What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-09 · 87 added, 49 removed, 160 unchanged (46% of the section changed)

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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, 2023, and this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, 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.

Certain factors as discussed under Item 1A - Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2023, and this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, 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.

RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 2024

RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2024

Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business.

Our regulated utility segment comprised 92.8% of total operating revenues for the three months ended March 31, 2024 and 92.4% for the three months ended March 31, 2023.

Our regulated utility segment comprised 93.3% of total operating revenues for the six months ended June 30, 2024 and 93.0% for the six months ended June 30, 2023.

Water sales are subject to seasonal fluctuations, particularly during summer when water demand may vary with rainfall and temperature.

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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 profitability is also attributed to other non-utility business, such as various contract operations, 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.

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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.

We anticipate continued growth in our non-utility subsidiaries mostly due to our SLP Plans.

We are affected by inflation, most notably by the continually increasing costs required to maintain, improve and expand our service capability.

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Increases in the number of customers contribute to increases, or help to offset any intermittent decreases, in our operating revenue.

As of March 31, 2024, the number of metered water customers in Delaware increased approximately 1.3% compared to March 31, 2023.

The number of metered water customers in Maryland increased approximately 1.7% compared to March 31, 2023.

The number of metered water customers in Pennsylvania remained consistent compared to March 31, 2023.

For the three months ended March 31, 2024, approximately 2.0 billion gallons of water were distributed in our Delaware systems and approximately 24.3 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.

As of June 30, 2024, the number of metered water customers in Delaware increased approximately 1.3% compared to June 30, 2023.

The number of metered water customers in Maryland increased approximately 2.0% compared to June 30, 2023.

The number of metered water customers in Pennsylvania remained consistent compared to June 30, 2023.

For the six months ended June 30, 2024, approximately 4.4 billion gallons of water were distributed in our Delaware systems and approximately 53.8 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 approximately $16.7 million, on an annualized basis, or 22.7%.

Temporary rates of approximately $10.8 million, on an annualized basis, or 14.6%, that were in effect since November 28, 2023 were replaced with the final approved rates pursuant to a DEPSC order that authorized a total increase in water sales revenue of $11.2 million on an annualized basis, or approximately 15.2%, with a rate effective date of June 12, 2024.

In addition, on June 12, 2024, the DEPSC approved Artesian Water’s application to implement a DSIC rate of 0.34%, effective July 1, 2024.

The previous DSIC rate of 7.50% was reset to zero when the temporary base rate increase was placed into effect on November 28, 2023.

This is discussed further in Note 13 – Regulatory Proceedings.

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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 March 31, 2024, the number of Delaware wastewater customers increased approximately 6.0% compared to March 31, 2023.

As of June 30, 2024, the number of Delaware wastewater customers increased approximately 5.9% compared to June 30, 2023.

Non-Utility Subsidiaries

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There has been consistent customer growth over the years.

As of March 31, 2024, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.4%, 2.4% and 5.4%, respectively, compared to March 31, 2023.

The non-utility customers enrolled in one of our three protection plans decreased 0.6%.

As of June 30, 2024, customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.4%, 2.5% and 2.0%, respectively, compared to June 30, 2023.

Strategic Direction and Recent Developments

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In addition, 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.

In April 2024, Artesian Wastewater received a permit from the Delaware Department of Natural Resources and Environmental Control and has commenced construction of a 625,000 gallon per day regional wastewater treatment facility, including a primary receiving headworks at its Sussex Regional Recharge Facility, or SRRF.

In April 2024, Artesian Wastewater received a permit from the Delaware Department of Natural Resources and Environmental Control for and has commenced construction of a 625,000 gallon per day regional wastewater treatment facility, including a primary receiving headworks at its Sussex Regional Recharge Facility, or SRRF.

SRRF previously provided a land disposal service for a commercial processing and treatment plant.

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Water utilities also will be required to meet the new MCLs by April 2029 and to notify the public of any violations of the MCLs as of and after that date.

The Company has treatment installed for PFAS at several wellfields to date and has included installation of treatment at additional locations in 2024 in its capital budget, with any remaining necessary treatment planned to be installed before 2029.

The Company has installed treatment for PFAS at several wellfields to date and has included installation of treatment at additional locations in 2024 in its capital budget, with any remaining necessary treatment planned to be installed before 2029.

The capital investment and operating costs for treatment of PFAS are anticipated to be recoverable in water rates charged to customers as approved by the applicable public service commission.

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See Note 16 – Legal Proceedings.

Results of Operations – Analysis of the Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023.

The Lead and Copper Rule, or LCR, is a federal regulation that limits the concentration of lead and copper allowed in public drinking water at the consumer's tap, in addition to limiting the permissible amount of pipe corrosion occurring due to the water itself.

The LCR limits the levels of lead and copper in water by improving water treatment, determining copper and lead levels for customers who use lead plumbing parts, and eliminating the water supply as a source of lead and copper.

The EPA published a revised LCR in 2021 to provide greater and more effective protection of public health by reducing exposure to lead and copper in drinking water.

Implementation of the revised rule is intended to better identify high levels of lead, improve the reliability of lead tap sampling results, strengthen corrosion control treatment requirements, expand consumer awareness and improve risk communication.

In addition, implementation of the revised rule is anticipated to accelerate lead service line replacements by closing existing regulatory loopholes, propelling early action, and strengthening replacement requirements.

We are fully compliant with the current LCR and are actively applying the revised LCR to ensure we are fully compliant on or before the compliance deadline date, which is October 16, 2024.

The EPA is also expected to establish new rules requiring the removal of lead water lines.

The EPA’s proposal, known as the Lead and Copper Rule Improvements, or LCRI, would require all public water systems to remove lead service lines within 10 years, among other proposed changes to regulations in the EPA’s Lead and Copper Rule.

The service lines connect a home’s plumbing system to a public water system’s main water line.

The proposed rules have not specified whether the customer or the water provider will cover the cost for customer-side pipe replacements.

Capital investment and operating costs incurred by water utilities for customer-side pipe replacements are typically recoverable in water rates charged to customers as approved by the applicable public service commission.

Results of Operations – Analysis of the Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023.

Operating Revenues

Revenues totaled $24.5 million for the three months ended March 31, 2024, $2.0 million, or 9.1%, more than revenues for the three months ended March 31, 2023 .

Water sales revenue increased $1.8 million, or 10.0%, for the three months ended March 31, 2024 from the corresponding period in 2023, 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.

We realized 80.8% and 80.1% of our total operating revenue for the three months ended March 31, 2024 and March 31, 2023, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.2 million, or 7.0%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

This increase is primarily due to an increase in wastewater revenue associated with customer growth.

Revenues totaled $27.4 million for the three months ended June 30, 2024, $2.2 million, or 8.6%, more than revenues for the three months ended June 30, 2023 .

Water sales revenue increased $1.9 million, or 9.0%, for the three months ended June 30, 2024 from the corresponding period in 2023, primarily as a result of a temporary rate increase of 14.6% of gross water sales placed into effect on November 28, 2023, as permitted under Delaware law.

These temporary rates were replaced with the final approved rates pursuant to a DEPSC order that authorized a total increase of approximately 15.2%, with a rate effective date of June 12, 2024.

The increase in customer base rates was partially offset by the Company’s DSIC rate of 7.50% resetting to zero upon implementation of the temporary rate increase.

In addition, there was an increase in the number of customers served and an increase in overall water consumption due to warmer and drier weather in late June 2024 compared to June 2023.

We realized 82.1% and 81.7% of our total operating revenue for the three months ended June 30, 2024 and June 30, 2023, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.3 million, or 8.4%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

This increase is primarily due to an increase in wastewater revenue associated with customer growth and the timing of industrial wastewater revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $0.8 million, or 5.6%, fo r the three months ended March 31, 2024, compared to the same period in 2023.

Utility operating expenses increased $0.7 million, or 6.1%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Operating expenses, excluding depreciation and income taxes, increased $0.6 million, or 4.3%, fo r the three months ended June 30, 2024, compared to the same period in 2023.

Utility operating expenses increased $0.6 million, or 4.8%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

The net increase is primarily related to the following.

Supply and treatment costs increased $0.3 million , primarily associated with water treatment and distribution operations, including filter replacements costs and chemical costs.

Supply and treatment costs increased $0.3 million, primarily related to filter replacements, well restoration, chemicals, and wastewater treatment and disposal operations.

Payroll and employee benefit costs increased $0.2 million, primarily related to an increase in overall compensation and an increase in medical benefit costs.

Purchased power and purchased water costs increased $0.1 million due to an increase in usage and utility operations.

Administrative costs increased $0.1 million, primarily due to an increase in outside service costs and rate filing costs, partially offset by a decrease in computer system maintenance and subscription fees.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 59.8% for the three months ended March 31, 2024, compared to 61.8% fo r the three months ended March 31, 2023.

Administrative costs increased $0.1 million, primarily due to an increase in the amortization of rate case expenses.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 54.2% for the three months ended June 30, 2024, compared to 56.4% fo r the three months ended June 30, 2023.

Depreciation and amortization expense increased $0.2 million, or 6.5%, 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 22.1%, primarily due to higher pre-tax income in 2024 compared to 2023.

Other income decreased $0.2 million, primarily due to a $0.2 million decrease in allowance for funds used during construction, or AFUDC, as a result of lower long-term construction activity subject to AFUDC for the three months ended March 31, 2024 compared to the same period in 2023.

Other income decreased $0.3 million, primarily due to a decrease in allowance for funds used during construction, or AFUDC, as a result of lower long-term construction activity subject to AFUDC for the three months ended June 30, 2024 compared to the same period in 2023.

Interest Charges

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Our net income applicable to common stock increased $0.9 million, or 19.9%.

Total operating revenues increased $2.0 million and interest charges decreased $0.3 million, offset by a $1.4 million increase in total operating expenses and a $0.2 decrease in other income.

Total operating revenues increased $2.2 million and interest charges decreased $0.2 million, offset by a $1.2 million increase in total operating expenses and a $0.3 million decrease in other income.

Results of Operations – Analysis of the Six Months Ended June 30, 2024 Compared to the Six Months Ended June 30, 2023.

Operating Revenues

Revenues totaled $52.0 million for the six months ended June 30, 2024, $4.2 million, or 8.8%, more than revenues for the six months ended June 30, 2023 .

Water sales revenue increased $3.7 million, or 9.5%, for the six months ended June 30, 2024 from the corresponding period in 2023, primarily as a result of a temporary rate increase of 14.6% of gross water sales placed into effect on November 28, 2023, as permitted under Delaware law.

These temporary rates were replaced with the final approved rates pursuant to a DEPSC order that authorized a total increase of approximately 15.2%, with a rate effective date of June 12, 2024.

The increase in customer base rates was partially offset by the Company’s DSIC rate of 7.50% resetting to zero upon implementation of the temporary rate increase.

In addition, there was an increase in the number of customers served and an increase in overall water consumption due to warmer and drier weather during late June 2024 compared to 2023.

We realized 81.5% and 81.0% of our total operating revenue for the six months ended June 30, 2024 and June 30, 2023, respectively, from the sale of water.

Other utility operating revenue increased approximately $0.5 million, or 7.8%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

This increase is primarily due to an increase in wastewater revenue associated with customer growth and the timing of industrial wastewater revenue.

Operating Expenses

Operating expenses, excluding depreciation and income taxes, increased $1.4 million, or 5.0%, fo r the six months ended June 30, 2024, compared to the same period in 2023.

Utility operating expenses increased $1.2 million, or 5.4%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The net increase is primarily related to the following.

Supply and treatment costs increased $0.6 million , primarily related to filter replacements, well restoration, chemicals, and wastewater treatment and disposal operations.

Payroll and employee benefit costs increased $0.4 million, primarily related to an increase in overall compensation and an increase in medical benefit costs.

Purchased power and purchased water costs increased $0.1 million due to an increase in usage and utility operations.

Administrative costs increased $0.1 million, primarily due to an increase in the amortization of rate case expenses.

The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.8% for the six months ended June 30, 2024, compared to 58.9% fo r the six months ended June 30, 2023.

Depreciation and amortization expense increased $0.5 million, or 7.0%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers.

Federal and state income tax expense increased $0.7 million, or 24.8%, primarily due to higher pre-tax income in 2024 compared to 2023.

Other income decreased $0.5 million, primarily due to a decrease in allowance for funds used during construction, or AFUDC, as a result of lower long-term construction activity subject to AFUDC for the six months ended June 30, 2024 compared to the same period in 2023.

Interest Charges

Interest charges decreased $0.4 million, primarily due to a decrease in short-term debt interest related to lower borrowing levels related to the Company’s lines of credit.

Our net income applicable to common stock increased $1.6 million, or 19.5%.

Total operating revenues increased $4.2 million and interest charges decreased $0.4 million, offset by a $2.7 million increase in total operating expenses and a $0.5 million decrease in other income.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sourc es of liquidity for the three months ended March 31, 2024 were $12.6 million of cash provided by operating activities and $5.2 million in net contributions and advances from developers.

Our primary sourc es of liquidity for the six months ended June 30, 2024 were $19.5 million of cash provided by operating activities and $8.3 million in net contributions and advances from developers.

We depend on the availability of capital for expansion, construction and maintenance.

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Operating Activities

One of our primary sources of liquidity for the three months ended March 31, 2024 was $12.6 million provided by cash flow from operating activities, compared to $10.5 million for the three months ended March 31, 2023.

The increase in cash flows from operating activities primarily resulted from higher material and supplies, income tax receivables, net income and prepaid expenses, offset by lower accounts receivables and accrued interest.

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.

One of our primary sources of liquidity for the six months ended June 30, 2024 was $19.5 million provided by cash flow from operating activities, compared to $15.2 million for the six months ended June 30, 2023.

The increase in cash flows from operating activities is primarily due to changes in materials and supplies, net income and prepaids.

Cash flows 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.

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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 three months of 2024 were $8.9 million compared to $16.8 million during the same period in 2023.

During the first three months of 2024, these investments include PFAS treatment equipment, relocation of facilities as a result of government mandates, renewals associated with the rehabilitation of aging infrastructure, installation of new main, purchase of new transportation equipment, and enhancing or improving existing treatment facilities and pumping stations to better serve our customers .

Developers contributed $2.7 million of these total investments during the first three months of 2024.

Capital expenditures during the first six months of 2024 were $18.4 million compared to $32.3 million during the same period in 2023.

During the first six months of 2024, these investments include PFAS treatment equipment, relocation of facilities as a result of government mandates, renewals associated with the rehabilitation of aging infrastructure, installation of new main, purchase of new transportation equipment, upgrading and automating our meter reading equipment, construction of a new wastewater treatment plant and upgrading existing pumping stations to better serve our customers .

Developers contributed $4.8 million of these total investments during the first six months of 2024.

Financing Activities

For the three months ended March 31, 2024, cash flows provided by financing activities were $2.7 million, compared to $5.0 million for the three months ended March 31, 2023.

Our primary source of liquidity from financing activities for the three months ended March 31, 2024 was $5.2 million in net contributions and advances from developers and $0.8 million from the issuance of long-term debt.

The cash flows provided by financing activities decreased due to decreased borrowings of lines of credit and higher stock dividend payments.

For the six months ended June 30, 2024, cash flows provided by financing activities were $2.0 million, compared to $21.6 million for the six months ended June 30, 2023.

Our primary source of liquidity from financing activities for the six months ended June 30, 2024 was $8.3 million in net contributions and advances from developers and $0.8 million from the issuance of long-term debt.

Cash flows provided by financing activities decreased due to the net proceeds from the issuance of Class A Stock in May 2023 and June 2023 as well as decreased contributions in aid of construction and borrowings on lines of credit.

We have several sources of liquidity to finance our investment in utility plant and other fixed assets.

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Lines of Credit and Long-Term Debt

At March 31, 2024, 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 March 31, 2024, there was $40.0 million of available funds under this line of credit.

At June 30, 2024, 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 June 30, 2024, there was $40.0 million of available funds under this line of credit.

The interest rate is a one-month Daily Secured Overnight Financing Rate, or 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.

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The Company expects to renew this line of credit.

At March 31, 2024, 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 March 31, 2024, there was $20.0 million of available funds under this line of credit.

At June 30, 2024, 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 June 30, 2024, there was $20.0 million of available funds under this line of credit.

The interest rate for borrowings under this line are either 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.

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Artesian’s long-term debt agreements and revolving lines of credit contain customary affirmative and negative covenants that are binding on us (which are in some cases subject to certain exceptions), including, but not limited to, restrictions on our ability to make certain loans and investments, guarantee certain obligations, enter into, or undertake, certain mergers, consolidations or acquisitions, transfer certain assets or change our business.

As of March 31, 2024, we were in compliance with these covenants.

As of June 30, 2024, 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.

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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, 2029.

The agreement includes two automatic five-year renewal terms, unless terminated by either party.

The agreement includes a remaining automatic five-year renewal term, 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.

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Information concerning our implementation and the impact of recent accounting pronouncements issued by the FASB is included in the notes to our 2023 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2023 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 three months of 2024 that had a material impact on our financial condition, liquidity or results of operations.

We did not adopt any accounting policy in the first six months of 2024 that had a material impact on our financial condition, liquidity or results of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis