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 93.1% o f total operating revenues for the year ended December 31, 2023 and 90.7% for the year ended December 31, 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. 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, 2023, the number of metered water customers in Delaware increased approximately 1.3% compared to December 31, 2022. The number of metered water customers in Maryland increased approximately 1.3% compared to December 31, 2022. The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2022. For the year ended December 31, 2023, approximately 8.7 billion gallons of water were distributed in our Delaware systems and approximately 105.5 million gallons of water were distributed in our Maryland systems. Artesian Water filed an initial request with the DEPSC on April 28, 2023, further supplemented with a request filed on November 30, 2023, to implement new rates to meet a requested increase in revenue of 22.66%, or approximately $16.7 million, on an annualized basis. The actual effective increase is less than 22.66% since Artesian Water has been permitted to recover specific investments made in infrastructure through the assessment of a 7.50% Distribution System Improvement Charge, or DSIC. Since the DSIC rate is set to zero when temporary rates are placed into effect, customers would experience an incremental increase of 15.16%, the net of the overall 22.66% 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, which was approved, to place into effect on November 28, 2023 a temporary base rate increase of 15% of gross water sales on an annual basis and to reduce the 7.50% DSIC rate to zero, with such interim rates subject to refund, until permanent rates are determined by the DEPSC. This is discussed further in our Notes to Consolidated Financial Statements – Note 13 – Regulatory Proceedings. 21 Table of Contents 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 December 31, 2023, the number of Delaware wastewater customers increased approximately 6.3% compared to December 31, 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 December 31, 2023, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 2.3%, 3.5% and 12.4%, respectively, compared to December 31, 2022. The non-utility customers enrolled in one of our three protections plans decreased 3.0%. 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 in new regions surrounding our service territory through strategic acquisitions. 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 four 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. 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. 22 Table of Contents 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. CRITICAL ACCOUNTING ESTIMATES Critical accounting 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 (Summary of Significant Accounting Policies) 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 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, Allowance for Funds Used during Construction, or 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. We record accounts receivable at the invoiced amounts. A provision for expected credit loss 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 provision for expected credit loss and associated bad debt expense has not been significant. 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. 23 Table of Contents 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, 2023. 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, 2023. Results of Operations 2023 Compared to 2022 Operating Revenues Revenues totaled $98.9 million for each of the years ended December 31, 2023 and December 31, 2022 . Water sales revenue increased $1.7 million, or 2.2%, for the year ended December 31, 2023 from the corresponding period in 2022, primarily as a result of a temporary rate increase of net 7.50% of gross water sales placed into effect on November 28, 2023, as permitted under Delaware law, until permanent rates are determined by the DEPSC, and an increase in overall water consumption. Since the DSIC rate is set to zero when temporary rates are placed into effect, the temporary rate increase is 15.0%, less the DSIC rate of 7.50% that was previously in effect. In addition, fixed fee revenue increased related to added customers. We realized 81.0% and 79.2% of our total operating revenue for the years ended December 31, 2023 and December 31, 2022, respectively, from the sale of water. Other utility operating revenue increased approximately $0.7 million, or 6.0%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in fee revenue related to inspections and service and finance charges. Non-utility operating revenue decreased approximately $2.4 million, or 26.9%, for the year ended December 31, 2023 compared to the same period in 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. Percentage of Operating Revenues 2023 2022 2021 Water Sales Residential 50.1 % 48.7 % 53.0 % Commercial 17.9 17.6 19.4 Industrial 0.1 0.1 0.1 Government and Other 12.9 12.8 13.2 Other utility operating revenues 12.3 11.6 7.9 Non-utility operating revenues 6.7 9.2 6.4 Total 100.0 % 100.0 % 100.0 % 24 Table of Contents Residential Residential water service revenues in 2023 amounted to $49.6 million, an increase of $1.5 million, or 3.0%, above the $48.1 million recorded in 2022, primarily due to an increase in overall water consumption and a temporary rate increase placed into effect on November 28, 2023. The volume of water sold to residential customers increased to 4,340 million gallons in 2023 compared to 4,209 million gallons in 2022, a 3.1% increase. The number of residenti al customers served increased by approximately 1,300, or 1.4%, in 2023. Commercial Water service revenues from commercial customers in 2023 increased by 0.9%, to $17.6 million in 2023 from $17.5 million in 2022, primarily due to a temporary rate increase placed into effect on November 28, 2023. The volume of water sold to commercial customers decreased to 2,231 million gallons in 2023 compared to 2,232 million gallons sold in 2022, a decrease of 0.1%. Industrial Water service revenues from industrial customers increased to $84,000 in 2023 from $79,000 in 2022. The volume of water sold to industrial customers increased to 10.3 million gallons in 2023 from 9.6 million gallons in 2022. Government and Other Government and other water service revenues in 2023 increased by 0.8%, to $12.7 million in 2023 from $12.6 million in 2022, primarily due to a temporary rate increase placed into effect on November 28, 2023. The volume of water sold to government and other customers decreased to 1,250 million gallons in 2023 compared to 1,337 million gallons in 2022, a decrease of 6.5%. 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 6.0%, to $12.2 million in 2023 from $11.5 million in 2022. This increase is primarily due to an increase in wastewater revenue associated with customer growth and an increase in fee revenue related to inspections and service and finance charges. Non-Utility Operating Revenue Non-utility operating revenue, derived from non-regulated water and wastewater operations, decreased by 26.9%, to $6.6 million in 2023 from $9.1 million in 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 $0.2 million, or 0.4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The components of the change in operating expenses primarily include an increase in utility operating expenses of $2.4 million, a decrease in non-utility operating expenses of $2.4 million and an increase in property and other taxes of $0.2 million. Utility operating expenses increased $2.4 million, or 5.6%, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The net increase is primarily related to the following. — Payroll and employee benefit costs increased $1.0 million, primarily related to an increase in medical premium costs, employee merit increases, and a decrease in capitalized payroll related to a 2022 software upgrade, partially offset by a decrease in bonuses compared to 2022. — Administrative costs increased $0.7 million, primarily due to increases in computer system maintenance costs, and customer billing costs. — Supply and treatment costs increased $0.7 million , primarily due to an increase in the cost and volume of chemicals used, an increase in wastewater treatment costs, a one-time acquisition adjustment related to TESI in 2022 and a reimbursement from the Delaware Sand and Gravel Remedial Trust, or DS&G Trust, in 2022 for Artesian Water’s operating costs related to certain 2021 treatment costs pursuant to a settlement agreement. These increases are partially offset by a decrease in filter media replacement costs related to varying replacement schedules. — Transmission, distribution and collection costs increased $0.3 million, primarily associated with tank painting costs and maintenance and repair of transmission mains. — 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. 25 Table of Contents Non-utility operating expenses decreased $2.4 million, or 35.4%, 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 3.9%, 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. Percentage of Operating and Maintenance Expenses 2023 2022 2021 Payroll and Associated Expenses 49.5 % 47.5 % 49.2 % Administrative 16.9 15.3 15.7 Supply and Treatment 11.9 10.8 9.4 Purchased Power 5.7 5.2 4.8 Transmission, Distribution and Collection 4.6 4.1 2.7 Purchased Water 2.7 3.6 9.5 Non-utility Operating 8.7 13.5 8.7 Total 100.0 % 100.0 % 100.0 % The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 57.4% for the year ended December 31, 2023, compared to 57.1% for the year ended December 31, 2022. Depreciation and amortization expense increased $0.7 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 $0.5 million, or 8.2%, primarily due to the recognition of additional valuation allowances on deferred tax assets related to state net operating losses and stock options exercised in the year of 2022, with no similar activity in 2023, partially offset by lower pre-tax income in 2023 compared to 2022. Other Income Other income increased $0.8 million, primarily due to a $0.7 million increase in AFUDC, as a result of higher long-term construction activity subject to AFUDC for the year ended December 31, 2023 compared to the same period in 2022. Miscellaneous income increased $0.1 million related to an increase in the annual patronage refund from CoBank, ACB. Interest Charges Total interest charges increased $0.7 million, or 7.7%. Long-term debt interest expense increased $0.5 million, primarily related to an increase in long-term debt interest associated with the Series W First Mortgage Bond issued on April 29, 2022 and an increase in the level of State Revolving Fund Loans . Short-term debt interest expense increased $0.1 million, primarily related to higher interest rates. The average short-term interest rate for the twelve months ended December 31, 2023 was 6.27% compared to 3.04% for the same period in 2022. Net Income Our net income applicable to common stock decreased $1.3 million, or 7.2%. Water sales and other operating revenue increased $2.4 million and other income increased $0.8 million, offset by a $2.4 million decrease in non-utility operating revenue, a $1.4 million increase in total operating expenses and $0.7 million increase in interest charges. Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2022 and 2021 and is incorporated herein by reference. 26 Table of Contents Liquidity and Capital Resources Overview The Company’s primary sources of liquidity for the year ended December 31, 2023 were $37.1 million in net proceeds from the issuance of Class A Non-Voting Stock, $31.9 million of cash provided by operating activities and $22.5 million in net contributions and advances from developers. Funds from these liquidity sources were used to invest $62.2 million in capital expenditures and to pay dividends of approximately $11.2 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 2024 will be approximately $51.6 million. Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2024 are anticipated to be approximately $12.0 million. Operating Activities One of our primary sources of liquidity for the year ended December 31, 2023 was $31.9 million provided by cash flow from operating activities, compared to $24.3 million for the year ended December 31, 2022. The increase in cash flows from operating activities primarily resulted from lower accounts payable and accrued expenses related to increased capital investments and lower accounts receivable balances. 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. See our Notes to Consolidated Financial Statements - Note 13 – 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 Activities The primary focus of our investment in 2023 was to continue to provide high quality, reliable service to our growing service territory. Capital expenditures during 2023 were $62.2 million compared to $48.5 million invested during the same period in 2022. During 2023, we invested in 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. We also continue to invest in wastewater treatment and distribution facilities. Developers contributed $8.3 million of the total investment during the year ended 2023. The following chart summarizes our investment in plant and systems over the past three fiscal years In thousands 2023 2022 2021 Source of supply, treatment and pumping $ 20,327 $ 14,158 $ 9,681 Transmission and distribution 26,886 17,712 20,951 General plant 4,553 3,856 1,739 Developer financed utility plant 8,301 8,038 6,866 Wastewater facilities 3,353 5,613 2,133 Allowance for Funds Used During Construction, AFUDC, equity portion (1,243 ) (894 ) (556 ) Total $ 62,177 $ 48,483 $ 40,814 Of the $55.6 million gross investment expected in 2024, approximately $16.4 million will be invested in upgraded PFAS treatment equipment, the rehabilitation and upgrading of two elevated storage tanks, booster station improvements, 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 $8.8 million will be invested in the relocations of facilities as a result of government mandates. Approximately $7.2 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 $6.2 million will be invested in renewals associated with the rehabilitation of aging infrastructure. Approximately $6.6 million will be invested in the construction of force mains used for the transmission of wastewater to plants. Approximately $5.8 million will be invested in general plant, which includes vehicles and other heavy duty operations related equipment, replacement computer hardware and software, equipment upgrades, new corporate automation, station security upgrades, radio communication upgrades and building renovations. Approximately $4.0 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory. Additionally, we will refund $0.6 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties. 27 Table of Contents 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 2024 is expected to be offset by developer contributions of $4.0 million for a net investment of $51.6 million in 2024. The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers. Financing Activities For the year ended December 31, 2023, cash flows provided by financing activities were $31.3 million, compared to $31.7 million for the year ended December 31, 2022. The cash flows provided by financing activities decreased due to increased repayments of lines of credit, lower issuance of long-term debt and higher stock dividend payments, mostly offset by higher proceeds from the issuance of common stock and an increase in net advances and contributions from developers. We have several sources of liquidity to finance our investment in utility plant and other fixed assets. Our primary source of liquidity from financing activities for the year ended December 31, 2023 was $37.1 million in net proceeds from the issuance of Class A Non-Voting 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 Non-Voting Stock, respectively. Other sources of liquidity include $22.5 million in net contributions and advances from developers, which includes $3.8 million of grant funds from the State of Delaware and $5.6 million from the issuance of long-term debt. 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, 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 December 31, 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 December 31, 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 December 31, 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: 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) 979 2,147 2,068 10,287 15,481 Promissory note (principal and interest) 1,200 1,923 1,924 9,652 14,699 Asset purchase contractual obligation (principal and interest) 339 659 320 --- 1,318 Lines of credit --- --- --- --- --- Operating leases 35 70 64 1,429 1,598 Operating agreements 76 112 109 749 1,046 Unconditional purchase obligations 870 1,762 114 312 3,058 Tank painting contractual obligation 626 313 --- --- 939 Total contractual cash obligations $ 12,027 $ 22,700 $ 45,209 $ 226,993 $ 306,929 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, 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. 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 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 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. 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS See Note 19 (Impact of Recent Accounting Pronouncements) to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.