ARTESIAN RESOURCES CORP 10-K

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 and wastewater services in our regulated utility business. Our regulated utility segment comprised 90.7% o f total operating revenues for the year ended December 31, 2022 and 93.4% for the year ended December 31, 2021. 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 these effects of weather are short term and do not materially affect the execution of our strategic initiatives. Our wastewater services provide a revenue stream that is not affected by these changes in weather patterns. We continue to seek growth opportunities to provide wastewater services in Delaware and the surrounding areas. Our profitability is also attributed to other non-utility business, such as various contract operations, water, sewer and internal SLP Plans and other services we provide. Our contract operations, SLP Plans and other services also provide a revenue stream that is not affected by changes in weather patterns. 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-utility subsidiaries due to our water, sewer, and internal SLP Plans. 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. 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 in 2021 and 2022. We have been successful in minimizing these delays with thorough planning and pre-ordering. In addition, as of December 31, 2022, we have increased our quantity of materials and supplies, at an increased value of approximately $2.8 million, reported in Current Assets – Materials and Supplies on the Company’s Consolidated Balance Sheets. However, there is no assurance that our future financial results or business operations will not be negatively affected. COVID-19 Pandemic As of December 31, 2022, 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 as well as increased costs. 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. Regulated Water Subsidiaries 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, 2022, the number of metered water customers in Delaware increased approximately 3.2% compared to December 31, 2021. The number of metered water customers in Maryland increased approximately 1.2% compared to December 31, 2021. The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2021. For the year ended December 31, 2022, approximately 8.6 billion gallons of water were distributed in our Delaware systems and approximately 136.6 million gallons of water were distributed in our Maryland systems. 20 Table of Contents Regulated Wastewater Subsidiaries 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 Artesian’s Delaware wastewater customers more than doubled compared to December 31, 2021, following the acquisition of Tidewater Environmental Services, Inc., or TESI . This acquisition agreement is discussed further in the “Strategic Direction and Recent Developments” section below. Non-Utility Subsidiaries Artesian Utility provides contract water and wastewater operation services to private, municipal, and governmental institutions. Artesian Utility also offers three protection plans to customers, the WSLP Plan, the SSLP Plan, and the ISLP Plan. SLP Plan customers are billed a flat monthly or quarterly rate, which contributes to providing a revenue stream unaffected by weather. There has been consistent customer growth over the years. As of December 31, 2022, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 2.4%, 0.9% and 6.4%, respectively, compared to December 31, 2021. The non-utility customers enrolled in one of our three protections plans increased 2.5%. 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 subsidiaries, 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. 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 attainable 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. 21 Table of Contents On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, a Delaware municipality located in Kent County, Delaware, including Clayton’s exclusive franchise territory and the right to provide water service to Clayton’s existing customers, or the Clayton Water System. The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the Clayton Water System. This transfer of Clayton’s exclusive franchise territory was approved by the DEPSC on April 20, 2022. In our regulated wastewater subsidiaries, 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’s Delaware wastewater subsidiaries are the sole regional regulated wastewater utilities 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 note due from Middlesex. This acquisition more than doubled the number of wastewater customers served by Artesian 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-utility subsidiaries, 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. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. 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. 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. 22 Table of Contents 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. During 2022, the Company experienced receivable cycles similar to those experienced prior to 2020. 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 subsidiaries 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 subsidiaries 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 subsidiaries 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 recoverabl e 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, 2022. In accordance with FASB ASC Topic 350, the accounting guidance for testing goodwill , the Company assesses goodwill for impairment annually or more frequently if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired . If the carrying value of the reporting unit exceeds its implied fair value, the Company will recognize an impairment charge for the difference up to the carrying value of the allocated goodwill. There was no impairment of goodwill as of December 31, 2022. Results of Operations 2022 Compared to 2021 Operating Revenues Revenues totaled $98.9 million for the year ended December 31, 2022, $8.0 million, or 8.8%, more than revenues for the year ended December 31, 2021 . Other utility operating revenue increased approximately $4.3 million, or 59.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This increase is primarily due to an increase in wastewater revenue associated with residential customer growth resulting from the acquisition of TESI in January 2022, industrial wastewater services that started in June 2021, as well as organic residential customer growth. 23 Table of Contents Non-utility operating revenue increased approximately $3.2 million, or 55.3%, for the year ended December 31, 2022 compared to the same period in 2021. The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue. Water sales revenue increased $0.5 million, or 0.6%, for the year ended December 31, 2022 from the corresponding period in 2021, primarily due to an increase in fixed fee revenue related to added customers. We realized 79.2% and 85.7% of our total operating revenue for the years ended December 31, 2022 and December 31, 2021, respectively, from the sale of water. Percentage of Operating Revenues 2022 2021 2020 Water Sales Residential 48.7 % 53.0 % 53.8 % Commercial 17.6 19.4 19.5 Industrial 0.1 0.1 0.1 Government and Other 12.8 13.2 13.4 Other utility operating revenues 11.6 7.9 7.4 Non-utility operating revenues 9.2 6.4 5.8 Total 100.0 % 100.0 % 100.0 % Residential Residential water service revenues in 2022 amounted to $48.1 million, a decrease of $0.1 million, or 0.2%, below the $48.2 million recorded in 2021, primarily due to a decrease in overall water consumption. The volume of water sold to residential customers decreased to 4,209 million gallons in 2022 compared to 4,230 million gallons in 2021, a 0.5% decrease. The number of residenti al customers served increased by approximately 2,900, or 3.3%, in 2022. Commercial Water service revenues from commercial customers in 2022 decreased by 0.6%, to $17.5 million in 2022 from $17.6 million in 2021, primarily due to a decrease in overall water consumption. The volume of water sold to commercial customers decreased to 2,232 million gallons in 2022 compared to 2,237 million gallons sold in 2021, a decrease of 0.2%. Industrial Water service revenues from industrial customers increased to $79,000 in 2022 from $49,000 in 2021. The volume of water sold to industrial customers increased to 9.6 million gallons in 2022 from 5.3 million gallons in 2021. Government and Other Government and other water service revenues in 2022 increased by 5.6%, to $12.6 million in 2022 from $12.0 million in 2021, primarily due to an increase in overall water consumption. The volume of water sold to government and other customers increased to 1,337 million gallons in 2022 compared to 1,155 million gallons in 2021, an increase of 15.8%. 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 59.9%, to $11.5 million in 2022 from $7.2 million in 2021. This increase is primarily due to an increase in wastewater revenue associated with residential customer growth resulting from the acquisition of TESI in January 2022, industrial wastewater services that started in June 2021, as well as organic residential customer growth. Non-Utility Operating Revenue Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased by 55.3%, to $9.1 million in 2022 from $5.8 million in 2021. The increase is primarily due to an increase in contract service revenue related to a contract for the design and construction of wastewater infrastructure and an increase in Service Line Protection Plan revenue. 24 Table of Contents Operating Expenses Operating expenses, excluding depreciation and income taxes, increased $5.6 million, or 10.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The components of the change in operating expenses primarily include an increase in non-utility operating expenses of $2.9 million, an increase in utility operating expenses of $2.4 million and an increase in property and other taxes of $0.3 million. Non-utility operating expenses increased $2.9 million, or 73.8%, primarily due to an increase in costs associated with the wastewater infrastructure design and construction contract and an increase in plumbing services related to Service Line Protection Plan repairs. Utility operating expenses increased $2.4 million, or 5.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The net increase is primarily related to the following. Payroll and employee benefit costs increased $1.6 million, primarily related to an increase in overall compensation and an increase in medical benefit costs. Administrative costs increased $1.2 million, primarily due to outside contract services for wastewater treatment and station maintenance associated with the TESI acquisition and adjustments made in 2021 to reduce the additional bad debt reserve from 2020 associated with the COVID-19 pandemic. Repair and maintenance costs increased $0.9 million, primarily related to an increase in overall maintenance costs related to the TESI acquisition. In addition, tank painting and fuel costs increased. This increase in repair and maintenance costs is partially offset by reimbursements from the Delaware Sand and Gravel Remedial Trust for Artesian Water’s operating costs related to certain treatment costs pursuant to a settlement agreement. Water treatment costs increased $0.6 million , primarily related to an increase in the cost and usage of water and wastewater treatment chemicals and an increase in water treatment testing costs. Purchased power costs increased $0.5 million, primarily due to an increase in usage related to the additional operational costs associated with the TESI acquisition and upgraded wastewater treatment facilities, in addition to an increase in overall water operations. Purchased water costs decreased $2.4 million, related to a decrease of water purchased under a new contract, effective January 2022, in which the minimum amount of water required to be purchased was reduced. Property and other taxes increased $0.3 million, or 5.1%, primarily due to an increase in utility plant subject to taxation. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells. Percentage of Operating and Maintenance Expenses 2022 2021 2020 Payroll and Associated Expenses 48.1 % 49.9 % 51.0 % Administrative 13.2 12.3 14.1 Purchased Water 3.6 9.5 9.9 Repair and Maintenance 11.1 10.2 8.3 Purchased Power 5.7 5.4 5.5 Water Treatment 4.8 4.0 3.7 Non-utility Operating 13.5 8.7 7.5 Total 100.0 % 100.0 % 100.0 % The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.1% for the year ended December 31, 2022, compared to 56.1% for the year ended December 31, 2021. Depreciation and amortization expense increased $0.7 million, or 6.2%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers. Federal and state income tax expense increased $0.1 million, or 2.5%, primarily due to higher pre-tax income in 2022 compared to 2021, partially offset by a decrease related to stock options exercised. Other Income, Net Other income, net increased $0.5 million, primarily due to a $0.5 million increase in AFUDC, as a result of higher long-term construction activity subject to AFUDC for the year ended December 31, 2022 compared to the same period in 2021. 25 Table of Contents Interest Charges Long-term debt interest increased $0.9 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 . Net Income Our net income applicable to common stock increased $1.2 million, or 7.0%. Total operating revenues increased $8.0 million and AFUDC increased $0.5 million, partially offset by a $6.4 million increase in total operating expenses and $0.9 million increase in interest charges. Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2021 and 2020 and is incorporated herein by reference. Liquidity and Capital Resources Overview The Company’s primary sources of liquidity for the year ended December 31, 2022 were $24.3 million of cash provided by operating activities, $16.4 million in net contributions and advances from developers, which includes $2.0 million of grant funds from the State of Delaware, $31.8 million from the issuance of long-term debt and $2.1 million in net proceeds from the issuance of common stock. These funds were used to invest $48.5 million in capital expenditures and $6.3 million in acquisitions and to pay dividends of approximately $10.3 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 2023 will be approximately $57.0 million. Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2023 are anticipated to be approximately $31.8 million. Operating Activities One of our primary sources of liquidity for the year ended December 31, 2022 was $24.3 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 2022 was to continue to provide high quality, reliable service to our growing service territory. Capital expenditures during 2022 were $48.5 million compared to $40.8 million invested during the same period in 2021. During 2022, we continue to focus our investment through our rehabilitation program for transmission and distribution facilities by replacing aging or deteriorating mains, installation of new mains, enhancing or improving existing treatment facilities, construction of new water storage tanks, and replacing aging wells and pumping equipment to better serve our customers. In May 2022, we completed the purchase of substantially all of the water operating assets from the Town of Clayton. We also continue to invest in wastewater projects, including the acquisition of TESI in January 2022. Developers contributed $8.0 million of the total investment during the year ended 2022. 26 Table of Contents The following chart summarizes our investment in plant and systems over the past three fiscal years In thousands 2022 2021 2020 Source of supply, treatment and pumping $ 14,158 $ 9,681 $ 14,999 Transmission and distribution 17,712 20,951 15,993 General plant and equipment 3,856 1,739 3,089 Developer financed utility plant 8,038 6,866 4,132 Wastewater facilities 5,613 2,133 2,586 Allowance for Funds Used During Construction, AFUDC (894 ) (556 ) (781 ) Total $ 48,483 $ 40,814 $ 40,018 Of the $67.3 million gross investment expected in 2023, approximately $10.5 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory. Approximately $16.4 million will be invested in renewals associated with the rehabilitation of aging infrastructure. Approximately $12.0 million will be invested in upgraded PFAS treatment equipment, an elevated storage tank, both additional and restored water treatment facilities, and 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 $9.8 million will be invested in the construction of force mains used for the transmission of wastewater to plants. Approximately $7.9 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 $7.5 million will be invested in general plant, which includes replacement computer hardware, transportation and equipment upgrades, new corporate automation, and building renovations. Approximately $2.4 million will be invested in the relocations of facilities as a result of government mandates. Additionally, we will refund $0.8 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 2023 is expected to be offset by developer contributions of $7.1 million and grant funds from the State of Delaware of $3.2 million, for a net investment of $57.0 million in 2023. 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, 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. We believe that our cash on hand and future cash generated from the foregoing activities will provide adequate resources to fund our short-term and long-term capital, operating and financing needs. However, 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, 2022, 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, 2022, there was $26.9 million of available funds under this line of credit. The previous interest rate for borrowings under this line was the London Interbank Offered Rate, or LIBOR, plus 1.00%. It is expected that the LIBOR rate for USD currency will be discontinued after June 30, 2023. As a result, effective May 20, 2022, this line of credit agreement was amended to replace LIBOR with the Daily Secured Overnight Financing Rate, or SOFR. The interest rate is a one-month SOFR plus 10 basis points, or Term SOFR, plus an applicable margin of 0.85%. Term SOFR cannot be less than 0.00%. This is a demand line of credit and therefore the financial institution may demand payment for any outstanding amounts at any time. The term of this line of credit expires on the earlier of May 21, 2023 or any date on which Citizens demands payment. The Company expects to renew this line of credit. At December 31, 2022, 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, 2022, there was $12.9 million of available funds under this line of credit. The previous interest rate for borrowings under this line allowed the Company to select either LIBOR plus 1.50% or a weekly variable rate established by CoBank; the Company historically used the weekly variable interest rate. In October 2022, this line of credit was amended to replace the previous interest rate options with a daily SOFR rate plus 1.45% option or a term SOFR rate plus 1.45% option that is locked in for either one or three months. The term of this line of credit expires on October 29, 2023. Artesian Water expects to renew this line of credit. 27 Table of Contents 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) $ 7,924 $ 15,773 $ 15,659 $ 237,358 $ 276,714 State revolving fund loans (principal and interest) 937 1,699 1,463 6,364 10,463 Promissory note (principal and interest) 961 1,921 1,924 10,613 15,419 Asset purchase contractual obligation (principal and interest) 345 672 647 --- 1,664 Lines of credit 20,174 --- --- --- 20,174 Operating leases 25 51 52 1,406 1,534 Operating agreements 60 79 84 782 1,005 Unconditional purchase obligations 809 1,568 770 --- 3,147 Tank painting contractual obligation 626 939 --- --- 1,565 Total contractual cash obligations $ 31,861 $ 22,702 $ 20,599 $ 256,523 $ 331,685 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, 2022, 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 April 29, 2022, Artesian Water and CoBank entered into a Bond Purchase Agreement, or the Agreement, relating to the issue and sale by Artesian Water to CoBank of a $30 million principal amount First Mortgage Bond, Series W, or the Bond, due April 30, 2047, or the Maturity Date. The Bond was issued pursuant to Artesian Water’s Indenture of Mortgage dated as of July 1, 1961, as amended and supplemented by supplemental indentures, including the Twenty-Fifth Supplemental Indenture dated as of April 29, 2022, or the Supplemental Indenture, from Artesian Water to Wilmington Trust Company, as Trustee. The Supplemental Indenture is a first mortgage lien against substantially all of Artesian Water’s utility plant. The proceeds from the sale of the Bond were used to pay down outstanding lines of credit of the Company and a loan payable to Artesian Resources, with any additional proceeds used to fund capital investments in Artesian Water. The DEPSC approved the issuance of the Bond on April 20, 2022. The Bond carries an annual interest rate of 4.43% through but excluding the Maturity Date. Interest is payable on June 30th, September 30th, December 30th and March 30th in each year and on the Maturity Date, beginning June 30, 2022, until Artesian Water’s obligation with respect to the payment of principal, premium (if any) and interest shall be discharged. Overdue payments shall bear interest as provided in the Supplemental Indenture. The term of the Bond also includes certain limitations on Artesian Water’s indebtedness. On May 26, 2022, Artesian Water completed its purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton. The total purchase price was $5.0 million, less the current payoff amount of secured debt or debt associated with the water operating assets. At closing, Artesian Water paid approximately $3.4 million of the total purchase price. The remaining $1.6 million is payable in five equal annual installments on the anniversary date of the closing date. Each annual installment is payable with interest at an annual rate of 2.0%. On August 12, 2022, Artesian Water entered into three Financing Agreements, or the Financing Agreements, with the Delaware Drinking Water State Revolving Fund (the “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. The Department makes loans to, and acquires obligations of, eligible persons in Delaware to finance the costs of drinking water facilities in accordance with the Federal Safe Drinking Water Act using funds from the Fund. Under the Financing Agreements, the Department has agreed to advance to Artesian Water up to $966,000, $1,167,000 and $3,200,000 (collectively, the “Loans”) from the Fund to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the “Projects”). In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. In connection with the Financing Agreements, Artesian Water issued to the Department three General Obligation Notes dated as of August 12, 2022, or the Notes. Under the Notes, borrowings under the Financing Agreements bear interest at a rate of 1.0% per annum and are further subject to an administrative fee at a rate of 1.0% per annum (collectively, interest and the administrative fee are referred to herein as “Fee”). The Fee shall be paid semiannually on each February 1 and August 1, beginning on February 1, 2023. The Notes will mature on February 1, 2043. As of December 31, 2022, approximately $1.8 million was borrowed under the Loans. 28 Table of Contents On December 9, 2022, Artesian Water Company entered into three Financing Agreements, or the Financing Agreements, with the Fund, acting by and through the Department. Under the Financing Agreements, the Department has agreed to advance to or to reimburse Artesian Water up to $901,170, $1,042,695 and $1,050,000 (collectively, the “Loans”) from the Fund to finance all or a portion of the costs to replace specific water transmission mains in service areas located in New Castle County, Delaware (collectively, the “Projects”). In accordance with the Financing Agreements, Artesian Water will from time to time request funds under the Loans as it incurs costs in connection with the Projects. In connection with the Financing Agreements, Artesian Water issued to the Department three General Obligation Notes dated as of December 9, 2022, or the Notes. Under the Notes, borrowings under the Financing Agreements bear interest at a rate of 1.0% per annum and are further subject to an administrative fee at a rate of 1.0% per annum (collectively, interest and the administrative fee are referred to herein as “Fee”). The Fee shall be paid semiannually on each June 1 and December 1, beginning on June 1, 2023. Two notes will mature on June 1, 2043 and one will mature on December 1, 2043. As of December 31, 2022, approximately $1.0 million was requested under the Loans, and funds received in January 2023. In order to control purchased power cost, in August 2018 Artesian Water entered into an electric supply contract with MidAmerican Energy Services, LLC 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. In January 2022, following the acquisition of Tidewater Environmental Services, Inc., TESI dba Artesian Wastewater assumed an electricity supply contract with WGL Energy that is effective through December 2024. 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 which required us to purchase water on a step down schedule through July 5, 2022, and now requires 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 was $1.2 million. In September 2022, this agreement was amended to paint an additional elevated water storage tank and to extend the term of the agreement for an additional year. Pursuant to the amended agreement, the total expenditure for the four years is $2.2 million. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS See Note 19 to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.