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, including per- and polyfluoroalkyl substances (“PFAS”) 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, 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 JUNE 30, 2024 OVERVIEW Our profitability is primarily attributable to the sale of water and wastewater services in our regulated utility business. Our regulated utility segment comprised 93.3% 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. 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. 27 Table of Contents 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. 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 mostly due to our 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 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. 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 June 30, 2024, the number of Delaware wastewater customers increased approximately 5.9% compared to June 30, 2023. 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 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. 28 Table of Contents 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. 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, 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 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. The new treatment facility will provide service for Artesian Wastewater’s regional system comprised primarily of residential and small commercial customers. The construction will also include the primary receiving facility for untreated effluent, sized to allow for the expansion of the regional treatment system planned for the site. The new treatment facility will utilize the existing disposal infrastructure. 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. 29 Table of Contents 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. Other Matters Environmental, Health and Safety, and Water Quality Regulation As required by the Safe Drinking Water Act, the U.S. Environmental Protection Agency, or EPA, establishes maximum contaminant levels, or MCLs, for various substances found in drinking water to ensure that the water is safe for human consumption. On April 10, 2024, the EPA established MCLs for certain per- and polyfluoroalkyl substances, or PFAS, in drinking water. Water utilities will be required to complete initial monitoring for PFAS by 2027 and to conduct ongoing compliance monitoring. 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 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. The Company is participating in the multi-district litigation class action settlements with certain manufacturers of PFAS seeking reimbursement of costs incurred and that will continue to be incurred. See Note 16 – Legal Proceedings. 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 $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. 30 Table of Contents 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 $0.6 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 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. 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 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 Short-term debt interest decreased $0.2 million, primarily due to lower borrowing levels related to the Company’s lines of credit. Net Income Our net income applicable to common stock increased $0.9 million, or 19.9%. 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 . 31 Table of Contents 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 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. Net Income 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. 32 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Overview 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. We rely on our sources of liquidity for investments in our utility plant and to meet our various payment obligations. Operating Activities 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. 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 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 investments is to continue to provide high quality reliable service to our growing service territory. 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 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. 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, and 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 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. 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 19, 2025 or any date on which Citizens demands payment. The Company expects to renew this line of credit. 33 Table of Contents 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. 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) $ 7,870 $ 15,659 $ 39,045 $ 198,313 $ 260,887 State revolving fund loans (principal and interest) 1,093 2,130 2,130 10,194 15,547 Promissory note (principal and interest) 961 1,924 1,924 9,170 13,979 Asset purchase contractual obligation (principal and interest) 333 647 --- --- 980 Lines of credit --- --- --- --- --- Operating leases 35 70 61 1,424 1,590 Operating agreements 77 114 99 716 1,006 Unconditional purchase obligations 881 1,353 114 284 2,632 Tank painting contractual obligation 626 --- --- --- 626 Total contractual cash obligations $ 11,876 $ 21,897 $ 43,373 $ 220,101 $ 297,247 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 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. 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 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. 34 Table of Contents 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, 2029. 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. 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 2023 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, 2023. 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, 2023. There have been no changes in our critical accounting estimates. Our significant accounting policies are described in our notes to the 2023 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2023. 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 six months of 2024 that had a material impact on our financial condition, liquidity or results of operations.