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 93.5% o f total operating revenues for the year ended December 31, 2024 and 93.1% for the year ended December 31, 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. 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, 2024, the number of metered water customers in Delaware increased approximately 1.6% compared to December 31, 2023. The number of metered water customers in Maryland increased approximately 2.3% compared to December 31, 2023. The number of metered water customers in Pennsylvania remained consistent compared to December 31, 2023. For the year ended December 31, 2024, approximately 9.4 billion gallons of water were distributed in our Delaware systems and approximately 106.7 million gallons of water were distributed in our Maryland systems. 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, 2024, the number of Delaware wastewater customers increased approximately 6.5% compared to December 31, 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 December 31, 2024, the eligible customers enrolled in the WSLP Plan, the SSLP Plan and the ISLP Plan increased 3.1%, 4.0% and 2.2%, respectively, compared to December 31, 2023. 20 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 recent years, we have completed several 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 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. Under its previous permit, SRRF provided solely land disposal services for a single commercial processing and treatment plant. Under its new permit, SRRF will continue providing those disposal services alongside the new 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 and is expected to be completed by the third quarter of 2025. 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. 21 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 allows 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. Revenues 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 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. Deferred income taxes 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. Results of Operations 2024 Compared to 2023 Operating Revenues Revenues totaled $108.0 million for the year ended December 31, 2024, an increase of $9.1 million, or 9.2%, over the revenues for the year ended December 31, 2023 . Water sales revenue increased $8.0 million, or 10.1%, for the year ended December 31, 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%, which went into effect on June 12, 2024. The increase in both temporary rates and final approved 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 overall water consumption due to drier weather experienced during the year ended December 31, 2024 compared to the same period in 2023 and an increase in the number of customers served. We realized 81.6% and 81.0% of our total operating revenue for the years ended December 31, 2024 and December 31, 2023, respectively, from the sale of water. Other utility operating revenue increased approximately $0.9 million, or 7.7%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. This increase is primarily due to an increase in wastewater revenue associated with an increase in the number of customers served. 22 Table of Contents Non-utility operating revenue increased approximately $0.1 million, or 1.7%, for the year ended December 31, 2024 compared to the same period in 2023, primarily due to an increase in SLP Plan revenue, partially offset by a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure that was mostly completed in prior years. Percentage of Operating Revenues 2024 2023 2022 Water Sales Residential 50.1 % 50.1 % 48.7 % Commercial 18.0 17.9 17.6 Government and Other 13.5 13.0 12.9 Other utility operating revenues 12.1 12.3 11.6 Non-utility operating revenues 6.3 6.7 9.2 Total 100.0 % 100.0 % 100.0 % Residential Residential water service revenues in 2024 amounted to $53.9 million, an increase of $4.4 million, or 8.8%, above the $49.6 million recorded in 2023, primarily due to a rate increase placed into effect on November 28, 2023 and an increase in overall water consumption. The volume of water sold to residential customers increased to 4,522 million gallons in 2024 compared to 4,340 million gallons in 2023, a 4.2% increase. The number of residenti al customers served increased by approximately 1,500, or 1.7%, in 2024. Commercial Water service revenues from commercial customers in 2024 amounted to $19.4 million, an increase of $1.8 million, or 10.1%, above the $17.6 million in 2023, primarily due to a rate increase placed into effect on November 28, 2023. The volume of water sold to commercial customers increased to 2,277 million gallons in 2024 compared to 2,231 million gallons sold in 2023, an increase of 2.1%. Government and Other Government and other water service revenues in 2024 amounted to $14.7 million, an increase of $1.9 million, or 14.8%, above the $12.8 million in 2023, primarily due to a rate increase placed into effect on November 28, 2023 and an increase in overall water consumption. The volume of water sold to government and other customers increased to 1,320 million gallons in 2024 compared to 1,260 million gallons in 2023, an increase of 4.8%. Other Utility Operating Revenue Other utility operating revenue, derived from regulated wastewater services, contract operations, antenna leases on water tanks, finance/service charges, wastewater customer service revenues and industrial wastewater service revenues , increased 7.7%, to $13.1 million in 2024, from $12.2 million in 2023. This increase is primarily due to an increase in wastewater revenue associated with an increase in the number of customers served. Non-Utility Operating Revenue Non-utility operating revenue, derived from non-regulated water and wastewater operations, increased by 1.7%, to $6.7 million in 2024 from $6.6 million in 2023. This increase is primarily due to an increase in SLP Plan revenue, partially offset by a decrease in contract service revenue related to a contract for the design and construction of wastewater infrastructure that was mostly completed in prior years . Operating Expenses Operating expenses, excluding depreciation and income taxes, increased $4.1 million, or 7.3%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. Utility operating expenses increased $3.6 million, or 7.8%. The increase in utility operating expenses consists of a $1.1 million increase in supply and treatment costs, a $0.9 million increase in payroll and employee benefits costs, a $0.5 million increase in each of transmission, distribution and collection system costs and administrative costs, a $0.3 million increase in purchased power costs and a $0.2 million increase in purchased water costs. 23 Table of Contents Non-utility operating expenses increased $0.3 million, or 7.1%, primarily due to an increase in plumbing repair costs associated with the SLP Plans and an increase in payroll and employee benefits costs. Property and other taxes increased $0.2 million, or 3.6%, primarily due to an increase in New Castle County, Delaware tax rates on utility plant, an increase in utility plant subject to taxation and an increase in payroll taxes. 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 2024 2023 2022 Payroll and Associated Expenses 47.7 % 49.5 % 47.5 % Administrative 16.7 16.9 15.3 Supply and Treatment 13.3 11.9 10.8 Purchased Power 5.8 5.7 5.2 Transmission, Distribution and Collection 5.1 4.6 4.1 Purchased Water 2.8 2.7 3.6 Non-utility Operating 8.6 8.7 13.5 Total 100.0 % 100.0 % 100.0 % The ratio of operating expense, excluding depreciation and income taxes, to total revenue was 56.4% for the year ended December 31, 2024, compared to 57.4% for the year ended December 31, 2023. Depreciation and amortization expense increased $0.3 million, or 2.2%, primarily due to continued investment in utility plant providing supply, treatment, storage and distribution of water to customers and service to our wastewater customers. Federal and state income tax expense increased $1.0 million, or 15.2%, primarily due to higher pre-tax income, lower state net operating loss valuation allowance, and higher regulatory deferred income tax amortization in 2024 compared to 2023. Other Income Other income decreased $0.4 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 twelve months ended December 31, 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 on the Company’s lines of credit. Net Income Our net income applicable to common stock increased $3.7 million, or 22.1%. Total revenue increased $9.1 million and interest charges decreased $0.4 million, offset by a $5.4 million increase in total operating expenses and $0.4 million decrease in other income. Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K includes a comparative discussion of the years ended December 31, 2023 and 2022 and is incorporated herein by reference. Liquidity and Capital Resources Overview The Company’s primary sources of liquidity for the year ended December 31, 2024 were $36.8 million of cash provided by operating activities and $20.4 million in net contributions and advances from developers. Funds from these liquidity sources were used to invest $45.9 million in capital expenditures and to pay dividends of approximately $12.2 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. 24 Table of Contents We expect that our net investments in utility plant in 2025 will be approximately $46.4 million. Our total obligations related to interest and principal payments on indebtedness, rental payments, elevated storage tank agreements and water service interconnection agreements for 2025 are anticipated to be approximately $11.6 million. Operating Activities One of our primary sources of liquidity for the year ended December 31, 2024 was $36.8 million provided by cash flow from operating activities, compared to $31.9 million for the year ended December 31, 2023. The increase in cash flows from operating activities is primarily due to changes in net income, materials and supplies, and income tax receivable. 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 investment in 2024 was to continue to provide high quality, reliable service to our growing service territory. Capital expenditures during 2024 were $45.9 million compared to $62.2 million invested during the same period in 2023. During 2024, these investments include relocation of facilities as a result of government mandates, renewals associated with the rehabilitation of aging infrastructure, installation of new mains, upgrading elevated storage tanks, purchase of new transportation equipment, upgrading and replacing our meter reading equipment, construction of a new wastewater treatment plant and upgrading existing pumping stations to better serve our customers . The following chart summarizes our investment in plant and systems over the past three fiscal years In thousands 2024 2023 2022 Source of supply, treatment and pumping $ 4,796 $ 18,339 $ 9,100 Transmission and distribution 31,683 37,175 30,808 General plant 2,251 4,553 3,856 Wastewater facilities 8,346 3,353 5,613 Allowance for Funds Used During Construction, AFUDC, equity portion (1,134 ) (1,243 ) (894 ) Total $ 45,942 $ 62,177 $ 48,483 Of the $62.6 million gross investment expected in 2025 approximately $16.2 million will be for extending transmission and distribution facilities to address service needs in growth areas of our service territory. Approximately $14.1 million will be invested in upgraded PFAS treatment equipment, new and rebuild water treatment facilities, equipment and wells throughout Delaware and Maryland. Approximately $9.1 million will be invested in renewals associated with the rehabilitation of aging infrastructure. Approximately $7.5 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 $5.8 million will be invested in the ongoing construction of a regional wastewater treatment plant along with improvements to existing wastewater treatment plants and wastewater pumping stations. Approximately $4.0 million will be invested in the relocation of facilities because of government mandates. Approximately $2.7 million will be invested to upgrade elevated storage tanks. Approximately $2.7 million will be invested in the construction of force mains used for the transmission of wastewater to plants. Additionally, we will refund $0.5 million to customers, real estate developers and builders related to previous advances for construction they provided to Artesian for distribution facilities on their properties. Our projected capital expenditures and other investments are subject to periodic review, and revision to reflect changes in economic conditions and other factors. The Company's investment for 2025 is expected to be offset by contributions in aid of construction of $16.2 million for a net investment of $46.4 million in 2025. The Company believes the net investment in utility plant will continue to be recovered through rates charged to customers. 25 Table of Contents Financing Activities For the year ended December 31, 2024, cash flows provided by financing activities were $7.1 million, compared to $31.4 million for the year ended December 31, 2023. Our primary source of liquidity from financing activities was $20.4 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 Non-Voting 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 December 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 December 31, 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. At December 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 December 31, 2024, there was $20.0 million of available funds under this line of credit. The interest rate for borrowings under this line is 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, 2025. 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) 1,144 2,130 2,130 9,662 15,066 Promissory note (principal and interest) 962 1,924 1,925 8,689 13,500 Asset purchase contractual obligation (principal and interest) 333 647 --- --- 980 Lines of credit --- --- --- --- --- Operating leases 28 56 42 1,321 1,447 Operating agreements 38 31 4 --- 73 Unconditional purchase obligations 928 1,000 114 260 2,302 Tank painting contractual obligation 313 --- --- --- 313 Total contractual cash obligations $ 11,616 $ 21,447 $ 43,260 $ 218,245 $ 294,568 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, 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. 26 Table of Contents The asset purchase contractual obligation is related to the purchase of substantially all of the water operating assets from the Town of Clayton in May 2022, by Artesian Water. The total purchase price was $5.0 million. At closing, Artesian Water paid approximately $3.4 million. The balance is payable in five equal annual installments on the anniversary date of the closing date. Each annual installment is payable with interest at an annual rate of 2.0%. As previously disclosed, on December 9, 2022, Artesian Water Company entered into a Financing Agreement, or the Financing Agreement, with the Delaware Drinking Water State Revolving Fund, or the Fund, acting by and through the Delaware Department of Health & Social Services, Division of Public Health, a public agency of the state of Delaware, or the Department. Under the Financing Agreement, the Department agreed to advance to or to reimburse Artesian Water up to $901,170 from the Fund to finance all or a portion of the costs to replace a specific water transmission main in a service area located in New Castle County, Delaware. In October 2024, Artesian Water provided notice to the Department confirming that no funds will be requested for reimbursement under this Financing Agreement. 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 electric supply contract with WGL Energy that was effective through December 2024. In November 2024, TESI entered into a short-term electric supply contract with WGL Energy effective December 2024 through May 2025. The fixed rate was increased 44.4% starting in 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 currently requires us to purchase a minimum of 0.5 million gallons of water 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS See Note 18 (Impact of Recent Accounting Pronouncements) to our Consolidated Financial Statements for a full description of the impact of recent accounting pronouncements.