ARTESIAN RESOURCES CORP 10-Q

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTION REGARDING FORWARD-LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q that express our "belief," "anticipation" or "expectation," as well as other statements that are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act and the Private Securities Litigation Reform Act of 1995. Statements regarding our goals, priorities, growth and expansion plans and expectation for our water and wastewater subsidiaries and non-regulated subsidiaries, customer base growth opportunities in Delaware and Cecil County, Maryland, our belief regarding the timing and results of our rate requests, our belief regarding our capacity to provide water services for the foreseeable future to our customers, our belief relating to our compliance and the cost to achieve compliance with relevant governmental regulations, our expectation of the timing of decisions by regulatory authorities, the impact of weather on our operations and the execution of our strategic initiatives, our expectation of the timing for construction on new projects, our expectation relating to the adoption of recent accounting pronouncements, contract operations opportunities, legal proceedings, our properties, deferred tax assets, adequacy of our available sources of financing, the expected recovery of expenses related to our long-term debt, our expectation to be in compliance with financial covenants in our debt instruments, our ability to refinance our debt as it comes due, our ability to adjust our debt level, interest rate, maturity schedule and structure, the timing and terms of renewals of our lines of credit, plans to increase our wastewater treatment operations, engineering services and other revenue streams less affected by weather, expected future contributions to our postretirement benefit plan, anticipated growth in our non-regulated division, the impact of recent acquisitions on our ability to expand and foster relationships, anticipated investments in certain of our facilities and systems and the sources of funding for such investments, and the sufficiency of internally generated funds and credit facilities to provide working capital and our liquidity needs are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "projects", "forecasts", "may", "should", variations of such words and similar expressions are intended to identify such forward-looking statements. Certain factors as discussed under Item 1A - Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022, and this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, such as changes in weather, changes in our contractual obligations, changes in government policies, the timing and results of our rate requests, failure to receive regulatory approval, changes in economic and market conditions generally, and other matters could cause results to differ materially from those in the forward-looking statements. While the Company may elect to update forward-looking statements, we specifically disclaim any obligation to do so and you should not rely on any forward-looking statement as a representation of the Company's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q. 26 Table of Contents RESULTS OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2023 OVERVIEW Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business. Our regulated utility segment comprised 93.4% of total operating revenues for the nine months ended September 30, 2023 and 92.0% for the nine months ended September 30, 2022. 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 as well as increased operating costs, which must be recovered from future cash flows. Our ability to recover increases in investments in facilities and operating costs 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 successfully minimized these delays with thorough planning and pre-ordering. However, there is no assurance that our future financial results or business operations will not be negatively affected. 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 September 30, 2023, the number of metered water customers in Delaware increased approximately 1.3% compared to September 30, 2022. The number of metered water customers in Maryland increased approximately 0.8% compared to September 30, 2022. The number of metered water customers in Pennsylvania remained consistent compared to September 30, 2022. For the nine months ended September 30, 2023, approximately 6.6 billion gallons of water were distributed in our Delaware systems and approximately 80.0 million gallons of water were distributed in our Maryland systems. 27 Table of Contents On April 28, 2023, Artesian Water filed a request with the DEPSC to implement new rates to meet a requested increase in revenue of 23.84%, or approximately $17.5 million, on an annualized basis. The actual effective increase is less than 23.84% since Artesian Water has been permitted to recover specific investments made in infrastructure through the assessment of a 7.50% DSIC. Since the DSIC rate is set to zero when temporary rates are placed into effect, customers would experience an incremental increase of 16.34%, the net of the overall 23.84% increase less the DSIC rate of 7.50% currently in effect, if the requested increase is granted in full by the DEPSC. Artesian Water filed an interim rates application to place into effect on November 28, 2023 a temporary base rate increase of 15% of gross water sales on an annual basis and reduce the 7.5% DSIC rate to zero, subject to refund, until permanent rates are determined by the DEPSC. This is discussed further in Note 11 – Regulatory Proceedings. Regulated Wastewater Subsidiaries Artesian Wastewater and TESI own wastewater collection and treatment infrastructure and provide regulated wastewater services to customers in Sussex County, Delaware. Artesian Wastewater Maryland is able to provide regulated wastewater services to customers in Maryland. It is not currently providing these services in Maryland. The majority of our residential and commercial wastewater customers are billed a flat monthly fee, and our large industrial wastewater customer is billed monthly based on wastewater flow, which contributes to providing a revenue stream unaffected by weather. As of September 30, 2023, the number of Delaware wastewater customers increased approximately 7.6% compared to September 30, 2022. 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 September 30, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 4.2%, 2.9% and 6.8%, respectively, compared to September 30, 2022. The non-utility customers enrolled in one of our three protection plans decreased 3.2%. 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 and availability of development sites in relatively close proximity to the Atlantic Ocean in Sussex County 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. 28 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. 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. Results of Operations – Analysis of the Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022. Operating Revenues Revenues totaled $26.6 million for both the three months ended September 30, 2023 and September 30, 2022, respectively . Other utility operating revenue increased approximately $0.4 million, or 13.9%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in the timing of industrial wastewater revenue. Water sales revenue decreased $0.1 million, or 0.3%, for the three months ended September 30, 2023 compared to the corresponding period in 2022, primarily related to a decrease in overall water consumption related to the wetter weather pattern experienced during the summer months of 2023, partially offset by an increase in fixed fee charges related to customer growth. We realized 81.5% and 81.6% of our total operating revenue for the three months ended September 30, 2023 and September 30, 2022, respectively, from the sale of water. Non-utility operating revenue decreased approximately $0.3 million, or 16.9%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion, partially offset by an increase in Service Line Protection Plan revenue. 29 Table of Contents Operating Expenses Operating expenses, excluding depreciation and income taxes, increased $0.8 million, or 5.6%, fo r the three months ended September 30, 2023, compared to the same period in 2022. Utility operating expenses increased $1.2 million, or 11.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The net increase is primarily related to the following; Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall compensation, a decrease in capitalized payroll related to a 2022 software upgrade, and an increase in medical benefit premium costs. Repair and maintenance costs increased $0.3 million, primarily associated with water treatment and distribution operations, including filter replacements costs, tank painting costs and a reimbursement from the Delaware Sand and Gravel Remedial Trust in the third quarter of 2022 for Artesian Water’s operating costs related to certain 2022 and 2021 treatment costs pursuant to a settlement agreement. Administrative costs increased $0.3 million, primarily due to increases in computer system maintenance and subscription fees, as well as an increase in consulting fees. Water treatment costs increased $0.1 million , primarily due to an increase in the cost and volume of chemicals used. Non-utility operating expenses decreased $0.5 million, or 28.5%, primarily due to a decrease in costs associated with a wastewater infrastructure design and construction contract. The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 53.5% for the three months ended September 30, 2023, compared to 50.6% fo r the three months ended September 30, 2022. Depreciation and amortization expense increased $0.2 million, or 7.3%, 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 $0.4 million, or 22.7%, primarily due to adjustments related to the application of net operating loss valuation allowances, partially offset by lower pre-tax income in 2023 compared to 2022 and a decrease in 2022 income tax expense related to stock options exercised in the third quarter of 2022, with no similar activity in 2023. Other Income Other income increased $0.3 million, primarily due to an increase in allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the three months ended September 30, 2023 compared to the same period in 2022. Net Income Net income applicable to common stock decreased $1.1 million, or 17.5%, due to the $1.4 million increase in Total Operating Expenses, offset by the $0.3 million increase in Other income, net. Results of Operations – Analysis of the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022. Operating Revenues Revenues totaled $74.3 million for the nine months ended September 30, 2023, $0.5 million, or 0.7%, more than revenues for the nine months ended September 30, 2022 . 30 Table of Contents Other utility operating revenue increased approximately $0.8 million, or 9.7%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This increase is primarily due to an increase in wastewater revenue associated with new customers and the timing of industrial wastewater revenue. Water sales revenue increased $0.7 million, or 1.2%, for the nine months ended September 30, 2023 from the corresponding period in 2022, primarily related to an increase in overall water consumption and an increase in fixed fee charges related to new customers. This increase is partially offset by a one-time refund issued to customers within the Town of Frankford for a rate change retroactive to February 2022, as approved by the DEPSC in the first quarter of 2023, in accordance with the agreement for the purchase of Frankford’s water assets. We realized 81.1% and 80.7% of our total operating revenue for the nine months ended September 30, 2023 and September 30, 2022, respectively, from the sale of water. Non-utility operating revenue decreased approximately $1.0 million, or 16.7%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This decrease is primarily due to a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure now nearing completion, partially offset by an increase in Service Line Protection Plan revenue. Operating Expenses Operating expenses, excluding depreciation and income taxes, increased $2.6 million, or 6.4%, fo r the nine months ended September 30, 2023, compared to the same period in 2022. Utility operating expenses increased $3.5 million, or 11.3%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The net increase is primarily related to the following; Payroll and employee benefit costs increased $1.7 million, primarily related to an increase in overall compensation, an increase in the number of employees, a decrease in capitalized payroll related to a 2022 software upgrade and an increase in medical benefit premium costs. Repair and maintenance costs increased $0.9 million, primarily associated with water treatment and distribution operations, including tank painting costs, and wastewater treatment and disposal operations, including a one-time acquisition adjustment related to TESI in 2022 and a reimbursement from the Delaware Sand and Gravel Remedial Trust in the third quarter of 2022 for Artesian Water’s operating costs related to certain 2021 treatment costs pursuant to a settlement agreement. Administrative costs increased $0.8 million, primarily due to increases in computer system maintenance and subscription fees, consulting fees, legal fees, a one-time adjustment related to the TESI acquisition in 2022, and customer billing costs. Water treatment costs increased $0.5 million , primarily due to an increase in the cost and volume of chemicals used. Purchased power costs increased $0.2 million due to an increase in usage in wastewater and water operations. Purchased water costs decreased $0.5 million, primarily related to a decrease of water purchased under contract, in which the minimum amount of water required to be purchased was reduced in July 2022. Non-utility operating expenses decreased $1.1 million, or 24.7%, primarily due to a decrease in costs associated with a wastewater infrastructure design and construction contract. Property and other taxes increased $0.2 million, or 3.6%, primarily due to an increase in utility plant subject to taxation and an increase in payroll taxes, related to increased payroll related expenses. Property taxes are assessed on land, buildings and certain utility plant, which include the footage and size of pipe, hydrants and wells. The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.0% for the nine months ended September 30, 2023, compared to 53.9% fo r the nine months ended September 30, 2022. Depreciation and amortization expense increased $0.5 million, or 5.7%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers. Federal and state income tax expense increased $0.2 million, or 3.6%, primarily due to adjustments related to the application of net operating loss valuation allowances, partially offset by lower pre-tax income in 2023 compared to 2022 and a decrease in 2022 income tax expense related to stock options exercised in the first nine months of 2022, with no similar activity in 2023. 31 Table of Contents Other Income Other income increased $1.0 million, primarily due to a $0.8 million increase in allowance for funds used during construction, or AFUDC, as a result of higher long-term construction activity subject to AFUDC for the nine months ended September 30, 2023 compared to the same period in 2022. Miscellaneous income increased $0.2 million primarily related to an increase in the annual patronage refund from CoBank, ACB. The primary refund calculation for both 2023 and 2022 was based on the average loan balance outstanding. Interest Charges Long-term debt interest expense increased $0.4 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 . Short-term debt interest expense increased $0.3 million, primarily related to higher interest rates. The average short-term interest rate for the nine months ended September 30, 2023 was 6.14% compared to 2.44% for the same period in 2022. Net Income Our net income applicable to common stock decreased $2.5 million, or 15.7%. Total Operating Revenues increased $0.5 million and Other income, net increased $1.0 million, offset by a $3.3 million increase in Total Operating Expenses and $0.8 million increase in Interest charges. LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sourc es of liquidity for the nine months ended September 30, 2023 were $23.4 million of cash provided by operating activities, $17.0 million in net contributions and advances from developers, which includes $3.6 million of grant funds from the State of Delaware, $2.0 million from the issuance of long-term debt and $36.5 million in net proceeds from the issuance of Class A Stock. On May 23, 2023 and June 16, 2023, the Company completed the sale of 695,650 shares and 67,689 shares of its Class A Stock, respectively. 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 customer growth levels and 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. See Note 11 – Regulatory Proceedings. 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 in Plant and Systems The primary focus of our investments is to continue to provide high quality reliable service to our growing service territory. Capital expenditures during the first nine months of 2023 were $48.8 million compared to $36.7 million during the same period in 2022. During the first nine months of 2023, we continued 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. Developers contributed $6.0 million of these total investments during the first nine months of 2023. We depend on the availability of capital for expansion, construction and maintenance. We rely on our sources of liquidity to finance our investments in utility plant and to meet our various payment obligations . We estimate that future investments will be financed by our operations and external sources, including short-term borrowings under our revolving credit agreements discussed below. We expect to fund our activities for the next twelve months using our available cash balances, bank credit lines, projected cash generated from operations, state revolving fund loans and capital market financing. We believe that internally generated funds along with existing credit facilities will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements. However, because part of our business strategy is to expand through strategic acquisitions, we may seek additional debt financing or issue additional equity securities to finance future acquisitions or for other purposes. There is no assurance that we will be able to secure funding on terms acceptable to us, or at all. 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. 32 Table of Contents Lines of Credit and Long-Term Debt At September 30, 2023, Artesian Resources had a $40 million line of credit with Citizens Bank, or Citizens, which is available to all subsidiaries of Artesian Resources. As of September 30, 2023, there was $40.0 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%. The LIBOR rate for USD currency was discontinued as of 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%, which was increased to 1.10% effective August 3, 2023. 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 20, 2024 or any date on which Citizens demands payment. The Company expects to renew this line of credit. At September 30, 2023, Artesian Water had a $20 million line of credit with CoBank, ACB, or CoBank, that allows for the financing of operations for Artesian Water, with up to $10 million of this line available for the operations of Artesian Water Maryland. As of September 30, 2023, there was $20.0 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 31, 2024. 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: 33 Table of Contents 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) $ 7,902 $ 15,714 $ 40,610 $ 204,564 $ 268,790 State revolving fund loans (principal and interest) 964 1,906 1,704 7,636 12,210 Promissory note (principal and interest) 960 1,923 1,924 9,893 14,700 Asset purchase contractual obligation (principal and interest) 339 659 320 --- 1,318 Lines of credit --- --- --- --- --- Operating leases 34 68 65 1,401 1,568 Operating agreements 76 112 109 749 1,046 Unconditional purchase obligations 812 1,539 194 --- 2,545 Tank painting contractual obligation 626 470 --- --- 1,096 Total contractual cash obligations $ 11,713 $ 22,391 $ 44,926 $ 224,243 $ 303,273 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 September 30, 2023, 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. 34 Table of Contents The asset purchase contractual obligation is related to the purchase of substantially all of the water operating assets from the Town of Clayton, or Clayton, in May 2022, by Artesian Water. The total purchase price was $5.0 million. At closing, Artesian Water paid approximately $3.4 million. 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%. In order to control purchased power cost, in February 2021, Artesian Water entered into an 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 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. dba Artesian Wastewater, or TESI, assumed an electricity supply contract with WGL Energy that is effective through December 2024. These fixed rate electric supply contracts are for normal purchases and are not derivative instruments. Payments for unconditional purchase obligations reflect minimum water purchase obligations based on rates that are subject to change under an interconnection agreement with the Chester Water Authority. The 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 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. The agreement includes two automatic five-year renewal terms, unless terminated by either party. 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. Critical Accounting Estimates; Recent Accounting Pronouncements This discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2022 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2022. The preparation of those financial statements required management to make assumptions and estimates that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual amounts or results could differ from those based on such assumptions and estimates. Our critical accounting estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2022. There have been no changes in our critical accounting estimates. Our significant accounting policies are described in our notes to the 2022 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2022. Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2022 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2022 and also in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q . We did not adopt any accounting policy in the first nine months of 2023 that had a material impact on our financial condition, liquidity or results of operations. 35 Table of Contents