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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, 2021
OR
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-18516

graphic
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. o

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial report under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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, 2021 was $300,628,287 and $10,211,240, 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, 2021, which trade date was June 30, 2021.  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, 2021, which trade date was June 18, 2021.

As of March 8, 2022, 8,534,673 shares of Class A Non-Voting Common Stock and 881,452 shares of Class B Common Stock were outstanding.
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ARTESIAN RESOURCES CORPORATION
TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS
 
 
 
PART I
 
Item 1. – Business
 
Item 1A.Risk Factors
 
Item 1B. – Unresolved Staff Comments
 
Item 2.Properties
 
Item 3.Legal Proceedings
 
Item 4.Mine Safety Disclosures
 
PART II
 
Item 5.Market for Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities
 
Item 6. – Reserved
 
Item 7. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A. – Quantitative and Qualitative Disclosure About Market Risk
 
Item 8.Financial Statements and Supplementary Data
 
Item 9. – Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
 
Item 9A. – Controls and Procedures
 
Item 9B. – Other Information
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
 
PART III
 
Item 10.Directors, Executive Officers and Corporate Governance
 
Item 11. – Executive Compensation
 
Item 12.Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters
 
Item 13. – Certain Relationships and Related Transactions, and Director Independence
 
Item 14.Principal Accountant Fees and Services
 
PART IV
 
Item 15. – Exhibits and Financial Statement Schedules
Item 16.Form 10-K Summary
 
   
SIGNATURES
 
 
 
Exhibit 21-Subsidiaries of the Company
 
Exhibit 23.1-Consent of BDO USA, LLP
 
Exhibit 31.1-Certification of Chief Executive Officer
 
Exhibit 31.2-Certification of Chief Financial Officer
 
Exhibit 32- Certification of Chief Executive Officer and Chief Financial Officer
 
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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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the specific and overall impacts of the COVID-19 global pandemic on our financial condition and results of operations;
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the impact of recent acquisitions on our ability to expand and foster relationships;
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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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anticipated investments in certain of our facilities and systems and the sources of funding for such investments; and 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;
-
changes in our contractual obligations;
-
changes in government policies;
-
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;
-
 unexpected events, restrictions and policies related to a public health crisis, including the COVID-19 pandemic; 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 is 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 is the 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.  Effective January 14, 2022, Artesian Wastewater is the holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI, a regulated public utility.  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 300 square miles of exclusive water service territory, most of which is in Delaware and some in Maryland and Pennsylvania.  Our largest connected regional water system, consisting of approximately 141 square miles and 77,800 metered customers, is located in northern New Castle County and portions of southern New Castle County, Delaware.  We hold CPCN’s for approximately 34 square miles of wastewater service territory located in Sussex County, Delaware.  In January 2022, approximately 20 square miles of wastewater service territory, located in Sussex County, Delaware, was added upon the closing of the acquisition of TESI.  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, 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.  Artesian Water also provides water for public and private fire protection to customers in our service territories.  Artesian Water produced approximately 86% of our 2021 consolidated operating revenues.

We derive about 98% of our self-supplied groundwater from wells that pump groundwater from aquifers and other formations located in the Atlantic Coastal Plain.  The remaining 2% 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 our self-supplied groundwater and to supply from interconnections.  We have 60 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 2021 came from our groundwater wells, while the remaining 14% came from interconnections with other utilities and municipalities.  In Delaware in 2021, we pumped an average of 19.6 million gallons per day, or mgd, from our groundwater wells and obtained an average of approximately 3.3 mgd from interconnections.  Our peak water supply capacity currently is approximately 57.0 mgd.  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.

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 24 interconnections with two neighboring water utilities and seven municipalities that provide us with the ability to purchase or sell water.  An interconnection agreement with Chester Water Authority, that expired December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day.  The current agreement with Chester Water Authority, which is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day.

As of December 31, 2021, we were serving customers through approximately 1,398 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 32 storage tanks in Delaware, most of which are elevated, providing total system storage of 43 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 hydro-pneumatic 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.

The majority of the 0.1 billion gallons of water we distributed in all of our Maryland systems during 2021 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 through an intake in the Susquehanna River, located in Cecil County, Maryland, which has the ability to supply up to 1 mgd of water.  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 with the Artesian Water system in Delaware, one interconnection with a neighboring utility, and four interconnections with municipalities.  These interconnections are capable of providing over 3.0 mgd of water to our Maryland systems.

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 began providing wastewater services in Sussex County, Delaware in July 2005.  Artesian Wastewater is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Delaware as a regulated public wastewater service company.

Artesian Wastewater owns and operates three wastewater treatment facilities, which are permitted to treat approximately 650,000 gallons per day.  Artesian Wastewater and Sussex County, a political subdivision of Delaware, provide reciprocal services to address the need of each for additional wastewater treatment and disposal capacity in certain service areas within Sussex County.  Artesian Wastewater received an operations permit in March 2020 for a disposal facility that includes a 90 million gallon storage lagoon and spray irrigation to agricultural land.  This facility provides treated process wastewater disposal services for an industrial customer at a rate up to 1.5 million gallons per day.  We began operating this facility in late June 2021, shortly after the industrial customer received its process wastewater treatment operating permit.

TESI

In January 2022, Artesian Wastewater acquired Tidewater Environmental Services, Inc.  Artesian Wastewater operates as the parent holding company of Tidewater Environmental Services, Inc. dba Artesian Wastewater, or TESI.  TESI was incorporated in December 2004 and is a regulated entity that owns wastewater collection and treatment infrastructure and provides wastewater services to customers in Sussex County, Delaware as a regulated public wastewater service company. Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million intercompany note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware and included all residents within the Town of Milton.

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.

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 agencies.  Artesian Utility also contracts with developers and government agencies for design and construction of wastewater infrastructure within the Delmarva Peninsula.  In addition, as further discussed below, Artesian Utility operates the Water Service Line Protection Plan, or WSLP Plan, the Sewer Service Line Protection Plan, or SSLP Plan, and the Internal Service Line Protection Plan, or ISLP Plan.

Artesian Utility currently operates wastewater treatment facilities for the town of Middletown, in southern New Castle County, Delaware, or Middletown, under a 20-year contract that expires in July 2039.  The Company currently operates three wastewater treatment systems with a combined capacity of up to approximately 3.8 mgd.  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 in 2017, was formed to provide design, installation, maintenance and repair services related to existing or proposed storm water management systems in Delaware and the surrounding areas.  The ability to offer storm water services will complement the primary water and wastewater services that we provide.  Artesian Storm Water is not actively seeking new opportunities.

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Government Regulations

Overview

The Company is subject to federal, state and local laws and regulations in all of the jurisdictions in which it operates.

These regulations include state commission orders, environmental protection, securities and exchange activities, including financial reporting and internal controls processes, data protection and privacy, tax compliance, health and safety, labor and employment practices, and other general business activities.

State Regulatory Commission Matters

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 13 to our Consolidated Financial Statements for a full description of recent regulatory proceedings.

Service Territory Expansion

In Delaware, 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, or MDE, 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

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 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, results of operations and planned capital investments.
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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.

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 Lead and Copper Rule, or LCR, is a United States federal regulation that limits the concentration of lead and copper allowed in public drinking water at the consumer's tap, as well as limiting the permissible amount of pipe corrosion occurring due to the water itself.  The EPA first issued the rule in 1991 pursuant to the Safe Drinking Water Act.  The EPA promulgated the regulations following studies that concluded that copper and lead have an adverse effect on individuals.  The LCR sought to therefore limit the levels of these metals in water through improving water treatment centers, determining copper and lead levels for customers who use lead plumbing parts, and eliminating the water source as a source of lead and copper.  If the lead and copper levels exceed the "action levels", water suppliers are required to educate their consumers on how to reduce exposure to lead.  The EPA published a revised LCR in 2021, with a compliance deadline expected in 2024.  These revised requirements provide greater and more effective protection of public health by reducing exposure to lead and copper in drinking water. Implementation of the revised rule will better identify high levels of lead, improve the reliability of lead tap sampling results, strengthen corrosion control treatment requirements, expand consumer awareness and improve risk communication.  In addition, implementation of the revised rule will accelerate lead service line replacements by closing existing regulatory loopholes, propelling early action, and strengthening replacement requirements.  We are fully compliant with the current LCR and are actively examining the revised LCR to ensure we are fully compliant on or before the deadline date.

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.

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 134 operating and 61 observation and monitoring wells in our Delaware systems.  At December 31, 2021, we had allocation permits for 115 wells and 24 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.

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%.

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.
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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.
 
Materials and Supplies

We are highly dependent on the availability of essential materials and parts from our suppliers for expansion, construction and maintenance of our services.  The majority of the materials required for our water and wastewater utility business are typically under contract at fixed prices, however, supply chain issues associated with the COVID-19 pandemic resulted in price increases and  delays in procuring certain materials and equipment.  We have been successful in minimizing these delays and cost increases with thorough planning and pre-ordering, however there is no assurance that our future financial results or business operations will not be negatively affected.

Suppliers and Independent Contractors

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.  While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules.  The COVID-19 pandemic has delayed some of our construction projects and our lead time for material deliveries however, they have not impacted our ability to maintain our level of service to customers.  We are also dependent on the availability of electricity and purchased water at affordable prices.  Our electric costs and purchased water costs are at a fixed price under contract.

Employees and Human Capital Resources

As of December 31, 2021, we employed 245 full-time employees.  Of these employees, 56 were officers and managers; 116 were employed as operations personnel, including engineers, technicians, draftsman, maintenance and repair persons, meter readers and utility personnel; and 37 were employed in accounting, budgeting, information systems, human resources, customer relations and public relations.  The remaining 36 employees were administrative personnel.  The Company has no collective bargaining agreements with any of its employees, and its work force is not union organized or union represented.  We believe that our relations with our employees are good. Through ongoing employee development, competitive compensation and benefits, and a focus on health, safety and employee wellbeing, we strive to help our employees in all aspects of their lives.

We believe the Company’s success depends on its ability to attract, develop and retain key personnel.  We provide our employees with resources that contribute to their professional development, including technical training and performance reviews.  A core principle of our company is to promote from within and offer advancement opportunities at all levels of employment, which helps us retain talented employees.  We believe our management team has the experience, talent and dedication necessary to effectively execute our business goals and growth strategy.  We recognize that the skills, experience, diversity, industry knowledge and dedication of our employees significantly benefit our operations and performance.

We set pay ranges based on market data. When considering compensation, we consider factors such as an employee’s role, experience, and their performance.  We regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our compensation is fair and equitable.

Health and safety in the workplace for our employees is one of the Company’s core values.  Hazards in the workplace are proactively identified and actions are taken to maintain workplace safety.  We sponsor a wellness program designed to enhance physical, financial, and mental wellbeing for all our employees.  Throughout the year, we encourage healthy behaviors through regular communications, educational sessions and other incentives.  The COVID-19 pandemic further emphasized the importance of keeping our employees safe and healthy.  In response to the pandemic, the Company took actions to help protect our employees so that they could continue to perform their work in a safe and effective manner.

We use outside consultants and independent contractors on an as needed basis for various services.  We rely on our independent contractors to manage their respective employee relations so that the services they are contractually obligated to perform for us satisfy our requirements.  Management believes that through our own employees, coupled with the services provided by our independent contractors and outside consultants, we have sufficient human capital to continue to operate our business successfully.

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.artesianwater.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.
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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 occur, actual results may vary materially from our projections.  

Risk Related to the COVID-19 Pandemic

Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the outbreak of the coronavirus and its variants, or COVID-19.

The COVID-19 pandemic continues to present business challenges.  Our business, results of operations, financial condition, cash flows and stock price may be adversely affected by pandemics, epidemics or other public health emergencies, such as the outbreak of COVID-19.  We are considered an essential utility service company, as defined by the U.S. Department of Homeland Security.  Although we have continued to operate our business to date consistent with federal guidelines and state and local orders, the outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have an adverse effect on our operations.  Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which may adversely impact our stock price.  To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this report, such as those relating to our financial performance.  The ultimate impact of COVID-19 on our operational and financial performance in future periods, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, or local vaccine mandates, all of which are uncertain and cannot be predicted.

In addition, we rely heavily on our suppliers to meet quality standards and delivery schedules at our anticipated costs.  Materials could become more expensive or unavailable, or deliveries could be subject to longer lead times, which could have a material adverse impact on our business and results of operations.

If executive orders are implemented mandating COVID-19 vaccines across our workforce, it is uncertain to what extent compliance with any such vaccine mandates may result in adverse impacts such as workforce loss for us or our suppliers or reduced morale or efficiency.  If the adverse impact is significant for us or our suppliers, our results of operations could be adversely affected.

Risks Related to Our Operations

We are dependent upon the ability of our suppliers and independent contractors to meet performance specifications, quality standards and delivery schedules at our anticipated costs.

While we maintain an extensive qualification and performance review system to control risk associated with such reliance on third parties, failure of suppliers or independent contractors to meet commitments could adversely affect construction and maintenance schedules and our results of operations and financial condition.  We have been affected and could continue to be affected by supplier delays and increased costs which are outside of our control and could affect our results of operations. We are also dependent on the availability of electricity and purchased water at affordable prices.  While our electricity costs and purchased water costs are at fixed prices under contracts, after the expiration of these contracts, we may be required to pay higher electricity costs and purchased water costs.

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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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.

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.

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.

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.

Climate variability may cause weather volatility in the future and may impact water usage and related revenue, or may require additional expenditures to reduce risk associated with any increasing storm, flood, drought or other weather occurrences, all of which may not be fully recoverable in rates or otherwise.

Severe weather, climate variability patterns and natural or other events, such as increased precipitation and flooding, increased frequency and severity of storms and other weather events, may cause decreases in water supply, changes in water usage patterns, potential degradation of water quality, disruptions in water or wastewater services to our customers, and increases in expenditures to repair any damage.  Due to the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our financial condition, results of operations, cash flows and liquidity.  Although some or all potential expenditures and costs with respect to our regulated businesses could be recovered through rates we charge to our customers, there can be no assurance that the applicable regulatory authority would authorize recovery of such costs, in whole or in part, for any of these impacts.

Risks Related to Governmental Laws and Regulations

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 for the operation of our wastewater facilities.

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 and current 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 add systems or continue to operate facilities of our water or wastewater business.
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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, deferred regulatory assets or increased costs, our profitability may suffer.


We file rate increase requests, from time to time, to recover our investments in utility plant, deferred regulatory assets 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, deferred regulatory assets 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.

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 and regulations, 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.

Risks Related to Our Financial Statements and Operating Results

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 could be adversely impacted by inflation.

If inflation increases significantly, we may seek to increase our rates charged to customers.  We can provide no assurances that any future rate increase request will be approved by the applicable regulatory authority, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.
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Risks Related to Our Business Strategy

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.

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.

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.

Risks Related to Legal Uncertainty

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.

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.
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Risk Related to Cybersecurity and Technology

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

We rely on our information technology systems to manage 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.

Risk Associated with Management

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.

Risks Related to Our Common Stock

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.
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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.

The Company 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.  The Company 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.

The Company owns land, rights-of-way, easements, transmission and distribution mains, collection mains, pump facilities, treatment plants, lift stations, treatment/disposal facilities, storage tanks, meters, vehicles and related equipment and facilities.  The following table indicates our utility plant as of December 31, 2021.



Utility plant comprises:
           
In thousands
           
 
 
Estimated Useful Life
(In Years)
   
December 31, 2021
 
Utility plant at original cost
           
Utility plant in service-Water
           
Intangible plant
   
---
   
$
140
 
Source of supply plant
   
45-85
     
25,045
 
Pumping and water treatment plant
   
8-62
     
109,087
 
Transmission and distribution plant
               
Mains
   
81
     
320,767
 
Services
   
39
     
53,210
 
Storage tanks
   
76
     
29,972
 
Meters
   
26
     
28,778
 
Hydrants
   
60
     
16,789
 
General plant
   
5-31
     
62,604
 
 
               
Utility plant in service-Wastewater
               
Intangible plant
   
---
     
116
 
Treatment and disposal plant
   
21-81
     
43,725
 
Collection mains and lift stations
   
81
     
33,901
 
General plant
   
5-31
     
1,665
 
 
               
Property held for future use
   
---
     
5,536
 
Construction work in progress
   
---
     
18,481
 
 
           
749,816
 
Less – accumulated depreciation
           
159,385
 
 
         
$
590,431
 

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, 2021, 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.

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ITEM 3. LEGAL PROCEEDINGS

For a discussion of our legal proceedings, refer to Note 17 to our Consolidated Financial Statements.

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 8, 2022, the last closing sale price as reported by the Nasdaq Global Select Market was $49.45 per share.  As of March 8, 2022 there were 548 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 8, 2022, the last reported trade of the Class B Stock on the OTC Bulletin Board was at a price of $44.65 per share on February 23, 2022.  As of March 8, 2022, there were 140 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, 2021, we did not issue any unregistered shares of our Class A or Class B Stock.
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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 2016 (assuming a $100 investment on December 31, 2016, and the reinvestment of any dividends) through December 2021:

graphic

 
 
 
INDEXED RETURNS
 
Base Period
Years Ending December 31
Company Name / Index
2016
2017
2018
2019
2020
2021
Artesian Resources Corporation
 
100
 
123.91
 
115.00
 
126.11
 
129.22
 
165.68
S&P 500 Index
 
100
 
121.83
 
116.49
 
153.17
 
181.35
 
233.41
Peer Group
 
100
 
128.23
 
128.58
 
173.45
 
200.03
 
247.99

The Peer Group includes American States Water Company, American Water Works Company, Inc., Essential Utilities, 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.


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ITEM 6.
RESERVED

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 85.7% of total operating revenues for the year ended December 31, 2021.  Our profitability is also attributed to the various contract operations, water, sewer and internal SLP Plans and other services we provide.  Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature.  In the event temperatures during the typically warmer months are cooler than expected, or rainfall is greater than expected, the demand for water may decrease and our revenues may be adversely affected.  We believe the effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our wastewater services, contract operations and other services provide a revenue stream that is not affected by changes in weather patterns.

While water sales are our primary source of revenues, we continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. We also continue to explore and develop relationships with developers and municipalities in order to increase revenues from contract water and wastewater operations, wastewater management services, and design, construction and engineering services. We plan to continue developing and expanding our contract operations and other services in a manner that complements our growth in water service to new customers. Our anticipated growth in these areas is subject to changes in residential and commercial construction, which may be affected by interest rates, inflation and general housing and economic market conditions.  We anticipate continued growth in our non-regulated division due to our water, sewer, and internal SLP Plans.

COVID-19 Pandemic

As of December 31, 2021, the Company’s financial results and business operations have not been materially adversely affected by the coronavirus, or COVID-19, outbreak, which was declared a pandemic in March 2020.  However, we have experienced delays in procuring some materials and supplies.  While we have been successful in managing these delays, there is no assurance that our future financial results or business operations will not be negatively affected.  The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.  Management is actively monitoring the situation and impacts on its operations, suppliers, industry, and workforce.

Inflation


We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.  The cumulative effect of inflation results in significantly higher facility replacement costs which must be recovered from future cash flows.  Our ability to recover increases in investments in facilities is dependent upon future rate increases, which are subject to approval by the applicable regulatory authority.  We can provide no assurances that any future rate increase request will be approved, and if approved, we cannot guarantee that any rate increase will be granted in a timely manner and/or will be sufficient in amount to cover costs for which we initially sought the rate increase.  The impact of inflation could adversely affect our results of operations, financial position or cash flows.

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, 2021, the number of metered water customers in Delaware increased approximately 1.5% compared to December 31, 2020.  The number of metered water customers in Maryland increased approximately 2.2% compared to December 31, 2020.  The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2020.  For the year ended December 31, 2021, approximately 8.3 billion gallons of water were distributed in our Delaware systems and approximately 134.7 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 Maryland.  It is not currently providing these services in Maryland.  Our residential and commercial wastewater customers are billed a flat monthly fee, which contributes to providing a revenue stream unaffected by weather.  The number of Delaware wastewater customers increased approximately 14.8% compared  to December 31, 2020.  In January 2022, Artesian Wastewater completed its agreement to acquire Tidewater Environmental Services, Inc, or TESI, which more than doubled our current number of wastewater customers served in Sussex County, Delaware.  The acquisition agreement with TESI is discussed further in the “Strategic Direction and Recent Developments” section below.
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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 30, 2021, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.9%, 2.1% and 28.6%, respectively, compared to December 31, 2020.  The non-utility customers enrolled in one of our three protections plans increased 3.7%.

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.  Our strategy has included a focus on building strategic partnerships with county governments, municipalities and developers.  By providing water and wastewater services, we believe we are positioned as the primary resource for developers and communities throughout the Delmarva Peninsula seeking to fill both needs simultaneously.  We believe we have a proven ability to acquire and integrate high growth, reputable entities, through which we have captured additional service territories that will serve as a base for future revenue.  We believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators, municipalities, developers and customers in both existing and prospective service areas.

In our regulated water division, our strategy is to focus on a wide spectrum of activities, which include strategic acquisitions of existing systems, expanding certificated service area, identifying new and dependable sources of supply, developing the wells, treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water.  Our strategy includes focused efforts to expand through strategic acquisitions and in new regions added to our Delaware service territory over the last 10 years.  We plan to expand our regulated water service area in the Cecil County designated growth corridor and to expand our business through the design, construction, operation, management and acquisition of additional water systems.  The expansion of our exclusive franchise areas elsewhere in Maryland and the award of contracts will similarly enhance our operations within the state.

Our ability to develop partnerships with various county governments, municipalities and developers has provided a number of opportunities.  In the last four years, we completed seven acquisitions including asset purchase agreements with municipal and developer/homeowner association operated systems.  Some recent acquisitions are noted below.

On August 3, 2020, Artesian Water completed the purchase of substantially all of the water system operating assets from the City of Delaware City, a Delaware municipality, or Delaware City, including the right to provide water service to Delaware City’s existing customers.  The total purchase price was $2.1 million.  Artesian Water had previously acquired the water assets of an area annexed by Delaware City, known as Fort DuPont, which was earmarked for growth and expansion of Delaware City.

On April 2, 2020, Artesian Water completed its purchase of substantially all of the operating assets of the water system of the Town of Frankford, a Delaware municipality, or Frankford, including the right to provide water service to Frankford’s existing customers, or the Frankford Water System.  Pursuant to the terms of the agreement, Frankford transferred to Artesian Water all of Frankford’s right, title and interest in and to all of the plant and equipment, associated real property, contracts, easements and permits possessed by Frankford at closing related to the Frankford Water System.  The total purchase price was $3.6 million. The Delaware Drinking Water State Revolving Fund issued a $1.5 million appropriation in July 2021 to partially offset the purchase price.

On February 16, 2022, Artesian Water signed an agreement, or the Asset Purchase Agreement, to purchase from the Town of Clayton, a Delaware municipality, or Clayton, substantially all of the operating assets of Clayton’s water system, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Water System.  Pursuant to the terms of the Asset Purchase Agreement, Clayton shall transfer to Artesian Water all of Clayton’s right, title and interest in and to substantially all of the municipal water utility, plant and equipment, associated real property, contracts, easements and permits possessed by Clayton at closing related to the Water System.  The total purchase price is $5.0 million, less the current payoff amount of any secured debt or debt associated with the Water System.  Closing on this transaction is pending due diligence and approval by the Delaware Public Service Commission related to the transfer of exclusive franchise territory.

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.
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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. There are numerous locations in Sussex County where Artesian Wastewater’s and Sussex County’s facilities are 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.  In addition, 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.  In addition, since closing the transaction with TESI noted below, Artesian Wastewater will be the sole regional regulated wastewater utility in Delaware, which we believe will enable us to increase efficiencies in the treatment and disposal of wastewater and provide additional opportunities to expand our wastewater operations.

On January 14, 2022, Artesian Wastewater acquired TESI, a wholly-owned subsidiary of Middlesex Water Company, or Middlesex, that provides regulated wastewater services in Delaware.  Artesian Wastewater purchased all of the stock of TESI from Middlesex for $6.4 million in cash and other consideration, including, forgiveness of a $2.1 million intercompany note due from Middlesex.  This acquisition more than doubled the number of wastewater customers served in Sussex County, Delaware and included all residents in the Town of Milton.

Artesian Wastewater began operating its Sussex Regional Recharge Facility in late June 2021, shortly after our large industrial customer received its process wastewater treatment operating permit.  The associated customer agreement includes a required minimum wastewater flow.  Pursuant to a settlement agreement, for the calendar year 2021 only, the minimum required volume of wastewater was prorated on a seven month basis beginning June 1, 2021 and ending December 31, 2021.

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, aging infrastructure and acquisitions.  Our planned and budgeted capital improvements over the next three years include projects for water infrastructure improvements and expansion in both Delaware and Maryland and wastewater infrastructure improvements and expansion in Delaware.  The DEPSC and MDPSC have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers.

In our non-regulated division, we continue pursuing opportunities to expand our contract operations.  Through Artesian Utility, we will seek to expand our contract design, engineering and construction services of water and wastewater facilities for developers, municipalities and other utilities.  We also anticipate continued growth due to our water, sewer and internal SLP Plans.  Artesian Development owns two nine-acre parcels of land, located in Sussex County, Delaware, which will allow for construction of a water treatment facility and wastewater treatment facility.  Artesian Storm Water was formed to expand contract work related to the design, installation, maintenance and repair services associated with existing or proposed storm water management systems in Delaware and the surrounding areas.

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.  Business combinations pursuant to ASC Topic 805 may result in a purchase price allocation and the acquired assets are required to be evaluated by the applicable regulatory agency.  Cost includes direct labor, materials, AFUDC (see description in Note 1-Utility Plant) 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, 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.
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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, using 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.  An allowance for doubtful accounts is calculated as a percentage of total associated revenues based upon historical trends and adjusted for current conditions.  We mitigate our exposure to credit losses by discontinuing services in the event of non-payment; accordingly, the related allowance for doubtful accounts and associated bad debt expense has not been significant.    However, the Company experienced longer receivable cycles throughout 2020, and into 2021, related to temporary executive orders issued by state governmental agencies requiring utility companies to prohibit late fees and service disconnections for non-payment, resulting in an adjustment to increase the reserve for bad debt.  Account balances are written off against the allowance 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.

Deferred income taxes are provided in accordance with FASB ASC Topic 740 on all differences between the tax basis of assets and liabilities and the amounts at which they are carried in the consolidated financial statements based on the enacted tax rates expected to be in effect when such temporary differences are expected to reverse. The Company’s rate regulated utilities recognize regulatory liabilities, to the extent considered in ratemaking, for deferred taxes provided in excess of the current statutory tax rate and regulatory assets for deferred taxes provided at rates less than the current statutory rate.  Such tax-related regulatory assets and liabilities are reported at the revenue requirement level and amortized to income as the related temporary differences reverse, generally over the lives of the related properties.

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, 2021.
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Results of Operations

2021 Compared to 2020

Operating Revenues

Revenues totaled $90.9 million for the year ended December 31, 2021, $2.7 million, or 3.1%, more than revenues for the year ended December 31, 2020.

Water sales revenue increased $1.3 million, or 1.8%, for the year ended December 31, 2021 from the corresponding period in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in non-residential consumption revenue.  We realized 85.7% and 86.8% of our total operating revenue for the years ended December 31, 2021 and December 31, 2020, respectively, from the sale of water.

Other utility operating revenue, predominately consisting of wastewater revenues, increased approximately $0.7 million, or 10.3%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  This increase is mainly due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue resulting from adjustments related to the amounts recorded for the minimum required volume of wastewater under contract, pursuant to a settlement agreement.  In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted.

Non-utility operating revenue increased approximately $0.7 million, or 13.7%, for the year ended December 31, 2021 compared to the same period in 2020.  The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue.


Percentage of Operating Revenues
                 
 
 
2021
   
2020
   
2019
 
Water Sales
                 
Residential
   
53.0
%
   
53.8
%
   
52.8
%
Commercial
   
19.4
     
19.5
     
21.0
 
Industrial
   
0.1
     
0.1
     
0.1
 
Government and Other
   
13.2
     
13.4
     
14.1
 
Other utility operating revenues
   
7.9
     
7.4
     
5.9
 
Non-utility operating revenues
   
6.4
     
5.8
     
6.1
 
Total
   
100.0
%
   
100.0
%
   
100.0
%

Residential

Residential water service revenues in 2021 amounted to $48.2 million, an increase of $0.8 million, or 1.7%, above the $47.4 million recorded in 2020, primarily due to an increase in fixed fee revenue related to customer growth and an increase in overall water consumption.  The volume of water sold to residential customers increased to 4,230 million gallons in 2021 compared to 4,209 million gallons in 2020, a 0.5% increase.  The number of residential customers served increased by approximately 1,400, or 1.6%, in 2021.

Commercial

Water service revenues from commercial customers in 2021 increased by 2.6%, to $17.6 million in 2021 from $17.2 million in 2020, primarily due to an increase in overall water consumption.  The volume of water sold to commercial customers increased to 2,237 million gallons in 2021 compared to 2,180 million gallons sold in 2020, an increase of 2.6%.

Industrial

Water service revenues from industrial customers decreased to $49,000 in 2021 from $71,000 in 2020.  The volume of water sold to industrial customers decreased to 5.3 million gallons in 2021 from 9.2 million gallons in 2020.

Government and Other

Government and other water service revenues in 2021 increased by 1.0%, to $12.0 million in 2021 from $11.8 million in 2020, primarily due to an increase in overall water consumption.  The volume of water sold to government and other customers increased to 1,155 million gallons in 2021 compared to 1,050 million gallons in 2020, an increase of 10.0%.

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 $6.5 million in 2020 to $7.2 million in 2021.  This increase is primarily due to an increase in wastewater revenue related to residential customer growth and housing development growth, mostly offset by a decrease in industrial wastewater service revenue.  In addition, service and finance charges increased, related to executive orders that were issued by state governmental agencies in 2020 requiring utility companies to prohibit late fees and service disconnections for non-payment that since have been lifted.

Non-Utility Operating Revenue

Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased by 13.7%, to $5.8 million in 2021 from $5.1 million in 2020.  The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure for a third party and an increase in Service Line Protection Plan revenue.
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Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $1.9 million, or 4.0%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  The components of the change in operating expenses primarily include an increase in utility operating expenses of $1.1 million, an increase in non-utility operating expenses of $0.7 million and an increase in property and other taxes of $0.2 million.

Utility operating expenses increased $1.1 million, or 2.7%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.  The net increase is primarily related to the following.

Repair and maintenance costs increased $1.0 million, related to an increase in maintenance costs primarily associated with water and wastewater treatment facilities and equipment, an increase in water treatment filter replacements, an increase in tank painting costs under contract, and an increase in fuel costs.
Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall compensation.
Water treatment costs increased $0.1 million, primarily related to an increase in chemicals and associated equipment during 2021 in both water and wastewater operations.
Administrative costs decreased $0.5 million, primarily due to a decrease in bad debt reserve related to non-payment of water customer receivable balances resulting from the COVID-19 pandemic, which was partially offset by increases in training and overall employee related costs, legal expenses associated with the transition of the 401(k) retirement plan to a new record keeper, and a settlement agreement concerning the payment of fees by an industrial wastewater customer.

Non-utility operating expenses increased 20.3%, primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract, an increase in plumbing services related to Service Line Protection Plan repairs, and an increase in payroll and employee benefit costs.

Property and other taxes increased $0.2 million, or 3.4%, 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
 
 
 
2021
   
2020
   
2019
 
Payroll and Associated Expenses
   
49.9
%
   
51.0
%
   
50.1
%
Administrative
   
12.3
     
14.1
     
13.6
 
Purchased Water
   
9.5
     
9.9
     
9.9
 
Repair and Maintenance
   
10.2
     
8.3
     
9.3
 
Purchased Power
   
5.4
     
5.5
     
5.5
 
Water Treatment
   
4.0
     
3.7
     
3.8
 
Non-utility Operating
   
8.7
     
7.5
     
7.8
 
 
                       
Total
   
100.0
%
   
100.0
%
   
100.0
%

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.1% for the year ended December 31, 2021, compared to 55.6% for the year ended December 31, 2020.

Depreciation and amortization expense increased $0.7 million, or 6.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Other Income, Net

Other income, net remained consistent.  Miscellaneous income increased $0.3 million related to an increase in the annual patronage refund from CoBank, ACB.  The primary refund calculation for both 2021 and 2020 was based on 0.8% of the average loan balance outstanding.  In addition, a special patronage distribution based on 0.2% and 0.1% of the average loan balance outstanding was refunded in March 2021 and March 2020, respectively.  Allowance for funds used during construction, or AFUDC, decreased $0.3 million as a result of lower long-term construction activity subject to AFUDC for the twelve months ended December 31, 2021 compared to the same period in 2020. 

Interest Charges

Long-term debt interest decreased $0.1 million, primarily related to amortizing debt.  Short-term debt interest increased $0.1 million, primarily related to higher short-term borrowing levels throughout 2021.

Net Income

Our net income applicable to common stock remained consistent.  Operating revenues increased $2.7 million, while operating expenses increased $2.7 million.

Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2020 and 2019 and is incorporated herein by reference.   
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Liquidity and Capital Resources

Overview

The Company’s primary sources of liquidity for the year ended December 31, 2021 were $31.9 million of cash provided by operating activities, $15.8 million in net contributions and advances from developers, $4.1 million from the issuance of long-term debt and $1.4 million in net proceeds from the issuance of common stock.  These funds were used to invest $41.5 million in capital expenditures and to pay dividends of approximately $9.8 million.

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 utility plant in 2022 will be approximately $50.4 million.  Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2022 are anticipated to be approximately $10.4 million.  

Operating Activities

Our primary source of liquidity for the year ended December 31, 2021 was $31.9 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.  We will continue to borrow on available lines of credit in order to satisfy current liquidity needs.  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 2021 was to continue to provide high quality reliable service to our growing service territory.  Capital expenditures during 2021 were $40.8 million compared to $40.0 million invested during the same period in 2020.  During 2021, we invested approximately $18.4 million for our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains and for installing new mains.  We invested $8.5 million to enhance or improve existing treatment facilities and replace aging wells and pumping equipment to better serve our customers.  We invested $1.7 million for equipment purchases, computer hardware and software upgrades and transportation equipment.  Developers financed $6.4 million for the installation of water mains and hydrants in 2021 compared to $4.1 million in 2020.  We invested $1.2 million to upgrade and automate our meter reading equipment.  We invested approximately $2.5 million in mandatory utility plant expenditures due to governmental highway projects, which required the relocation of water service mains in addition to facility improvements and upgrades.  We invested $2.1 million in wastewater projects in Delaware.

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

In thousands
 
2021
   
2020
   
2019
 
   
Source of supply, treatment and pumping
 
$
9,681
   
$
14,999
   
$
13,000
 
Transmission and distribution
   
20,951
     
15,993
     
13,789
 
General plant and equipment
   
1,739
     
3,089
     
3,180
 
Developer financed utility plant
   
6,866
     
4,132
     
4,573
 
Wastewater facilities
   
2,133
     
2,586
     
7,021
 
Allowance for Funds Used During Construction, AFUDC
   
(556
)
   
(781
)
   
(886
)
Total
 
$
40,814
   
$
40,018
   
$
40,677
 
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Of the $67.2 million gross investment expected in 2022, approximately $15.1 million will be invested in upgraded and improved booster stations, a new elevated storage tank, new water treatment facilities, water treatment 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.  Approximately $12.5 million will be invested in renewals associated with the rehabilitation of aging infrastructure.  Approximately $12.3 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory.  Approximately $8.7 million will be invested in the construction of force mains used for the transmission of wastewater to plants.  Approximately $8.0 million will be invested into the ongoing construction of a regional wastewater treatment plant along with improvements to existing wastewater treatment plants and wastewater pumping stations.  Approximately $4.9 million will be invested in the relocations of facilities as a result of government mandates.  Approximately $4.8 million will be invested in general plant, which includes transportation and equipment upgrades, new corporate automation, and building renovations.  Additionally, 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.

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 2022 is expected to be offset by developer contributions of $10.8 million and grant funds from the State of Delaware of $6.0 million, for a net investment of $50.4 million in 2022. The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers.

Financing Activities

We have several sources of liquidity to finance our investment in utility plant and other fixed assets.  We estimate that future investments will be financed by our operations and external sources.  We expect to fund our activities for the next twelve months using our projected cash generated from operations, bank credit lines, a $30 million first mortgage bond, state revolving fund loans, government grants, and other capital market financing as needed to provide sufficient working capital to maintain normal operations, to meet our financing requirements and to expand through strategic acquisitions.  There is no assurance that we will be able to secure funding on terms acceptable to us, or at all.  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.

Material Cash Requirements

Lines of Credit and Long Term Debt

At December 31, 2021, 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, 2021, there was $31.3 million of available funds under this line of credit.  The interest rate for borrowings under this line is the London Interbank Offered Rate, or LIBOR, plus 1.00%.  It is expected that the LIBOR rate for USD currency after June 30, 2023.  As a result, it is possible that, in the future, the LIBOR rate may become unavailable or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on LIBOR Rate Loans.  In light of this eventuality, Citizens currently has initiatives underway to identify new or alternative reference rates to be used in place of the LIBOR rate.  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 22, 2022 or any date on which Citizens demands payment. The Company expects to renew this line of credit.

At December 31, 2021, 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, 2021, there was $2.0 million of available funds under this line of credit.  The interest rate for borrowings under this line allows the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company has historically used the weekly variable interest rate.  The patronage refunds earned by Artesian Water for 2021 and 2020 were $1.4 million and $1.0 million respectively.  The term of this line of credit expires on July 30, 2022. Artesian Water expects to renew this line of credit.

The Company’s material cash requirements include the following lines of credit commitments and contractual obligations:


Material Cash Requirements
 
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)
 
$
6,623
   
$
13,169
   
$
13,056
   
$
188,219
   
$
221,067
 
State revolving fund loans (principal and interest)
   
820
     
1,535
     
1,122
     
4,336
     
7,813
 
Lines of credit
   
26,703
     
---
     
---
     
---
     
26,703
 
Promissory note (principal and interest)
   
961
     
1,921
     
1,923
     
11,576
     
16,381
 
Operating leases
   
29
     
48
     
49
     
1,335
     
1,461
 
Operating agreements
   
63
     
77
     
81
     
825
     
1,046
 
Unconditional purchase obligations
   
1,518
     
1,489
     
1,403
     
---
     
4,410
 
Tank painting contractual obligation
   
392
     
588
     
---
     
---
     
980
 
Total contractual cash obligations
 
$
37,109
   
$
18,827
   
$
17,634
   
$
206,291
   
$
279,861
 
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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.  As of December 31, 2021, 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 and promissory note obligation have an amortizing mortgage 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 February 7, 2022, Artesian Water entered into an interest rate lock agreement, or the Agreement, with CoBank.  The Company is seeking to finance a $30 million principal amount First Mortgage Bond, or the Bond.  The Agreement allows for a maturity period of 25 years and a fixed interest rate of 4.43% per annum, or the Fixed Rate, for the Bond.  The Agreement is effective through May 7, 2022, or the Settlement Date.  Pursuant to the Agreement, the Bond is not subject to redemption based on mortgage style amortization.  Interest on the outstanding principal balance will be payable quarterly on the 30th day of January, April, July and October each year.  The proceeds from the sale of the Bond shall be used to pay down outstanding lines of credit of Artesian Water, with any additional proceeds used to fund future capital investments in Artesian Water.  Closing on the debt financing is subject to approval by the DEPSC.  Also pursuant to the Agreement, the Company agrees to pay to CoBank, on demand, a broken funding charge if the Company does not, for any reason whatsoever, borrow the entire $30 million principal amount on or before the Settlement Date.  The broken funding charge shall be in an amount equal to the present value of the sum of all losses and expenses incurred by CoBank in retiring, liquidating, or reallocating any debt, obligation, or cost incurred or allocated by CoBank to fund or hedge the Fixed Rate.

On July 15, 2021, Artesian Water entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreement, the Department agreed to advance to Artesian Water up to approximately $2.5 million, or the Loan, to finance all or a portion of the cost to acquire the Town of Frankford water system and to replace water transmission mains and renew services and hydrants in the Town of Frankford, collectively, the Project.  In accordance with the Financing Agreement, Artesian Water will from time to time request funds under the Loan as it incurs costs in connection with the Project.  Artesian Water requested an initial draw of approximately $1.5 million for the acquisition of the Town of Frankford water system.  Upon receipt of the initial draw, an amount equal to approximately $1.5 million was forgiven by the Department and is no longer considered outstanding or unpaid principal under the Financing Agreement.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 1.0% per annum and an administrative fee at the rate of 1.0% per annum.

On April 28, 2020, Artesian Water entered into three financing agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department.  Under the Financing Agreements, the Department agreed to advance to Artesian Water up to approximately $1.7 million, $1.0 million and $1.3 million, collectively, the Loans, to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware, collectively, the Projects.  The Company shall pay to the Department, on the principal amount drawn down and outstanding from the date drawn, interest at a rate of 0.6% per annum and an administrative fee at the rate of 0.6% per annum.  As of December 31, 2021, the full amount that will be borrowed under the Loans is approximately $2.6 million.

In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican effective from September 2018 through May 2022.  In February 2021, Artesian Water entered into a new electric supply contract with MidAmerican that is effective from May 2021 to May 2025.  The fixed rate was lowered 5.6% starting in May 2021.  In August 2018, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2019 through May 2022.  In February 2022, Artesian Water Maryland entered into an electric supply agreement with Constellation NewEnergy, Inc., effective from May 2022 through November 2025.
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Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under two interconnection agreements with the Chester Water Authority.  One agreement, that expired on December 31, 2021, had a “take or pay” clause requiring us to purchase 3 million gallons per day.  The other agreement is effective from January 1, 2022 through December 31, 2026, includes automatic five year renewal terms, unless terminated by either party, and has a “take or pay” clause requiring us to purchase water on a step down schedule through July 5, 2022, thereafter requiring us to purchase a minimum of 0.5 million gallons per day.  In addition, payments for unconditional purchase obligations reflect minimum water purchase obligations based on a contract rate under our interconnection agreement with the Town of North East, which expires June 26, 2024.

In April 2021, Artesian Water entered into a 3-year agreement with Worldwide Industries Corporation effective July 1, 2021 to paint elevated water storage tanks.  Pursuant to the agreement, the total expenditure for the three years is $1.2 million.





IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 18 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 and the term of the promissory note, 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, 2021 were approximately $26.7 million.  An increase in the variable interest rates will result in an increase in the cost of borrowing on these variable rate lines of credit.  Also, changes in LIBOR could affect our operating results and liquidity.  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.

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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
In thousands

ASSETS
 
December 31, 2021
   
December 31, 2020
 
Utility plant, at original cost less accumulated depreciation
 
$
590,431
   
$
559,561
 
Current assets
               
Cash and cash equivalents
   
92
     
28
 
Accounts receivable (less allowance for doubtful accounts 2021 - $429; 2020-$862)
   
8,863
     
10,162
 
Income tax receivable
   
2,234
     
629
 
Unbilled operating revenues
   
1,080
     
1,166
 
Materials and supplies
   
1,933
     
1,535
 
Prepaid property taxes
   
2,306
     
1,891
 
Prepaid expenses and other
   
2,652
     
2,208
 
Total current assets
   
19,160
     
17,619
 
Other assets
               
Non-utility property (less accumulated depreciation 2021-$919; 2020-$865)
   
3,751
     
3,796
 
Other deferred assets
   
5,097
     
5,309
 
Operating lease right of use assets
   
451
     
460
 
Total other assets
   
9,299
     
9,565
 
Regulatory assets, net
   
6,321
     
6,473
 
Total Assets
 
$
625,211
   
$
593,218
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Stockholders' equity
               
Common stock
 
$
9,414
   
$
9,357
 
Preferred stock
   
     
 
Additional paid-in capital
   
104,989
     
103,463
 
Retained earnings
   
63,607
     
56,606
 
Total stockholders' equity
   
178,010
     
169,426
 
Long-term debt, net of current portion
   
143,259
     
142,333
 
 
   
321,269
     
311,759
 
Current liabilities
               
Lines of credit
   
26,703
     
26,813
 
Current portion of long-term debt
   
1,591
     
1,757
 
Accounts payable
   
10,206
     
6,341
 
Accrued expenses
   
4,534
     
3,414
 
Overdraft payable
   
30
     
105
 
Accrued interest
   
917
     
930
 
Income taxes payable
   
     
237
 
Customer and other deposits
   
2,273
     
2,060
 
Other
   
1,448
     
2,067
 
Total current liabilities
 
$
47,702
   
$
43,724
 
 
               
Commitments and contingencies (Note 11)
   
     
 
 
               
Deferred credits and other liabilities
               
Net advances for construction
 
$
4,295
   
$
4,578
 
Operating lease liabilities
   
440
     
432
 
Regulatory liabilities
   
21,260
     
21,681
 
Deferred investment tax credits
   
456
     
473
 
Deferred income taxes
   
53,133
     
50,313
 
Total deferred credits and other liabilities
 
$
79,584
   
$
77,477
 
 
               
Net contributions in aid of construction
   
176,656
     
160,258
 
Total Liabilities and Stockholders' Equity
 
$
625,211
   
$
593,218
 
 
The notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share amounts

 
 
For the Year Ended December 31,
 
 
 
2021
   
2020
   
2019
 
 
                 
Operating revenues
                 
Water sales
 
$
77,821
   
$
76,476
   
$
73,609
 
Other utility operating revenue
   
7,195
     
6,525
     
4,916
 
Non-utility operating revenue
   
5,843
     
5,140
     
5,070
 
Total Operating Revenues 
   
90,859
     
88,141
     
83,595
 
                         
Operating expenses
                       
Utility operating expenses
   
41,414
     
40,338
     
39,189
 
Non-utility operating expenses
   
3,942
     
3,277
     
3,315
 
Depreciation and amortization
   
11,885
     
11,143
     
10,803
 
Taxes
                       
State and federal income tax expense (benefit)
                       
Current
   
3,360
     
8,073
     
8,420
 
Deferred
   
2,377
     
(2,389
)
   
(3,239
)
Property and other taxes
   
5,587
     
5,404
     
5,182
 
  Total Operating Expenses
   
68,565
     
65,846
     
63,670
 
 
                       
Operating income
   
22,294
     
22,295
     
19,925
 
 
                       
Other income, net
                       
Allowance for funds used during construction (AFUDC)
   
823
     
1,170
     
1,410
 
Miscellaneous
   
1,302
     
971
     
614
 
 
   
2,125
     
2,141
     
2,024
 
 
                       
Income before interest charges
   
24,419
     
24,436
     
21,949
 
 
                       
Interest charges
   
7,592
     
7,619
     
7,024
 
 
                       
Net income applicable to common stock
 
$
16,827
   
$
16,817
   
$
14,925
 
 
                       
Income per common share:
                       
Basic
 
$
1.79
   
$
1.80
   
$
1.61
 
Diluted
 
$
1.79
   
$
1.79
   
$
1.60
 
 
                       
Weighted average common shares outstanding:
                       
Basic
   
9,394
     
9,327
     
9,277
 
Diluted
   
9,426
     
9,369
     
9,326
 
 
                       
Cash dividends per share of common stock
 
$
1.05
   
$
1.01
   
$
0.98
 

The notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands

 
For the Year Ended December 31,
 
 
 
2021
   
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income
 
$
16,827
   
$
16,817
   
$
14,925
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
   
11,885
     
11,143
     
10,803
 
Deferred income taxes, net
   
2,803
     
(1,963
)
   
(2,813
)
Stock compensation
   
193
     
178
     
181
 
AFUDC, equity portion
   
(556
)
   
(781
)
   
(886
)
 
                       
Changes in assets and liabilities:
                       
Accounts receivable, net of allowance for doubtful accounts
   
94
     
(2,324
)
   
(94
)
Income tax receivable
   
(1,605
)
   
(610
)
   
753
 
Unbilled operating revenues
   
86
     
45
     
230
 
Materials and supplies
   
(398
)
   
(271
)
   
195
 
Income taxes payable
   
(28
)
   
(106
)
   
343
 
Prepaid property taxes
   
(415
)
   
63
     
(84
)
Prepaid expenses and other
   
(444
)
   
42
     
(126
)
Other deferred assets
   
(445
)
   
(409
)
   
(361
)
Regulatory assets
   
115
     
390
     
388
 
Regulatory liabilities
   
(535
)
   
(635
)
   
(642
)
Accounts payable
   
3,547
     
(1,835
)
   
(11
)
Accrued expenses
   
(71
)
   
301
     
(789
)
Accrued interest
   
(13
)
   
100
     
46
 
Revenue reserved for refund
   
     
     
(3,298
)
Customer deposits and other
   
270
     
213
     
110
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
31,310
     
20,358
     
18,870
 
 
                       
CASH FLOWS USED IN INVESTING ACTIVITIES
                       
Capital expenditures (net of AFUDC, equity portion)
   
(40,814
)
   
(34,277
)
   
(40,677
)
Investment in acquisitions
   
     
(5,741
)
   
 
Proceeds from sale of assets
   
90
     
46
     
51
 
NET CASH USED IN INVESTING ACTIVITIES
   
(40,724
)
   
(39,972
)
   
(40,626
)
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Net (repayments) borrowings under lines of credit agreements
   
(110
)
   
19,313
     
(8,442
)
(Decrease) increase in overdraft payable
   
(75
)
   
90
     
(102
)
Net advances and contributions in aid of construction
   
15,817
     
9,280
     
10,507
 
Net proceeds from issuance of common stock
   
1,390
     
1,539
     
1,033
 
Issuance of long-term debt
   
4,126
     
     
30,000
 
Dividends paid
   
(9,826
)
   
(9,376
)
   
(9,122
)
Debt issuance costs
   
(19
)
   
(28
)
   
(90
)
Principal repayments of long-term debt
   
(1,825
)
   
(1,772
)
   
(1,725
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
9,478
     
19,046
     
22,059
 
 
                       
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
64
     
(568
)
   
303
 
 
                       
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
28
     
596
     
293
 
 
                       
CASH AND CASH EQUIVALENTS AT END OF YEAR
 
$
92
   
$
28
   
$
596
 
 
                       
Non-cash Investing and Financing Activity:
                       
Utility plant received as construction advances and contributions in aid of construction
 
$
3,538
   
$
2,403
   
$
3,716
 
Contractual amounts of contributions in aid of construction due from developers included in accounts receivable
 
$
545
   
$
1,705
   
$
710
 
Contractual amounts of contributions in aid of construction received from developers previously included in accounts receivable
 
$
1,749
   
$
781
   
$
2,050
 
  Amounts included in accounts payable and accrued payables related to capital expenditures
 
$
3,763
   
$
3,122
   
$
7,332
 
                         
Supplemental Cash Flow Information:
                       
Interest paid
 
$
7,605
   
$
7,519
   
$
6,978
 
Income taxes paid
 
$
5,181
   
$
8,792
   
$
7,332
 
                         
Purchase price allocation of investment in acquisitions:
                       
Utility plant
 
$
   
$
5,118
   
$
 
Other deferred assets/goodwill
   
     
623
     
 
Total investment in acquisitions
 
$
   
$
5,741
   
$
 

The notes are an integral part of the consolidated financial statements.
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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, 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
 
 
                                                       
Net income
   
     
     
     
     
     
16,817
     
16,817
 
Cash dividends declared
                                                       
Common stock
   
     
     
     
     
     
(9,376
)
   
(9,376
)
Issuance of common stock
                                                       
Dividend reinvestment plan
   
11
     
     
11
     
     
377