
$
37,903
   
$
146,644
 
 
                                                       
Net income
   
     
     
     
     
     
14,278
     
14,278
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(8,819
)
   
(8,819
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
10
     
     
10
     
     
356
     
     
366
 
Employee stock options and awards(4)
   
13
     
     
13
     
     
306
     
     
319
 
Employee Retirement Plan(3)
   
12
     
     
12
     
     
451
     
     
463
 
Balance as of December 31, 2018
   
8,368
     
882
   
$
8,368
   
$
882
   
$
100,639
   
$
43,362
   
$
153,251
 
 
                                                       
Net income
   
     
     
     
     
     
14,925
     
14,925
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(9,122
)
   
(9,122
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
11
     
     
11
     
     
389
     
     
400
 
Employee stock options and awards(4)
   
21
     
     
21
     
     
426
     
     
447
 
Employee Retirement Plan(3)
   
10
     
     
10
     
     
357
     
     
367
 
Balance as of December 31, 2019
   
8,410
     
882
   
$
8,410
   
$
882
   
$
101,811
   
$
49,165
   
$
160,268
 

(1)
At December 31, 2019, 2018, and 2017, Class A Common Stock had 15,000,000 shares authorized.  For the same periods, shares issued, inclusive of treasury shares, were 8,439,223, 8,398,005 and 8,362,431, respectively.
(2)
At December 31, 2019, 2018, and 2017, Class B Common Stock had 1,040,000 shares authorized and 882,000 shares issued.
(3)
Artesian Resources Corporation registered 500,000 shares of Class A Common Stock available for purchase through the Artesian Retirement Plan and the Artesian Supplemental Retirement Plan.
(4)
Under the Equity Compensation Plan, effective December 9, 2015, Artesian Resources Corporation authorized up to 331,500 shares of Class A Common Stock for issuance of grants in forms of stock options, stock units, dividend equivalents and other stock-based awards, subject to adjustment in certain circumstances as discussed in the Plan. Includes stock compensation expense for the years ended December 31, 2019, 2018, and 2017, see Note 1-Stock Compensation Plans.

The notes are an integral part of the consolidated financial statements.
 
29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The audited consolidated financial statements are presented in accordance with the requirements of Form 10-K and accounting principles generally accepted in the United States and consequently include all the disclosures required in the consolidated financial statements included in the Company's annual report on Form 10-K. The accompanying consolidated financial statements include the accounts of Artesian Resources Corporation and its subsidiaries and all intercompany balances and transactions between subsidiaries have been eliminated.

Reclassification

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.

Utility Subsidiary Accounting

The accounting records of Artesian Water Company, Inc., or Artesian Water, and Artesian Wastewater Management, Inc., or Artesian Wastewater, are maintained in accordance with the uniform system of accounts as prescribed by the Delaware Public Service Commission, or the DEPSC.  The accounting records of Artesian Water Pennsylvania, Inc., or Artesian Water Pennsylvania, are maintained in accordance with the uniform system of accounts as prescribed by the Pennsylvania Public Utility Commission, or the PAPUC.  The accounting records of Artesian Water Maryland, Inc., or Artesian Water Maryland, and Artesian Wastewater Maryland, Inc., or Artesian Wastewater Maryland, are maintained in accordance with the uniform system of accounts as prescribed by the Maryland Public Service Commission, or the MDPSC.  All five subsidiaries follow the provisions of FASB ASC Topic 980, which provides guidance for companies in regulated industries. These regulated subsidiaries account for the majority of our operating revenue. The operating revenues of our non-regulated division are presented in the Consolidated Statements of Operations.

Utility Plant

Utility plant is stated at original cost.  Cost includes direct labor, materials, AFUDC (see description below) and indirect charges for such capitalized items as transportation, supervision, pension, medical, and other fringe benefits related to employees engaged in construction activities. When depreciable units of utility plant are retired, the historical costs of plant retired is charged to accumulated depreciation. Any cost associated with retirement, less any salvage value or proceeds received, is charged to the regulated retirement liability.  Maintenance, repairs, and replacement of minor items of utility plant are charged to expense as incurred.

In accordance with a rate order issued by the DEPSC, Artesian Water and Artesian Wastewater accrue an Allowance for Funds Used during Construction, or AFUDC. AFUDC, which represents the cost of funds devoted to construction projects through the date the project is placed in service, is capitalized as part of construction work in progress. The rate used for the AFUDC calculation is based on Artesian Water's and Artesian Wastewater's weighted average cost of debt and the rate of return on equity authorized by the DEPSC. The rate used to capitalize AFUDC for Artesian Water in 2019, 2018, and 2017 was 7.1%, 7.4%, and 7.7%, respectively.  The rate used to capitalize AFUDC for Artesian Wastewater in 2019, 2018, and 2017 was 7.1%, 5.9%, and 3.6%, respectively.

30

Utility plant comprises:
           
In thousands
           
 
       
December 31,
 
 
 
Estimated Useful Life
(In Years)
   
2019
   
2018
 
Utility plant at original cost
                 
Utility plant in service-Water
                 
Intangible plant
   
   
$
140
   
$
140
 
Source of supply plant
   
45-85
     
22,611